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TMI Blog2018 (4) TMI 1723X X X X Extracts X X X X X X X X Extracts X X X X ..... d the following grounds of appeal for assessment year 2011-12: 1. The order of the CIT(A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in directing the Assessing Officer to exclude the income of foreign branches in violation to Central Government notification No. SO 2123 (e) dt. 28.08.2008 which clearly indicates its inclusion while arriving at the total Income. 3. On the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in deleting the disallowance of broken period interest paid, inspite of the decision of Hon'ble Supreme Court in the case of CIT vs Vijaya Bank (187 ITR 541). 3. Ground No.1 is general in nature and needs no specific adjudication. Ground No.2 relates to exclusion of income of Foreign branches. The ld. DR for the Revenue supported the order of Assessing Officer. The ld. DR for the Revenue further submits that income from foreign branch should be considered for the purpose of income-tax. The ld DR submits that on similar ground in appeal filed for assessment year 2009-10, the Tribunal has allowed the appeal of the revenue, vide its order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into by the Central Government with the Government of any country outside India for granting relief to tax, or as the case may be, avoidance of double taxation, provides that any income of a resident of India "may be taxed" in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-Tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement." 25. We find that after taking into account the aforesaid notification the Tribunal in the aforesaid order has concluded as under. "In view of the aforesaid findings/conclusion, we hold that the income of the branches of the assessee shall also taxable in India i.e., it would be included in the return of income filed by the assessee in India and whatever taxed have been paid by the Branches in the other contracting States i.e., the source country, credit of such taxes shall be given." 26. A reading of the above makes it clear the Tribunal had held that the income of the foreign branches of the assessee shall also be taxable in India, that is, it wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the submission of the parties and find that identical ground of appeal was raised by Revenue in appeal for A.Y. 2008-09 & 2009-10 has been decided against the revenue in ITA No. 5605, 5604/Mum/2016 dated 01.03.2018 and the decision rendered by the Tribunal is extracted below:- "4. We have considered the rival submission of the parties and have gone through the order of lower authorities. The Assessing Officer made the disallowance on the basis of decision of Vijaya Bank Ltd. vs. ACIT [197 ITR 541 SC)] on his observation that broken period interest is a part of capital outlet for acquisition of securities and also on the basis of decision of CIT vs. Bank of Rajasthan that expenses made by Bank towards broken period interest on securities purchased by it is not allowable business deduction. The Assessing Officer also concluded that assessee is not a trader in security and not entitled for claim of broken period interest expenses. 5. The Hon'ble Bombay High Court in CIT Vs. HDFC Bank Ltd 366 ITR 505 (Bom), while relying on the ratio laid down in its earlier decision in American Express International Banking Corporation Vs. CIT reported in 258 ITR 601 (Bom), which in turn, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of interest expenditure under rule 8D does not arise since the interest free funds held by the appellant far exceed the amount of investments in assets earning tax free income. The CIT(A) ought to have followed the ratio laid down by Jurisdictional High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340 and held that no disallowance of interest as contemplated in rule 8D was warranted. 1.4 Without prejudice to the above contention, as held in various judicial decisions, the disallowance in no case can exceed the tax free income earned by the appellant and in any case the disallowance cannot exceed the tax free income earned of Rs. 57.04 crore. 2. The CIT (A) erred in restricting the deduction u/s 36(1)(viia) to the extent of provision made for bad and doubtful debts in the books instead of allowing the same based on eligible deduction as per the said section. 3. The CIT (A) ought to have allowed the appellants claim in respect of exclusion of income of foreign branches situated in countries where there is a Double tax Avoidance Agreement based on Article 7 of the respective agreements which provides that the business profits is to be taxed in the respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are held as stock-in-trade, main purpose is to trade in those shares and earn profits therefrom, in the process, certain dividend is also earned, though incidentally, which is also an income. This triggers applicability of section 14A which is based on theory of apportionment of expenditure between taxable and non-taxable income. Therefore, to that extent, expenditure incurred in acquiring those shares will have to be apportioned. Thus, considering the decision of Hon'ble Apex Court and the decision of co-ordinate bench in assessee's own case for earlier years i.e. 2009-10 this ground of appeal is restored to the file of Assessing Officer for deciding the issue afresh after considering the decision of Hon'ble Apex Court in Maxopp Investment Ltd. (supra) and the other decisions and pass the order in accordance with laws. Needless to say that Assessing Officer shall grant adequate opportunity to the assessee before passing the order. 14. In the result, the Ground No. 1 of the assessee's appeal is allowed for statistical purpose. 15. Ground No.2 relates to provision for bad and doubtful debts u/s 36(1) (viia) to the extent of provision made in books during the previous year instea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ". If second method is followed, then the closing balance of "Provision for bad and doubtful debts" has to be considered for the purposes of sec. 36(1)(viia) of the Act. Hence, if the assessee has followed the second method, then there is merit in the claim of the assessee. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine the method followed by the assessee and if the assessee has debited its Profit and Loss account with incremental amount of provision only, then the AO is directed to take the closing balance of Provision for bad and doubtful debts as the amount for the purpose of working out allowance u/s 36(1)(viia) of the Act. 18. In the result, ground no. 2 of the appeal is treated as allowed. 19. Ground No. 3 relates to exclusion of income of foreign branches. The ld. AR of the assessee conceded that this ground of appeal is decided against the assessee in appeal for A.Y. 2009-10. Considering the contention of the ld. AR of the assessee that similar ground of appeal was decided against the assessee this ground of appeal is dismissed. Moreover, we have already allowed the similar gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective agreements which provides that the business profits is to be taxed in the respective countries. The CIT (A) failed to note that notification 91 of 2008 relied upon by Hon'ble ITAT does not apply to business profits but only to other sources of income. 22. Ground No.1 of the appeal raised by assessee relates to the disallowance under section 14A. We have noted that this ground of appeal is identical to the Ground No.1 of the appeal for Assessment Years 2011-12, which we have already restored to the file of assessing officer. Thus, following the principal of consistency this ground of appeal is also restored to the file of assessing officer with similar direction. In the result, Ground No.1 is allowed for statistical purpose. 23. Ground No.2 relates to provision for bad and doubtful debts. We have noted that this ground of appeal is identical to the Ground no.2 of the appeal for A.Y. 2011-12, which we have restored to the file of the AO with certain directions and accordingly the said ground was treated as allowed. Thus, following the principal of consistency this ground of appeal is restored to the file of the AO with similar direction and accordingly treated as allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn country but remained silent on the foreign branch income that has not been taxed (treated as exempt in the foreign country. 3. On the facts and in the circumstances of the case and in Law, the Ld CIT(A) has erred in holding that the broken period interest is allowable on matching principles, without realizing that the same has not been incurred for realizing the interest on securities as enunciated by the Apex Court in Vijaya Bank Ltd. (57 Taxman 1582)(SC). 4. On the facts and in the circumstances of the case and in Law, the Ld CIT(A) has erred in relying on the ratio of the Apex Court in the case of Citi Bank (Civil Appeal No. 1549 of 2006) where the income from securities were treated as business income which was not the same in the present case. 5. For these and other grounds that may be urged at the time of hearing, the decision of the CIT(A) may be set aside and that of the restored. 31. Ground No1 relates to disallowance under section 36(1)(viia) (Erroneously mentioned as 36(1)(vii)). We have noted that this ground of appeal is identical to ground No2 of appeal by revenue in ITA No. 4504/M/2016 for AY 2011-12, which we have already restored to the file of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Utilities and Power Ltd 313 ITR 340 and held that no disallowance of interest as contemplated in rule 8D was warranted. 1.4 Without prejudice to the above contention, as held in various judicial decisions, the disallowance in no case can exceed the tax free income earned by the appellant and in any case the disallowance cannot exceed the tax free income earned of Rs. 69.82 crore. 2. The CIT (A) ought to have allowed the appellants claim in respect of exclusion of income of foreign branches situated in countries where there is a Double tax Avoidance Agreement based on Article 7 of the respective agreements which provides that the business profits is to be taxed in the respective countries. The CIT (A) failed to note that notification 91 of 2008 relied upon by Hon'ble ITAT does not apply to business profits but only to other sources of income. 36. Ground No.1 relates to disallowance under section 14A. We have noted that this ground of appeal is identical to the Ground No.1 in appeal for A.Y. 2011-12 & 2012-13, which we have already restored to the file of Assessing Officer. Considering the principle of consistency, this ground of appeal is also restored to the file of Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in directing the A.O. not to apply 115JB and thus not to make addition of disallowance u/s 14A to the book profits computed." 40. Ground No. 1 relates to the income of foreign branches. We have noted that this ground of appeal is identical to the ground No. 2 of the revenues appeal for assessment year 2011-12, which we have already decided in favour of the revenue, hence, following the principle of consistency this ground of appeal is allowed with similar direction. In the result this ground of appeal is allowed. 41. Ground No. 2 relates to broken period interest. We have noted that this ground of appeal is identical to the ground No.3 raised by revenue in appeal for assessment year 2011-12. We have already dismissed the identical ground of appeal in appeal for assessment year 2011-12 in earlier paras of this order. Thus, following the principle of consistency this ground of appeal is dismissed with similar direction. 42. Ground No. 3 to 5 relates to applicability of section 115JB of the Act. The ld. DR for the revenue relied on the order of the assessing officer. On the other hand the ld. AR for the assessee submits that the provisions of section 115JB are not app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 100.47 crore on a tax free income of Rs. 56.71 crore over looking fact that the appellant had himself quantified the disallowance at Rs. 1.08 crore 'being 0.5% of average investments earning tax free income. The CIT(A) should have appreciated as all the assets from which the tax free income has been earned are stock in trade, as held in the case of CCI Ltd (250 CTR 291). 2.2 Without prejudice to the above contention, even if rule 8D is to be applied, the disallowance can only be nil since the appellant does not hold any investment the income from which does not or shall not form part of total income and the appellant only holds stock in trade. 2.3 Without prejudice to the above contention, the question of disallowance of interest expenditure under rule 8D does not arise since the interest free funds held by the appellant far exceed the amount of investments in assets earning tax free income. The CIT(A) ought to have followed the ratio laid down by Jurisdictional High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340 and held that no disallowance of interest as contemplated in rule 8D was warranted. 2.4 Without prejudice to the above contention, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign Branches. We have noted that identical ground of appeal was raised by the assessee in appeal for assessment year 2011-12, which we have decided against the assessee on the basis of decision of Tribunal in assessment year 2009-10. Thus, following the principle of consistency this ground of appeal is dismissed with similar observation. 50. Ground No. 4 (As shown Ground No. 3.1 by assessee) relates to taxability of notional credit on account of unrecorded entries in NOSTRO account. The ld. AR for the assessee submits that NOSTRO account represents dealings with foreign banks. The long pending unreconciled entries (about more than 10 years) were advised to be closed by RBI by transferring the credit entries to Profit and Loss account. The Circular of RBI specifically states that the amount so credited to Profit and Loss account will not be available for declaration of dividend and hence to be transferred to General Reserve Account. He submitted that those credits were not claimed as expenditure in the earlier years and hence the provisions of sec. 41(1) shall not apply. Accordingly he submitted that the impugned amount is not taxable. 51. The ld DR, however, supported ..... X X X X Extracts X X X X X X X X Extracts X X X X
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