TMI Blog2014 (1) TMI 537X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to the taxable income is embedded in the provisions of section 14A to ensure that the expenditure incurred in relation to the income which is not chargeable to tax shall not be allowed as deduction against the income which is chargeable to tax - the income, which is chargeable to tax is taken as net income after deduction of the allowable expenditure and similarly the income which is not chargeable to tax is also taken net and the expenditure incurred in relation to such income is reduced from it - Thus, the income, which does not form part of the total income, shall also be the net income after considering the expenditure directly or indirectly incurred in relation to earning the said income. Applicability of section 14A of the Act - Interest received from the HO is not an income - No question of exclusion from the total income – Held that:- Following M/s. Societe Generale Versus The Dy. Director of Income-tax (International Taxation) -2(1) Mumbai [2013 (5) TMI 374 - ITAT MUMBAI] - the applicability of section 14A upheld in respect of the interest which was held to be exempt on principle of mutuality - there is no ambiguity on the issue that section 14A is applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjection No. 86/Mum/2004, ITA No 581/Mum/2004, ITA No 582/Mum/2004, ITA No 2872/Mum/2006, ITA No 1608/Mum/2008 - - - Dated:- 22-3-2013 - Shri Rajendra Singh, AM And Shri Vijay Pal Rao, JM,JJ. For the Petitioner : Shri Niraj Sheth For the Respondent : Sh Mahesh Kumar ORDER Per Bench: These four sets of cross appeals and two cross objections by the assessee are directed against the separate orders of the Commissioner of Income Tax(Appeals) for the AYs 1998-99, 99-00, 2002-03 and 2003-04 respectively. 2 Some of the grounds raised by the assessee are common in all the appeals;therefore, the grounds raised in the Assessment Year 2003-04, which covers thecommon grounds raised by the assessee in other appeals, are as under: The Commissioner of Income-tax (Appeals)-XXXIII, Mumbai [hereinafter referred to as the CIT(A)] erred in upholding the action of the Assistant Director of Income-tax (International Taxation)-3(2), Mumbai (ADIT) in considering interest of Rs.2,24,09,344 received from Head Office as forming part of the taxable income. 2. The CIT(A) erred in upholding the action of the AO in bringing to tax year end provision of Rs. 6,37,899 made for expenses whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." For the Assessment Year 2002-03: "I On the facts and circumstances of the case and in law the ld Commissioner of Income Tax(Appeals) has erred in directing the Assessing Officer to allow deduction of Rs. 18,45,898/- u/s 37(1) of the I T act over and above the allowance made u/s 44C of the act. Ii On the facts and circumstances of the case and in law, the dl Commissioner of Income Tax(Appeals) ) has erred in directing the Assessing Officer to delete the disallowance of Rs 13,16,602/- on the ground that the provisions of sec 40(a)(i) are not applicable." For the Assessment Year 2003-04: i. On the facts and in the circumstances of the case and in law, the ld Commissioner of Income Tax(Appeals) erred in directing the Assessing Officer to allow assessee's claim for deduction u/s 37 of the act of Rs. 21,63,436/- representing travelling expenses of HO personnel to India and Certificate fees paid to Auditors. Ii On the facts and in the circumstances of the case and in law, the ld Commissioner of Income Tax(Appeals) erred in deleting the disallowance of transaction charges of Rs. 14,13,006/- made on Nostro account u/s 40(a)(i) of the I T Act. Iii The appellate prays that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its head office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the head office. At the time of hearing before us, the learned representatives of both sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the permanent establishment, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) does not arise. Accordingly we answer question No. 1 referred to this Special Bench in the negative, i.e., in favour of the assessee and question 2 in affirmative, i.e., again in favour of the assessee." 4 We further note that the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was held by him to be not chargeable to tax. During the hearing before the Tribunal, the assessee conceded that the interest income received from Nostro account be held as chargeable to tax and consequently disallowed u/s 14A made by the Commissioner of Income Tax(Appeals) be deleted. Since the assessee conceded the taxability of the interest income as held by the Assessing Officer; therefore, the Tribunal, allowing the claim of the revenue has also allowed the ground of the assessee against the disallowance made by the Commissioner of Income Tax(Appeals) by invoking the provisions of sec. 14A. 4.4 It is clear from the case of M/s Credit Agricole Indosuez (supra) that the issue of disallowance u/s 14A does not arise from the issue of taxability of the interest income received from the HO. 4.5 The ld DR has further referred to the decision of the Tribunal dated 21.9.2012 in the case of M/s Credit Agricole Indosuez for the AY 1994-95, 1998-99 and 2000-01 and submitted that the issue of disallowance u/s 14A was decided by the Tribunal by considering the fact that the assessee had accepted the taxability of interest received on Nostro account. Therefore, the applicability of sec. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional ground raised by the revenue may be admitted for adjudication on merits. 4.7 On the other hand, the ld AR of the assessee vehemently opposed the additional ground raised by the revenue and submitted that for the Assessment Year 1996-97, the revenue has not raised any ground for disallowance u/s 14A; even before the High Court. He has referred the order of the Hon'ble High Court for the AY 1996-97 and submitted that the revenue had not raised any such ground for the said Assessment Year; therefore, the revenue cannot be permitted to raise the admitted, concluded issue for the first time for the year under consideration. 4.8 The ld AR has further submitted that for the Assessment Years 2000-01 and 2001-02, the Tribunal has rejected the plea raised by the revenue on the ground that the issue of disallowance u/s 14A does not emerge from the orders of the authorities below. Therefore, when the admissibility of the additional ground has been turned down by the Tribunal in assessee's own case, then a difference view cannot be taken for the year under consideration. The ld AR has further submitted that in the case of M/s Credit Agricole Indosuez (supra), there was no issue of ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 581 (Mum) held that an additional ground relating to a new source of income being brought to tax cannot be raised. He has further submitted that the subject matter before the Tribunal cannot be expended. The ld AR has further contended that the time limit for reassessment and revision has already expired and therefore, at this stage the additional ground raised by the revenue cannot be admitted. The ld AR also contended that the ld DR cannot go beyond the assessment order as per the decision of the Special Bench in the case of Assistant Commissioner of Income-tax, Circle 16(1), Mumbai v. Prakash L. Shah reported in 115 ITD 167. 4.16 The ld AR has submitted that the facts regarding the borrowed fund from India has been placed with the HO is required to be examined and even other wise, the borrowed funds from India are not permitted to be placed with the HO by the RBI. The ld AR has further contended that there is a delay of 9 to 10 yeas in filing the additional ground as the issue arising in the appeal of the assessee; therefore, the revenue cannot raise the additional ground in the appeal; except the Cross Objection. There is no explanation of delay of 9 years and therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income and further deducting all the allowable claims and the exemption/deduction while computing the total income. Thus, the total income chargeable to tax means the net income computed from the gross receipts after the deduction of the allowable expenditure and other deductions. As per the scheme of the Income Tax, the income which is chargeable to tax is computed after the deduction of the expenditure which has been incurred for earning such taxable income. Therefore, the expenditure incurred for other than the income chargeable to tax, is not permitted to be reduced from the income for computation of the total income. This aspect of allowing the expenditure incurred in relation to the taxable income is embedded in the provisions of section 14A to ensure that the expenditure incurred in relation to the income which is not chargeable to tax shall not be allowed as deduction against the income which is chargeable to tax. In other words, the income, which is chargeable to tax is taken as net income after deduction of the allowable expenditure and similarly the income which is not chargeable to tax is also taken net and the expenditure incurred in relation to such income is reduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue at the earlier stage. 6.3 Further, as it is evident that for the Assessment Years 2000-01 and 2001-02, the revenue has also raised a plea regarding disallowance u/s 14A without filling any additional ground; therefore, we do not find any reason to hold that the delay in filing the additional round is malafide or a device to serve the ulterior purpose. Therefore, we accept the reason for delay in filing the additional ground. 7 The next objection of the ld AR is that when such plea raised by the revenue for the AYs 2001-01 and 2001-02 was rejected by the Tribunal, then this additional ground cannot be admitted for the year under consideration. 7.1 It is to be noted that for the Assessment Years 2001-01 and 2001-02, there was no additional ground filed by the revenue and only during the course of hearing of the appeal, the ld DR had raised a contention that a disallowance u/s 14A in respect of the interest income received from the HO held as exempt should be made. The Tribunal has rejected the contention in limine without examining the issue. The observations of the Tribunal in para 4 as under: "4. The other contention raised by the learned Departmental Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant material on record. We have held above that the amount of interest at 3.97 crore received by the assessee on funds placed with head office / overseas branches is exempt from tax on the principle of mutuality. Similar view has been consistently taken for the earlier years as well. Once interest income is exempt from tax, it is but natural that the expenses incurred in relation to such exempt income cannot be allowed as deduction u/s 14A. Sub-section (1) of section 14A unambiguously provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. When we hold that the interest earned by the assessee from placement of funds with its head office / other overseas branches is exempt from taxation, the natural and logical conclusion which therefore has to follow is that no deduction should be allowed towards expenses incurred in relation to such exempt income. We, therefore, hold in principle that the provisions of section 14A are attracted on the interest earned by the assessee from placement of funds with its head office / overseas brandies which has been claime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in hand, the additional ground is in relation to disallowance u/s 14A in respect of interest income held to be exempt on the principle of mutuality. Therefore, this additional plea is not a new subject matter but only an additional aspect of the same subject matter of taxability of interest income. Even otherwise, the issue of disallowance u/s 14A is consequential to the issue of taxability of interest received from the HO. Once the interest income is held to be exempt from tax on the principle of mutuality, the issue of disallowance u/s 14A crops-up from the very issue of taxability; therefore, there is a direct nexus between the issue of taxability and disallowance u/s 14A. If an income is taxable, there is no question of disallowance u/s 14A. On the contrary, if the income is held to be exempt, then the question of disallowance u/s 14A arises from the very subject matter of interest income treated as exempt. Therefore, we find that the aspect of disallowance u/s 14A is part and parcel of the subject matter before this Tribunal regarding the taxability of the interest income received from the HO/overseas branch and cannot be said that this is an entirely a new issue/subject matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y procedural in character and do not, in any way, circumscribe or control the power of the Tribunal under section 33(4) of the Act. We are accordingly of the opinion that the Tribunal had jurisdiction to entertain the argument of the department in this case and to direct the Income-tax Officer to find whether any depreciation was actually allowed under the Industrial Tax Rules and whether such depreciation should be taken into consideration for the purpose of computing the written down value." 9.8 By following the decision in the case of Hukumchand Mills Ltd. (supra),, the full Bench of the Hon'ble Jurisdictional High Court in the case of Ahmedabad Electricity Co Ltd (supra) has observed at pages 357 and 358 as under: "Under section 254(1), the Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, " pass such orders thereon as it thinks fit ". This gives a very wide power to the Appellate Tribunal to pass, on the appeal, such orders as it may think fit. In the case of the Appellate Assistant Commissioner, there is an express power granted to him to enhance the tax liability. This is because the Department does not have a right of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the proceedings." 9.11 Thus, the question of allowing an additional point is matter of discretion and therefore, if the Tribunal finds sufficient reasons for allowing a new ground to be raised before it, which relates to the subject matter before the Tribunal , then there is no fetter to the powers of the Tribunal in permitting such a new point or ground to be raised. 9.12 The Hon'ble High Court has gone to the extent that even the Tribunal can permit other ground also to be raised before it, provided they arises out of proceedings. Thus, the Hon'ble High Court has held that the Tribunal has jurisdictional to permit additional ground to be raised before it even though, the ground does not arise from the orders of the authorities below so long as these grounds are in respect of subject matter of the entire tax proceedings. 9.13 We may clarify that when the Assessing Officer has assessed the interest income received from HO, then the reversal of the findings of the authorities below and holding that the interest received from HO is not taxable on the principle of mutuality and allowing the disallowance u/s 14A may not necessarily mean placing the assessee in worse position, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and with circumstances of the case, we do not find any merit in the objections raised by the ld AR and accordingly, the additional ground raised by the revenue is admitted for disposal. 14 As we have discussed above, the issue of applicability of section 14A has been covered by the decision of the coordinate Bench of the Tribunal in the case of M/s Societe Generale (supra). Accordingly by following the decision of the coordinate Bench of this Tribunal, we hold that the provisions of sec. 14A are applicable on the exempt interest income earned from the HO/overseas Branches. 14.1 For limited purpose of determining the quantum of disallowance, we set aside this issue to the record of the Assessing Officer with a direction to decide the quantum of disallowance after giving a reasonable opportunity of hearing to the assessee. 15 The next ground in the appeal of the assessee is regarding the assessment of provision made for expenditure, which is subsequently turned out to be in excess. 15.1 This ground is common for the AY 2002-03 and 2003-04. 16 We have heard the ld AR as well as the ld DR and considered the relevant material on record. The Assessing Officer brought to tax t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad debts written off of Rs 21.75 lacs. This ground is common in all the Assessment Years. 20 We have heard the ld AR as well as the ld DR and considered the relevant material on record. Since the claim of bad debts has already been allowed by the Tribunal for the Assessment Year 1995-96; therefore, this issue has become infructuous. Revenue's appeal 21. We will first take up the appeals of the revenue for the AY 1998-99 in ITA.581/Mum/2004: 22 Ground no.1 is regarding expenditure incurred by the HO on behalf of Indian Branch office allowed by the Commissioner of Income Tax (Appeals) u/s 37(1). This issue is common for all the years. 23 We have heard the ld DR as well as the ld AR and considered the relevant material on record. At the outset, we find that this issue is covered by the decision of the Hon'ble jurisdictional High Court in the case of Commissioner of Income-tax v. Emirates Commercial Bank Ltd reported in 262 ITR 55 wherein the Hon'ble High Court has decided this issue as under: "Section 44C is applicable only in the cases of those non-residents, who carry on business in India through their branches. The said section was introduced to get over difficulties in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the coordinate Bench of this Tribunal in the case of Siam Commercial Bank PCL vs Dy Director of Income Tax (International Taxation) reported in 17 ITR (Trib) 599 (Mum) and held in paras 26 to 33 as under: "We have heard the rival submissions and perused the relevant material on record. Learned counsel for the assessee has invited our attention towards page 3 of the paper book, showing the working of Rs. 85,302. It was explained that the assessee received FCNR deposit of $2,50,000 on January 14, 2000. This deposit was converted into Indian rupees by selling the same in the open market at the rate of Rs. 43.565 per dollar. It was stated that on the same day, the assessee entered into a forward contract with another to buy equal number of dollars at the rate of Rs. 45.165 on December 29, 2000. The difference between the rates of Rs. 43.565 and Rs. 45.165 when multiplied with $2,50,000 was stated to be resulting loss of Rs. 4,00,000 covering the period from January 14, 2000 to December 29, 2000. It was explained that out of total loss of Rs. 4 lakhs arising out of this transaction covering the above referred period, loss on pro rata basis from January 14 to March 31, 2000 amounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s juncture it will be relevant to understand the modus operandi of forward contract. If there is an obligation to fulfil a future commitment, the parties may enter into forward contract so as to pre-determine their future liability for taking business decisions. In the context of forward contract for dollars, the buyer undertakes to purchase dollars from the seller on a specified date at a particular rate. If the prevailing rate of dollar as on the date of execution of contract is equal to the rate earlier contracted, there shall not be any profit or loss. Neither the buyer will be interested in buying nor the seller will be interested in selling the dollars at the rate contracted because this transaction will be profit neutral in view of the availability of dollar at the same rate in the open market. But if the prevailing market rate of dollar as on the date of execution of contract is more or less than the rate earlier contracted, there shall arise the question of profit or loss due to forward contract. To illustrate, if a forward contract is made, say on 1st January for purchase of dollar as on 31st January at the rate of Rs 45, the profit or loss from such contract will arise b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. Both these transactions are independent of each other. On a pertinent query, it was admitted that there is no tripartite agreement between the assessee-bank, its depositor abroad and the party with which it entered into a forward contract. It cannot be so naturally for the reason that when the assessee received FCNR deposit of $2,50,000, that transaction came to an end and was completely closed. The assessee became liable to repay the deposit in the subsequent year in the same currency and in order to repay iii dollars, the assessee needed dollars at the maturity date of deposit,, being December 29, 2000. In order to repay in dollars on such date, the assessee had the option of either purchasing the dollars from market on the said' date or to enter into a forward contract. On December 29, 2000 being the date of repayment of FCNR deposit in the next year, the rate of dollar may have been higher or lower than the rate at which the assessee get converted $2,50,000 at the rate of Rs. 43.565 during the current year. Whether such rate would he higher or lower at the time of maturity in the succeeding year is not capable of ascertainment as at the close of the year on March 31, 2000. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uous. However, the Cross Objection no. 87/Mum/2004 for the Assessment Year 1999-00 of the assessee is allowable as consequential effect that the said claim of deduction of swap cost has been disallowed for the Assessment Year 1998-99 as the same is allowable in the year of maturity of contract. Accordingly, the Cross Objection for Assessment Year 1999-00 is allowed. 27 The next ground for the Assessment Year 2002-03 is regarding disallowance made u/s 40(a)(i). This ground is common for the Assessment Year 2003-04 also. 28 We have heard the ld DR as well as the ld AR and considered the relevant material on record. At the outset, we note that this issue is covered by the earlier order of this Tribunal in assessee's own case. For the Assessment Year 2001-02, the Tribunal has decided this issue in para 17 and 18 as under: 17 Last ground is against the deletion of disallowance of Rs 13,47,430 in view of section 40(a)(i) of the Act. The assessee paid transaction charges on MOSTRO account with banks outside India. In the absence of assessee having deducted any tax at source on such payments, the Assessing Officer made disallowance u/s 40(a)(i). The ld Commissioner of Income Tax(Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
