2017 (12) TMI 1417 - AT - Income Tax

Tribunal Reverses HUDCO Bonds Disallowance, Upholds Section 44C & 115JB; Order on 26/12/2017

The appeal was partly allowed by the Tribunal. The disallowance of interest expenditure related to tax-free HUDCO bonds was reversed, as the assessee had ... Disallowing being interest paid on pro-rata basis relating to earning tax free interest Income on tax free HUDCO Bond - Held that:- During the year assessee has made investment in HUDCO of ₹ 2 crores as mentioned at page No. 3 of the assessment order whereas, interest free funds available with the assessee of share capital and reserve and surplus of ₹ 42.28 crores as at 31.03.2006. Further, as at 31.03.1999 the available interest free funds in the form of share capital and reserve and surplus was ₹ 35.14 crores. In view of this the presumption would lie in favour of the assessee that assessee has made investment out of its own tax free funds. Therefore, following decision of the Hon'ble Bombay High Court in HDFC Bank Ltd Vs. DCIT [2016 (3) TMI 755 - BOMBAY HIGH COURT] we reverse the finding of the lower authorities and direct the Ld AO to delete the disallowance of ₹ 364206/- on account for interest expenses being allegedly paid on pro rata basis relating to earning of tax free interest income of ₹ 15.50 lacs on tax free HUDCO bonds of ₹ 2 crores. In the result ground No. 1 of the appeal is allowed. Disallowance of interest paid on borrowings from Head Office - Held that:- Explanation to section 9(1)(v) has been inserted w.e.f. 01.04.2015, therefore, the situation arises is that the assessee a branch of a foreign bank of non treaty jurisdiction who has paid interest to its foreign head office is allowable as deduction or not. Prior to 01.04.2015 if interest is paid by the assessee to its Taiwan Head Office it is payment to self. In para no 50 of the decision of the Sumitomo Mitusi banking cop V DDIT (2012 (4) TMI 80 - ITAT MUMBAI) while dealing with domestic tax law this issues has been discussed that in domestic tax law there is no question of granting deduction of interest paid by the assessee to its HO , because it is payment to self. The issue of any applicability of any DTAA is not before us, therefore various case laws cited before us are not relevant as they deal with various DTAAs. In the result we do not find any infirmity in the orders of lower authorities in denying deduction of interest paid to HO by the assessee. Denying the claim of the assessee u/s 44C - head office expenses restricted - Held that:- The actual expenditure said to be borne by the head office is ₹ 3781095880/-. However due to the restriction placed u/s 44C of the Act the above expenditure claim were restricted to ₹ 1661289/- for the purpose of section 44C of the act. The assessee has not produced details of the expenditure incurred by the assessee, which are attributable to the business of the assessee either before lower authorities as well as before us. In the present case the total expenditure incurred by the head office of NTD 27056314/- as well as pension of NTD 4481126/- was said to be attributable to the assessee’s business. The details of the expenditure with respect to nature of such expenditure, purpose of such expenditure and actual incurring of such expenditure were neither provided before the lower authorities as well as before us. In view of this, we do not find any infirmity in the order of the lower authorities in denying the claim of the assessee u/s 44C of the Act. In the result ground No. 3 of the appeal of the assessee is dismissed. Issues Involved:1. Disallowance of interest expenditure related to tax-free HUDCO bonds.2. Disallowance of interest paid on borrowings from the Head Office.3. Disallowance of expenses incurred by the Head Office and attributable to the branch under Section 44C.4. Addition of provision for bad and doubtful debts for computation of book profits under Section 115JB.Detailed Analysis:Issue 1: Disallowance of Interest Expenditure Related to Tax-Free HUDCO BondsThe assessee challenged the disallowance of Rs. 3,64,206/- being interest paid on a pro-rata basis related to earning tax-free interest income of Rs. 15,50,685/- on tax-free HUDCO bonds of Rs. 2 crores. The Assessing Officer (AO) disallowed the proportionate interest as the assessee could not show which funds were deployed in tax-free investments. The CIT(A) upheld this disallowance. The assessee argued that it had sufficient interest-free funds and relied on the Bombay High Court's decision in CIT Vs. HDFC Bank Ltd. The Tribunal noted that the assessee had interest-free funds exceeding the investment in HUDCO bonds and reversed the lower authorities' findings, directing the AO to delete the disallowance. Thus, the appeal on this ground was allowed.Issue 2: Disallowance of Interest Paid on Borrowings from the Head OfficeThe assessee contested the disallowance of Rs. 84,56,510/- being interest paid on borrowings from its Head Office, arguing it had deducted TDS. The AO disallowed the interest, citing the Special Bench decision in Tokyo Mitsubishi Vs. CIT, which held that interest paid to self is not allowable. The CIT(A) upheld this disallowance. The assessee relied on the Kolkata High Court's decision in ABN Amro Bank Vs. CIT, but the Tribunal noted that India does not have a Double Taxation Avoidance Agreement (DTAA) with Taiwan. The Tribunal upheld the disallowance, agreeing with the lower authorities that interest paid to the Head Office is not deductible under domestic tax law. Hence, the appeal on this ground was dismissed.Issue 3: Disallowance of Expenses Incurred by the Head Office and Attributable to the Branch under Section 44CThe assessee claimed Rs. 16,61,289/- as expenses incurred by the Head Office and attributable to the branch. The AO disallowed these expenses due to the lack of evidence of actual benefit and absence of debit notes. The CIT(A) upheld this disallowance. The assessee argued that detailed submissions were made, but the Tribunal found that no substantial evidence was provided to support these expenses. The Tribunal upheld the lower authorities' decision, dismissing the appeal on this ground.Issue 4: Addition of Provision for Bad and Doubtful Debts for Computation of Book Profits under Section 115JBThe assessee contested the addition of Rs. 2,17,69,446/- to the book profit under Section 115JB. The AO and CIT(A) made this addition based on the retrospective amendment by the Finance (No. 2) Act 2009, effective from 01.04.2001. The Tribunal, agreeing with the Delhi High Court's decision and the clear provisions of the law, upheld the addition. Thus, the appeal on this ground was dismissed.Conclusion:The appeal was partly allowed, with the Tribunal reversing the disallowance related to the interest expenditure on HUDCO bonds but upholding the disallowances and additions on other grounds. The order was pronounced in the open court on 26/12/2017.