2012 (8) TMI 371 - AT - Income Tax

Tribunal Ruling: Deductibility of Various Expenses for Non-Resident Indians and Head Office

The Joint Commissioner of Income-tax Versus M/s. American Express Bank Limited

The Joint Commissioner of Income-tax Versus M/s. American Express Bank Limited - [2012] 19 ITR 650 Issues Involved:1. Disallowance of expenses for solicitation of deposits from non-resident Indians and head office expenses under Section 44C.2. Disallowance of entertainment expenses under Section 37(2).3. Disallowance of estimated expenses related to tax-free interest on bonds under Section 14A.4. Deductibility of expenses attributable to earning interest and dividend income under Section 115A.5. Disallowance of club expenses.Issue-wise Detailed Analysis:1. Disallowance of Expenses for Solicitation of Deposits from Non-resident Indians and Head Office Expenses under Section 44C:The assessee, a non-resident banking company, claimed deductions for head office and NRI marketing expenses. The Assessing Officer (AO) restricted the deductions to 5% of the gross total income under Section 44C, leading to disallowance. The CIT(A) sustained these disallowances. However, the Tribunal noted that the Hon'ble Bombay High Court had previously ruled in favor of the assessee for a similar issue, holding that such expenses were covered under Section 37(1) and not Section 44C. The Tribunal observed that the expenses in question were exclusive and not common, thus should be allowed under Section 37(1). Consequently, the assessee's appeal on this issue was allowed.2. Disallowance of Entertainment Expenses under Section 37(2):The assessee estimated a 30% disallowance for entertainment expenses, which the AO increased to 80%. The CIT(A) upheld the AO's decision. The Tribunal noted conflicting decisions in similar cases and examined the legal position. It concluded that the disallowance should be computed by taking 50% of the total expenses towards entertainment, following the precedent set by the Karnataka High Court. The assessee's appeal was partly allowed.3. Disallowance of Estimated Expenses Related to Tax-free Interest on Bonds under Section 14A:The AO disallowed proportionate expenses for earning tax-free interest, which the CIT(A) deleted. The Tribunal noted that Section 14A, inserted retrospectively, governs the non-deductibility of such expenses. It held that the AO's action was in line with Section 14A, and directed the AO to compute the disallowance on a reasonable basis as per the mandate of the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. The Revenue's appeal was allowed to this extent.4. Deductibility of Expenses Attributable to Earning Interest and Dividend Income under Section 115A:The AO computed proportionate expenses for earning income liable to tax under Section 115A and omitted to disallow these expenses against income chargeable at normal rates. The CIT(A) ruled in favor of the assessee. The Tribunal held that the assessee is entitled to deduction of these expenses against income chargeable at normal rates, following the principle that Section 14A does not apply to income chargeable at a lower rate. The Revenue's appeal on this issue was dismissed.5. Disallowance of Club Expenses:The AO disallowed club expenses, which the CIT(A) deleted. The Tribunal found the issue covered in favor of the assessee by the jurisdictional High Court's judgment in Otis Elevator Co. (India) Ltd. v. CIT and the Madras High Court's judgment in CIT v. Sundaram Industries Ltd. The Revenue's appeal on this issue was not allowed.Conclusion:Both the assessee's and the Revenue's appeals were partly allowed. The Tribunal provided detailed rulings on each issue, ensuring compliance with relevant legal precedents and statutory provisions.