Vijay Pal Rao, Judicial Member - These two set of cross appeals are directed against respective orders of CIT(A) for the assessment years 1997-98 and 1998-99. For the assessment year 1997-98 the Assessee has raised the following grounds:—
'Ground No.1 The learned Commissioner of Income-tax (Appeals) VII, Mumbai [hereinafter referred to as "the CIT (Appeals)"] erred in confirming the decision of the learned Assessing Officer in not allowing a deduction in respect of expenditure of Rs.85,053,699 incurred by your Appellants' overseas branches, on the ground that such expenses come within the ambit of the provisions of Section 44C of the Income-tax Act, 1961 (hereinafter referred to as "the Act") pertaining to Head Office expenses, having failed to appreciate that the expenses incurred overseas which are directly attributable to the Indian operations of your Appellants do not attract the restrictive provisions of Section 44C of the Act.
Ground No.2 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in not allowing interest of Rs.18,147,135 paid to the Income-tax Authorities to be set off against interest of Rs.110,469,871 received from the Income-tax Authorities during Assessment Year 1997-98.
Ground No.3 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in disallowing certain expenses incurred for your Appellants' business in India, having failed to appreciate that under Article 7(3) of the Indo-U.S. Tax Treaty, such expenses incurred for the purpose of your Appellants' business in India are deductible in computing taxable income.
Ground No.4 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in rejecting your Appellants' claim that 25% of the expenditure incurred on entertainment be attributed to staff members accompanying the clients and be, therefore, deleted.
Ground No.5 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in treating an addition hoc amount of Rs.200,000 as expenditure incurred in respect of tea, coffee to visitors at office premises and falling within the scope of entertainment expenditure.
Ground No.6 The learned CIT(Appeals) erred in confirming the decision of the learned Assessing Officer in disallowing a sum of Rs.1,805,170 in respect of expenditure on rent, repairs and depreciation for Guest House, having failed to appreciate that the disallowance under section 37(4) is restricted to items of expenditure which are not deductible under sections 30 to 36, but are deductible only under section 37(1) of the Act.
Ground No.7 The learned CIT (Appeals) erred in confirming the decision of the learned Assessing Officer in disallowing a sum of Rs.374,704 paid to RBI, for shortfall in the maintenance of Cash Reserve Ratio, having failed to appreciate that the expenditure was compensatory and not penal in nature and, therefore, allowable.
Ground No.8 The learned CIT(Appeals) erred in confirming the decision of the learned Assessing Officer in disallowing a sum of Rs.930,377 paid to RBI for not adhering to Statutory Liquidity Reserve requirements, having failed to appreciate that the expenditure was compensatory and not penal in nature and, therefore, allowable.
Ground No.9 The learned CIT (Appeals) erred in directing the Assessing Officer to examine the feasibility of taxing the interest paid by the Appellant's Indian Branches to its Singapore branch "by way of taking recourse to sec. 163 or to the direct assessment", having failed to appreciate that the Assessing Officer had not brought such interest to tax and, that in any event, the giving of such a direction was beyond the jurisdiction and powers of the learned CIT (Appeals).
Ground No.10 The learned CIT (Appeals) erred in holding that the interest paid by the Appellant's Indian branches to its Singapore branch was chargeable to tax in India, having failed to appreciate that, having regard to the provisions of the Act and the India-US Tax Treaty such sum was not income chargeable to tax in your Appellant's hands in India.'
2. Ground No.1 regarding disallowance of expenditure incurred by the over-seas branches of the Assessee by applying the provisions of section 44C of the Income tax Act, 1961 (the Act). We have heard the ld. Senior Counsel as well as the ld. DR and considered the relevant material on record. The ld. Sr. Counsel has pointed out that AO has disallowed the expenses incurred by the overseas branches by considering the fact that a similar issue came up in the assessment year 1996-97. The ld. Sr. Counsel has referred the assessment order and submitted that the Assessee explained before AO that the expenditure incurred by the overseas branches of the bank is actually expenditure incurred by assessee. In fact the expenditure has been duly audited by local accounting firms at these locations and certified that the expenditure is incurred by the NRI desks exclusive for the Indian Branch and, therefore, the said expenditure is not covered under the provisions of section 44C. The Assessee has given a report of CA regarding expenses incurred outside India. Therefore, there was no ambiguity in the nature of expenditure incurred by the overseas branch. He has further submitted that an identical issue has been considered and decided by this Tribunal in the case of the Assessee for the assessment year 1992 Dy. CIT v. Bank of America NT & SA [2011] 47 SOT 124/13 taxmann.com 103 (Mum.)(URO). The ld. Sr. Counsel has submitted that the Tribunal has decided the issue by following the decision of Hon'ble Jurisdictional High Court in the case of CIT v. Emirates Commercial Bank Ltd. [2003] 262 ITR 55/[2004] 134 Taxman 682 (Bom.). On the other hand the ld. DR has relied upon the orders of the authorities below.
2.1 Having considered the rival submissions and carefully gone through the relevant record we find that AO has mentioned that the issue is identical as in assessment year 1996-97. Therefore, the facts with respect to the issue of disallowance of the expenses incurred by the overseas branches are identical as in the assessment year 1996-97. An identical issue has been considered and decided by this Tribunal in Assessee's own case for the assessment years 1993-94 to 1996-97 in Bank of America NT & SA (supra) which was followed in all subsequent assessment years. The finding of the Tribunal in para-12 and 13 of the order are as under:—
'12. At the time of hearing it was brought to our notice that identical issue has come up for consideration in assessee's own case for A.Y 1991-92 in ITA No.5241/Bom/05. The Tribunal held as follows.
"12. Ground 2 relates to the deduction of CIT(A) in upholding the action of the AO, who disallowed the expenditure of Rs.2,73,29,000/- incurred by the overseas branches of the assessee for its Indian operations on the ground that such expenses come within the ambit of the provisions of section 44C. 13. Relevant facts in this regard are that the assessee claimed the above expenses in the computation of income and not in the profit and loss account are incurred by overseas branches to the tune of Rs.273.29 lakhs in respect of NRI branches. As per the assessee, these are directly connected expenses to the business operations of the bank of the Indian branches. Expenses were incurred by those branches abroad to earn income by Indian Branches in India. These expenses were debited under the head of 'staff related expenses' and pertained to staff manning the NRI Desk at various branches outside India such as Singapore, Hong Kong, Jakarta and London. It was further stated that the expenses are directly for Indian operations and they were not considered or accounted by such overseas branches as deductible under their respective tax laws. Since these are expenses incurred exclusively for Indian branches, the provisions of section 44C and limitations provided therein are in applicable. However AO was of the opinion that provisions of section 44C apply to the assessee for the reason that relevant books of accounts, details of expenditure, as maintained by the overseas branches are not available for him for verify if the said expenditure is exclusively related to the business of the Indian branches of the assessee bank. After considering the above facts as well as legal position, the CIT(A) upheld the action of the AO. 14. Aggrieved with the above, the assessee is before the Tribunal. The ld. Counsel for the assessee argued that this is the case of expenditure of head office expenses, which are directly linked to the Indian branches and this is not a case of the double claim of the assessee once in the hands of the assessee and other in the hands of the Branches abroad. He further relied on jurisdictional High Court judgment in the case of Emeritus Commercial Bank Ltd. (262 ITR 55) as well as the Tribunal order in ITA No.2297/Mum/1996 in the case of British Bank of the Middle East and in ITA 4082/Mum/97 (Para 11) in the case of the Hond Kong and Shanghai Banking Corporation ltd. for the proposition that where the expenditure was incurred abroad exclusively for the Indian branches, the provisions of section 44C has no application. On the other hand, the ld. D.R for the revenue argued that the expenses claimed is not possible to be directly linked to the Indian operations for the reason that such NRI Desks must also be guiding the customers of not only of Indian origin but also the other Asian countries. He further mentioned that the claim of the assessee u/s. 37 is not correct. He further relied on the orders of the lower authorities. 15. We have heard the rival submissions and also the relevant part of the paper book connected to this ground. We have also gone through the provisions of section 44C in this regard, the same are reproduced as under:-
"44C. Deduction of head office expenditure in the case of non-residents: Notwithstanding anything to the contrary contained in section 28 to 43A, in the case of an assessee, being a non-resident, no allowance shall be made, in computing the income chargeable under the head "Profits and gains of business or profession", in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely:-Explanation for the purpose of this section:- …………… (iv) "head office expenditure" means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of- Rent, rates, taxes, repairs or insurance of any premises outside India used for the purpose of the business or profession; Salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of any office outside India; Travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and Such other matters connected with executive and general administration as may be prescribed." From the above provisions, it is evident from the use of the words and phrases in the above section i.e. 'in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount' that these provisions are inapplicable to the cases, where the alleged expenses are exclusively incurred and accounted in the books. In the instant case, the expenses of Rs. 273.29 lakhs are undoubtedly falling within the definition of 'head office expenses' within the meaning of the clause (iv) of the Explanation to section 44C of the Act. There is no dispute in this regard. Nevertheless, the case of the assessee is that the said expenses are incurred wholly and exclusively for the business purposes of Indian Business of the Bank. However, the case of the revenue is that the said expenses are incurred also for other Bank branches in Asian Regions. But the Special Counsel for revenue did not have any evidence to support the argument. We have perused the decisions in the case of Emirate Commercial Bank (Supra), and the British Bank of Middle East (supra) and BSBC Ltd. (supra). We find that book entries are not very important for determining the correct assessed income of the assessee. The claim can be made through the 'Computation of Income' route. The provision of section 44C are inapplicable in a case of expenses incurred exclusively by the Bank branches abroad in respect of NRI Desks maintained by those branches. Therefore, we are of the considered opinion that the provision of section 44C is in applicable to this claim of the assessee. Accordingly, ground 2 is allowed."
13. Ld. D.R however relied on a decision of the Tribunal in the case of Bank of Bahrain & Kuwait vs. DCIT in ITA No.6731/M/06 & 6605/M/06 for A.Y 2002-03. In the said decision the Tribunal held that if the expenses are shared/allocated/apportioned/non-exclusive head expenses then they will fall within the limits under section 44C of the Income Tax Act, 1961 (the Act). The Tribunal further held that if expenses are exclusively incurred by the head office for the Indian Branch then they shall be considered under general provisions of the Income Tax Act,1961. According to the ld. D.R in the present case it has not been established by the assessee that the expenses had been incurred exclusively for the purpose of business carried on in India. In this regard we find that the AO in the order of assessment has not given any finding as to whether these expenses are exclusively incurred in connection with the business carried on in India or otherwise. It is however, clear from the order of the AO that the assessee had claimed that expenses incurred by the bank overseas branches directly pertained to the operations and business of the Indian branches. In the statement of facts before the CIT(A) the assessee had taken a specific stand that these were expenses directly incurred for the business in India. The CIT(A) while dealing with this issue has simply followed the order of this predecessor in A.Y. 1991-92. In these circumstances we are of the view that it is not possible to accept the contention on behalf of the revenue that the matter should be remanded to the AO to examine as to whether these expenses were incurred exclusively for the business carried on in India. Respectfully following the decision of the ITAT in assessee's own case for A.Y 1991-92, we direct the AO to allow the cla
m for deduction as made by the assessee.'
2.2 Following the earlier order of this Tribunal in Assessee's own case, we decide ground No.1 of Assessee's appeal in favour of the Assessee and against the Revenue.
3. Ground No.2 regarding disallowance of interest paid to the Income tax authorities to set off against interest received from Income tax authorities.
3.1 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The assessee claimed deduction of interest paid to the Income tax authorities. The AO asked the assessee to explain why the said claim of interest of Rs.1,81,47,135/-paid to the Government may not be disallowed in view of the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. v. CIT [1957] 31 ITR 153 (Bom.) as well as the decision of Ferro Alloys Corpn. Ltd. v. CIT [1992] 196 ITR 406 (Bom.) and also decision of Hon'ble Supreme Court in the case of CIT v. Parmeshwari Devi Sultania [1998] 230 ITR 745/97 Taxman 269 . In reply, the assessee made an alternative plea that the interest paid should be set off against interest received and only net amount should be brought to tax. The AO did not accept the contention of the assessee and disallowed the claim of the assessee regarding interest paid to the Government/Income tax authorities. The ld. Sr. Counsel has submitted that for the assessment year 1990-91 in ITA No.5240/Mum/1995 vide order dated 27/03/2008 (copy enclosed page 88 of paper book ) in assessee's own case, the Tribunal has allowed the claim of netting of interest. On the other hand the ld. DR has relied on orders of authorities below and submitted that the issue is covered by the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. (supra), as relied upon by the AO. The ld. DR has further submitted that the issue is also covered against the assessee by the decision of Third Member in the case of Dy. CIT v. Sandvik Asia Ltd. [2011] 133 ITD 126/15 taxmann.com 381 (Pune) (TM).
3.2 Having considered the rival submissions and careful perusal of the decisions relied upon by the authorities we note that for the assessment year 1990-91, the Tribunal has allowed the claim of the assessee to the extent of netting of interest, however, in the case of Sandvik Asia Ltd. (supra) the issue has been considered and decided by the Third Member Bench in para-13 to 18 as under :—
'13. The next question which arises is whether on general principles and on the principle of real income the interest received from and paid to the income tax department can be adjusted or netted against each other. On this question there are two judgments, one of the Supreme Court in Dr V P Gopinathan (supra) and the other of the Bombay High Court in the case of Aruna Mills Ltd. (supra), both of which are against the assessee. In the case of Dr V P Gopinathan (supra), the assessee placed monies in a fixed deposit with the bank and earned interest. He took a loan from the bank on the security of the fixed deposit and paid interest on the loan. The interest received on the fixed deposit was more than the interest paid on the loan by Rs. 27,034/-. The assessee's case was that he should be taxed only on the difference of Rs. 27,034/- under the residuary head whereas the case of the revenue was that the entire interest received should be brought to tax without reducing the same by the interest paid. It was noticed by the Supreme Court that the learned counsel appearing for the assessee before the Tribunal had made it clear that the assessee's case did not rest upon the provisions of section 57(iii) of the Act, which provided for a deduction of the interest paid by the assessee for earning the interest income. In other words, it was not the contention of the assessee that he was paying interest to the bank to facilitate the earning of interest from the bank. This aspect of the matter was noticed by the Supreme Court at page 450 of the report. Thereafter the Supreme Court noticed that the argument before them on behalf of the assessee was that the real income of the assessee was only Rs. 27,034/-. This argument was rejected by the Supreme Court in the following words: —
"It was not disputed, as it could not be, that if the assessee had taken a loan from another bank and paid interest thereon his real income would not diminish to the extent thereof. The only question then is : does it make any difference that he took the loan from the same bank in which he had placed the Fixed deposit. There is no difference in the eye of the law. The interest that the assessee received from the bank was income in his hands. It could stand diminished only if there was a provision in law which permits such diminution. There is none, and, therefore, the amount paid by the assessee as interest on the loan that he took from the bank did not reduce his income by way of interest on the fixed deposit placed by him in the bank."
The learned counsel for the assessee sought to point out a distinction between Dr. V.P. Gopinathan's case (supra) and the present case by pointing out that if the assessee in the case before the Supreme Court had taken a loan from another bank on the strength of the fixed deposit placed by him in his bank and paid interest thereon then the decision of the Supreme Court would have been different. I am unable to accept the submission because in the paragraph quoted above the Supreme Court has observed that even if that were to be the case, the assessee's real income would not have diminished to the extent of the interest paid to the bank from which he took a loan. The judgment of the Supreme Court, rejecting the argument based on the theory of real income, applies equally to the computation of business income and in this view of the matter I must decide that the rule of netting does not apply to the case before me and that the assessee is properly assessable on the gross interest of Rs. 45,90,876/- and not merely on the net interest of Rs. 44,53,655/-.
14. I must also refer to the judgment of the Hon'ble Bombay High Court in the case of Aruna Mills Ltd. (supra), where this very argument has not found favour. One of the arguments advanced on behalf of Aruna Mills Limited before the High Court was that the Court must look at the payment of interest by the assessee company and the receipt of interest by the assessee company as a single indivisible transaction and when it is so looked, the transaction should be held to have resulted only in the company receiving the excess of the interest received over the interest paid and only such excess would be liable to tax. It was further argued that it was not proper to sever the transaction, i.e. to tax the interest received and not to allow any credit for the amount of interest paid. Dealing with this argument, the Hon'ble Bombay High Court held that in their opinion there was no relationship whatever between the receipt of interest by the assessee company and the payment of interest under the provisions relating to payment of advance tax. It was pointed out that it was difficult to understand what connection there is between the advance tax paid by the assessee by his discharging the statutory obligation and receiving the interest, and the failure of the assessee to make that statutory advance. It was held that in the first case the assessee was being paid interest for making the advance payment and in the second case he is made to pay interest for failure to pay the advance payment. According to the Hon'ble High Court, there was no connection between the two positions and that it is impossible to accept the claim that the two situations are so connected as to constitute one transaction. The result of each of these facts, according to the Hon'ble High Court, have separate and independent legal consequences and that the receipt undoubtedly constituted income of the assessee and the claim to deduct or reduce the interest paid from the interest received should be examined independently. Thereafter the High Court went on to examine the contention based on the principle of netting and eventually rejected the same. Another argument based on the contention that both commercially and technically the payment of interest by the Government and the payment of interest by the assessee stand on the same footing was also rejected. In fact, this is a branch of the argument based on the rule of netting. It was observed by the Court that the provision for payment of interest in the Act is not as compensation for use of the money belonging to the creditor which a debtor has, but the payment is for an entirely different consideration, namely, that there was a default in complying with the statutory obligation to make advance payment of tax. The High Court observed that though the interest cannot be strictly called a penalty, it was in the nature of penalty because it was for a default and also because a higher rate of interest was charged from the assessee compared to the rate of interest which the Government paid to the assessee on the advance payment of tax. On this basis also the rule of netting was not accepted by the Hon'ble Bombay High Court. It needs to be mentioned that in the case of Aruna Mills Ltd. (supra) the assessee had, as in the case before me, shown the net interest as business income and though the Assessing Officer did not accept the claim of the assessee for netting, he did not dispute the assessee's claim that the interest should be dealt with under the head "Business". In the case before me also the Assessing Officer has taken an identical stand.
15. I am therefore of the considered opinion that on the question of netting or adjustment of the interest received and interest paid and on the question of real income, the judgment of the Supreme Court in the case of Dr V P Gopinathan (supra) and that of the Bombay High Court in the case of Aruna Mills Limited (supra) are against the assessee.
16. In view of the above legal position, I am unable to give effect to the order of the Delhi Bench of the Tribunal in the case of R N Aggarwal (supra) and the order of the Bombay Bench of the Tribunal in the case of Cynamide India Ltd. (supra). In this case (order dated 23.05.1984), the Tribunal accepted the assessee's submission that the interest received from the income tax department and the interest paid to the income tax department should be adjusted against each other and only the net interest received can be brought to tax as income. In the light of the judgments in Dr V P Gopinathan's case (supra) and Aruna Mills Ltd.'s (supra), I am unable to give effect to the orders of the Tribunal.
17. The learned counsel for the assessee was at pains to point out that the judgment of the Hon'ble Bombay High Court in Aruna Mills Ltd.'s case (supra) should not be read or understood as deciding the matter against the assessee since the law at that time was that the assessee could make advance payments of the income tax and earn interest. I do not see how this could make any difference to the result.
18. In the result, I hold that the assessee is assessable in respect of the gross interest of Rs. 45,90,876/- received from the income tax department and not merely on the net interest of Rs. 44,53,655/ remaining after set off of the interest of Rs. 1,37,225/- paid to the income tax department. The interest payment cannot also be allowed as a deduction from the interest received. I thus agree with the decision of the learned Judicial Member in respect of Ground No. 4 taken by the department.'
3.3 It is clear that in the case of DCIT v. Sandvik Asia, the issue has been decided against the assessee by following the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills (supra), whereas for the assessment year 1990-91 the Tribunal has followed the decision in the case of Delhi Bench of this Tribunal in the case of K.N. Agarwal without considering the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. (supra). In the Third Member decision in the case of Sandvik Asia the order of the Delhi Bench in case of R.N. Agarwal has been distinguished in view of the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. (supra). Therefore, we are of the view that this issue is covered against the assessee by the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. (supra), as well as by the Third Member decision of this Tribunal in the case of Sandvik Asia Ltd. (supra). Following the decision of Hon'ble Jurisdictional High Court in the case of Aruna Mills Ltd. (supra)., we decide the issue against the assessee.
4. Ground No.3 regarding disallowance of expenditure claimed under Article 7(3) of India US Tax Treaty (Indo US-DTAA). The assessee has shown various expenditures as per the tax audit report which are reproduced by the AO at page-18 as under :—
1. Entertainment expenditure : |
Rs.45,72,391/- |
2. Expenditure on Gifts (Rule 6B): |
Rs.5,89,831/- |
3. Expenditure on travelling |
Rs.8,38,879/- |
4. Rent Repairs and depreciation |
|
of guest house |
Rs.18,05,170/- |
5. Maintenance of Guest House |
Rs.26,08,794/- |
6. Club Membership |
Rs.9,63,803/- |
7. Contribution towards Staff |
|
Welfare Fund (40A(9)) |
Rs.6,62,339/- |
4.1 The AO asked the assessee as to why these expenditures should not be restricted under the various provisions of the Income tax Act. The assessee has submitted that under Article 7(3) of Indo US DTAA, expenditure incurred for the purpose of business of PE (Indian Branch) shall be allowed as deduction. The assessee explained that the expenses have been actually incurred for business of banking in India, therefore, the restrictive provisions of Income tax Act other than Section 44C relating to disallowance of certain expenses are not applicable. The AO did not accept the contention of the assessee and disallowed the expenses under various restrictive provisions of the Income tax Act. On appeal, the ld. CIT(A) has confirmed the action of the AO.
4.2 Before us, at the outset the ld. Sr. Counsel has submitted that though an identical issue has been considered by the Tribunal in Assessee's own case for the assessment year 1992-93 in Bank of America NT & SA (supra) wherein, the Tribunal has held that there is nothing in the Article 7(3) as well as technical explanation of Indo US Treaty and protocol to show that restrictions in the local law for allowing certain expenses will not apply while determining profit attributable to PE. Therefore, the Tribunal held that the expenses incurred by the PE in India have to be allowed subject to limitation in domestic law i.e., Act. The ld. Sr. Counsel has submitted that while deciding this issue the Tribunal has relied upon the decision in the case of Mashreqbank PSC v. Dy. DIT (IT) [2007] 14 SOT 1 (Mum.) as well as in the case of Dresdner Bank AG v. Asstt. CIT [2007] 108 ITD 375 (Mum.). Whereas the decision in case of Mashreqbank PSC (supra) is no longer a good law in view of the decision of Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corpn. v. Dy. DIT [2012] 136 ITD 66/19 taxmann.com 364 (Mum.) . The ld. Sr. Counsel has also referred to Article 7(3) of Indo US-DTAA as well as the technical explanation of Indo US Treaty and protocol and submitted that as general rule the expenses which are incurred for the purpose of business of PE shall be allowed as deduction and the restriction provided under second part of Article 7(3) is only in respect to the allocable expenses which fall under the provisions of Section 44C of the Act. Thus the ld. Sr. Counsel submitted that as far as the expenditure incurred exclusively for the business of the PE the same shall be allowed as deduction without any restriction and only the allocable expenses in respect of general expenses, research and development expenses and other expenses incurred for the purpose of enterprise as a whole the provisions of local law and limitations provided under local law of the State of PE are applicable. On the other hand the ld. DR has submitted that the issue has been considered by this Tribunal in Assessee's own case and therefore, it is covered by the decision of this Tribunal.
4.3 We have considered the rival submissions as well as relevant material on record. The Tribunal in Assessee's own case in ITA No.141/Bom./96 for the assessment year 1992-93 has discussed the issue in detail and finally arrived at the conclusion in para-29 and 34 as under :—
'29. We have very carefully considered the rival submissions. The decision of the Tribunal in the case of American Express Bank (supra) was based on the decision of the Tribunal Bank Indosuez ITA Nos. 2089 to 2091/Bom/1991. The said decision was rendered in the context of Indo-French DTAA which had a specific Article viz., Article XIX(1) which specifically provided that the laws in force in either of the contracting states will continue to govern the taxation of income in the respective contracting state except where specific provisions to the contrary is made in the treaty. The Mumbai Bench of Tribunal while deciding the case of Mashreqbank PSC (Supra) was of the view that in view of the above specific Article XIX (1) in the indo-French treaty, which was not taken note of by the Tribunal while deciding the case of Bank Indosuez (supra), the said decision was per incurium.
In the case of Mashreqbank PSC (supra), the Mumbai Bench of ITAT dealt with Indo-UAE treaty which had a similar article like Article XIX(1) of Indo-French Treaty and therefore the Tribunal proceeded to hold that artificial disallowances under the Act will have to be made while determining profits of a PE attributable to operations in India. The decision of the Delhi Bench of ITAT in the case of Mitsubishi Heavy Industries Ltd. (Supra) was rendered in the context of Indo-Japan Treaty in which Article XI provided that the laws in force in either of the contracting states will continue to govern the taxation of income in the respective contracting state except where specific provisions to the contrary is made in the treaty. We are in the present case concerned with Indo-USA treaty. We have perused the Indo-USA treaty. As contended by the learned counsel for the Assessee, that there is no clause in the said treaty which provides that the laws in force in either of the contracting states will continue to govern the taxation of income in the respective contracting state except where specific provisions to the contrary is made in the treaty. The decision in the case of Mashreqbank PSC (supra) proceeded to hold that even in the absence of such a provision in the treaty, the restrictions contained in the domestic law would apply, as otherwise, the non-resident having PE in India would get a preferential treatment compared to a resident carrying on same business in India.
34. The technical explanation of the Indo-US treaty and protocol which serves as an office guide and reflects the policies behind particular convention provisions with respect of the application and interpretation of the treaty, in pages 31.043, 31.044, 31.085 and 31.099-10 provides as follows:
Pages 31.043-44: "Paragraph 3 provides that in determining the business profits of a permanent establishment, deductions shall be allowed for expenses incurred for the purpose of the permanent establishment. Deductions are to be allowed regardless of where the expenses are incurred. The paragraph specifies that a deduction is to be allowed for a reasonable allocation of expenses for research and development, interest, executive and general administrative expenses and other expenses incurred for the purposes of the enterprise as a whole (or part thereof which includes the permanent establishment). The language of this paragraph differs from that in the U.S.Model in one significant respect. Under the US Model, deductions are not subject to the limitations of local laws which may conflict with the general principle of the paragraph. Paragraph 3 in the Convention provides for such deductions in accordance with the provisions of and subject to the limitation of the taxation laws of the State in which the permanent establishment is situated.
Indian law limits certain deductions of a permanent establishment with respect to head office expenditures. The deduction of amounts characterized as executive and general administration expenditures (not interest) is capped at five percent of the adjusted total income of the permanent establishment. This limitation was included in the Convention because of the difficulties India has had in verifying claimed deductions for head office expenses and because of the desire of the Indians to avoid litigation on this issue. In practice, the Indian taxing authority does not inquire extensively into deductions that do not exceed the five percent cap. The amount permitted to be deducted is understood by India to be an approximate average of head office executive and general administrative expenses incurred by non-Indian companies for the purpose of their permanent establishments in India. However, the rule does not provide absolute certainty that US companies with a permanent establishment in India will be able to deduct from their income subject to Indian tax the entire amount of head office expenses incurred for the purpose of the permanent establishment."
Page: 31.085: "(7) In computing taxable business profits, deductions generally are allowed for expenses, wherever incurred, that are incurred for the purposes of the permanent establishment"
Page: 31.099-10: "In computing taxable business profits, deductions generally are allowed for expenses, wherever incurred, that are incurred for the purposes of the permanent establishment"
The technical explanation of the treaty and protocol (underlined for emphasis above), makes it clear that the restrictions for allowing expenses incurred by the PE being head office expenses which are covered by Sec.44C of the Act (domestic law) as well as other expenses incurred in India are sought to be brought within the fold of Article 7(3) of the DTAA. There is nothing in the technical explanation to show that the restrictions in the local law for allowing certain expenses will not apply while determining profits attributable to the PE. As stated in the technical explanation, under the US Model all expenses are to be allowed without any limitation whether incurred in the source country or head office. There is a departure from the US model by virtue of Article 7(3) of the Indo-US treaty. There is nothing to show that this departure is only with reference to the head office expenses. The fact that in the technical explanation there is a reference to only head office expenses does not mean that expenses incurred in the source country have to be allowed without any limitation under the local law of the source country. By implication expenses incurred by the PE in India, have to be allowed subject to the limitations in the domestic law i.e., the Act. In such circumstances, we are of the view that the ratio laid down by the ITAT Mumbai in the case of Bank Indosuez (supra) can no longer be followed in view of the later decisions referred to above. The above aspects were not brought to the notice of the bench when it decided the case of American Express bank (supra). Consequently, the limitations for allowing certain expenses under the domestic law i.e., the Act, will apply to the income attributable to the permanent establishment. We therefore hold that the view taken in the case of American Express Bank (Supra) can no longer be followed. We therefore agree with the submission on behalf of the Revenue that as far as expenses incurred in India attributable to the business carried on in India are concerned, they have to be allowed subject to the limitations provided in the Act. We therefore allow ground No.4 raised by the Assessee. We however make it clear, as explained in the commentary by Klaus Vogel (supra) that the treaty provisions have to be perused carefully to find out whether the limitations provided by internal laws would apply or not.'
4.4 Though, the contention of the ld. Sr. Counsel supports a possible view in respect of interpretation of Article-7(3) and technical Explanation of Indo US DTAA and protocol however, when a view has been taken by co-ordinate Bench of this Tribunal in Assessee's own case, therefore, to maintain a Rule of consistency we follow earlier order of this Tribunal and decide this issue in same terms.
5. Ground Nos.4 and 5 is regarding disallowing the claim of 25% of expenditure incurred on entertainment to be attributable to the staff members accompanying the clients and allowing an adhoc amount of Rs.2.00 lacs.
5.1 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The assessee claimed 25% of the entertainment expenses incurred being attributable to staff members entertaining the clients. The AO disallowed the claim to the assessee however, the AO has estimated the expenditure on this account at Rs.2.00 lacs. The estimation made by AO has been confirmed by the CIT(A). The ld. Sr. Counsel submitted that a reasonable estimate may be considered by the Tribunal in allowing the claim of the assessee. On the other hand the ld. DR has relied upon the orders of AO and the CIT(A).
5.2 Having considered the facts and circumstances of the case we note that the AO has not ruled out some part of the entertainment expenses attributable to the staff members entertaining the clients. Therefore, to bring an end to the controversy we estimate 10% of the entertainment expenses to be attributed to the staff members entertaining the clients and accordingly allowable to that extent.
6. Ground No.6 is regarding disallowance in respect of expenditure on rent, repairs and depreciation for the use of Guest House under section 37(iv) of the Income tax Act.
6.1 We have heard the ld. Sr. Counsel for the assessee as well as the ld. DR and have considered the relevant material on record. Though this issue has been decided by the Tribunal in assessee's own case for the assessment years 1992-93 to 1996-97 however, the ld. Sr. Counsel has fairly conceded that now this issue is covered against the assessee by the decision of the Hon'ble Supreme Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546/148 Taxman 468. In view of the fact that the issue is now settled by the Hon'ble Supreme Court in the case of Britannia Industries Ltd. (supra), the claim of expenditure on rent, repair/depreciation on Guest House is not allowable. Accordingly following the decision of the Hon'ble Supreme Court in case of Britannia Industries Ltd. (supra), we decide this issue against the assessee.
7. Ground Nos.7 and 8 are regarding disallowance in respect of amount paid to RBI for shortfall in maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR). The AO disallowed a sum of Rs.3,74,704/- paid to RBI for shortfall in maintenance of CRR as well as an amount of Rs.9,30,377/- paid to RBI for not complying with the SLR requirements. These disallowances were made by AO on the ground that the payments are infraction of law and therefore, cannot be allowed u/s. 36(1). The ld. CIT(A) has confirmed the disallowance made by Assessing Officer.
7.1 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The ld. Sr. Counsel has submitted that this issue has been considered and decided by the Tribunal in Assessee's own case for the assessment year 1992-93 in ITA No.141/Bom/96 in favour of assessee. He has further submitted that an identical issue has been decided by the Hon'ble Jurisdictional High Court in case of Bank of Baroda [IT Appeal No.4169 of 2009, dated 15.02.2011]. On the other hand the ld. DR has relied upon the orders of authorities below.
7.2 Having considered the rival submissions and careful perusal of record we note that this issue is covered by the decision of Hon'ble Jurisdictional High Court in the case of Bank of Baroda (supra), wherein the Hon'ble High Court has held as under :—
"The only question raised by the revenue in this appeal is, whether the interest paid by the assessee for non maintenance of the cash reserve ratio/ statutory liquidity ratio as per Section 24 of the Banking Regulation Act, 1949 and Section 42 of the Reserve Bank of India Act, 1934 constitute penalty so as to disallow the interest claim. The Tribunal following the decision in the case of Dhanalakshmi Bank Ltd. (Cochin) reported in 76 TTJ 439 held that the interest paid to the RBI was not penalty and accordingly the interest expenditure is allowable. SLP filed by the revenue against similar decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) has been dismissed by the Apex Court as reported in [2005] 277 ITR (ST) 3. In this view of the matter, we find no merit in the appeal and the same is dismissed with no order as to costs."
7.3 Following the decision of the Hon'ble High Court we decide this issue in favour of the Assessee and against the Revenue.
8. Ground Nos.9 & 10 of the assessee's appeal will be considered alongwith Ground No.2 of the revenue appeal for the assessment year 1997-98.
Cross Appeal by Revenue Assessment Year 1997-98 :
8.1 The revenue for the assessment year 1997-98 raised the following grounds:—
"1. |
|
On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.9,63,803/- made on account of membership fee paid to club. |
2. |
|
On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.9,18,78,860/- made on account of interest paid to its Singapore Branch. |
3. |
|
On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.19,35,716/- made on account of estimated expenditure incurred on earning interest on the interest free bonds. |
4. |
|
On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting addition of Rs.9,27,131/- made on account of deduction claimed u/s. 36(1)(viia) and section.44C of the Income-tax Act, 1961. |
5. |
|
On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the interest charged u/s. 234B of the Income tax Act, 1961." |
8.2 Ground No.1 is regarding club membership fee. The AO has disallowed a sum of Rs.9,63,803/- in respect of club membership fee and subscription. On appeal the CIT(A) has allowed the claim of the assessee by following the order of this Tribunal in assessee's own case as well as the decision of the Hon'ble Jurisdictional High Court in the case of Otis Elevator Co. India Ltd. v. CIT [1992] 195 ITR 682/60 Taxman 215 (Bom.)
8.3 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. This issue has been considered and decided by this Tribunal in assessee's own case consistently for the assessment year 1992-93 to 1996-97. The Tribunal has decided this issue in favour of the assessee by following the decision of the Hon'ble Jurisdictional High Court in the case of Otis Elevator Co. India Ltd. (supra), for the assessment year 1990-91 which has been followed in the subsequent assessment year 1992-93. The Tribunal considered and decided this issue in para - 57 Bank of America NT & SA (supra) as under :
'57. At the time of hearing it was agreed that this issue had been considered by the Tribunal in assessee's own case in A.Y 1990-91 in ITA No.8057/Bom/95 and the Tribunal held as follows:
"2. The issue as to whether the assessee is entitled to deduction on account of annual subscription paid to the clubs, in respect of its employees, is covered in favour of the assessee by the decision of the Tribunal in assessee's own case, for assessment years 19983-84 to 1985-86, in ITA Nos. 1305/Bom/1987, 3914& 8922/Bom/1988 and 1374/Bom/1987, order dated 6th May 1991. Reliance is also placed on the decision of the Bombay High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682, in support of the admissibility of the claim.
3. We respectfully following the decision of the Tribunal referred to above, in assessee's own case, uphold the order of the Commissioner of Income-tax (Appeals) VII, Mumbai and dismiss the appeal of the revenue."
In view of the above we find no merits in Ground No.8, consequently the same is dismissed. In the result, the appeal by the revenue is dismissed'.
8.4 In view of the earlier orders of this Tribunal as well as the decision of the Hon'ble Jurisdictional High Court in case of Otis Elevator Co. India Ltd. (supra), we decide this issue against the revenue and in favour of the assessee.
9. Ground No.2 of the revenue appeal and ground No.9 and 10 of assessee's appeal are regarding allowability of claim being interest paid to Singapore branch as well as taxability of the said interest income of the assessee.
9.1 The India branch of assessee's bank has borrowed funds from Head office/overseas branches on which the assessee paid interest to the tune of Rs.9,18,78,860/- to its Singapore branch and claimed the same as deduction in computation of income. The AO has disallowed the claim of interest on the ground that interest payment to Singapore branch constitutes payment to self. The assessee challenged the disallowance made by AO before the CIT(A). Ld. CIT(A) though accepted the claim of the assessee being interest expenditure paid to overseas branch in view of Article 7(3) of DTAA between India and Singapore however, the ld. CIT(A) has held that the said interest income in the hand of assessee's overseas bank has arisen and accrued in India and therefore, taxable u/s. 9 of the Income tax Act as well as Article 11(2) of DTAA.
9.2 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The ld. Sr. Counsel has pointed out that the issue of deductibility and taxability of interest paid to the overseas branch is covered by the decision of the Special Bench of this Tribunal in case of Sumitomo Mitsui Banking Corpn. (supra). As pointed out by the ld. Sr. Counsel we note that the issue is now covered by the Special Bench of this Tribunal in case of Sumitomo Mitsui Banking Corpn. (supra) wherein the Special Bench has decided this issue in para 55 to 58 as under :—
"55. The first and foremost aspect which is relevant in the context of the issue involved in question No.2 is whether interest payable by the Indian PE is chargeable to tax in India in the hands of GE of which the PE is a part. In our opinion, this issue first of all has to be considered and examined from the point of view of relevant provisions contained in the Income-tax Act, 1961 so as to ascertain whether interest payable by the Indian branch of the assessee bank to its overseas HO is chargeable to tax in India as per the domestic law or not. Only when it is found that the said income is chargeable to tax in India as per the domestic law, one can refer to the relevant treaties to look for any benefits available to the assessee vis-à-vis the Income-tax Act since as per the specific provisions contained in section 90(2), provisions of DTAA override the provisions of the Act in so far they are more beneficial to the assessee. It is also to be taken into consideration that the provisions contained in tax treaties are not the charging provisions inasmuch as they do not bring to tax income which otherwise is not taxable as per the domestic law. This position is clear from the decision of Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) wherein it was held that no provision of double taxation agreement can possibly fasten a tax liability where the liability is not imposed by the Act. It was held that if a tax liability is imposed by the Act, the agreement may be resorted to for negativing or reducing it.
56. In so far as the taxability of interest payable by PE in India in the hands of GE under the domestic law is concerned, it is relevant to note that the PE in India and the GE abroad of which the said PE is part are not independent persons under the domestic law i.e. Indian Income-tax Act and they are not assessed to tax separately in India. The taxable entity is only one i.e. the overseas GE which is the assessee bank in the present case who is a non resident in India and the PE in India is part of that entity which is a taxable entity in India even in respect of income attributable to the PE in India. There is thus only one person assessable to tax i.e. GE and PE is not an independent person who is assessed to tax separately in India. It is a part of the GE and its income is chargeable to tax in the hands of GE which alone is the person assessable to tax in India.
57. In the case of Sir Kikabhai Premchand (supra) it was held by the Hon'ble Supreme Court that under the Income-tax Act, all that the State can tax is income, profits and gains in the relevant accounting year. It was held that it is well recognized that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the case before the Hon'ble Supreme Court, the business was owned and run by the assessee himself and it was held in these facts and circumstances by the Hon'ble Supreme Court that it was wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of fictional sale introduce a fictional profit which in truth and in fact was non-existent. It was held that cut away this fiction and one easily reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the fact of it is not only absurd but against all cannons of Mercantile and Income-tax Law.
58. A somewhat similar situation arose before the Hon'ble Calcutta High Court in the case of Betts Hartley Huett & Co. Ltd. (supra) wherein the assessee was non resident company with its head office in London. Its business in Calcutta was mainly that of purchasing Tea for its constituents abroad. In the relevant assessment year, the assessee had charged from its constituents in respect of Tea purchased actual cost, commission or brokerage and also a sum of Rs. 10 paise per pound of Tea on account of shipping, sampling and other miscellaneous charges. In respect of dispatch to the head office, the assessee did not charge any commission but charged all other items of expenses. The AO, however, held that the amount of commission which was not charged on sale to the head office as income accrued to the assessee's head office in London and estimated the profit attributable to purchase operations of the assessee's London office in India through the assessee at 1.5% of the value of Tea to compute such income assessable to tax in India u/s 9(1). On appeal, the AAC accepted the contention of the assessee that the sales to its head office having been effected on a principal to principal basis, there was no profit assessable u/s 9(1) of the Income-tax Act, 1961. Accordingly he directed the deletion of the addition made by the AO on this issue to the income of the assessee. The Tribunal, however, held that the London Office did not earn more because of its business connection through the assessee in India and by not paying commission, this earning accrued or arose to the assessee because of its business connection in India. The Tribunal accordingly set aside the order of the AAC on this issue and restored the addition made by the AO as profit in respect of purchase operation carried on in India on behalf of the London office. On reference, the question raised before the Hon'ble Calcutta High Court was whether on the facts and circumstances of the case, the Tribunal was right in holding that the amount in question was includible in the computation of assessee's income as profit in respect of sales made to its head office in London within the meaning of section 9(1) of the Income-tax Act, 1961. Their lordships answered the said question in the negative and in favour of the assessee holding that when the transaction between the London head office of the assessee and its unit in India was a transaction as between principal and principal, it cannot be held that any income arose in favour of the assessee either directly or indirectly since the gain in London office was offset by the loss incurred in the Indian branch. It was held that in law there cannot be a valid transaction of sale between the branch office of the assessee in India and its head office in London. It was held that it is a elementary proposition that no person can enter into a contract with oneself and debiting or crediting one's account cannot alter this legal position. It was held that if one unit of a business does not debit any commission to another unit of the same business then it is difficult to follow how any saving has been effected by the business".
9.3 The Special Bench has held that the interest paid to the overseas branch head office is an allowable deduction by virtue of provisions of DTAA and at the same time the said interest paid by the India PE is not chargeable to tax under the provisions of IT Act being income to self. Accordingly in view of the decision of the Special bench ground No.2 of the revenue's appeal is dismissed and ground No.9 and 10 of assessee's appeal are allowed.
10. Ground No.3 of the revenue appeal is regarding disallowance of expenditure incurred for earning the income exempt under section 10(15)(iv)(h).
10.1 During the year under consideration the assessee received a sum of Rs.41,71,500/- as interest on tax free bonds by the Indian Railway Finance Corporation (IRFC). The assessee claimed the said sum as exempt from tax under section 10(15(iv)(h) of the I.T. Act. The assessee stated before the AO that no expenditure was incurred on earning this income from IRFC and gross interest is exempt. The AO did not accept the contention of the assessee and estimated an expenditure of Rs.9,35,216/- as incurred by the assessee towards earning the exempt income in question and accordingly disallowed the same. On appeal CIT(A) has deleted the disallowance made by the AO by following the decision of the Hon'ble Supreme Court in the case of CIT v. Indian Bank Ltd. [1965] 56 ITR 77 .
10.2 Before us the ld. DR has relied upon the order of the AO and submitted that the AO has relied upon the decision of Hon'ble Supreme Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43/[1992] 65 Taxman 420, wherein the Hon'ble Supreme Court has held that the assessee cannot avail deduction more than 100%. The ld. DR has submitted that if gross amount is allowed as exempt from tax, then it would amount to allow deduction of more than 100% of expenditure incurred for earning the taxable income. He has further pointed out that the AO has also relied upon decisions of Hon'ble Supreme Court in the case of Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120/22 Taxman 49 as well as in case of CIT v. United General Trust [1995] 200 ITR 488 (SC). Thus, it is settled proposition that proportionate expenses has to be deducted from the gross exempt income. On the other hand the ld. Sr. Counsel has submitted that the AO has disallowed the proportionate expenses from the total expenditure booked by the assessee in the P&L Account without considering the fact that the tax free bonds were purchased by the assessee in the earlier years by using its own funds and the AO did not disallow any sum in the earlier years. He has further submitted that when no expenditure has been incurred by the assessee then the question of disallowance does not arise even under section 14A. The ld. Counsel has further contented that the issue is also covered by the decision of this Tribunal in case of British Bank of Middle East v. Jt. CIT [2005] 4 SOT 122 (Mum.) He has further submitted that section 14A is not applicable in case of the assessee because bonds in question are held as stock in trade and this fact has been recorded by CIT(A). He has relied upon the following decisions:—
| (i) |
|
CIT v. Indian bank Ltd. case (supra) |
(ii) |
|
CCI Ltd. v. Jt. CIT [2012] 20 taxmann.com 196/206 Taxman 563 (Kar.) and |
(iii) |
|
State Bank of Mauritius [IT Appeal No.5778(Mum.) of 2011 order, dated 7-12-2012] |
10.3 Thus, the ld. Sr. Counsel summarized his contention under three propositions viz.
| (i) |
|
The bonds are held as trading assets as stock-in-trade. Therefore, Section 14A is not applicable. |
(ii) |
|
The gain on transfer/sale of bond is assessable as business income. Therefore, in view of decision of the Hon'ble Supreme Court in the case of Indian Bank Ltd. (supra), no disallowance can be made on tax free interest received by the assessee. |
(iii) |
|
The assessee's own funds are sufficient to purchase these bonds and therefore, no disallowance can be made in respect of interest expenditure. |
10.4 We have considered the rival submissions and carefully perused the relevant material on record. The AO has disallowed the proportionate expenditure by taking into consideration the total expenditure booked by the assessee to the P&L Account. There is no quarrel on the principle that if an income does not form part of the total income because it is exempt under the provisions of the Act then the exclusion of such exempt income shall be net income and not gross. Thus, the expenditure incurred for earning the non-taxable income has to be disallowed so that only the expenses which are related to the earning of the taxable income shall be allowed. There may be direct expenditure incurred for earning exempt income but expenditure incurred for the composite/indivisible activities in which taxable and non-taxable income is received, then the principle of apportionment will apply. The AO has not brought out any direct expenditure incurred for earning the exempt income in question and disallowed the proportionate expenses by considering total expenditure incurred by the assessee and booked to the P&L Account. Thus, it is clear that the AO has taken into consideration the expenses which were exclusively incurred for the purpose of taxable income which is not permissible. When there is no direct expenditure incurred for earning the exempt income then the apportionment of the expenditure is only for such expenditure which has been incurred for composite/indivisible activities resulting in taxable and non taxable income. It is not the case of the AO that the assessee has utilized borrowed fund for purchase of the tax free bonds in question. Therefore, when the assessee is having sufficient own funds then no disallowance can be made in respect of interest expenditure. As regards the expenditure which is common for the activities for taxable and non taxable income, the disallowance has to be considered in the light of provisions of Section 14A. It is pertinent to note that Section 14A was not in existence when the assessment in the said case was completed by the AO. However, the provision has been inserted by the Finance Act, 2001 retrospectively w.e.f 01/04/1962. Therefore, the disallowance of the proportionate expenditure incurred for composite or indivisible activity in which taxable and non-taxable income is received has to be examined in the light of the provisions of Section 14A. Though the ld. Sr. Counsel has relied upon the decision of Hon'ble Karnataka High Court in the case of CCI Ltd. (supra) as well as the decision dated 07/12/2012 of the Tribunal in the case of State Bank of Mauritius (supra) for assessment year 2008-09. However, AO has not examined the issue by considering the expenditure which is incurred for the composite/indivisible activities in which taxable/non-taxable income is received. Therefore, in the facts and circumstances of the case we set aside this issue to the record of AO to reconsider and decide the same as per law only in respect of such expenditure which is common and indivisible in respect of taxable and non taxable income.
11. Ground No.4 of the Revenue appeal is regarding computation of deduction u/s.36(1)(viia) and section 44C. The Assessee has computed deduction u/s. 36(1)(viia) at 5% of the adjusted total income before claiming deductions u/s. 36(1)(viia) and u/s.44C. Thereafter the Assessee computed deduction u/s. 44C. Thus the Assessee has computed the deduction u/s. 44C and section 36(1)(viia) of 5% of the gross total income. AO was of the view that the Assessee was not eligible for deduction u/s. 44C and 36(1)(viia) of 5% of gross total income and held that both the deductions have to be given after calculating the income as per the provisions of the Act. In other words deduction u/s. 44C has to be given after taking into account deduction u/s. 36(1)(viia) and deduction u/s.36(1)(viia) has to be given after taking into account deduction u/s. 44C. On appeal the CIT(A) accepted the claim of the Assessee by following the order for the assessment year 1996-97. Accordingly, CIT(A) directed AO to compute deduction u/s. 36(1)(viia) and section 44C of the Act as per claim made by assessee.
11.1 Before us the ld. DR has relied upon the order of Assessing Officer and submitted that deduction u/s. 36(1)(viia) as well as Section 44C has to be given as per the provisions of the Act. On the other hand the ld. AR has contended that the Revenue has accepted the order of ld. CIT(A) for the assessment year 1996-97 and, therefore, the Revenue shall maintain the consistency for the subsequent assessment year. He relied upon the order of ld. CIT(A) for the assessment year 1996-97.
11.2 We have considered the rival submissions and carefully perused the provisions u/s. 36(1)(viia) as well as section 44C. The deduction u/s. 36(1)(viia) in case of a bank incorporated outside India is restricted under sub-clause(b) to 5% of total income computed before making any deduction under that clause. For ready reference we quote sub clause(b) to section 36(1)(viia) as under :—
"Section 36(1)(viia)....
(b) a bank, being a bank incorporated by or under the laws of a country outside India, an amount not exceeding five per cent. of the total income (computed before making any deduction under this clause and Chapter VI-A) "
11.3 Similarly the deduction in respect of the head office expenditure allocable to the business or profession of the non resident Assessee in India is restricted to 5% of the adjusted total income or expenditure incurred by the head office as attributable to the business generally whichever is less as per provisions of section 44C. The definition of adjusted income has been given in clause-(i) of the Explanation to section 44C as under :—
"Section 44C ………
Explanation.—For the purposes of this section,—
(i) "adjusted total income " means the total income computed in accordance with the provisions of this Act, without giving effect to the allowance referred to in this section or in sub-section (2) of section 32 or the deduction referred to in section 32A or section 33 or section 33A or the first proviso to clause (ix) of sub-section (1) of section 36 or any loss carried forward under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A or the deductions under Chapter VIA"
11.4 Thus the adjusted total income for the purpose of Section 44C means total income computed in accordance with the provisions of the Act and interalia after giving effect to the deduction u/s. 36(1)(viia). The conjoined reading of section 36(1)(viia) as well as section 44C makes it clear that for computation of deduction u/s. 36(1)(viia) the deduction u/s. 44C has to be given effect and similarly for deduction u/s. 44C, deduction u/s. 36(1)(viia) has to be given effect. Hence, principally we do not find any error in the view of AO. Accordingly we set aside the order of CIT(A) qua this issue and restore the order of AO.
12. Ground No.5 of the Revenue appeal regarding interest charged u/s.234B which is consequential and need not be adjudicated upon as no specifying finding is required.
ITA No.604/Mum/2002 (AY: 1998-99)(Assessee's Appeal):
13. For the assessment year 1998-99 the assessee has raised the following grounds:—
"1. |
|
Denying the benefit of exemption u/s. 10(15)(iv)(fa) in respect of interest paid to Singapore branch and in any event holding that payment of such interest is chargeable to tax in India. |
2. |
|
Disallowance of Rs.9,81,75,044/- in respect of deemed expenditure for earning interest on tax free bonds and interest on lending/investment in infrastructure projects to be deleted. |
3. |
|
Deduction in respect of Head Office Expenditure be allowed as claimed by your Appellants." |
13.1 Ground Nos.1 and 2 regarding chargeability of interest paid to Singapore Branch to tax in India and at the same time allowability of expenditure of the said amount.
13.2 We have heard the ld. Sr. Counsel as well as the ld. DR. and also considered the material available on record. An identical issue has been considered in the assessment year 1997-98 in para 9.2 of this order. Accordingly, in view of our finding for the assessment year 1997-98 Ground No.1 and 2 of the Assessee's appeal are allowed.
14. Ground No.3 regarding deduction in respect of head office expenditure. The assessee has claimed 5% of the adjusted total income as head office expenditure under section 44C of the Income tax Act. The AO restricted the deduction to the amount of Rs.1,510.18 lacs as debited by the assessee in the P&L Account. On appeal the CIT(A) has confirmed the action of the AO restricting the head office expenditure to that actually incurred.
14.1 Before us, the ld. Sr. Counsel has submitted that the assessee has filed certificate of chartered Accountant to show actual expenditure incurred by the head office and, therefore, the expenditure debited in the books of account is not relevant while allowing expenditure under section 44C of the Income tax Act. He has contended that as per the provisions of section 44C of the Income tax Act, allowable expenditure is 5% of the adjusted total income or actual expenditure whichever is least. When the assessee has produced certificate of chartered accountant in respect of actual expenditure incurred, then the issue has to be decided by considering actual expenditure or 5% of adjusted total income. The ld. Sr. Counsel has relied upon the decision of this Tribunal in the case of British Bank of Middle East (supra). On the other hand the ld. DR has relied upon the orders of authorities below.
14.2 We have considered the rival submissions as well as relevant material on record. The assessee has claimed to have filed a certificate from the head office auditors confirming head office administrative expenses of Rs.26,07,93,141/- against which assessee has claimed 5% of the adjusted total income amounting to Rs.17,67,21,879/-. Since the assessee has debited the head office administrative expenses in the P&L Account at Rs.15,10,18,863/-, therefore, the AO restricted the deduction only to the extent of the amount which was debited to the P&L Account. Thus, it is clear that the AO has not examined the certificate from the head office auditors regarding the actual expenditure incurred in respect of head office administrative expenses. The CIT(A) has also not examined this issue by taking into account the certificate from the head office showing actual expenses incurred. Accordingly, in the facts and circumstances of the case and in view of the decision of the Tribunal in the case of British Bank of Middle East (supra), we set aside the issue to the record of the AO for deciding the same afresh after considering the certificate from head office auditor recording the actual expenditure incurred in respect of administrative expenses.
ITA No.894/Mum/2002 (AY : 1998-99) Revenue's Appeal :
15. For the assessment year 1998-99 the revenue has raised the following grounds :—
"1. |
|
On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in directing AO to reconsider the disallowance of expenditure incurred by the overseas branch amounting to Rs.1,010.85 lacs. The ld. CIT(A) also erred in holding that the expenses of Rs.1,010.85 lacs were not hit by the provisions of section 44C of the I.T. Act. The ld. CIT(A) also erred in holding that the provisions of Article 7(3) of the DTAA between India and the USA were not applicable. The ld. CIT(A) also erred in holding that the ratio laid down in the case reported in 228 ITR 487 (AAR) is not applicable. The ld. CIT(A) erred in holding that the ratio of the ITAT in the case reported in ITA Nos.7027 and 7392(Bom.) are not applicable. |
2. |
|
The ld. CIT(A) erred in deleting the disallowance of Rs.10.07 lacs being Club Membership expenses. |
3. |
|
The ld. CIT(A) erred in deleting the disallowance of Rs.4,363.45 lacs being interest paid to Singapore branch. The AO disallowed the claim keeping in view the Article 7(2) and 11 of DTAA. The CIT(A)'s decision of treating the interest paid to Singapore Branch as allowable under Article 7(3) of the DTAA and u/s.36(1)(iii) are erroneous and needs to be reversed." |
15.1 Ground No.1 is regarding expenses incurred by overseas branch attributable to India Branch.
15.2 We have heard the ld. DR and the ld. Sr. Counsel for the Assessee. We note that Ground No.1 is common to Ground No.1 of Assessee's appeal for the assessment year 1997-98. In view of out finding in Assessee's appeal for the assessment year 1997-98 this issue is decided against the revenue and in favour of the assessee.
16. Ground No.2 regarding club membership fee. We have heard the ld. DR and the ld. Sr. Counsel for the assessee. This ground is common to the ground No.1 of the revenue's appeal for the assessment year 1997-98. In view of our finding for the assessment year 1997-98 this issue is decided against the revenue and in favour of the assessee.
17. Ground No.3 regarding interest paid to the assessee's Singapore Branch. This ground is common to the Ground No.2 of the Revenue's appeal for the assessment year 1997-98. In view of our finding for the assessment year 1997-98 this issue is decided against the Revenue and in favour of the Assessee.
18. In the result appeals of the Assessee are partly allowed and appeal by the Revenue for the assessment year 1997-98 is partly allowed for statistical purposes and appeal for assessment year 1998-99 is dismissed.