2014 (2) TMI 743 - AT - Income Tax

HO interest non-taxable; branch interest payments nondeductible; HO travel expenses allowed under s.37(1); s.44C inapplicable; s.14A denies related expenditure

ITAT held that interest received from the head office is not taxable and interest paid by the branch to the head office is not deductible (decision for ... Interest paid to Head Office allowed – Held that:- As decided in assessee’s own case, The interest income received from Head Office is not chargeable to tax being it is an income to self - the interest paid by the Assessee Branch PE in India to Head Office is also not to be allowed as deduction – Decided in favour of Revenue. Disallowance of Deduction u/s 37 of the Act – Disallowance made u/s 40(a)(i) of the Act – Payment made to NOSTRO – Held that:- The travelling expenses incurred by the Head Office on travelling of its own staff and directly in connection with India branches is allowable u/s. 37(1) of the Act and section 44C is not applicable to it – Relying upon CIT vs. Emirates Commercial Bank Ltd. [2003 (4) TMI 2 - BOMBAY HIGH COURT] - Revenue could not controvert the fact – Decided against Revenue. Claim of bad debt of the amount – Held that:- The claim of bad debts has been allowed in earlier assessment year 1995-96 and consequently the order of the ld. CIT(A) is to be reversed and confirm the action of Assessing Officer – Decided in favour of Revenue. Applicability of Section 14A of the Act – Interest received from the head office – Held that:- The interest income received from head Office does not give rise to income - the expenditure incurred by the Assessee in relation to such income cannot be allowed – the additional groud taken by the department is to be allowed in favour of the department and against the Assessee and that the provisions of section 14A are applicable on the exempt interest income earned from Head Office/overseas branches – Decided in favour of Revenue. Issues Involved:1. Taxability of interest received from Head Office.2. Deduction of travelling expenses and Certificate fee paid to Auditors.3. Disallowance of transaction charges on NOSTRO account.4. Claim for bad debts.5. Additional ground regarding applicability of section 14A.6. Excess provision for expenses.7. Deduction of broken period interest on purchase of securities.8. Deduction of bad debts in respect of Biogenics (I) Ltd.Issue-wise Detailed Analysis:1. Taxability of Interest Received from Head Office:The Assessee, a non-resident company engaged in banking, reduced Rs.64,60,038/- as interest received from its Head Office, claiming it was not taxable. The AO disagreed, stating that the Assessee's branch in India is considered an independent entity and thus, the interest is taxable. The CIT(A) upheld this view but allowed the deduction of interest paid to the Head Office. The Tribunal referenced the Special Bench decision in Sumitomo Mitsui Banking Corp., concluding that interest income received from the Head Office is not taxable as it is considered income to self, applying the principle of mutuality. Consequently, both the interest received and paid were not chargeable to tax, reversing the CIT(A)'s order.2. Deduction of Travelling Expenses and Certificate Fee Paid to Auditors:The AO disallowed Rs.17,59,457/- for travelling expenses and Rs.45,420/- for auditor fees, considering them under section 44C. The CIT(A) allowed these deductions under section 37, supported by the Tribunal's earlier decisions and the Bombay High Court's ruling in CIT vs. Emirates Commercial Bank Ltd. The Tribunal upheld this view, confirming that such expenses are deductible under section 37(1).3. Disallowance of Transaction Charges on NOSTRO Account:The AO disallowed Rs.16,56,533/- paid as transaction charges on NOSTRO accounts under section 40(a)(i), arguing no tax was deducted at source. The CIT(A) deleted this disallowance, following earlier Tribunal decisions. The Tribunal reaffirmed this, rejecting the department's appeal based on consistent prior rulings in the Assessee's favor.4. Claim for Bad Debts:The AO disallowed the claim for bad debts of Rs.21,75,000/-, but the CIT(A) allowed it. The Tribunal, however, reversed this decision, agreeing with the department that the claim had already been allowed in the assessment year 1995-96.5. Additional Ground Regarding Applicability of Section 14A:The department raised an additional ground concerning the applicability of section 14A if the interest received from the Head Office is not taxable. The Tribunal, referencing the Special Bench decision, agreed that section 14A applies to the exempt interest income, allowing the department's additional ground.6. Excess Provision for Expenses:The CIT(A) upheld the AO's disallowance of Rs.4,11,385/- for excess provision of expenses, directing that it should not be taxed in the subsequent year. The Assessee did not press this ground, and the Tribunal rejected it accordingly.7. Deduction of Broken Period Interest on Purchase of Securities:The Assessee did not press this ground as the Tribunal had already allowed the deduction in the assessment year 2002-03. Consequently, the Tribunal rejected this ground.8. Deduction of Bad Debts in Respect of Biogenics (I) Ltd.:Similarly, the Assessee did not press this ground as the Tribunal had allowed the deduction in the assessment year 1995-96. The Tribunal rejected this ground as well.Conclusion:The appeals of both the Department and the Assessee for the assessment year 2004-05 were allowed in part, with the Tribunal's decisions aligning with established precedents and the principle of mutuality. The order was pronounced in the open court on 13th September, 2013.