2025 (1) TMI 1296 - HC - Income Tax

NRI deposit solicitation expenses and excess pension contributions allowed as deductions under Section 36

The Commissioner of Income Tax - International Taxation-3 Versus Standard Chartered Grindlays Ltd.

The Delhi HC decided in favor of the assessee on two issues. First, regarding NRI expenses for soliciting foreign currency deposits, the court held these ... NRI expenses - Expenses incurred on soliciting and mobilization of foreign currency deposits from Non-Resident Indians on the assessee's Indian business in the backdrop of Section 44C - HELD THAT:- Issue would have to be answered in favour of assessee in light of the order passed by us in ANZ Grindlays Bank [2024 (10) TMI 185 - DELHI HIGH COURT] held expenses were incurred for the purposes of inviting NRIs’ to open deposits in the Indian branches of the respondent assessee. The aforesaid initiative was predicated upon the circular of the RBI itself which is dated 16 October 1991. Since this was expenditure which was incurred solely for the purpose of the business of the respondent assessee in India, we find no merits in the challenge which stands mounted to the order of the Tribunal in this respect. Expenditure on account of contribution to approved pension funds - contribution have breached the limits prescribed by Section 36 (1) (iv) and thus not liable to be allowed as deductions bearing in mind the provisions made in Section 40A (10) - HELD THAT:- The factual position which had fallen for notice of the Calcutta High Court in Exide Industries [2022 (9) TMI 1259 - CALCUTTA HIGH COURT] and which lead it to draw a distinction between an initial or qualificatory contribution as distinguished from a contribution made in a particular year in discharge of employer obligations. It thus held that the limits that the Board could prescribe would only apply to an initial or an ordinary annual contribution. Any contribution made additionally in discharge of an overarching obligation would thus not be rendered as a disallowable expense. We find ourselves in agreement with the view expressed in Exide Industries. Appeal decided in favour of the assessee. ISSUES PRESENTED and CONSIDEREDThe appeal before the Delhi High Court involved two primary legal questions:i) Whether the Income Tax Appellate Tribunal (ITAT) erred in allowing the deduction claimed by the assessee for expenses incurred on soliciting and mobilizing foreign currency deposits from Non-Resident Indians (NRIs) in the context of Section 44C of the Income Tax Act, 1961.ii) Whether the ITAT erred in allowing the deduction of INR 9.81 crores as expenditure on account of contributions to approved pension funds, ignoring the provisions of Section 36(1)(iv) and 40A(9) of the Act, read with Rule 87 of the Income Tax Rules, 1962.ISSUE-WISE DETAILED ANALYSISIssue (i): Deduction for NRI ExpensesRelevant Legal Framework and Precedents: The core legal framework revolves around Section 44C of the Income Tax Act, which deals with the allocation of head office expenses for non-resident entities operating in India. The relevant precedent cited was the court's own decision in Director of Income Tax vs. ANZ Grindlays Bank.Court's Interpretation and Reasoning: The Court referred to its previous ruling in the ANZ Grindlays Bank case, where it was established that expenses incurred for garnering foreign currency deposits from NRIs were not to be classified as head office expenses under Section 44C. The Court emphasized that these expenses were India-centric and directly related to the business operations within India.Key Evidence and Findings: The Tribunal noted that the expenses were incurred for soliciting NRI deposits in Indian branches, driven by the Reserve Bank of India's (RBI) circulars during a balance of payments crisis, which offered favorable interest rates for NRI deposits.Application of Law to Facts: The Court found that the expenses were incurred solely for the purpose of the Indian business, and thus, they were not head office expenses. Consequently, the deduction was allowable.Treatment of Competing Arguments: The Court dismissed the appellant's argument that these expenses should be classified as head office expenses, aligning with the Tribunal's view that they were directly related to the Indian business.Conclusions: The Court upheld the Tribunal's decision, allowing the deduction for NRI-related expenses, finding no merit in the appellant's challenge.Issue (ii): Deduction for Pension Fund ContributionsRelevant Legal Framework and Precedents: The legal framework includes Section 36(1)(iv) and 40A(9) of the Income Tax Act, along with Rule 87 of the Income Tax Rules. The Supreme Court's decision in Commissioner of Income Tax vs. Sirpur Paper Mills was pivotal in interpreting these provisions.Court's Interpretation and Reasoning: The Court relied on the Supreme Court's interpretation in Sirpur Paper Mills, which clarified that conditions imposed by the Central Board of Direct Taxes (CBDT) cannot curtail the scope of deductions granted by the statute. The Court also considered the decision in Principal Commissioner of Income Tax vs. Exide Industries Ltd., which distinguished between ordinary annual contributions and additional contributions made in exceptional circumstances.Key Evidence and Findings: The Tribunal found that the contribution of INR 9.81 crores was necessitated by business requirements, particularly to meet pension obligations under a Voluntary Retirement Scheme (VRS).Application of Law to Facts: The Court determined that the contribution in question was not an ordinary annual contribution but a necessary payment due to a shortfall in the pension fund, thus falling outside the limits prescribed by Rule 87.Treatment of Competing Arguments: The appellant's argument that the contribution exceeded the statutory limit was rejected, as the Court found the contribution was made in exceptional circumstances and was not subject to the usual limits.Conclusions: The Court upheld the Tribunal's decision, allowing the deduction of the entire contribution amount, aligning with the principles established in Sirpur Paper Mills and Exide Industries.SIGNIFICANT HOLDINGSVerbatim Quotes of Crucial Legal Reasoning: 'The amplitude of the deduction permitted by the section cannot be cut down under the guise of imposing a 'condition'. In fact, this is not a condition but an impermissible attempt to rewrite the section.' (Sirpur Paper Mills)Core Principles Established: The Court reinforced the principle that deductions under the Income Tax Act should not be curtailed by conditions that go beyond the statutory framework. It also emphasized that contributions made in exceptional circumstances, such as to meet specific business obligations, are deductible even if they exceed the usual statutory limits.Final Determinations on Each Issue: The Court answered both questions in favor of the assessee, dismissing the appeal. It upheld the Tribunal's decisions on both the deduction for NRI-related expenses and the pension fund contributions.