TaxTMI 
TaxTMI 
2026 (3) TMI 1118
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.... account of expenditure incurred in earning income claimed exempt u/s. 10(15) and 10(23G) of I.T. Act. 2. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in directing to allow the sum of Rs. 1,15,79,017/- towards expenses incurred for Indian Branches u/s. 37(1) of the Income Tax Act, 1961, holding it outside the scope of section 44C of the I.T Act. 3. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) has erred in directing the A.O. to compute deduction u/s. 36(1)(viia) of the IT Act, 1961 before the deduction u/s. 44C of the Act." The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO restored." 3. Ground No. 1, raised in Revenue's appeal, pertains to the deletion of the disallowance of expenditure incurred on earning the income exempt under section 10(15) and section 10(23G) of the Act. 4. We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is a commercial bank having its Head Office in Charlotte, USA. The assessee has five branches in India at Mum....
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.... to establish a direct correlation between the funds available with it by way of cash balances, on the date of the investment, and the investments made. The AO held that the opening capital balance available with the assessee in the year under consideration would not have been available to the assessee as surplus cash and bank balance for deployment in tax-free investments. Thus, for want of proof of specific correlation between the funds available with the assessee on the date of the investment and the investment so made, the AO rejected the contention of the assessee. Accordingly, on the basis that the gross interest received by the assessee is not eligible to be exempted under section 10 of the Act and only the net receipts would be allowed as an exemption, the AO restricted the exemption under section 10(15) and section 10(23G) of the Act to the total amount of Rs. 5,49,48,220 as against the claim of Rs. 45 lakh and Rs. 14,18,82,201 by the assessee. 6. The learned CIT(A), vide impugned order, upheld the findings of the AO insofar as it pertained to the exemption of only net income under section 10 of the Act. However, the learned CIT(A), after taking into consideration the p....
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.... Deposits Demand Deposits : I) From Bank 70,981,729 68,306,758 67,973,713 II) From Others 4,505,995,377 6,380,438,426 6,105,760,570 Particulars March 31, 2000 March 31, 1999 March 31, 1998 Total Owned funds available with Bank 11,444,104,265 12,840,171,474 12,201,595,707 Statement of lending to infrastructure projects and investment in Tax free bonds Particulars Date of disbursement/(re-payment) Rupees Bal. o/s. of March 31, 2000 (A) Lending to infrastructure projects u/s 10(23G) Birla AT & T Communication 10-Dec-97 465,400,000 465,400,000 Tata Communication Ltd. 30-Mar-99 100,000,000 100,000,000 Dabhol Power Company Ltd. 12-May-97 81,000,000 10-Jun-97 20,000,000 11-Mar-98 19,000,000 20-Aug-98 14,000,000 14-Oct-98 5,000,000 12-Nov-98 7,000,000 11-Dec-98 ....
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....ister concerns, the Hon'ble Delhi High Court in the case of Tin Box Co. Pvt. Ltd. (260 ITR 637) has clearly held that capital and reserves of the assessee, if exceeded the amounts advanced to sister concerns, no disallowance can be made of the interest if the Department fails to point out any specific interest bearing funds, which has been diverted by the assessee to its sister concern. The fact that capital and interest free loans of the assessee exceeded the amounts advanced has to be controverted or disproved by the Department. 4.5 Thus, in view of the aforesaid factual and legal position when it is found that there is no nexus proved between funds for lending to infrastructure projects/ investment in tax free bonds and interest bearing funds and on the other hand there are sufficient funds to finance such lending/investment, the action of the A.O. in disallowing exemption u/s. 10(15)(iv)(h) and 10(23G) of part of interest cannot be sustained. The A.O. is directed to delete the disallowance made in this regard." 7. Having considered the submissions of both sides and perused the material available on record, in the present case, it is evident that there is no disp....
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.... since these expenses pertain to the NRI Desks at the Head Office/overseas branches of the assessee's bank, they are directly attributable to the Indian branch. During the assessment proceedings, the assessee claimed that the limit prescribed under section 44C of the Act does not apply to its case and that the expenses should be allowed in full to the extent attributable to Indian operations. In this regard, the assessee also referred to the provisions of Article 7 of the DTAA. It was further submitted that the deduction is allowable for all expenses incurred as per the provisions of Article 7(3) of the DTAA, irrespective of the fact whether such expenses are incurred in the state in which the Permanent Establishment is situated or elsewhere. 10. The AO, vide order under section 143(3) of the Act, disagreed with the submissions of the assessee and held that there is no dispute that the deduction for Head Office expenditure should be allowed to the Permanent Establishment. It was further held that Article 7 of the DTAA ensures that legitimate business expenditure is allowed to be deducted from the profits of the Permanent Establishment in a uniform manner by all member countries.....
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....press Bank Ltd, reported in [2025] 181 taxmann.com 433 (SC), wherein the stand taken by the AO in the present case was upheld. The learned DR submitted that the provisions of section 44C of the Act are applicable to all expenses, whether common or exclusive, incurred by the Head Office which are attributable to its Indian branches. It was further submitted that the deduction claimed by the assessee in respect of expenditure incurred by overseas branches for its India operations was rightly restricted by the AO under section 44C of the Act. The written submissions filed by the learned DR are reproduced as follows, for ready reference: - "5.2 Brief Note of DR: The DR relied on the decision of the Hon'ble Supreme Court in the case of DIT(IT)-1, Mumbai v. American Express Bank Ltd. in Civil Appeal No. 8291 of 2015 and 4451 of 2016, as cited in [2025]181 taxmann.com 433(SC)[15.12.22025]. The salient features of this decision are enumerated hereunder: a. In para 28 to 40, the Hon'ble SC analyses the basic principles of interpretation and ultimately summarizes that: i. Taxation statute requires strict interpretation. ii. Where the words are plai....
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....he words "as may be prescribed" in clause (d) otiose and redundant. c. The Hon'ble Apex has taken into consideration the decision of Hon'ble Bombay HC in the case of: i) Emirates Commercial Bank ii) Deutsche Bank c.1 The Hon'ble Apex has also taken into consideration the decision of Hon'ble Calcutta HC in the case of: i) Rupenjuli Tea Co. Ltd. d. In conclusion the Hon'ble Apex Court provides its conspectus as under: Para 86- a) Section 44C is a special provision that exclusively governs the quantum of allowable deduction for any expenditure incurred by a non-resident assessee that qualifies as 'head office expenditure. b) For an expenditure to be brought within the ambit of Section 44C, two broad conditions must be satisfied: (i) The assessee claiming the deduction must be a non-resident; and (ii) The expenditure in question must strictly fall within the definition of 'head office expenditure' as provided in the Explanation to the Section. c) The Explanation prescribes a tripartite test to determine if an expense qualifies as 'head office expenditure' - ....
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....in the present case, the expenditure incurred by the Head Office/overseas branches for generating business for the Indian branches is in the nature of marketing expenditure and thus cannot be categorised as "executive and general administration" expenditure. Accordingly, the learned Senior Counsel submitted that the NRI Desks expenditure incurred by the assessee's overseas branches is not covered by the provisions of section 44C of the Act. The written submissions filed by the assessee, pertaining to this ground, are reproduced as follows for ready reference: - "Submission: 8. The learned AO, in the assessment order, has considered the aforesaid expenses to be in the nature of executive and administrative expenditure and hence to be treated as head office expenses under section 44C of the Act. 9. At the outset, it would be relevant to highlight that the learned AO has not provided any basis on which the said expense are in the nature of "executive and administrative" expenses. 10. Further, on perusal of the written submissions dated 14 January 2026 filed by the learned DR, reliance has been placed on the decision of the Hon'ble Supreme Court ....
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...." under section 44C of the Act. 15. In light of the above, the Respondent submits that the nature of NRI desk expenditure incurred by the Respondent are not in the nature executive and general administration expenses and hence, should not get covered by section 44C of the Act." 14. We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee has its Head Office in Charlotte, USA, with branches all over the world. In India, the assessee has five branches at Mumbai, New Delhi, Calcutta, Bangalore and Chennai. During the year under consideration, an amount of Rs. 1,15,79,071 was incurred by the assessee's London and Singapore branches towards NRI Desks charges. As these expenses were incurred for operations in India, the same were claimed as deductions while computing the assessee's income from India operations. As per the assessee, NRI Desks are located in cities which have a high concentration of Indian nationals, and therefore, these desks help the assessee to survey the market, identify potential customers and render a more efficient service to them. It is the plea of the assessee that it has set u....
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....ure incurred by the overseas branches for the Indian branch also falls under the purview of section 44C of the Act. 17. In American Express Bank Ltd (supra), the Hon'ble Supreme Court also laid down the tests to determine whether an expenditure will qualify as "Head Office Expenditure" within the meaning of the Explanation to section 44C of the Act. In this regard, it is relevant to note the following observations of the Hon'ble Supreme Court in the aforesaid decision: - "75. In other words, for an expenditure to qualify as 'head office expenditure' within the meaning of the Explanation to Section 44C, the assessing officer has to be satisfied of the following three ingredients: (a) First, the expenditure must be incurred outside India. (b) Secondly, the expenditure must be in the nature of executive and general administration, i.e., a broad genus. (c) Thirdly, the said executive and general administration expenditure must fall within the specific species enumerated in clauses (a), (b), and (c), or expressly prescribed under clause (d)." 18. After laying down the aforesaid legal principles, the Hon'ble Supreme Court restored the mat....
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....gh-value and long-standing customers, have also played an important role in building stronger customer relationships. The banks, through their branches, also expand their customer base through referrals and partnerships, thereby maintaining a constant connection with their customers. Thus, all these activities that build stronger customer relationships are part and parcel of the general banking business conducted by a branch, which ultimately results in increased business through higher customer deposits or interest income from lending funds. It is pertinent to note that such activities are conducted by the branch employees only, who have the knowledge about various schemes and products of the bank, and accordingly, they guide the customers. At this stage, it is important to note that over 25 years ago, banks also used other methods to reach out to customers, such as television and radio advertisements, print advertising like newspaper ads, flyers, brochures, and outdoor signage or billboards, to not only build their brand name but also promote new schemes or offers. However, these mass media efforts target broader segments or the general public. 21. Therefore, we are of the con....
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....oyees conducted general banking business from the infrastructure at the branch. This fact is further evident from the details of expenditure as certified in the sample local accountant's certificates, which also do not indicate any marketing/sales expenditure being incurred by the overseas branches in respect of the NRI Desks. Thus, we are of the considered view that the decision of the Special Bench relied upon by the assessee is factually distinguishable. 24. Since in the present case, it is undisputed that these expenditures were incurred outside India, accordingly, we are of the considered view that the tripartite test laid down by the Hon'ble Supreme Court in American Express Bank Ltd (supra) is satisfied in the present case, and the expenditure incurred by the assessee's London and Singapore branches towards NRI Desks charges qualify as "Head Office Expenditure" under the Explanation to section 44C of the Act. Therefore, the provisions of section 44C of the Act are applicable in the present case. As a result, the impugned order on this issue is set aside, and the order passed by the AO restricting the deduction under section 44C of the Act is reinstated. Hence, Ground No. ....
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.... we are of the considered view that the effect of the deduction under section 36(1)(viia) has to be given prior to computation of deduction under section 44C of the Act. Accordingly, we do not find any infirmity in the findings of the learned CIT(A) on this issue, and the same are upheld. Accordingly, Ground No. 3 raised in Revenue's appeal is dismissed. 29. In the result, the appeal by the Revenue is partly allowed. ITA No. 4154/Mum./2004 Assessee's appeal - A.Y. 2000-01 30. In this appeal, the assessee has raised the following grounds: - "Ground No. 1 The Commissioner of Income-tax (Appeals)-XXXI, Mumbai [hereinafter referred to as "CIT(A)] erred in disallowing expenses of Rs. 58,106,542 incurred by your Appellants' overseas branch for it's Indian operations by invoking section 40(a)(i) having failed to appreciate that said amount was not royalty and in any event there was no obligation to deduct tax at source under section 195 in respect of the same. Ground No. 2 The learned CIT(A) erred in considering the sale of its Retail business as slump sale as against an itemised sale, as evidenced in the sale agreement."....
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.... systems/applications and for storing data. These facilities were being accessed by various subsidiaries/affiliates of ABC group located in different parts of world. Its Indian subsidiary "XT" at Delhi provided customer services by way of data processing and for doing the data processing work pertaining to travel related services, "XT" accessed the computer network of "Y" located in Hong Kong and in USA. The CPU of "y" in USA was accessed by "XT" not directly but through a central data network (CDN) of "Y" installed in Hong Kong. For allowing use of CDN and CPU, "XT" paid "y" certain charges. The AAR in this case held that since the software was customised and secret, the payment had been received for the use of, or the right to use..... design or model, plan, secret formula or process within the meaning of the term "royalty". In the present appeal also the computer facility including the software is provided by the Croydon data center and the payment is made by the Indian Branch for such usage. Needless to say such payment qualifies to be considered as royalty as per the ruling of the Hon'ble AAR in the aforesaid case in P. No. 30 of 1999. 5.6 The action of the A.O. i....
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....xpenditure is being claimed as deduction under one particular provision of the Act, the appellant can not turn around and make an excuse for not complying with another provision of the same statute in relation to the same subject matter. Thus, it emerges that the sum of Rs. 5,81,06,542/- (equivalent to US $ 1,334,249) is otherwise not allowable under section 40(a)(i) and only the balance amount of Rs. 1,15,79,017/- (Rs. 21,67,645 + Rs. 94,11,372) can be considered as allowable under section 37(1) and outside the scope of section 44C of the I.T. Act. The A.O. is directed to allow the H.O. expenses accordingly." Being aggrieved, the assessee is in appeal before us. 34. We have considered the submissions of both sides and perused the material available on record. The assessee in its London branch has set up a global banking system data centre, known as Croydon Data Processing Centre, which supports, inter alia, the entire wholesale banking and capital market business of the assessee in India. As per the assessee, the cost incurred at this centre was allocated to various branches of the assessee globally on a proportionate basis by applying appropriate allocation keys. Accordingl....
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....ion 195 of the Act. From the plain reading of the provisions of section 195 of the Act, we find that the liability to deduct tax on payment to a non-resident arises at the time of credit of such income to the account of the payee or at the time of payment thereof by the modes prescribed, whichever is earlier. However, in the present case, it is an undisputed fact that the amount was neither credited nor paid by the assessee's Indian branch to the overseas branch in respect of the cost allocated to the assessee of Croydon Data Processing Centre. Thus, without going into the question whether the cost was in the nature of Royalty income, we do not find any merit in the disallowance made under section 40(a)(i) of the Act, and the same is deleted. As a result, Ground No. 1 raised in assessee's appeal is allowed. 37. Ground No. 2, raised in assessee's appeal, pertains to the applicability of the provisions of section 50B of the Act in respect of the sale of Retail Banking Business by the assessee to M/s ABN Amro Bank N.V. 38. The brief facts of the case, pertaining to this issue, as emanating from the record are: During the assessment proceedings, from the perusal of the return fil....
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....r passed under section 143(3) of the Act, disagreed with the submissions of the assessee that the provisions of section 50B of the Act are not applicable to the sale transaction, on the basis that the sale transaction is in the nature of "Slump Sale". The AO, by referring to the various covenants of the agreement entered into between the assessee and M/s. ABN Amro Bank N.V. held that the capital gains computed by the assessee item-wise are incorrect. The AO held that the lump sum amounting to USD 12.5 million also strikes down the assessee's claim that the sale of its Retail Banking Business is not in the nature of a Slump Sale. Accordingly, the AO held that the sale transaction is in the nature of a Slump Sale and the provisions of section 50B of the Act are applicable. The AO computed long-term capital gains of Rs. 92,61,77,470. The relevant findings of the AO, vide assessment order, are reproduced as follows: - "6.3 It is seen from the perusal of the agreement, dated 19-05-1999, filed by the assessee vide reply dated 24-03-2003 that M/s. ABN Amro Bank had agreed to purchase from the assessee the Business and certain assets and certain deposits and other liabilities, and....
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....er, it is necessary to peruse the definition of Slump Sale as given in Sec. 2(42C) of the I.T. Act, 1961. This sub-section was inserted by the Finance Act, 1999, w.e.f. 01-04-2000 and accordingly, it is applicable to AY 2000-01. This sub-section defines the term "Slump Sale" to mean the transfer of one or more undertakings, as a result of a sale, for a lumpsum consideration, without values being assigned to the individual assets and liabilities in such a sale transaction. In the present case, the assessee has received the sales consideration i.e. the purchase price mentioned in Article 3.1 which consists of two portions as highlighted above. The first portion is the Book Value of the sale assets over the Book Value of the assumed liabilities. Sale assets comprise of various assets as mentioned above. The term Assumed Liabilities has been defined in sec.2.3 of the agreement to mean all the liabilities and obligations in respect of the sale assets, as mentioned above in para 6.3, as also the Deposit Liabilities of the seller i.e. assessee. In this context, it is noteworthy that Deposit Liabilities are not, and cannot be, listed in the definition of Sale Assets as given in sec.2.1 of ....
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....abilities and, accordingly, the capital gains were computed with respect to each asset on the basis of the nature of the asset and the period for which it was held. The AO as well as the learned CIT(A) disagreed with the submissions of the assessee and held that the sale transaction is in the nature of a Slump Sale, and thus the capital gains are to be computed as per the provisions of section 50B of the Act. The lower authorities also rejected the contention of the assessee regarding the item-wise sale of assets. 43. Before proceeding further, it is pertinent to note the provisions of the Act which are relevant for deciding this issue. Section 2(42C) of the Act defines the term "slump sale" as follows: - "(42C ) "slump sale" means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Explanation 1.- For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA). Explanation 2.- For the removal of doubts, it is hereby declared that the determination of the value of an asset....
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....llowing: - "BUSINESS The retail banking business carried on by Seller at or through the Banking Centers and Retail Office in India, principally comprising. (a) automobile "liquity" and real estate loans and credit lines, overdraft lines against time deposits, guarantees and other loans and lines of credit attributable to the retail banking business; (b) current, savings and time deposit accounts, and temporary overdrafts on such accounts; and (c) related banking services (including ATM services)". 49. Thus, the Retail Banking Business carried out by the assessee at or through the banking centres and retail offices in India was transferred to ABN AMRO Bank N.V. We find that section 3.1 of the agreement contains the consideration for the transaction as follows: - "i) Excess of Book Value of the Sale Assets over the Book Value of the Assumed liabilities, and ii) A Purchase Premium of USD 12.5 million" 50. Thus, the difference between the book value of the assets and liabilities as per the assessee's local statutory general ledger was the first component of the purchase consideration apart from the lump sum purchase p....
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....lities. Therefore, it was submitted that the sale of Retail Banking Business is not in the nature of a Slump Sale falling within the purview of section 2(42C) and, accordingly, the provisions of section 50B of the Act are not applicable. 53. During the hearing, a specific query was raised about whether the business was transferred as a going concern. In response thereto, it was submitted that the transfer of the business as a going concern would not impact the characterisation of the concern as an itemised sale or a Slump Sale, as the same is dependent on the manner in which the constituent of the assets transferred is determined. 54. Having considered the submissions of both sides and perused the material available on record, at the outset, from the break-up value assigned to assets and liabilities, as per Exhibit A of the agreement, noted in the foregoing paragraphs, we find that separate consideration is not placed for each and every item comprising the assets and liabilities and the value has been assigned to category of assets and liabilities. Therefore, we do not find any merit in the submissions of the assessee that values were assigned to the individual items of asset....