2015 (4) TMI 1251 - HC - Income Tax

Appeal admitted on - (1) Whether on the facts and circumstances of the case and in law, the ITAT was justified in holding that interest received by the assessee, out of funds placed with its HO and other overseas branches, is not taxable in India? (2) Whether on the facts and circumstances of the case and in law, the ITAT was justified in holding that interest payable by the Indian branch / permanent establishment of the foreign bank to its head office and other overseas branches, is deductible in computing the total income ? (3) Whether on the facts and circumstances of the case and in law, the ITAT was justified in holding that provisions of section 40(a)(i) are not applicable on interest payable by the Indian branch / permanent establishment of the foreign bank to its head office and other overseas branches, as it does not give rise to any income although as per the deeming provisions of article 7 of the concerned DTAA the income of the branch is to be computed as a separate and a distinct identity from the main entity and for the computation of income the provisions of domestic law are applicable ? Addition on account of deferred guarantee commission - ITAT not deciding the case on merits and setting aside the matter on the issue to the assessing officer - Held that - The matter has been sent back to the authority, lower to the Tribunal for a decision on merits. Merely because a order passed in the case of Bank of Bahrain and Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI has been brought to the notice of the parties and the assessing officer, does not necessarily mean that the issue will not be decided by him in accordance with law. We do not see any basis for entertaining this question. Addition u/s 14A - Held that - ITAT was justified in holding that no interest section 14A for earning of interest income on tax free bonds as the assessee has sufficient interest free funds available. Setting aside the matter to the assessing officer on the issue of applicability of provisions of section 115JA to foreign companies - No substantial question of law.

Summary

Issues Involved:
1. Taxability of interest received by the assessee from its head office and overseas branches.
2. Deductibility of interest payable by the Indian branch to its head office and overseas branches.
3. Applicability of section 40(a)(i) on interest payable by the Indian branch to its head office and overseas branches.
4. Setting aside the matter on the issue of addition on account of deferred guarantee commission.
5. Disallowance of interest under section 14A for earning interest income on tax-free bonds.
6. Applicability of provisions of section 115JA to foreign companies.

Issue-wise Detailed Analysis:

1. Taxability of Interest Received by the Assessee:
The court addressed whether the interest received by the assessee from funds placed with its head office and other overseas branches is taxable in India. The Income Tax Appellate Tribunal (ITAT) held that such interest is not taxable in India. The High Court admitted this as a substantial question of law, noting that this issue is already subject to pending appeals.

2. Deductibility of Interest Payable by the Indian Branch:
The court examined whether the interest payable by the Indian branch (permanent establishment) of the foreign bank to its head office and other overseas branches is deductible in computing total income. The ITAT ruled in favor of the assessee, allowing the deduction. The High Court admitted this as a substantial question of law, indicating its significance and pending appeals on similar issues.

3. Applicability of Section 40(a)(i):
The court considered whether section 40(a)(i) applies to interest payable by the Indian branch to its head office and overseas branches. The ITAT concluded that these provisions are not applicable as the interest does not give rise to any income. The High Court admitted this question as a substantial question of law, reflecting its complexity and ongoing related appeals.

4. Deferred Guarantee Commission:
The court reviewed the ITAT's decision to set aside the matter regarding the addition on account of deferred guarantee commission to the assessing officer, to be decided in accordance with the ratio laid down in DCIT (IT) v. Bank of Bahrain & Kuwait. The High Court dismissed this question, noting that the matter was not prejudicial to the revenue and was sent back for a decision on merits. The court saw no basis for entertaining this as a substantial question of law.

5. Disallowance of Interest under Section 14A:
The court scrutinized the ITAT's decision on the disallowance of Rs. 34,90,860 under section 14A for earning interest income on tax-free bonds. The ITAT allowed the exemption under section 10(15) on a gross basis but sustained disallowance under section 14A for administrative and other expenses. The High Court dismissed this question, criticizing the Tribunal's practice of consolidating appeals and noting the lack of clarity and proper justification for such consolidation. The court emphasized the need for a clear and consistent approach in handling similar issues across different assessment years.

6. Applicability of Section 115JA to Foreign Companies:
The court evaluated whether the provisions of section 115JA, which mandate a minimum tax payable by companies, apply to foreign companies. The ITAT set aside the matter to the assessing officer for a decision. The High Court dismissed this question, aligning its reasoning with the dismissal of question No. 4, and noted that the appeal did not raise a substantial question of law.

Conclusion:
The High Court admitted the appeal on questions 1 to 3 as substantial questions of law, reflecting their complexity and ongoing related appeals. The court dismissed questions 4, 5, and 6, critiquing the Tribunal's procedural practices and emphasizing the need for clear, consistent, and timely decisions. The court's observations aim to guide the Tribunal in avoiding procedural errors and ensuring thorough and accurate adjudication of similar issues.