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 sufficient interest-free funds. However, the disallowance of interest paid on borrowings from the Head Office and expenses incurred by the Head Office attributable to the branch under Section 44C were upheld. Additionally, the addition of provision for bad and doubtful debts for computation of book profits under Section 115JB was also upheld based on a retrospective amendment. The order was pronounced on 26/12/2017.

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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 Bonds
The 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 Office
The 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 44C
The 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 115JB
The 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.

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