1989 (7) TMI 151 - AT - Income Tax

Tribunal: DTA Prevails over Indian IT Act, Interest Income Taxable, Deductions Denied

The Tribunal held that in case of conflict between the Indian IT Act and the Double Taxation Avoidance Agreement (DTA), the provisions of the DTA prevail. ... - Issues Involved:1. Conflict between Indian IT Act and Double Taxation Avoidance Agreement (DTA).2. Taxability of interest income from U.K. Treasury Stock.3. Deduction claims for donations made to charitable trusts.4. Interest on inter-branch deposits.5. Deduction for interest attributable to head office credit balance.6. Applicability of s. 40A(5) and s. 37(2A) restrictions.7. Gross vs. net income from interest.8. Deduction of head office expenses.9. Deduction under s. 80G.10. Business promotion expenditure.11. Loss on sale of car.12. Levy of interest under s. 139(8) and s. 217(1A).Summary:1. Conflict between Indian IT Act and DTA:The Tribunal emphasized that in case of conflict between the Indian IT Act and the DTA, the provisions of the DTA will prevail as specified in Article XI(1) of the DTA.2. Taxability of Interest Income from U.K. Treasury Stock:The Tribunal rejected the assessee's contention that interest on U.K. Treasury Stock was not taxable in India. It was held that the interest income from these securities, which were kept in India as a condition precedent to continuing banking operations, would be taxable as industrial or commercial profits under the DTA.3. Deduction Claims for Donations:The Tribunal upheld the CIT(A)'s decision to deny full deduction for donations made to charitable trusts under s. 80G, as the assessee failed to prove any nexus between the donations and the receipt of deposits or any other business benefit.4. Interest on Inter-Branch Deposits:The Tribunal rejected the assessee's grounds of appeal regarding interest on inter-branch deposits, noting that no specific arguments were addressed, and the grounds were considered redundant.5. Deduction for Interest Attributable to Head Office Credit Balance:The Tribunal agreed with the CIT(A) that no deduction for interest attributable to head office credit balance should be allowed, as these were the assessee's own funds and there was no question of treating the Indian branch as a separate entity dealing at arm's length with the non-resident assessee.6. Applicability of s. 40A(5) and s. 37(2A) Restrictions:The Tribunal noted that the latest completed assessment for asst. yr. 1986-87 did not make disallowances under s. 40A(5) and s. 37(2A) based on the Board's clarification from 1966. Therefore, it was held that no additions under these sections should be made in the assessment years under appeal.7. Gross vs. Net Income from Interest:The Tribunal held that the gross amount of interest should be taken into account for tax purposes, and the question of deductible expenses from gross interest needs to be considered separately.8. Deduction of Head Office Expenses:The Tribunal upheld the CIT(A)'s direction that head office expenses should be apportioned on the basis of Indian net proceeds to global net proceeds, in line with Art. III(3) of the DTA.9. Deduction under s. 80G:The Tribunal modified the CIT(A)'s direction, stating that while the AO can demand original receipts of donation, they should not require the original certificates issued by the CIT in respect of the donee trust.10. Business Promotion Expenditure:The Tribunal found that disallowance under s. 37(2A) would be rendered redundant in light of the Department's stand in the assessment for asst. yr. 1986-87, where no disallowance was made under s. 37(3A).11. Loss on Sale of Car:The Tribunal restored the matter of loss on sale of car to the file of the AO for adjudication as per law, noting some confusion and mixing up of figures in the computation.12. Levy of Interest under s. 139(8) and s. 217(1A):The Tribunal upheld the Department's contention that the matter of interest under s. 139(8) was not appealable, reversing the CIT(A)'s directions. The assessee was advised to approach appropriate authorities for reduction/waiver of interest. Similar reasoning applied to interest under s. 217(1A) for asst. yr. 1978-79.Conclusion:The appeals were partly allowed, with specific directions provided for each issue, ensuring compliance with the DTA and relevant provisions of the Indian IT Act.