2012 (11) TMI 499 - AT - Income Tax

Tribunal grants appeal on various grounds, instructs reassessment & avoids double taxation

American Express Bank Ltd. Versus Additional Commissioner of Income-tax, Spl. Range-32, Mumbai

American Express Bank Ltd. Versus Additional Commissioner of Income-tax, Spl. Range-32, Mumbai - TMI Issues Involved:1. Disallowance of expenses incurred at the head office for Indian branches.2. Disallowance of expenses incurred for solicitation of deposits from non-resident Indians.3. Disallowance of expenditure incurred for earning interest on tax-free bonds.4. Disallowance of expenditure incurred for earning interest on foreign currency loans.5. Disallowance of notional expenditure for earning dividend income.6. Disallowance of exemption claimed for interest income earned on funds placed with foreign branches and taxation of interest paid to foreign branches.7. Disallowance of deduction claimed under section 43D for interest on bad or doubtful debts.8. Double taxation of interest on bad or doubtful debts under the Interest Tax Act.Detailed Analysis:1. Disallowance of Expenses Incurred at the Head Office for Indian Branches:The Tribunal noted that the issue of disallowance of head office expenses was previously decided in favor of the assessee by the Hon'ble Bombay High Court in the case of CIT v. Emirates Commercial Bank Limited. The Tribunal held that the expenses incurred exclusively for the Indian branch are to be allowed under section 37(1) and not under section 44C. Consequently, the Tribunal allowed the assessee's appeal on this ground.2. Disallowance of Expenses Incurred for Solicitation of Deposits from Non-Resident Indians:Similarly, the Tribunal observed that the expenses incurred for solicitation of deposits from non-resident Indians were also considered in the earlier assessment years and decided in favor of the assessee. The Tribunal reiterated that such expenses are exclusive to the Indian branch and should be allowed under section 37(1). Therefore, this ground was also allowed.3. Disallowance of Expenditure Incurred for Earning Interest on Tax-Free Bonds:The Tribunal referred to the case of Dresdner Bank AG v. Addl. CIT, where it was held that section 14A applies to the expenditure incurred for earning tax-free income. The Tribunal directed the Assessing Officer to compute the disallowance under section 14A on a reasonable basis, following the precedent set by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT. The matter was restored to the file of the AO for fresh computation, and this ground was allowed for statistical purposes.4. Disallowance of Expenditure Incurred for Earning Interest on Foreign Currency Loans:The Tribunal found that the issue of disallowance of expenses for earning interest on foreign currency loans was similar to the disallowance of expenses for earning tax-free interest. The Tribunal directed the AO to recompute the disallowance under section 14A on a reasonable basis, similar to the direction given for tax-free bonds. This ground was also allowed for statistical purposes.5. Disallowance of Notional Expenditure for Earning Dividend Income:The Tribunal noted that the issue of notional expenditure for earning dividend income was covered by the earlier decision in the case of Godrej & Boyce Mfg. Co. Ltd. The Tribunal directed the AO to recompute the disallowance under section 14A on a reasonable basis. This ground was allowed for statistical purposes.6. Disallowance of Exemption Claimed for Interest Income Earned on Funds Placed with Foreign Branches and Taxation of Interest Paid to Foreign Branches:The Tribunal referred to its earlier decision in the assessee's own case for A.Y. 1991-92, where it was held that interest received from and paid to foreign branches should not be taxed, following the Special Bench decision in ABN Amro Bank NV v. Asstt. DIT. The Tribunal held that no deduction should be allowed for interest paid to the head office, and no income should be recognized for interest earned from the head office. This ground was partly allowed.7. Disallowance of Deduction Claimed Under Section 43D for Interest on Bad or Doubtful Debts:The Tribunal observed that the assessee is a Scheduled Bank, and section 43D allows the taxation of interest on bad or doubtful debts only when it is credited to the P&L Account or actually received. The Tribunal directed the AO to verify the figures and ensure that only the interest actually received is taxed. This ground was allowed for statistical purposes.8. Double Taxation of Interest on Bad or Doubtful Debts Under the Interest Tax Act:The Tribunal held that interest on non-performing assets should be taxed only when it is credited to the P&L Account or actually received, as per section 43D. The Tribunal directed the AO to recompute the assessable interest under the Interest Tax Act, ensuring that there is no double taxation. This ground was allowed for statistical purposes.Conclusion:The appeals were partly allowed for statistical purposes, with directions to the AO for fresh computation and verification of figures as per the Tribunal's observations.