2016 (10) TMI 1336 - AT - Income Tax

Taxation of income earned by the assessee from investment made in Malaysia - DTAA between Union of India and Government of Malaysia - HELD THAT - As rightly submitted by the Ld. D.R. this Tribunal examined the issue for assessment year 2000-01 and found that there was no permanent establishment in Malaysia. The Malaysian branch of the assesseecompany invested in M/s Goldman Sachs on the basis of the decision taken at Chennai. This Tribunal found that M/s Goldman Sachs invested in various bonds and shares. The Malaysian branch of the assessee-company was in fact operated from Chennai. This Tribunal for the assessment year 2000-01 examined entire nature of investments made by the assessee7 company in Malaysia and found that the interest / income earned by the assessee from investments in Malaysia has to be construed as income from other sources . The loss suffered by the assessee on sale of shares and investments cannot be allowed to set off against the capital gain. This Tribunal further found that the income earned by the Malaysian branch of the assessee-company is taxable in India and not taxable in Malaysia. In view of the decision of this Tribunal in the assessee s own case for the assessment year 2000- 01 this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Expenditure incurred by the assessee in Malaysian branch - HELD THAT - This Tribunal found that the income from Malaysian branch has to be classified as income from other sources and it cannot be said to be arising from business therefore there cannot any question of allowing the expenditure against the business income. In view of this order of the Tribunal the CIT(Appeals) is not justified in allowing the claim of the assessee. In fact this order of the Tribunal was not brought to the notice of the CIT(Appeals). Interest under Section 234B - HELD THAT - Payment of advance tax was increased due to inclusion of income of Malaysian branch in India. The assessee claims that there was a bona fide belief that the Malaysian income would not form part of total income of the assessee in India. The assessee-company is not making investments in any another companies. The other company M/s Goldman Sachs was doing business. The decision to make investment was taken in India therefore the Malaysian branch cannot be construed a permanent establishment. In those factual circumstances this Tribunal found for the assessment year 2000- 01 in the assessee s own case that the income earned on investments by Malaysian branch of the assessee-company is taxable in India. The taxability of income at Malaysian branch is not because of any legislative change brought in subsequently. Therefore it cannot be said that the assessee was under the bona fide belief. This is the case of levy of tax on the income. Since there was no legislative change brought in by the Parliament this Tribunal is of the considered opinion that the judgment of Madras High Court in Revathi Equipment Limited 2007 (6) TMI 154 - MADRAS HIGH COURT may not be applicable to the facts of the case. Therefore when the assessee admittedly paid advance tax which is less than 90% of assessed tax the assessee is liable to pay interest under Section 234B of the Act. Therefore this Tribunal is unable to uphold the order of the CIT(Appeals). Accordingly the order of the CIT(Appeals) is set aside and that of the Assessing Officer is restored. Levy of interest under Section 234D - claim of the assessee before the lower authorities was that no interest could be chargeable under Section 234D of the Act prior to assessment year 2001-02 - HELD THAT - The Madras High Court in Infrastructure Development Finance Co. Ltd. 2011 (9) TMI 591 - MADRAS HIGH COURT found that Section 234D of the Act came into force with effect from 01.06.2003. When the regular assessment was completed after the provisions of Section 234D of the Act came into force the assessee was liable to pay interest on the excess amount refunded as contemplated under Section 234D of the Act. In this case also the regular assessment was admittedly made on 21.01.2009 after Section 234D of the Act came into operation. Therefore the assessee is liable to pay interest under Section 234D of the Act on the excess amount refunded. Reopening of assessment u/s 147 - assessee is challenging the reopening of assessment on the ground that the Malaysian branch of the assessee-company constitutes a permanent establishment in Malaysia therefore the income does not escape from assessment - HELD THAT - This Tribunal for assessment year 2000-01 in the assessee s own case found that the Malaysian branch of the assessee-company cannot constitute a permanent establishment and the assessee s Malaysian branch is not doing any business other than making investments. Therefore income from Malaysian branch is taxable India. In view of the finding of this Tribunal for assessment year 2000-01 that the income escaped assessment therefore the Assessing Officer has rightly reopened the assessment under Section 147 of the Act. On identical situation for assessment years 2002-03 and 2003-04 this Tribunal confirmed the order of the Assessing Officer for reopening assessment. Therefore this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Classification of interest income and dividend income - assessee submitted that the business of the assessee is investment therefore the interest income earned by the assessee from investments and dividend income have to be classified as income from business - HELD THAT - It is not in dispute that the assessee has invested in one M/s Goldsman Sachs through its Malaysian branch. The assessee has not done any other business other than making investment in M/s Goldsman Sachs. In those circumstances this Tribunal is of the considered opinion that the income by way of interest and dividend income received from M/s Goldsman Sachs have to be classified as income from other sources and not as income from business. Therefore this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Unrealised gain on currency translation - HELD THAT - The gain on foreign currency translation from various international currencies is notional one. The Uttarakhand High Court in ONGC case 2007 (3) TMI 204 - UTTARAKHAND HIGH COURT examined this issue and found that the gain is only a notional one and it is not taxable in the hands of the assessee. Since the CIT(Appeals) has followed the judgment of Uttarakhand High Court this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Provision for diminution in the value of current investment - HELD THAT -As rightly submitted by the Ld.counsel for the assessee the assessee continuously valuing the current investments at cost or market price whichever is lower Therefore as on the last day of the financial year the quantum of diminution in the value of current asset can be ascertained. Hence as rightly submitted by the Ld.counsel for the assessee it is not a provision. Therefore the CIT(Appeals) has rightly allowed the claim of the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Diminution in the value of stocks - DR submitted that the profit on sale of investments was found to be a capital gain by this Tribunal for assessment years 2002-03 and 2003-04. Therefore diminution in the value cannot be allowed as deduction - HELD THAT - The investment made by the assessee has been continuously valued either at market price or at cost whichever is lower as per the provisions of Section 145 of the Act. Therefore the diminution in the value of investment is ascertainable at the end of the financial year. Hence the CIT(Appeals) has rightly allowed the claim of the assessee. This Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Disallowance u/s 14A - HELD THAT - As rightly submitted by assessee Rule 8D of Incometax Rules 1962 is not applicable for assessment year 2007-08. This Tribunal is uniformly taking a view that 2% of the exempt income has to be taken as expenditure for earning that income. Therefore this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Expenses incurred on bank guarantee - HELD THAT - It is not in dispute that the assessee borrowed loan from HDFC Bank on the basis of the bank guarantee given by M/s Goldsman Sachs. It is also not in dispute that the assessee has paid lower rate of interest. Therefore the expenditure incurred by the assessee in giving bank guarantee is for business purpose. Therefore the CIT(Appeals) has rightly allowed the same. Therefore this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Summary

Issues Involved:
1. Taxation of income earned by the assessee from investment made in Malaysia.
2. Expenditure incurred by the assessee in Malaysian branch.
3. Levy of interest under Section 234B of the Act.
4. Levy of interest under Section 234D of the Act.
5. Reopening of assessment.
6. Classification of interest income and dividend income.
7. Unrealised gain on currency translation.
8. Provision for diminution in the value of current investment.
9. Diminution in the value of stocks.
10. Disallowance made under Section 14A of the Act.
11. Foreign exchange fluctuation loss.
12. Expenses incurred on bank guarantee.

Detailed Analysis:

1. Taxation of Income Earned by the Assessee from Investment Made in Malaysia:
The primary issue revolves around whether the income earned by the Malaysian branch of the assessee-company should be taxed in India or Malaysia. The assessee argued that the income should be taxed in Malaysia under the Double Taxation Avoidance Agreement (DTAA) between India and Malaysia, citing that the Malaysian branch constitutes a permanent establishment. However, the Tribunal, referencing its earlier decision for assessment year 2000-01, concluded that the Malaysian branch did not constitute a permanent establishment and that the income earned from investments in Malaysia should be taxed in India as "income from other sources."

2. Expenditure Incurred by the Assessee in Malaysian Branch:
The Tribunal examined whether the expenditure incurred by the Malaysian branch should be allowed while computing the total income in India. The CIT(A) had allowed the expenditure, but the Tribunal, referencing its decision for assessment year 2003-04, found that since the income from the Malaysian branch is classified as "income from other sources," the expenditure cannot be allowed against business income. Thus, the Tribunal set aside the CIT(A)'s order and restored the Assessing Officer's decision.

3. Levy of Interest under Section 234B of the Act:
The Tribunal upheld the levy of interest under Section 234B, rejecting the assessee's argument of a bona fide belief that the Malaysian income was not taxable in India. The Tribunal emphasized that the global income of a resident company is taxable in India unless excluded by a DTAA.

4. Levy of Interest under Section 234D of the Act:
The Tribunal confirmed the levy of interest under Section 234D on the excess amount refunded to the assessee, citing the Madras High Court judgment in Infrastructure Development Finance Co. Ltd. The Tribunal noted that the regular assessment was completed after Section 234D came into operation, making the assessee liable for interest on the refunded amount.

5. Reopening of Assessment:
The Tribunal upheld the reopening of the assessment under Section 147, referencing its earlier decision that the Malaysian branch did not constitute a permanent establishment and that the income escaped assessment. The Tribunal found no reason to interfere with the lower authority's order.

6. Classification of Interest Income and Dividend Income:
The Tribunal confirmed the classification of interest income and dividend income from investments in M/s Goldman Sachs as "income from other sources," rejecting the assessee's claim that it should be classified as "income from business."

7. Unrealised Gain on Currency Translation:
The Tribunal upheld the CIT(A)'s decision to exclude unrealised gain on currency translation from taxable income, citing the Uttarakhand High Court judgment in CIT v. ONGC, which considered such gains as notional and not taxable.

8. Provision for Diminution in the Value of Current Investment:
The Tribunal confirmed the CIT(A)'s decision allowing the provision for diminution in the value of current investment, recognizing that the assessee consistently valued current investments at cost or market value, whichever is lower, making it an ascertainable and permissible deduction.

9. Diminution in the Value of Stocks:
The Tribunal upheld the CIT(A)'s decision allowing the diminution in the value of stocks, noting that the assessee continuously valued investments at cost or market value, whichever is lower, as per Section 145 of the Act.

10. Disallowance Made under Section 14A of the Act:
The Tribunal confirmed the CIT(A)'s decision to restrict the disallowance to 2% of the exempt income, noting that Rule 8D of the Income-tax Rules, 1962, is not applicable for assessment year 2007-08.

11. Foreign Exchange Fluctuation Loss:
The Tribunal upheld the CIT(A)'s decision to consider foreign exchange fluctuation loss as notional and not taxable, following the Uttarakhand High Court judgment in CIT v. ONGC.

12. Expenses Incurred on Bank Guarantee:
The Tribunal confirmed the CIT(A)'s decision allowing the expenses incurred on bank guarantee as a business expenditure under Section 37(1) of the Act, recognizing that the guarantee was for business purposes, specifically for installing a windmill.

Conclusion:
The Tribunal delivered a mixed verdict, allowing some appeals and dismissing others, while also partly allowing certain cross-objections. The detailed analysis of each issue reflects the Tribunal's adherence to prior decisions, legal principles, and relevant case laws.