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TMI Blog1989 (7) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... ss profits for the Indian branch are to be treated for the purpose of the DTA as 'industrial or commercial profits'. This position is clear from the fact that the assessee has made a written request to the CBDT vide its letter dt. 18th Dec., 1964. The main request was contained in the penultimate para of that letter in the following terms; "Therefore, we would be very much obliged if you will kindly issue a clarification to the effect that "the term industrial or commercial profits as used in this agreement is not intended to exclude normal banks profits inclusive of interest on loans and advances," which will enable us to claim the head office expenses as deduction in arriving at industrial or commercial profits" The assessee received a reply from the CBDT dt. 17th Feb., 1966 saying that the instructions in the matter had been issued to the CIT concerned. The Board's instructions to the CIT are not before us. The learned counsel for the assessee, Shri Dastur, has brought to our notice para 3.3 of the assessment order dt. 6th Dec., 1988 in assessee's own case for asst. yr. 1986-87 wherein the Dy. CIT Special Range 3, Bombay has referred to the CBDT's letter No. 11(4)-65/TPL d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erve Bank of India. The point sought to be made out was that the only reason of the securities being brought to India was the closure of the London branch of the Reserve Bank of India. Giving the historical background, Shri Dastur argued that the Department has sought to tax interest from those securities for the first time in 1977-78 and on that basis reopened some earlier assessments also but in the context of original assessments right from 1964 to 1977, it was an accepted position even on the part of the Department that the interest from these securities is not taxable in India. It was submitted that interest from these securities cannot be attributed to Indian branch of the assessee-company and hence in terms of Art. III(1) of the DTA it was not taxable in India. 5. We have very carefully considered all these aspects. As already mentioned the profits and gains of the Indian Branch of the assessee are to be treated as 'industrial or commercial profits. This is so because the assessee requested the CBDT in December, 1964 for issuance of directions to this effect and the Department has now accepted (through para 3.3 of the assessment order dt. 6th Dec., 1982 in assessee's own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owledges the Reserve Bank's Circular letter DBO No. Leg. 7943/C.233A-64 of 30th June, 1964 and then it proceeds as follows: "At present our Bank has deposited with the State Bank of India, London Officer, U.K. 30 per cent Saving Bonds in Compliance with s. 11(2) of the Banking Companies Act, 1959, under the temporary arrangement made consequent to the closure of your Bench in London. As per the amendments referred to in your above letter, we are required to deposit cash or securities in the principal office of your Bank of company with s. 11(2) of the Banking Companies Act, 1949. In this connection we would like to know from you whether we can deposit the above-mentioned sterling Securities with your principal office to comply with s. 11(2) of the Act. If it is possible, we would like you to let us know the required formalities to be gone through at your end. Also we shall thank you to let us know within what time we should comply with the provisions of the above amendment." On page 11 of the paper book there is a reply from the Reserve Bank of India saying that the said sterling securities may be deposited for the purpose of compliance with s. 11(2) of the Banking Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deposit cash or gold in terms of s. 11(2) and 24(2A) of the Banking Regulation Act and the assessee chose to officer the said sterling securities as deposit with the Reserve Bank of India and the latter accepted that proposal of the assessee. So during the relevant previous year the said sterling securities were required to be held and were actually held in India towards the satisfaction of a condition precedent to the assessee continuing banking operations in India. 6. Thus it is clear that the interest income from the said sterling securities would be taxable as industrial or commercial profits in terms of the DTA and further that the said sterling securities were held in India towards the satisfaction of a condition precedent to the assessee continuing banking operations in India. Now, we turn to Art. III(1) of the DTA on whose basis the learned Advocate for the assessee, Shri Dastur has taken some alternative contentions. Last part of that provision is relevant and may be extracted as follows: "If it has such a permanent establishment, the profits attributable thereto may be subjected to tax in that Contracting State" It means that since the assessee has a permanent e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax which is attributable to the permanent establishment than what would be attributed as profit of that permanent establishment is which might be expected to be derived by that permanent establishment if it were an independent enterprise, engaged in the same or similar activities, under the same or similar conditions and dealing at arm's length with the enterprise of which it is a permanent establishment. Obviously, the specific condition laid down therein was that the permanent establishment would be treated as dealing with the main concern at arm's length. In the case before us there is no such condition laid down. As already mentioned we are taxing the total income of the non-resident assessee though the scope of taxation would be limited to the profits attributable to the Indian Branch. We are not considering and cannot consider the Indian Branch working independently and dealing with the main assessee at arm's length. Therefore, the decision cited on behalf of the assessee, also does not help it. 8. In the light of the fact that the said securities were kept as a condition precedent to the assessee continuing business in India and income from them is to be taxed as commer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvocate for the assessee cited Gujarat High Court decision in CIT vs. Maneklal (S.L.M.) Industries Ltd. (1977) 107 ITR 133 (Guj) also. In that case some presents were given to the representatives of the foreign collaborators when they visited that assessee's establishments in India. Obviously, the facts of the decided case were altogether different and the nexus was treated as proved. In the case before us, the very nexus is not proved and hence, grounds of appeal Nos. 6 and 7 of the assessee's appeal deserve to be dismissed. 11. Grounds of appeal Nos. 8 and 9 raise some questions of interest on inter Branch deposits. There points are dealt with by the CIT(A) in paras 32 33 of his detailed order. No specific arguments were addressed to us on behalf of the assessee, on these points. On the other hand, it was faintly suggested that the grounds may turn out to be redundant or at least or no consequence as far as any substantive relief is concerned. Hence, grounds of appeal Nos. 8 and 9 are also rejected. 12. Grounds of appeal Nos. 10 and 11 of the assessee's appeal again pertain to assessee's claim of deduction for interest attributable to a sum of Rs. 3,76,947 of the Head Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a condition precedent to the assessee continuing banking operations in India, Income from interest on these securities is taxable as industrial or commercial profits of the assessee-company. As we are assessing the assessee-company as non-resident but in respect of the profits attributable to the Indian Branch, we have to see whether, vis-a-vis non-resident assessee, it is the gross income or the net income. We find that while forwarding the net amount of interest to the assessee's Indian Branch, the Reserve Bank of India forwarded also the certificate of tax deducted at source and the Indian Bench in turn, forwarded that certificate of tax deducted at source to its London Branch. If the credit for tax deducted at source is available to the non-resident assessee, it is the gross amount of interest which constitutes the income of the non-resident assessee. At any rate, this aspect has to be looked into. We may mention that the Supreme Court decision in CIT vs. Clive Insurance Co. Ltd. (1978) CTR (SC) 68 : (1978) 113 ITR 636 (SC) and the Calcutta High court decision in CIT vs. Oriental Co. Ltd. (1981) 25 CTR (Cal) 75 : (1982) 137 ITR 777 (Cal) are not applicable to this case. Those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total interest outgoing of the Bank, the same proportion as the value of these securities bears to the total interest bearing borrowings of the Bank preferably as on the last day of the relevant previous year or thereabout. The precise computation would be done by the ITO on the assessee's supplying of relevant information. 17. Ground of appeal No. 4 in the Department's appeal for asst. yr. 1977-78 reads as follows: "On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the allowability of Head Office expenses in covered by Art. III(3) of the Double Taxation Avoidance Agreement entered into by India and Japan i.e., the allocation on the basis of Indian net proceeds to global net proceeds is to be considered as a reasonable allocation and not as per provisions contained in s. 44C of the Act." We have already held that the provisions of the DTA would over-ride, if necessary, the provisions of Indian IT Act in respect of allowability of Head Office expenses. Art. III(3) of the DTA is relevant and may be produced as below: "In determining the industrial or commercial profits of a permanent establishment, there shall be allowed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-trust had incorporated on its receipt any wrong information in this regard. The directions of the CIT(A) may be treated as modified to the extent indicated above. 20. Ground of appeal No. 6 taken by the Department reads as follows: "On the facts and in the circumstances of the case and in law the CIT(A) erred in directing the IAC to examine the details of business promotion expenditure inspite of the fact that the same was considered in details". This is dealt with by the CIT(A) in paras 16 to 18 of his order on pages 13 to 16. This is relevant in the context of disallowance made under s. 37(2A) for entertainment expenses. Actually, in the context of stand taken by the Department in the order dt. 6th Dec., 1988 for asst. yr. 1986-87 no disallowance is made under s. 37(3A) etc. In this view of the matter, this whole exercise would turn out to be futile and the Department's ground of appeal would be rendered redundant. 21. This brings up to the Department's grounds of appeal Nos. 7 to 12 which pertain to the quantification of addition under s. 40A(5) and the in consequence thereof, quantification of deductible interest against income from securities. In para 3.3.1 on pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27,710 Deduct depreciation of foreign cars disallowed (7861 + 6751) Rs. 14,612 . Rs. 13,098 Loss on sale of assets disallowed under s. 32(1)(iii) (12,499 + 2805) Rs. 15,304 Loss on obsolate assets (170+60) Rs. 230 . . Rs. 28,632 . . Rs. 22,90,496" Obviously, there is some confusion and mixing up of figures. The CIT(A) has accepted the assessee's contention just like that. Taking totality of circumstances into account we would restore this matter to the file of the AO to be adjudicated upon as per law and after giving a reasonable opportunity of being heard to the assessee. 24. Grounds of appeal Nos. 14 and 15 of the Department pertain to levy of interest under s. 139(8). The CIT(A) has dealt with this aspect in paras 38 to 41 on pages 25 and 26 of his appellate order for asst. yr. 1977-78, return was originally filed on 30th Sept., 1977 but under the signature of Chief Executive officer stationed in India. Subsequently, return was filed after obtaining the signature of the Foreign Director. This was so because there was no director of the company stay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s. 217(1A). We may also mention that for asst. yr. 1978-79 also original return was filed on 30th Sept., 1978 and our reasoning in regard to that item as given in asst. yr. 1977-78 would apply to this year also with full force. c. In regard to the Department's ground of appeal No. 18 about the expenditure in the inter office commission of Rs. 4,427 in para 29 of the assessment order, the ITO has held that this is an expenditure representing bank charges on handling of import export bills by the assessee-company's business. The ITO has disallowed it on the footing that it is payment to self. Actually, this item would be covered by our directions and observations in regard to inter branch commission given in the context of assessee's grounds of appeal Nos. 8 and 9. For the reasons given therein, the assessee would not be entitled to this deduction and, therefore, we uphold the Department's contention. 27. Before parting, we may mention that the additional grounds of appeal Nos. 1 to 4 were taken on behalf of the assessee. Therein, the assessee objects to the disallowances to be made in pursuance of the restrictive provisions of ss. 40A(5) and 37(2A) etc. on the plea that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bombay High Court decision in the case of Ugar Sugar Works Ltd. vs. CIT (1982) 27 CTR (Bom) 174 : (1983) 141 ITR 326 (Bom) it has to be held that the CIT(A) was justified in entertaining the claims and adudicating upon them. Then, we have the Supreme Court decision in CIT vs. Mahalakshmi Textile Mills Ltd. (1966) 66 ITR 710 (SC) wherein the Tribunal's decision of allowing the total expenditure on Casa Blanca conversion system on revenue amount upheld by the Court while the assessee's claim all along before the ITO, IAC and the Tribunal was for allowance of development rebate and alternative claim was made by the assessee before the Tribunal when the Department denied the assessee's claim of development rebate on the footing that it did not involve installation of any new machinery. We are further fortified in our view by the Calcutta High court decision in Madhu Jayanti P. Ltd. vs. CIT (1985) 49 CTR (Cal) 1 : (1985) 154 ITR 277 (Cal) CIT vs. Gordhandas Jerambhai (1985) 49 CTR (Cal) 7 : (1985) 154 ITR 288 (Cal) wherein all together new items were raised before the Tribunal for claiming weighted deduction under s. 35B when dispute was kept alive by the assessee by staking a clai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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