TaxTMI 
TaxTMI 
2025 (10) TMI 1425
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....nder this Act", as understood for the purposes of section 14A of the Act?" 2. Hon'ble President vide order dated 20/02/2025 reconstituted the Special Bench and has accordingly placed the above issue before the present bench comprising of Three Members. Brief Facts leading to the issue under consideration are as under: 3. The assessee is a foreign bank, permitted by the RBI to undertake banking business in India, receives, as a part of its banking business, deposits in designated foreign currencies under various schemes stipulated by the RBI for example FCNR(B) Scheme. The RBI under the scheme permit to lend amounts so received in the overseas overnight call money market in which institutions like banks participate. It is submitted that the Indian Branch office is permitted to temporarily lend the amounts in the overseas overnight call Money Market. 3.1 During the Financial Year relevant to assessment year 1998-99, the Indian branch office of the assessee earned Rs.2,70,56,575/- as interest on the surplus funds deposited with the overseas branches/ Head office. In the P&L account Rs.2,70,56,575/- was credited as interest received in India on short term lending to oversea....
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....into a contract with oneself and debiting or crediting the accounts cannot alter this position. 3.4 The Ld.AO after considering above submissions disallowed the claim on the following key grounds: ● The reliance placed by the assessee on the decision of the Hon'ble Calcutta High Court in the case of Betts Hartley Huett & Co v CIT(supra) is misplaced because the issue in that case was different and distinguishable; ● The interest received by the Indian branches of the assessee is covered within the provisions of section 9 read with section 5 of the Act, since it emanates from the Indian operations; ● Deduction under section 44C of the Act is provided to non-resident assessee such as the assessee, in order to arrive at the true profit and gain of the Indian branches as if they were an Independent entity; and ● The interest received has been accounted for in the books of the Indian branch of the assessee. 4. On an appeal before the Ld. CIT(A), the observations of the Ld.AO was upheld and the addition made was confirmed. 4.1 Aggrieved by the order of the Ld. CIT(A), the assessee preferred appeal before this Tribunal. ....
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....n terms of section 255(3) of the Act to decide the following question:- "Whether an income which is not subject to tax on the doctrine of mutuality can be construed to be an "income which does not form part of the total income under this Act", as understood for the purposes of section 14A of the Act?" 6. It emerges from the reference that, the very foundation of the Revenue's cross-objection is rooted from the ratio decidendi laid down by Hon'ble Special Bench in the aforesaid case. The question referred by the Ld. Division Bench is therefore being examined on first principles, based on the submissions of both sides. 7. The submission on behalf of the Revenue, advanced by the Ld. Standing Counsel, proceeds on the footing that, where the impugned interest income does not form part of the total income, the mandate of section 14A of the Act stands attracted so as to disallow the expenditure incurred in relation to the earning of such income. In aid of her submission, reliance has been sought to be placed on the observations of the Coordinate Bench of the Tribunal in Oman International Bank SAOG (supra). "5. We have considered the rival submissions as well as....
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....d AR of the assessee is that the provisions of section 14A cannot be applied in respect of Interest received from the HO, which is not an income; therefore, there is no question of exclusion of the same from the total Income. 8.1 The Id AR has contended that the Tribunal and the Hon'ble High Court have held that the interest received is not taxable because one cannot earn Income from oneself for the purpose of income tax. This issue has been considered by the Tribunal in the case as relied upon by the id DR and it has been held that the provisions of sec 14A are applicable in respect of Interest Income received from HO. Therefore, we do not agree with the contention of the Id AR that the provisions of sec. 14A are not applicable because there is no income which is contrary to the fact that the assessee itself has shown the interest received from the HO as Income in the P&L. account; but has not offered the same for taxation. 8.2 In the case of M/s Societe Generale, the Tribunal has upheld the applicability of section 14A in respect of the interest which was held to be exempt on principle of mutuality. The Tribunal has given the finding in para 44 of the order ....
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....e it clear that our this conclusion is based on the appreciation of the provisions under the Act. The question of allowability or otherwise of such expenses under the governing Treaty was not argued by the Id. AR and hence the same has not been considered. Thus it is held in principle that the provisions of section 14A are applicable on the exempt interest Income earned from the head office/overseas branches. Therefore, there is no ambiguity on the issue that section 14A is applicable in respect of interest received from HO/overseas branches which is held as exempt on the principle of mutuality. 7.1 The written submissions filed on behalf of the Revenue, vide submission dated 07.08.2025, form part of the record and stand reproduced herein for ready reference IV. The sole question before this Hon'ble Bench is "whether an income which is not subject to tax on the doctrine of mutuality can be construed to be an "income which does not form part of the total income under this Act," as understood for the purposes of section 14A of the Act"? V. There are two facets to the referred question. First, there exists "an income which is not subject to tax on the....
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....xistence of income is one thing and chargeability of that income is another: what the Hon'ble Special Bench has observed is that although the assessee had earned interest income, the same is not chargeable to tax in view of the principle of mutuality. The understanding of the Hon'ble Special Bench in Sumitomo Mitsui Banking Corporation is clear interest receipt has the character of "income" but the said income is not chargeable to tax under the Act in view of the doctrine of mutuality IX. It is most respectfully submitted that these observations made by the Hon'ble Special Bench were binding on the Hon'ble Division Bench that made the instant reference. Additionally, the Hon'ble Division Bench in in the case of Oman International Bank SAOG vs. Joint Director of Income Tax had correctly understood and applied the principle laid down in Sumitomo Mitsui Banking Corporation, in holding that income which is not chargeable to tax shall fall within the purview of section 14A of the Act. As a matter of fact, both Oman International Bank and Sumitomo Mitsui Banking Corporation proceed on the assumption that receipt or sum of money arising from a mutual transacti....
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....ble in the total income is immaterial for the purposes of section 14A, so long as no tax is paid on that income. This is no longer a substantial question of law in view of the decision of the Hon'ble Supreme Court in the case of CIT vs Walfort Share and Stock Brokers Pvt Ltd (2010), wherein the Hon'ble Supreme Court has unambiguously held that any income that is exempt from tax and, therefore, does not form part of total income shall be covered under the provisions of section 14A of the Act. XI. Without prejudice to the above, it is submitted that the wording in section 14A cannot be construed and applied de hors the legislative intent behind it. Section 14A embodies the fundamental principle that expenses are only allowable if they are tied to an income which is part of the total income, and not otherwise Section 14A is not concerned with whether the assessee makes a profit or loss. The emphasis is on expense and not "income" or "receipt" The objective of the section is to deny deduction of expenses that are tied to income that is not included in the total income. In other words, expenses can be allowed only to the extent that they are relatable to the earning of ....
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....y and allowability or disallowability of expenses-under section 14A of the Act or generally was not in question. Nor was there any occasion for the Hon'ble Supreme Court to examine the interplay between the definition clause and the charging section with section 14A of the Act keeping in mind the notwithstanding clause contained in section 14A of the Act. XII. In conclusion, it is submitted that the assessee has not been able to make good its case by showing any judicial precedent that would allow this Hon'ble Special Bench to reformulate the question referred to it. Assuming without conceding that this Hon'ble Special Bench can reformulate the referred question, the assessee has failed to show any judicial precedent to support its contention that a receipt which does not has the character of income is not hit by section 14A. None of the decisions cited by the assessee pertain to section 14A and do not deal with the non obstante clause occurring in section 14A of the Act. On the contrary, there are decisions of this Hon'ble Tribunal in the cases of Oman International Bank and Society Generale which categorically hold that section 14A would apply to income t....
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....er words, section 14A of the Act has no application in a situation where the receipt itself is not in the nature of 'income'. It was further emphasised that the Tribunal, in the case of Oman International Bank SAOG (supra), failed to appreciate the fundamental principle that no person can earn income from itself. Consequently, he submitted that, mere credit of interest in the books of the Indian Branch Office cannot confer upon it the character of 'income'. It was thus urged that, the Tribunal in Oman International Bank SAOG (supra) proceeded on an erroneous footing in holding that, the receipt of interest constituted income, which was required to be excluded from the total income on a net basis. 8.3 The Ld. Sr. Counsel further emphasised that, once a receipt does not partake the character of income and is not in the nature of income chargeable to tax, the question of making a disallowance under section 14A of the Act does not arise. It was submitted that the provisions of section 14A are attracted only in respect of income which does not form part of the total income under Chapter III of the Act, and not in respect of receipts which are excluded at the very threshold for want o....
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.... i.e. GE and PE is not an independent person who is assessed to tax separately in India. It is a part of the GE and its income is chargeable to tax in the hands of GE which alone is the person assessable to tax in India. 57. In the case of Sir KikabhaiPremchand (supra) it was held by the Hon'ble Supreme Court that under the Income-tax Act, all that the State can tax is income, profits and gains in the relevant accounting year. It was held that it is well recognized that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the case before the Hon'ble Supreme Court, the business was owned and run by the assessee himself and it was held in these facts and circumstances by the Hon'ble Supreme Court that it was wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of fictional sale introduce a fictional profit which in truth and in fact was non-existent. It was held that cut away this fiction and one easily reach the position that the man is supposed to be selling to himself and thereby making a profit out of h....
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....n the negative and in favour of the assessee holding that when the transaction between the London head office of the assessee and its unit in India was a transaction as between principal and principal, it cannot be held that any income arose in favour of the assessee either directly or indirectly since the gain in London office was offset by the loss incurred in the Indian branch. It was held that in law there cannot be a valid transaction of sale between the branch office of the assessee in India and its head office in London. It was held that it is a elementary proposition that no person can enter into a contract with oneself and debiting or crediting one's account cannot alter this legal position. It was held that if one unit of a business does not debit any commission to another unit of the same business then it is difficult to follow how any saving has been effected by the business. ............... 74. In the assessment order, the AO has relied on the provisions of section 9(1)(v)(c) of the Income-tax Act to hold that interest payable by PE in India being income deemed to accrue or arise in India is chargeable to tax in India. In our opinion, such interes....
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....e interest received by the Indian BO does not assume the character of 'income' under section 4 of the Act at the very threshold. Ld. Sr. Counsel thus submitted that, the question of exemption does not arise at all, and the ratio of the aforesaid decision can have no application to the facts at hand. Accordingly, the reliance placed by the Revenue on the said judgment is wholly misplaced. 8.7 The Ld. Sr. Counsel thus submitted that the mere credit of interest in the books of the Indian BO cannot confer upon it the character of 'income'. It was contended that the Tribunal, in the case of Oman International Bank SAOG (supra), proceeded on an erroneous foundation in treating the aforesaid receipt of interest as income which was required to be excluded from the total income on a net basis. For all the aforesaid reasons, it was urged that the decision of the Tribunal in Oman International Bank SAOG (supra) does not lay down the correct law. 8.8 The Ld. Sr. Counsel placed reliance on the decision of the Hon'ble Supreme Court in the case of Bangalore Club v. CIT reported in 350 ITR 509. It was pointed out that in the said case the Hon'ble Supreme Court was dealing with a club which c....
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.... common feature of mutual organizations in general and of licensed clubs in particular, is that participants usually do not have property rights to their share in the common fund, nor can they sell their share. And when they cease to be members, they lose their right to participate without receiving a financial benefit from the surrender of their membership. A further feature of licensed clubs is that there are both membership fees and, where prices charged for club services are greater than their cost, additional contributions. It is these kinds of prices and/or additional contributions which constitute mutual income. 8.9 Relying on the aforesaid exposition of the 'doctrine of mutuality' by the Hon'ble Supreme Court, the Ld. Sr. Counsel submitted that, the same principle squarely applies to the relationship between a HO and its BO. In this regard, reliance was placed on the decision of the Special Bench in Sumitomo (supra), wherein it was held that a payment from the BO to its HO partakes the nature of 'self-to-self' and, being governed by the 'doctrine of mutuality', does not give rise to income chargeable to tax under section 4 of the Act and therefore is out of the ambit of ....
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....computing the total income as these are exempt under various provisions of the act's there have been cases where deductions have been claimed in respect of such exempt income this in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the legislature since the inception of the income tax act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the income tax act. The proposed amendment will take effect retrospectively from 01/04/1962 and will accordingly, apply in relation to the a....
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....der section 10 in chapter III. For the purposes of highlighting the difference between the provisions that are dealing with exemptions and the provisions that deal with deduction the Ld. Sr. Counsel on behalf of the assessee referred to the decision of Hon'ble Karnataka High Court in case of ITO vs Stumpp Schedule and Somappa Pvt. Ltd. reported in (1977) 106 ITR 399.He also relied on the decision of Hon'ble Bombay High Court in case of CIT vs Century Spg.&Mfg.Co. Ltd., reported in (1978) 111 ITR 6, approved by Hon'ble Supreme Court reported in (1991) 187 ITR 108. 10.7 The issue that was considered by Hon'ble High Courts referred to herein above was in the context of levy of surtax. Hon'able Court observed that according to the provisions of this Act charged profits, i.e., the total income of an assessee computed under the Act after making adjustments in accordance with the 1st schedule thereof was liable to surtax. And a statutory deduction was allowed being amount equal to 10% of the capital of the company in accordance with the provisions of the 2nd schedule. Hon'ble Court observed that rule 4 of the 2nd schedule provided as under: "Where a part of the income, profits....