TMI Blog2020 (11) TMI 371X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal taking cognizance of the fact that from A.Y. 2008-09 onwards disallowance under Sec. 14A was to be computed in accordance with Rule 8D, had thus, rejected the aforesaid claim of the assessee. In our considered view as there is no substance in the claim of the assessee that de hors any investment made for earning of the interest income from its H.O no disallowance was called for under Sec. 14A r.w. Rule 8D(2)(iii), we decline to accept the same. Deduction u/s 44C - attributing part of the head office expenses incurred by an assessee, a non-resident, to the business of the assessee in India - HELD THAT:- Legislature in all its wisdom had provided a basis for attributing a part of the head office expenses incurred by an assessee, a non-resident, to the business of the assessee in India. For purpose for making available of the aforesaid statutory provision i.e Sec. 44C on the statute, we find, that the same was backed by the reason that it was extremely difficult to scrutinise and verify the veracity of the claims of the non-resident assessee‟s carrying on any business or profession in India, as regards their head office expenses attributable to such business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 14A of the Income Tax Act, 1961 (hereinafter referred to as the Act ) are applicable with respect to interest received by the branch of the appellants from its HO raving failed to appreciate that interest received from HO is not exempt income. 2. Without prejudice to (1) above, the CIT(A) erred in not appreciating that since the bank had not incurred any expenditure for the purpose of earning the interest amount, provisions of section 14A are not applicable. 3. Without prejudice to ground nos. 1 and 2, the CIT(A) erred in upholding the action of AO of applying the provisions of section 14A r.w. Rule 8D of the Act not appreciating that the said provisions can be invoked only if the AO is not satisfied with the correctness of the claim of the appellants in respect of such expenditure in relation to such income. Re. Relief No. 2 4. The CIT(A) erred in upholding the action of the AO of denying the appellant's claim for deduction under 44C of the Act. Re. Relief No.3 5. The CIT(A) erred in upholding the action of the AO that transfer pricing provisions are applicable for transactions between the branch and its HO/overseas branches having failed to appreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced from its income the amount of interest received from its H.O on the ground that the same was an income received from self. After deliberating on the aforesaid facts, the A.O called upon the assessee to explain that now when the H.O and the branch office were separate entities, then why the aforesaid interest income of ₹ 3,49,939/- received by it from the H.O may not be considered as part of its taxable income. In reply, it was submitted by the assessee that the ITAT vide its order dated 29.06.2012 in its own case for A.Y 1996-97 and A.Y 1997-98, had held, that the interest received by the Indian branch from its H.O could not be treated as the income of the Indian branch since it was received from self. Although, the ITAT, Mumbai as well as the Hon‟ble High Court in the assessee‟s own case for the earlier years, had held, that interest received by the assessee i.e the India branch from its H.O would not be taxable in the hands of the assessee, the A.O however taking note of the fact that the department had not accepted the aforesaid decisions and had carried the same further in appeal, declined to accept the assessee‟s claim that the interest of ₹ 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenses incurred by the H.O were in respect of the Indian branch i.e the assessee, the liability in respect of which was borne by the H.O. In the backdrop of his aforesaid observation the A.O disallowed the assessee‟s claim for deduction under Sec. 44C on the following grounds: i. The appellants have not shown any expense under the head head office expense . The audit report or the notes to accounts also does not say anything about the head office expense. ii. The quantum and nature of the expense is not known, In order to claim deduction under section 44C of the Act there has to be an expense and Section 44C is not a blanket deduction provision for 5% of ALP. Accordingly, the A.O worked out the disallowance under Sec. 44C at an amount of ₹ 42,33,512/-. In the backdrop of his aforesaid deliberations the A.O assessed the income of the assessee at ₹ 49,77,142/-, vide his order passed under Sec. 143(3) r.w.s 92CA of the Act, dated 17.05.2013. 5. Aggrieved, the assessee assailed the assessment framed by the A.O before the CIT(A). However, the CIT(A) not finding favour with the claim of the assessee insofar the aforesaid issues were concerned, viz. (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head office, thus, no disallowance of any part of the administrative expenses was called for in its hands. Assailing the disallowance of the assessee‟s claim for deduction under Sec. 44C, it was submitted by the ld. A.R that the same was based on misinterpretation of the said statutory provision by the lower authorities. It was submitted by the ld. A.R that the assessee‟s claim for deduction of ₹ 25,25,634/- i.e 5% of the adjusted total income , being lower than the proportionate amount of the H.O expenditure that was attributable to the business of the assessee in India, was rightly claimed by the assessee. In order to buttress his aforesaid claim the ld. A.R took us through the aforesaid statutory provision. It was further submitted by the ld. A.R that in the subsequent years i.e A.Y 2010-11 and A.Y 2011-12 the assessee‟s claim for deduction under Sec. 44C had been accepted by the department. 7. Per contra, the ld. Departmental Representative (for short D.R‟) had relied on the orders of the lower authorities. Insofar the netting of the interest income and interest expenditure for the purpose of working out the disallowance under Sec. 14A r.w Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of the ld. A.R that the disallowance of the interest expenditure under Sec. 14A r.w Rule 8D(2)(ii) was to be worked out by the A.O after netting of the interest income received and interest expenditure incurred, we find substantial force in the same. Admittedly, the disallowance of the interest expenditure under Sec. 14A r.w Rule 8D(2)(ii) has to be carried out after netting of the interest income and interest expenditure. Our aforesaid view is fortified by the order of the Hon ble High Court of Bombay in the case of CIT, Central-III Vs. Jubiliant Enterprises Pvt. ltd. [ITA No. 1512 of 2014, dated 28.02.2017]. In the said case, the Hon‟ble High Court approving the view taken by the Tribunal that the disallowance made under Sec.14A r.w Rule 8D was to be carried out on the basis of netting of the interest expenditure had dismissed the appeal of the revenue. Also, a similar view had been taken by the Hon ble High Court of Gujarat in the case of PCIT-3, Vs. Nirma Credit and Capital (P. Ltd.) (2018) 300 CTR 286 (Guj) . It was observed by the Hon‟ble High Court that for the purpose of working out the disallowance under Rule 8D(2)(ii) the amount of expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be subject to the ceiling of the deduction contemplated in Sec. 44C of the Act. It was further observed by the A.O that the assessee had claimed a deduction of ₹ 25,25,634/- being 5% of the adjusted total income under Sec.44C of the Act. Observing, that the assessee had not shown any expense under the head Head Office Expenses either in its audit report or the notes to accounts, the A.O was of the view that no part of the H.O expenses was attributable to the business of assessee in India. Apart from that, the A.O was of the view that as the quantum and nature of the expenses were not known, therefore, for the said reason also the assessee was not entitled for claim of deduction under Sec.44C of the Act. On the basis of his aforesaid observations the A.O disallowed the aforesaid claim of expenditure by the assessee aggregating to an amount of ₹ 42,33,512/- [₹ 17,07,878/- (+) ₹ 25,25,634/-]. On appeal, the CIT(A) finding no infirmity in the view taken by the A.O upheld the aforesaid disallowance made by him. 11. Before us, it is the claim of the ld. A.R that both the lower authorities had misconceived or in fact misinterpreted the scope of Sec.44C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perusal of Sec.44C, we find, that the same therein contemplates a ceiling on the allowability of the head office expenditure insofar the same is attributable to the business in India, while computing the income of an assessee, being a non-resident, under the head profits and gains of business or profession. Under the said statutory provision the allowability of the expenditure is to be restricted to viz. (i) an amount equal to five percent of the adjusted total income; or (ii) the amount of so much of the expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India; whichever is less. As observed by us hereinabove, the lower authorities held a conviction that from the details filed by the assessee it was not clear as to whether or not the expenses incurred by the assessee were in respect of its Indian branch. Accordingly, drawing support from sub-section (c) to Sec.44C, the A.O had concluded that no amount of expenditure was allowable as deduction to the assessee under the said statutory provision. On the contrary, it was the claim of the assessee that working of the Central Administrativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-resident, to the business of the assessee in India. On a perusal of the purpose for making available of the aforesaid statutory provision i.e Sec. 44C on the statute, we find, that the same was backed by the reason that it was extremely difficult to scrutinise and verify the veracity of the claims of the non-resident assessee‟s carrying on any business or profession in India, as regards their head office expenses attributable to such business or profession in India. We are unable to concur with the view taken by the lower authorities that the absence of the head office expenses attributable to its business in India, in the audit report or the notes to accounts of the Indian branch would therein render it ineligible to claim the deduction under Sec. 44C of the Act. In our considered view the assessee had rightly claimed deduction of 5% of the adjusted total income , as the same is lower than the amount of the head office expenditure incurred by the assessee as is attributable to its business in India. We thus, in terms of our aforesaid observations not finding favour with the view taken by the lower authorities, therein set aside‟ the order of the CIT(A) and direct t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee from its H.O during the year under consideration was a miniscule amount of ₹ 3,866/-, therefore, in all fairness the disallowance under Sec. 14A may be restricted to the said extent. It was averred by the ld. A.R, that as instructed, in case the disallowance is restricted to the aforesaid amount of exempt income, then the remaining grounds of appeal would not to be pressed. 15. Per contra, the ld. Departmental Representative (for short D.R‟) did not object to the aforesaid claim of the counsel for the assessee. 16. We have given a thoughtful consideration to the aforesaid issue before us, and find substantial force in the claim of the ld. A.R that the amount of the disallowance under Sec. 14A is liable to be restricted to the extent of the exempt interest income. Our aforesaid view is fortified by the judgments of the Hon ble High Court of Delhi in the case of JCIT Vs. Joint Investments Pvt.ltd. (2015) 372 ITR 694 (Del) and Cheminvest Ld. Vs. CIT 378 ITR 33 (Del) . Accordingly, in terms of our aforesaid observations, the A.O is directed to restrict the disallowance under Sec.14A to the extent of the amount of the exempt income of the assessee for t ..... 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