2013 (12) TMI 718 - AT - Income Tax

Tribunal Rules for Assessee on Expenditure Disallowance & Tax Issues

Bank of America Versus JCIT -Special Range-32, Mumbai

Bank of America Versus JCIT -Special Range-32, Mumbai - TMI Issues Involved:1. Disallowance of expenditure incurred by overseas branches under Section 44C.2. Disallowance of interest paid to Income Tax Authorities.3. Disallowance of certain expenses under Article 7(3) of Indo-US Tax Treaty.4. Disallowance of 25% of entertainment expenditure.5. Disallowance of expenditure on rent, repairs, and depreciation for Guest House.6. Disallowance of amounts paid to RBI for shortfall in maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR).7. Taxability of interest paid by Indian branches to Singapore branch.8. Deletion of addition on account of club membership fees.9. Deletion of addition on account of estimated expenditure incurred on earning interest on tax-free bonds.10. Computation of deduction under Section 36(1)(viia) and Section 44C.Detailed Analysis:1. Disallowance of Expenditure Incurred by Overseas Branches under Section 44C:The Tribunal considered the rival submissions and the relevant material on record. The Assessee argued that the expenses incurred by overseas branches were directly for Indian operations and should not fall under Section 44C. The Tribunal followed its earlier decisions and the decision of the Hon'ble Jurisdictional High Court, concluding that the provisions of Section 44C do not apply to expenses incurred exclusively for Indian branches. The Tribunal decided this issue in favor of the Assessee.2. Disallowance of Interest Paid to Income Tax Authorities:The Assessee claimed deduction for interest paid to Income Tax Authorities, arguing for netting against interest received. The Tribunal, after considering the decisions of higher courts and the Third Member decision in DCIT vs. Sandvik Asia Ltd., held that the interest paid to the Income Tax Authorities cannot be netted against interest received. The Tribunal decided this issue against the Assessee.3. Disallowance of Certain Expenses under Article 7(3) of Indo-US Tax Treaty:The Tribunal examined Article 7(3) and the technical explanation of the Indo-US DTAA. The Tribunal noted that the expenses incurred by the PE in India should be allowed subject to the limitations of the local law. The Tribunal upheld its earlier decision, holding that the restrictive provisions of the Income Tax Act apply to expenses incurred by the PE in India, and decided this issue against the Assessee.4. Disallowance of 25% of Entertainment Expenditure:The Assessee claimed that 25% of entertainment expenses were attributable to staff members. The AO estimated an allowance of Rs. 2.00 lakhs. The Tribunal, considering the facts, allowed 10% of the entertainment expenses to be attributed to staff members and allowed this portion.5. Disallowance of Expenditure on Rent, Repairs, and Depreciation for Guest House:The Tribunal noted that this issue was settled by the Hon'ble Supreme Court in the case of Britannia Industries Ltd., which held that such expenditures are not allowable. The Tribunal decided this issue against the Assessee.6. Disallowance of Amounts Paid to RBI for Shortfall in Maintenance of CRR and SLR:The Tribunal followed the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs. Bank of Baroda, which held that such payments are not penalties but compensatory in nature. The Tribunal decided this issue in favor of the Assessee.7. Taxability of Interest Paid by Indian Branches to Singapore Branch:The Tribunal referred to the decision of the Special Bench in Sumitomo Mitsui Banking Corporation, which held that interest paid to the overseas branch is an allowable deduction and not chargeable to tax under the provisions of the IT Act. The Tribunal decided this issue in favor of the Assessee.8. Deletion of Addition on Account of Club Membership Fees:The Tribunal followed its earlier decisions and the decision of the Hon'ble Jurisdictional High Court in Otis Elevator Co. India Ltd., allowing the claim for club membership fees. The Tribunal decided this issue in favor of the Assessee.9. Deletion of Addition on Account of Estimated Expenditure Incurred on Earning Interest on Tax-Free Bonds:The Tribunal noted that the AO did not establish any direct expenditure incurred for earning the exempt income. The Tribunal set aside this issue to the AO to reconsider and decide as per law, specifically for common and indivisible expenditures.10. Computation of Deduction under Section 36(1)(viia) and Section 44C:The Tribunal clarified that deductions under Section 36(1)(viia) and Section 44C should be computed as per the provisions of the Act, which require giving effect to each deduction before calculating the other. The Tribunal restored the AO's order on this issue.Conclusion:The Tribunal partly allowed the Assessee's appeals and partly allowed the Revenue's appeal for statistical purposes for the assessment year 1997-98, while dismissing the Revenue's appeal for the assessment year 1998-99.