TMI Blog2012 (8) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... alification in Article 7(3) of the DTAA that the expenses will be allowed “in accordance with the provisions of and subject to the limitations of the taxation laws of that State” applies to all expenditure incurred for the business of the PE and not merely to Section 44C alone. It, therefore, follows that the deductibility of expenses in assessee’s case is subject to the relevant provisions including section 37(2) under the provisions of DTAA. Dis-allowance computed at 50 %. The fact that the assessee’s interpretation was accepted in earlier year does not mean that it cannot be departed with when several orders have been subsequently rendered by various benches of the Tribunal taking contrary view. Dis-allowance u/s 14A - Interest on tax free bonds – gross interest claimed as exempt u/s 10(15)(iv) – assessee contended that provisions of section 14A are not applicable where the shares are held as stock in trade - Held that:- Here assessee has tried to make out a case that main purpose of the holding of shares was to earn income from sale and the dividend income was just incidental to such holding. Section 14A talks of making dis-allowance of expenses incurred in relation to an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent provided in that section. The second ground is against the confirmation of disallowance of expenses amounting to Rs.13,50,87,275 incurred at the head office directly in relation to Indian branches on the ground that such expenses were covered by the provisions of section 44C and should, therefore, be allowed as deduction in the manner and to the extent provided in that section. 2.1. Briefly stated the facts of these two grounds are that the assessee, a non-resident banking company, claimed deduction of head office expenses and NRI expenditure amounting to Rs.13.50 crore and Rs.6.39 crore respectively in relation to the Indian branch. The assessee was called upon to explain as to why these expenses be not covered u/s 44C and hence disallowed as was held by the Tribunal for assessment year 1987-89. The assessee tendered its reply submitting that the deduction was claimed for head office expenses and NRI marketing expenses from income chargeable to tax which was not subject to the provisions of section 44C. It was stated that such expenses were : Rs.direct in nature and incurred exclusively for the branch in India. There is no question of there being allocated / apportioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (I.T.) Vs. Bank of Bahrain Kuwait (2011) 44 SOT 693 (Mum) has canvassed similar view by holding that the exclusive expenses incurred by the head office for Indian branch are outside the purview of sec. 44C and only common head office expenses are governed by this section. There can be no quarrel over this proposition of law. But the fact of the matter is that the expenses which are subject matter of ground nos. 1 and 2 are exclusive and not common. It is amply borne out from the assessment order, where the AO has reproduced the reply filed by the assessee stating that these expenses were exclusive. Relevant part of such contention advanced on behalf of the assessee has been extracted verbatim in para 2.1 of this order. The AO has no where controverted this submission. Thus, it follows that the assessee s contention of these amounts representing exclusive head office expenses was accepted by the AO. Once the amount is found to be exclusive expenditure incurred by the head office towards the Indian branch, the same is required to be allowed in terms of section 37(1), without clubbing it with shared head office expenses as per sec. 44C. This submission of the Revenue is jettisoned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal has decided similar issue in favour of the assessee in earlier years by holding that it is entitled to deduction towards entertainment expenses in full. At the same time it is equally true that in a subsequent decision in the case of Bank of America NT SA (supra) a contrary view has been recorded by considering all the relevant facts and circumstances including the decision rendered in assessee s own case for earlier years. 3.5. Ordinarily we would have followed the view taken by the coordinate bench of the Tribunal in assessee s own case for the preceding year. However, we find that several orders have been subsequently rendered by various benches of the Tribunal taking contrary view. In such a situation it becomes imperative to examine the legal position in this regard rather than blindly following one view or the other. 3.6. Section 37(2), prior to its omission by the Finance Act, 1997 with effect from 01.04.1998, provided that any expenditure in the nature of entertainment expenditure incurred by the assessee shall be allowed as deduction to the extent of Rs.10,000 in full and thereafter 50% of such expenditure. The restriction on deduction is qua the expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. (emphasis supplied by us) 3.9. A bare perusal of the above clause indicates that the assessee is entitled to deduction for the expenses which are incurred for the business of the permanent establishment including the allocation of executive and general administrative expenses etc. incurred whether in the State in which the permanent establishment is situated or elsewhere. The allowability of expenses in the determination of profits of the permanent establishment is with qualification stipulated in clause (3) itself as per which such expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear that the limitations for the allowability of expenses as per the provisions under the Act are on all the expenses incurred for the purposes of the business of the permanent establishment, which also inter alia, include executive and general administrative expenses. If the intention had been to limit the deductibility only in respect of allocation of executive and general administrative expenses, thereby granting deduction in full for all other expenses, then the reference would have been made to section 44C of the Act and its parallel under the American Income-tax Act. Since a wider expression has been employed and that too at the end of the sentence and the earlier part refers to the expenses incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses, in our considered opinion there can be no question of reading the limit as applicable only to the executive and general administrative expenses. In our considered opinion the restriction on the allowability of expenses in accordance with and subject to the limitations of the Act extends not only to the expenses covered u/s 44C but under all other relevant sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar issue subsequently came up for consideration before the tribunal in the case of Bank of America NT SA (supra), the bench considered all the relevant parameters about the deductibility of expenses and thereafter took a view in favour of the Revenue, of course, after due deliberation of the order passed in assessee s case. This later view has been followed in a number of cases brought to our notice by the ld. DR. No material has been brought on record to demonstrate that the latter view of the tribunal has been modified or reversed by the Hon ble High Court. We are, therefore, more inclined to accept the latest view on this issue, whose correctness has been tested by us above in the light of discussion on Article 7 of the DTA. Accordingly it is held that the provisions of section 37(2) are attracted for limiting the deductibility of entertainment expenses under DTA. 3.14. From the facts of the case it is noticed that the assessee initially offered qualifying amount for disallowance u/s 37(2) at the rate of 30% of the expenses as relatable to non-employees participation, which was increased by the Assessing Officer to 80%. The Hon ble Karnataka High Court in the case of CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue is aggrieved against this finding of the learned CIT(A). 4.3. We have heard the rival submissions and perused the relevant material on record. Insofar as the question of exemption u/s 10(15)(iv) is concerned, we find that the relevant provision clearly refers to the exemption in respect of Rs.interest payable by any public sector company in respect of such bonds or debentures and subject to such condition . The crucial words used in this provision are Rs.interest payable in respect of the bonds or debentures etc. as notified by the Central Government in the Official Gazette. There is no reference to allowing exemption in respect of any income arising out of interest payable to the assessee. When the legislature has exempted the amount of Rs.interest payable in respect of specified bonds, there can be no logic in curtailing the exemption by reducing the expenditure from such interest income. The learned Departmental Representative was fair enough to concede and rightly so that the Revenue was not aggrieved against the allowing exemption u/s 10(15) on gross interest. He submitted that the ground raised by the Revenue restricts itself to the granting of deduction of exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from securities held as stock-in-trade, no disallowance can be made u/s 14A as the income from such securities is only incidental to the holding of shares. For this proposition he relied on the judgment dated 14.06.2010 of the Hon ble Kerala High Court in the case of CIT v. Smt. Leena Ramachandran [(2011) 339 ITR 296 (Ker.)]. When the attention of the ld. was drawn towards the judgment of the Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. v. DCIT (supra) and the special bench order in the case of ITO v. Daga Capital Management (P.) Ltd. [(2009) 117 ITD 169 (Mum.) (SB)], it was submitted that the ratio in the case of Godrej Boyce (supra) is not applicable where the disallowance u/s 14A is in respect of exempt income from securities held as stock-in-trade. As regards the special bench decision in Daga Capital (supra), it was stated that albeit it has been laid down in this case that section 14A applies whether or not the shares are held as stock in trade, but the judgment in the case of Smt. Leena Ramachandran (supra) will prevail over the special bench order. 4.5. It has been noticed above that the Revenue is not aggrieved, and rightly so, on the questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Dresdner Bank AG (supra) has been modified or reversed by the Hon ble jurisdictional High Court. Respectfully following the precedent, we hold that recourse to the provisions of section 14A for making disallowance of proportionate expenditure incurred for earning exempt income, has been validly taken on behalf of the Revenue. 4.6. We now proceed to deal with the arguments put forth by the learned AR on the non-applicability of section 14A. First part of his submissions was devoted to relying on the judgment of the Hon ble Supreme Court in the case of Indian Bank Ltd. (supra) for bringing home the point that the interest paid by the bank on deposits utilized for purchasing tax free securities has to be allowed as deduction in entirety against the taxable profit of the business. It is observed that almost similar view was taken by the Hon ble Supreme Court in CIT v. Maharashtra Sugar Mills Ltd. [(1971) 82 ITR 452 (SC)] which was reiterated by the Hon ble Apex Court in the case of Rajasthan State Warehousing Corporation (supra). In this latter case, the Hon ble Summit Court held that in computing the profits and gains of business or profession when an assessee is carrying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which does not form part of the total income even though such expenditure may be allowable under any other provisions such as section 36(1)(iii). It has further been held in this case that provisions of section 14A are applicable with respect to the dividend income earned by the assessee engaged in the business of dealing in shares and securities, on the shares held as stock-in-trade. Insofar as the computation of disallowance u/s 14A is concerned, the Special Bench sent the matter back to the file of A.O. for computing the disallowance as per rule 8D. The said Special Bench order was followed by the co-ordinate bench of the tribunal in the case of Godrej Boyce Mfg. Co. Ltd. This later case came up before the Hon ble jurisdictional High Court in Godrej Boyce Mfg. Co. Ltd. v. DCIT (supra). In this case it has been held that the dividend income and income from mutual funds falling within the ambit of section 10(33) is not includible in computing the total income of the assessee and consequently no deduction can be allowed in respect of expenditure incurred by the assessee in relation to such income by virtue of the provisions of section 14A(1). It has also been held in this case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst this order, the Revenue preferred an appeal before the Hon ble High Court. Reversing the order of the Tribunal and restoring the disallowance made by the AO, the Hon ble High Court observed that any expenditure incurred for earning any income which is not taxable under the Act, is not an allowable expenditure. From the facts of the this case, it is evident that the assessee therein borrowed funds for acquiring shares of the company under its control claiming it as a business purpose. The said Rs.business purpose was not denied either by the Hon ble High Court or the authorities under the Act. Obviously, the dividend income from such investment in shares was incidental to the holding of shares of company under its control for the purpose of its business. When the disallowance has been held to be sustainable in that case despite the dividend being incidental income, we are unable to find any logic in not applying the command of the said judgment to the facts of the case under consideration. Here also the assessee has tried to make out a case that the main purpose of the holding of shares was to earn income from sale and the dividend income was just incidental to such holding. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in respect of exempt dividend income arising from the shares held as stock-in-trade. It is the second sentence, which refers to the receipt of exempt dividend and mandates the making of disallowance under section 14A. 4.10. Be that as it may and without prejudice to above finding, it is seen that the Hon ble High Court in this case was confronted with a question of disallowance in a situation in which dividend was earned from the shares held for business purpose, which has been decided against the assessee. So the ratio decidendi of the judgment is this disallowance of interest u/s 14A and the other observations are simply obiter dicta, which have been made without there being any question before it. It is a trite law that it is the ratio of a decision which is binding and not its obiter dicta. 4.11. At this juncture it will be relevant to note the facts of Godrej Boyce (supra), which case also deals with the question of disallowance u/s 14A and, being that of the Hon ble jurisdictional High Court, has a binding force on us. In that case the assessee claimed a dividend of Rs.34.34 crores as exempt from the total taxable income under section 10(33). On being called upon to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith respect to dividend income earned by the assessee from the shares held as stock-in-trade also, has not been disturbed. 4.14. We, therefore, hold that the contention raised by the learned AR for not applying the provisions of section 14A in respect of dividend income from shares held as stock-in-trade cannot be accepted. As the Assessing Officer computed proportionate expenditure for earning tax free income by certain mathematical exercise, which has also been challenged by the assessee before us, we are of the considered opinion that the ends of justice will meet adequately if the Assessing Officer is directed to compute the disallowance u/s 14A on some Rs.reasonable basis as per the mandate of the Hon ble jurisdictional High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra). The view taken by the learned CIT(A) in deleting the disallowance is accordingly set aside. 5.1. Second ground of the Revenue s appeal is as under:- On the facts and circumstances of the case and in law, the ld.CIT(A) has erred in holding (indirectly) that the expenses attributable to earning the interest income and dividend income of Rs.43,47,247 and Rs.40,51,189 are allowable against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to tax at the normal rate does not emanate from the order of the authorities below. The AO, though discussed the issue in the body of the order and also computed the amount disallowable at Rs.83.90 lac but committed a mistake by not disallowing such amount in the final computation of total income chargeable to tax at the normal rate. Then, the ld. CIT(A) also never held that such expenses are deductible against the other income. He was called upon to decide the question of gross or net amount eligible for taxation at special rate, which he decided in assessee s favour, which finding has been accepted by the Revenue. 5.3. It is therefore, palpable that the grouse of the Department through this ground in requiring us to hold that such expenses should not be allowed as deduction against the other income chargeable to tax at normal rate, does not emanate from the impugned or the assessment order. It is axiomatic that the tribunal is not a forum for rectifying such mistakes committed by the AO. For that purpose, there are other provisions, such as, revision u/s 263 and rectification u/s 154. On this very short point, this ground is liable to be dismissed. 5.4. We find that it is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch other judgments by providing that expenditure incurred in relation to Rs.income which does not form part of total income under this Act shall not be allowed as deduction. In other words, the deductibility of expenses incurred for earning exempt income has been inhibited. But for that, the ratio of these judgments is intact. To put it simply, the decision of allowing entire expenditure incurred by the assessee in an indivisible business against the taxable income has been statutorily altered by forbidding the allowability of expenses incurred in relation to exempt income. If the income is not exempt but chargeable to tax at a lower rate, then two consequences follow. Firstly, the provisions of section 14A shall cease to apply and secondly, the position will stand covered by the judgment in the case of Rajasthan State Warehousing Corporation (supra) for allowing the expenses in full without any apportionment. Section 14A does not provide that if income is liable to tax at a lower rate then also the proportionate expenditure should not be allowed as deduction against the other business income. As the assessee in the instant case is carrying on one composite business earning incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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