Computation of Income and disallowance of expenses relating to H.O cannot be made by invoking section 44C of IT Act

IN THE INCOME TAX APPELLATE TRIBUNAL “L” BENCH, MUMBAI

BEFORE SHRI DINESH KUMAR AGARWAL, JM AND

SHRI P.M. JAGTAP, AM

I.T.A. No. 6530/Mum/2006

(Assessment Years: 2003-04)

Abu-Dhabi Commercial Bank Ltd.,

75B Rehmat Manzil,

Veer Nariman Road,

Mumbai – 400 020.

(Appellant)  

Vs.

The Deputy Director of Income

Tax (International Taxation)- 1(1),

Scindia House,

Narottam Morarjee Marg,

Ballard Estate,

Mumbai – 400 038.

PAN: AAACA 4216B

 (Respondent)

I.T.A. No. 3463/Mum/2010

(Assessment Years: 2004-05)

Abu-Dhabi Commercial

Bank Ltd.,

75B Rehmat Manzil,

Veer Nariman Road,

Mumbai – 400 020.

(Appellant)

Vs.

The Deputy Director of Income

Tax (International Taxation)-1(1),

Scindia House,Narottam Morarjee Marg,

Ballard Estate,

Mumbai – 400 038.

PAN: AAACA 4216B

 (Respondent)

I.T.A. No. 581/Mum/2007

(Assessment Years: 2003-04)

The Deputy Director of

Income Tax (International Taxation)-1(1),

Scindia House, Narottam Morarjee Marg,

Ballard Estate,

Mumbai – 400 038.

(Appellant)

Vs.

Abu-Dhabi Commercial Bank Ltd.,

75B Rehmat Manzil, Veer Nariman Road,

Mumbai – 400 020.

PAN: AAACA 4216B

 (Respondent)

Cross objection/ No. 114/Mum/2007

Arising out of ITA No. 581/Mum/2007

(Assessment Year: 2003-04)

Abu-Dhabi Commercial

Bank Ltd.,

75B Rehmat Manzil,

Veer Nariman Road,

Mumbai – 400 020.

Cross Objector  

Vs.

The Deputy Director of Income

Tax (International Taxation)- 1(1),

Scindia House,

Narottam Morarjee Marg,

Ballard Estate,

Mumbai – 400 038.

PAN: AAACA 4216B

 (Respondent)

Assessee by: Shri A.V. Sonde

Revenue by: Shri Mahesh Kumar

Date of Hearing: 26-7-2012

Date of Pronouncement: 03-08-2012

O R D E R

PER DINESH KUMAR AGARWAL, J.M.

The appeal in ITA No. 6530/Mum/2006 and 581/Mum/2007 are cross appeals preferred by the assessee and the Revenue are directed against the order dtd. 5-9-2006 passed by the ld. CIT(A) for the A.Y. 2003-04. The appeal in ITA No. 3463/Mum/2010 preferred by the assessee is directed against the order dtd. 18-2-2010 passed by the ld. CIT(A) for A.Y. 2004-05. The assessee has also filed C.O. for the A.Y. 2003-04. Since the facts are identical and issues involved are common, all the appeals and C.O. are disposed of by this common order for the sake of convenience.

2. Briefly stated facts of the case are that the assessee is a commercial bank having its Head Office in U.A.E. The assessee has two branches in India i.e. Mumbai and Bangalore. It is involved in normal banking activities including financing of foreign trade and foreign exchange transactions. During the course of assessment proceeding it was inter alia observed by the A.O. that the assessee has claimed Head Office expenses of Rs. 1,98,01,876/- based on the actual expenses incurred by the Head Office which are attributable to Indian branch. He further observed that the entire expenditure has been claimed by way of deduction on the ground that no restriction should be made in view of Article 7(3) of the treaty. However, the A.O. did not agree with the claim of the assessee and held that all the said expenditure, which are not debited to the

books of accounts of the assessee and are executive and administrative in nature have to be treated as Head Office expenses in respect of which deduction is allowable only as per provisions of section 44-C of the Income Tax Act, 1961 (the Act). Accordingly he disallowed the same. On appeal the ld. CIT(A) following the appellate order for the assessment years 1997-98, 1998-99, 1999- 2000, 2000-01 and 2002-03 held that the full claim of Head Office administration and supervision expenses attributable to Indian branch cannot be allowed and this expenditure is to be allowed to the extent of limit prescribed by section 44-C and accordingly upheld the disallowance made by the A.O.

3. Being aggrieved by the order of the ld. CIT(A) the assessee is in appeal before us challenging the sustenance of disallowance of Head Office expenses allocated to the Indian branch is amounting to Rs. 1,98,01,876/-.

4. At the time of hearing the ld. counsel for the assessee submits that this issue stands covered in favour of the assessee by the order of the Tribunal in assessee’s own case in ITA Nos. I.T.A. NO.3462/M/2010 and others for assessment years 1995-96 to 2000-01 wherein the Tribunal vide order dtd. 20- 7-2012 has held that the income of the PE of the assessee should be computed as business income after allowing all the expenses attributable to its business in India including the Head Office expenses. He also placed on record a copy of the said order of the Tribunal.

5. On the other hand, the ld. D.R. while admitting that the Tribunal has decided the issue in favour of the assessee, however, supports the order of the A.O. and the ld. CIT(A).

6. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that similar disallowance was made by the A.O. in the preceding assessment years and the ld. CIT(A) following the appellate order for the earlier assessment years has confirmed similar disallowance made by the A.O. We further find that the Tribunal in assessee’s own case (supra) vide para 14 of its order has held as under:-

“Thus, in view of our above finding, we hold that, firstly, in the assessment year involved, limitation clause of applicability of income-tax Act will not apply in Article 7(3) and consequently provisions of sections 44C will not be applicable; secondly, the amendment brought by way of Protocol by which article 7(3) has been amended and limitation clause has been brought in, will apply from 1^st April, 2008 and will not have any retrospective effect; thirdly, the judgment of Mashreqbank psc(supra), is no longer relevant in view of the decision of the Special Bench in the case of M/s Sumitomo Mitsui Banking Corp.(supra).and

Lastly, from the above conclusions, it is held that computation of income and disallowance of expenses relating to head office cannot be made by invoking the provisions of Section 44C of IT Act. Thus, in view of the above conclusions, we hold that income of the PE of the assessee should be computed as business income after allowing all the expenses attributable to its business in India including the head office expenses.”

7. In absence of any distinguishing feature brought on record by the Revenue, we respectfully following the order of the Tribunal (supra) delete the disallowance of Rs. 1,98,01,876/- made by the A.O. and sustained by the ld. CIT(A). The ground taken by the assessee is, therefore, allowed. Additional ground and C.O. No. 114/Mum/2004 (By assessee for A.Y. 2003-04):

8. The assessee in the additional ground and in the C.O. has challenged the A.O’s action for applying the tax rate of 40% plus surcharge to the assessee’s business income instead of 35% plus surcharge.

9. At the time of hearing the ld. counsel for the assessee very fairly submits that this issue stands covered against the assessee by the order of the Tribunal for assessment years 1995-96, 1996-97 and 1997-98, therefore, the issue may be decided accordingly.

10. On the other hand, the ld. D.R. supports the order of the A.O. and the ld. CIT(A).

11. After hearing the rival parties and perusing the material available on record we find that the Tribunal in assessee’s own case (supra) after following the earlier order of the Tribunal in assessee’s own case in ITA No. 4316 & 4317/M/2000 and others for assessment years 1995-96 to 1997-98 dtd. 14-2- 2007 vide para 35 of the order dtd. 20-7-2012 has decided the issue against the assessee. In the absence of any distinguishing feature brought on record by the assessee, we respectfully following the consistent view of the Tribunal, reject the additional ground and C.O. taken by the assessee.

12. The grounds taken by the Revenue read as under:-

1. “On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that in the absence of any nexus the Assessing Officer has wrongly attributed interest of Rs. 2,74,04,053/- towards the tax free bonds.

2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in allowing the appeal on this ground.”

13. Brief facts of the above issue are that the A.O. observed during the year the assessee has earned interest Rs. 3,01,12,220/- from tax free bonds and claimed as exempt u/s 10(33) and 10(15) of the Act. The A.O. further observed that the point for consideration is whether it is the gross receipt or the net income earned out of such receipts, which is exempt u/s 10(15) and 10(33) of the Act. The A.O. after considering the relevant provisions of section 10 held that the entire interest received is not exempt u/s 10 and interest expenditure of Rs. 2,74,04,053/- is allocable to exempt income by following his reasoning that the proportionate interest expenditure in the proportion of exempt interest income to total interest income is attributable to the exempt interest income. On appeal the ld. CIT(A) while observing that in the absence of any nexus and following the appellate order for the A.Y. 2002-03 held that the A.O. has wrongly attributed interest of Rs. 2,74,04,053/- towards the tax free bonds and accordingly deleted the disallowance made by the A.O.

14. At the time of hearing the ld. D.R. while relying on the order of the A.O. submits that since the A.O. has not examined the issue in the light of the provisions of section 14-A of the Act, therefore, the issue may be set aside to the file of the A.O. The reliance was also placed on the decision of the Tribunal in Dresdner Bank AG vs. Addl. CIT (2007) 108 ITD 375 (Mum).

15. On the other hand, the ld. counsel for the assessee submits that this issue also stands covered in favour of the assessee by the decision of the Tribunal in assessee’s own case (supra), therefore, the ground taken by the Revenue is liable to be rejected.

16. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. counsel for the assessee that the issue stands covered in favour of the assessee by the consistent view of the Tribunal in assesse’s own case. Recently the Tribunal in ITA No. 2205/Mum/2004 for A.Y. 1998-99 (supra) after following the earlier order of the Tribunal for A.Y. 1997-98 has held vide para 40 to 42 of the order dtd. 20-7-2012 as under:-

“40. In ground no.1 of this appeal, the Department has challenged allowing of exemption u/s 10(15) of the Act, in respect of ‘gross receipts’ and not in respect of the ‘net income’ arising to the assessee.

41. At the outset, learned Counsel submitted that this issue stands covered in favour of the assessee by the Tribunal in assessee’s own case in assessment year 1997-1998 in ITA No.2116/M/2001 and catena of other decisions passed by the ITAT, Mumbai Bench. After gone through the order of the Tribunal for the assessment year 1997-1998, we find that this issue stands allowed in favour of the assessee after observing and holding as under:

“We have considered the rival submissions and perused the materials on record. We find that in the case of State Bank of Indi (supra), this issue has been decided by the Tribunal in favour of the assessee by holding that for exemption u/s 10(15), gross interest has to be considered. While holding so, the Tribunal has followed the judgment of Hon’ble Bombay high Court rendered in the case of CIT vs. New Great Insurance Co. Ltd., 90 ITR 348 and also on the judgment of Hon’ble Apex Court rendered in the case of Rajasthan Warehousing Corporation, 242 ITR 450. In the case of JCIT vs. Mashrequ Bank PSC (supra), the Tribunal has decided the issue in favour of the assessee by following the Tribunal judgment rendered in the case of State Bank of India (surpa). In the case of British Bank of Middle East (supra) also, the issue has been decided by following the Tribunal judgment in the case of State Bank of India (supra ) and it held that provisions of section 10(15)(iv) are very clear and unambiguous and what is exempt under the said section is ‘interest payable’ and not the income by way of the interest; and hence, the revenue’s grievance is devoid of any substance and the same was rejected. Respectfully following the precedent, this issue is decided in favour of the assessee and this ground of the revenue is rejected.”

42. Thus, respectfully following the aforesaid decision, this ground is decided against the department and in favour of the assessee. In the result, ground no.1 is dismissed.”

17. As regards the plea taken by the ld. D.R. that the issue may be set aside to the file of the A.O. for considering the issue in the light of the provisions of section 14A of the Act, we find that even after insertion of section 14A, inserted by Finance Act, 2001 w.r.e.f. 1-4-1962, the A.O. has not invoked the provisions of section 14A of the Act. However, on appeal the ld. CIT(A) while examining the applicability of provisions of section 14A relied upon the decision of the Tribunal in the case of Maruti Udyog Ltd. vs. Dy. CIT (2005) 92 ITD 119 (Del.) wherein it has been held that even after deduction of section 14A, the Revenue has to establish the nexus of borrowed fund with tax free investment. In the absence thereof and keeping in view that neither the A.O. has invoked the provisions of section 14A and nor such ground has been taken by the Revenue despite the finding given by the ld. CIT(A) in this regard, we are of the view that the plea taken by the ld. D.R. at this stage is not maintainable and hence we reject the same. This being so, we respectfully following the consistent view of the Tribunal in assessee’s own case (supra) decline to interfere with the order passed by the ld. CIT(A) in deleting the disallowance made by the A.O. The grounds taken by the Revenue are, therefore, rejected.

18. Ground of appeal No. 1(a), (b) & (c) are on the validity of reopening of assessment u/s 147 r.w.s. 143(3) of the Act.

19. The ld. counsel for the assessee after referring pages 1 to 11 of the assessee’s paper book containing copy of notice u/s 148, copy of reasons recorded by the A.O. and assessee’s reply reiterates the same submissions as submitted before the ld. CIT(A) and further submits that the reopening of the assessment u/s 147/148 of the Act be quashed.

20. The ld. D.R., on the other hand, supports the order of the A.O. and the ld. CIT(A).

21. After hearing the rival parties and perusing the material available on record and keeping in view that since we have decided the assessee’s appeal for A.Y. 2003-4 (supra) on merit in favour of the assessee, therefore, we do not consider it necessary to adjudicate the issue on the reopening of the assessment u/s 147/148 of the Act and accordingly the grounds taken by the assessee are rejected.

22. Ground of appeal No. 2(a), (b) & (c) are against the sustenance of disallowance of Head Office expenses allocated to Indian Branch Rs. 2,04,59,104/-.

23. At the time of hearing both the parties have agreed that the facts of the above issue are same as in the assessee’s appeal for the A.Y. 2003-04, therefore, the plea taken by the parties in the said appeal may be considered while deciding the above grounds of appeal.

24. After hearing the rival parties and perusing the material available on record and in the absence of any distinguishing feature brought on record by the Revenue, we, keeping in view of our finding recorded in para 6 & 7 of this order delete the disallowance of Rs. 2,04,59,104/- made by the A.O. and sustained by the ld. CIT(A). The grounds taken by the assessee are, therefore, allowed.

25. Ground No. 3(a), (b) & (c) are against the direction of the ld. CIT(A) to allow interest u/s 244 A of the Act up to the date of issue of refund voucher.

26. Brief facts of the above issue are that the assessee claimed that it is entitled to refund u/s 244A of the Act from the date of regular assessment to the date of receipt of refund voucher and in support, the reliance was also placed on various decisions appearing at page 10 of the order of the ld. CIT(A). However, the ld. CIT(A) while relying on the CBDT Circular No. 20-D(XXII) of

1968 dtd. 20-8-1968 inter alia stating that interest should be calculated up to the date of refund voucher and keeping in view that the words used u/s 244 and 244A that “the date on which the refund is granted”, directed the A.O. to grant interest u/s 244A of the Act up to the date of issue of refund voucher.

27. At the time of hearing the ld. counsel for the assessee submits that this issue stands covered in favour of the assessee by the order of the Tribunal (supra), therefore, the issue may be decided accordingly. In support, the ld. counsel for the assessee has also filed the copy of the Tribunal order in assessee’s own case in ITA No. 5136/Mum/2009 for A.Y. 1990-91 dtd. 2-7-2010.

28. On the other hand, the ld. D.R. supports the order of the A.O. and the ld. CIT(A).

29. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. counsel for the assessee that the similar ground 2(c) was also taken by the assessee in its appeal in ITA No. 3857/Mum/2010 for A.Y. 1996-97. The Tribunal while relying on the earlier order of the Tribunal for A.Y. 1990-91 has restored the issue to the file of the A.O. vide finding recorded in para 22, 23 and 24 of the order dtd. 20-7-2012. In the absence of any distinguishing feature brought on record by the Revenue and respectfully following the consistent view of the Tribunal, set aside the issue to the file of the A.O. to decide the same afresh in the light of the direction of the Tribunal (supra) and according to law after providing reasonable opportunity of being heard to the assessee. The grounds taken by the assessee are, therefore, partly allowed for statistical purposes.

30. In the result, assessee’s appeals for A.Y. 2003-04 and 2004-05 are partly allowed and the Revenue’s appeal and assessee’s C.O. for A.Y. 2003-04 are dismissed.

Order pronounced in the open court on 03-08-2012. .

Sd/-                                                                 Sd/-

(P.M. JAGTAP)                                   (DINESH KUMAR AGARWAL)

ACCOUNTANT MEMBER                           JUDICIAL MEMBER