TaxTMI 
TaxTMI 
2012 (10) TMI 134
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....owing the order passed by the Tribunal in ITA No.525/Mum/2001 for assessment year 1997-98, we uphold the impugned order on this issue. This ground is not allowed. 3. Ground no.2 is against the confirmation of disallowance of expenditure on purchase of fixed assets at Rs. 3,43,28,114. On this issue also the learned AR was fair enough to admit that the Tribunal decided similar issue against the assessee in its order for assessment year 1997-98. Respectfully following the precedent, we uphold the impugned order on this score. This ground is not allowed. 4.1 Ground no. 3 is against the sustenance of disallowance out of bonus expense. The facts apropos this ground are that the assessee claimed deduction of Rs. 66,500 as bonus. The Assessing Officer found that only a sum of Rs. 24,000 was paid before the due date of filing the return of income. As per the tax audit report in Form no.3CD, the auditor had reported that the remaining amount of Rs. 42,500 was not paid on or before the due date. Invoking the provisions of section 43B, the Assessing Officer made disallowance for Rs. 42,500. The learned CIT(A) upheld the disallowance. The assessee is aggrieved against the sustenance of th....
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....ike manner, if any expenditure incurred by the assessee is not deductible as per the provisions of the Act, the same shall still be allowed as deduction if the DTA provides for such deduction. The crux of the matter is that the DTA overrides the regular provisions of the Act, in so far as it is more beneficial to the assessee. If the DTA provides for a more liberal mode of computation of income, then it is this mode of computation, which needs to be followed notwithstanding any contrary provision contained in the Act. However, if there is no specific provision in the DTA concerning a particular aspect, then it is the basic law, that is, the Act, which applies. 4.5 Having seen that the disallowance u/s 43B is called for in the determination of income under the Act, let us see the position under the DTA. The assessee is admittedly a tax resident of Mauritius. The authorities below have not disputed the entitlement of the assessee to avail the benefit, if any, available to it as per the terms of DTA. Rather, the ld. CIT(A) has considered the claim of the assessee as per the DTA and thereafter rejected it as having been not maintainable. 4.6 Article 7 of the DTA provides for the ....
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....ablishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise. 5 & 6** ** **" 4.7 A bare perusal of para 1 of Article 7 reveals that when the enterprise of one Contracting State (say, Mauritius) carries on business in the other Contracting State (say, India), the profits of the enterprise may be taxed in India but only so much of them as are attributable to the permanent establishment (hereinafter also called 'the PE'), through which the Mauritius enterprise carries on business in India. Para 2 of Article 7 talks of attribution of profits to such PE by considering it as distinct and separate enterprise de hors the general enterprise for the limited purpose of the computation of business profits. The provisions of para 2 are "subject to the provisions of paragraph 3 of this Article". When we turn to para 3 of Article 7, it transpires that in determining the profits of the permanent establishment, deduction is allowed for all expenses which are incurred for the purpose of the busi....
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....prise as a whole (or the part thereof which includes the permanent establishment), whether incurred in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. ......" (emphasis supplied by us) 4.11 Para 3 of Article 7 of Indo-US DTAA can be split into two parts, viz, the first part granting deduction for the expenses incurred for the purposes of the business of the permanent establishment and the second part, towards the end of the para, restricting such deduction 'in accordance with the provisions of and subject to the limitations of the taxation laws' (hereinafter referred to as 'the restrictive clause') of the State. On a careful reading of para 3 of Article 7 in entirety, it emerges that the deductibility of any expenditure has to necessarily pass the restrictive clause, if any, contained in the Act. Suppose there is any provision restricting the deductibility of any expenditure or such deduction has been made dependent on the satisfaction of any condition, then unless such condition is fulfilled, the deduction cannot be allowed and that too, to the ext....
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....Article 7(3). The absence of the restrictive clause in para 3 of Article 7 makes it abundantly clear that any expenditure incurred for the purpose of business of the permanent establishment deserves to be allowed as deduction in entirety. As we are presently computing the business profits of the assessee from the operations carried out in India through its permanent establishment, all the expenses so incurred including the bonus qualify for deduction in entirety. It is noticed that but for section 43B, the entire amount of bonus would have been allowed as deduction. Section 43B has placed a limit on the otherwise full deductibility of bonus expenditure to the amount actually paid on or before the due date of filing the return. Prior to the insertion of section 43B, the entire amount of bonus was allowed as deduction under the mercantile system of accounting on the principle of incurring liability in respect of such bonus irrespective of its payment. It is not the case of the Department that the assessee did not incur liability in respect of such bonus expenditure. The assessee has incurred this expenditure and it is only the payment part which is delayed for the time being. The oth....
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....ision in para 1 of Article 3, can be lifted in the DTA through Article 3(2). Clearly the disallowance of bonus as per section 43B, cannot be characterized as "any term not defined" as per Article 3(2). In our considered opinion the contention raised on behalf of the Revenue that section 43B should be read into Article 7 by means of Article 3(2), deserves the fate of rejection. 4.16 The learned Departmental Representative then focused his attention on para 1 of Article 23 to bolster his submission that the restriction u/s 43B should be read in to Article 7(3). Para 1 of Article 23 provides that : "The laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention". The first part of para 1 of Article 23 makes out a general rule that if income of the permanent establishment is to be computed in India, then the provisions of the Act shall govern the taxation of income in India. However, the second part of para 1 of Article 23 contains a rider, which makes the operation of the first part of para 1 of Article 23 subject to the fulfillment o....
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....ction of expenses and not a disabling provision for restricting the otherwise allowable deductions. Thus para 3 of Article 7 is a specific provision governing the deductibility of expenses as per the DTA. 4.19 Section 29 of the Act provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D. There are various sections under Chapter IV-D which grant deductions for expenses and allowances, such as sections 30, 31, 32 and 36. In the like manner, there are certain sections, which restrict the otherwise allowability of deductions, such as sections 40, 43B, 44C. Thus, while computing income under the head 'Profits and gains of business or profession', what is required to be done is to allow deduction for expenses under the relevant sections only to the extent it is not barred by the operation of the later sections such as 30, 43B and 44C. Resultantly, section 43B needs to be read in conjunction with the other relevant sections providing for the deduction of expenses as enumerated in clauses (a) to (f) of section 43B. For example, section 36(1)(iii) provides deduction of interest on capital borrowed for the purp....
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....TA. In the otherwise situation, that is, in the case of a treaty not containing such restrictive clause, the deductibility of expenses is governed by the first part of para 3 of Article 7, which sanctions the grant of deduction of expenses to the full extent in so far as these are incurred for the purposes of the business of the PE. The acceptance of this contention of the ld. DR will obliterate the difference in the language of treaties containing and not containing such restrictive clause, thereby rendering the restrictive clause in para 3 of Article 7 in some of the treaties, as redundant. Obviously, it can not be the case. As such, we turn down the contention of the learned Departmental Representative that para 1 of Article 23 impliedly sanctions the invoking of section 43B, as in our considered opinion there is an express contrary provision in Article 7(3) providing for deduction of all expenses incurred for the purpose of business of permanent establishment. Before disassociating with this issue, we consider it our duty to record that both the sides have relied on tribunal orders supporting their respective stands. In fact, these orders, do fortify the viewpoint of the rival ....
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....wance of interest was called for. The ld. CIT(A) concurred with the submissions advanced on behalf of the assessee and deleted the disallowance made by the A.O. u/s 14A. 5.2 We have heard the rival submissions and perused the relevant material on record. It is not disputed that the assessee invested Rs. 10 crore in tax free bonds from the borrowing made by it from the RBI on 12.11.1998. It is equally not disputed that the assessee has paid interest on such borrowings made from the RBI. In such circumstances, the question arises as to whether any disallowance of interest can be made when there is a direct nexus between the borrowed funds and investment in tax free bonds. 5.3 The learned AR vehemently argued that the decision of the learned CIT(A) in deleting the disallowance u/s 14A should be upheld for the reason that Article 7(3) does not provide for limiting the deductibility of expenses as per the provisions of the Act. In that view of the matter, it was contended that the provisions of section 14A also limiting the deductibility of expenses, cannot be applied. 5.4 It is clear from the language of section 14A that it provides for disallowance of expenses incurred by the....
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....siness income can be determined after deducting business expenses. If we compartmentalize business income and expenses into taxable and exempt parts, it is but natural that only that much of the business expenditure can be allowed as deduction from the taxable income as has been incurred in relation to such taxable income. Business expenditure incurred for earning the exempt business income shall call for deduction only against the exempt business income. It is quite elementary that, unless expressly provided otherwise, exemption is always in respect of income and not the gross receipt. It is the excess of gross receipt over the expenditure for earning such income, which qualifies for exemption. The crux is that if any business income is exempt from taxation under the Act, the expenditure incurred in relation to such income shall also stand qualify for reduction against the exempt income and not any taxable income. Neither such exempt income nor any expenditure incurred in relation to such exempt income shall enter into the computation of taxable income. 5.7 We have noticed above that a DTAA can only cure the rigor of the Act and not convert an exempt income under the Act into a....
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....ses which are otherwise deductible. It is because of such limit or breach of stipulation that the otherwise deductible expense becomes non-deductible or deductible at a lower level. We find that position is quite different in so far as section 14A is concerned. This section contains a fundamental principle that any expenditure incurred in relation to an income not includible in total income, shall not be allowed as deduction. This section, at the very threshold itself, snatches away the deductibility of expenses incurred in relation to an exempt income. It is not a case that the expenses are otherwise deductible but have become non-deductible due to the operation of section 14A. Rather, the expenses do not qualify for deduction at the very first instance. This position u/s 14A is in sharp contrast to other sections as discussed above, such as 37, 40, 43, and 44C. Whereas these later sections apply to take away the deduction of expenses, which are otherwise allowable and have entered into the basket of deductible expenses, section 14A restricts the entry of certain expenses into the basket of deductible expenses. This is the underlying distinction between section 14A and the other s....
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....ermanent establishment and further the assessee has also claimed exemption in that regard which has been rightly granted as well, the expenses incurred in relation to such interest income cannot equally be allowed as deduction. 5.12 The next point urged by the learned AR was that tax free securities were held by the assessee as stock-in-trade and hence the provisions of section 14A cannot apply to disallow any expenditure notwithstanding the fact that the interest income is exempt. We find that similar contention was raised before the Mumbai Bench of the Tribunal in the case of JCIT v. American Express Bank Limited in ITA No. 5904/Mum/2000 for the A.Y. 1997-98. In that case the assessee relied on the judgment of the Hon'ble Kerala High Court in the case of CIT v. Smt. Leena Ramachandran [2011] 339 ITR 296 (Ker.)] for raising a proposition that no disallowance can be made u/s 14A because the securities were held as investment. The Mumbai Bench considered this issue at length in the light of the judgment of the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010] 328 ITR 81 (Bom)]. Vide its order dated August, 2012, the tribunal has held in ....
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....be made, that should be restricted to interest for one day alone as the amount borrowed from Reserve Bank of India on 12.11.1998 for purchasing tax free bonds was repaid on the next day i.e. 13.11.1998. Similar contention raised before the Assessing Officer, who had the benefit of the statement of bank account for the relevant period, remained uncontroverted. It is further seen that the AO has restricted disallowance only to the interest expenditure and not to any other administrative or management expenses incurred in relation to the income not chargeable to tax. It is borne out from the impugned order that the assessee has sufficient interest free funds at its disposal apart from sufficient net profit from business operations for the year. No material has been brought out on record by the ld. DR to show that finding of the ld. CIT(A) is incorrect. This factual scenario brings us to a stage where the assessee did borrow interest bearing funds for making investment in tax free bonds and repaid such loan out of its own interest free funds on the next day. There is obviously a direct nexus between the borrowing of interest bearing funds and making of investment in tax free bonds. The....