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2012 (10) TMI 134 - AT - Income TaxIndia Mauritius DTAA - disallowance of bonus expense u/s 43B - Held that:- Disallowance u/s 43B can be made in respect of the bonus unpaid before the due date of filing of return u/s 139(1) because Article 7(3) expressly provides for the deduction of all expenses incurred for the purpose of the business of permanent establishment. Further Article 3(2) and Article 23(1) do not impliedly sanction the invoking of section 43B in Article 7(3) of the DTA. When there is a specific provision as per Article 7(3) of the DTA providing for the deductibility of all expenses incurred for the purpose of permanent establishment, we fail to comprehend as to how Article 23(1) can be applied to invoke disallowance u/s 43B. This contention of the DR, being devoid of any merit - in favour of assessee. Disallowance u/s 14A - CIT(A) deleted the addition - Held that:- DTAA can only cure the rigor of the Act and not convert an exempt income under the Act into a taxable one. If a particular amount of income is exempt under the Act, it will cease to form part of 'Business profits' of the enterprise under Article 7. Once a particular item of income does not itself constitute business profit as per Article 7 because of its exemption under the Act, there can be no question of allowing any deduction for an expenditure incurred in relation to such income against the other taxable business income - This factual scenario brings to a stage where the assessee did borrow interest bearing funds for making investment in tax free bonds and repaid such loan out of its own interest free funds on the next day. There is obviously a direct nexus between the borrowing of interest bearing funds and making of investment in tax free bonds. There can be no dispute on the fact that only such part of interest can be disallowed which has been incurred in relation to the income not forming part of the 'business profits' of the assessee as per Article 7 of the DTA. The disallowance of interest is definitely called for but it cannot exceed the actual amount of interest paid in respect of borrowed funds used for the purposes of making investment in tax free bonds, which in the present case is only one day. The AO is directed to calculate disallowance on Rs. 10 crore for one day at the rate which was charged by the RBI on the loan advanced to the assessee on 12.11.1998. This will be the amount of interest paid by the assessee in relation to tax free interest income which is not included in the business profits as per Article 7 of the DTA, warranting disallowance in the computation of 'business profits' - partly in favour of revenue.
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