TaxTMI 
TaxTMI 
2026 (6) TMI 985
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.... and received from its Head Office and Overseas branches amounting to Rs. 38,23,04,460/- and not holding that interest received on NOSTRO account is the income of the assessee and interest paid to HO/Overseas branches without deduction of tax at source is an expense which is not allowed U/s 40(a)(i) of the I.T.Act, 1961. 2. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in directing to allow sum of Rs. 2,18,23,430/- towards the expenses incurred for Indian Branches by Head Office/Cerseas branches of the assessee and holding that they are beyond the provision U/s 44C of the I.T.Act, 1961. 3. Whether on the facts and circumstances of the case and in law the Ld.CIT(A) has erred in deleting the addition of Rs. 2,26,35,438/- on account of expenditure incurred in earning income exempt U/s 10(33) and 10(15) of the I.T. Act, 1961. 4. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in directing to allow the broken period interest of Rs. 50,03,39,125/- without appreciating the fact that the said broken period interest forms cost of securities held by the assessee as investment." 3. Wi....
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.... before us. 8. Before us, ld. Departmental Representative ('ld. DR' for short) relied upon the reasoning of the A.O., whereas, ld. Counsel appearing for the assessee submitted that in case of Director of Income-tax (IT) vs. Credit Agricole Indosuez (supra), the Hon'ble Jurisdictional High Court has in principle accepted assessee's contention that no person can make profit out of itself, hence, the interest income received from head office and overseas branches are not taxable at the hands of the PE as per domestic law. He submitted, in assessee's case in A.Y. 1998-99, after following the decision of the ITAT, Special Bench in case of ABN Amro Bank N. V. vs. Asstt. DIT [2005] 91 ITD 89 (Kol.)(SB)(para 8), the co-ordinate bench has held that interest received from head office and overseas branches is not taxable as income of the PE. In this context, he also relied upon the decision of the Special Bench in case of Sumitomo Mitsui Banking. Corporation v/s DDIT [2012] 19 taxmann.com 364 (Mum.). 9. We have considered rival submissions, in light of the decisions relied upon and perused the materials on record. It is evident, at the stage of assessment proceeding, the assessee ha....
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....provisions of section 44C of the Act. 13. The assessee contested the aforesaid decision of the A.O. before ld. First appellate authority. 14. While deciding the issue, referring to the decision of Hon'ble Jurisdictional High Court in assessee's case and in case of another assessee, ld. First appellate authority observed that expenditure incurred specifically on salary, etc. of employees actually working in Indian branch cannot be considered to be falling within the scope of section 44C of the Act. Thereafter, while examining the nature of the expenditure, he observed that the expenditure claimed by the assessee included an amount of USD 21,48,000 towards global system charges, which according to him, was in the nature of royalty. Hence, he was of the view that while making such payments, the assessee should have withhold tax u/s. 195 of the Act. The assessee having failed to do so, the said amount equivalent to Rs. 8,88,69,204/- has to be disallowed u/s. 40(a)(i) of the Act. However, he held that the balance amount of Rs. 2,18,23,430/-, being outside the scope of section 44C of the Act, is allowable u/s. 37(1) of the Act. Insofar as, the amount of Rs. 5,53,45,862/- claime....
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.... elsewhere in the order, the Hon'ble Supreme Court has held as under: 70. The summary of the legal position emerging from the aforementioned analysis is as follows: a) First, Section 44C would apply only when the two primary conditions are met: the assessee is a non-resident and has incurred expenditure in the nature of head office expenditure. b) Secondly, the definition of 'head office expenditure' in the Explanation keeps in mind two factors: the nature of the expense (executive and general administration) and its geographic location (incurred outside India). It is entirely irrelevant whether such expenditure is common or exclusive. c) Thirdly, clause (c) mandates computation on an actual basis, and the phrase "attributable to" as present in clause (c) is wide enough to encompass both the shared expenses allocated to India branches and exclusive expenses incurred for India branches. 71. Thus, after examining the issue from all angles, we have no doubt that Section 44C does not create a distinction between common and exclusive head office expenditure. We, therefore, find no merit in the contention of the respondents that e....
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....ds, 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). 76. Such a restrictive interpretation of the term 'head office expenditure' is also supported on the basis of legislative intent. On this aspect, the Memorandum Regarding Delegated Legislation, which is part of the Notes on Clauses for Finance Bill, 1976, reads thus: "Clause 10 of the Bill seeks, inter alia, to insert a new section 44C in the Income-tax Act. The new section provides for a ceiling limit in respect of deduction to be allowed on account of expenditure in the nature of head office expenditure in computing the profits and gains of a non- resident. Clause (iv) of the Explanation t....
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....td. (Civil Appeal No. 1527 of 2006), this Court, on the issue of applicability of Section 44C, had held as follows: Question No.(4) stands concluded against the Revenue and in favour of the assessee in view of our order of even date in C.A.No.1544 of 2006 etc. 80. From the above, it could be inferred that this Court's decision in CIT vs. Emirates Commercial Bank Ltd. (Civil Appeal No. 1527 of 2006) was also based on the reasoning that the Revenue had accepted the decision in Rupenjuli Tea (supra). 81. However, we have made ourselves very clear in the preceding paragraphs that the facts and reasoning governing the decisions in Rupenjuli Tea (supra) and Emirates Commercial Bank (supra), respectively, are starkly different. In fact, unlike in Deutsche Bank (supra), the Bombay High Court in Emirates Commercial Bank (supra) made no reference to the decision in Rupenjuli Tea (supra). Consequently, it could in no manner be stated that this Court had accepted the principle of law that exclusive expenditure cannot be brought within the ambit of the term 'head office expenditure' provided in Section 44C of the Act, 1961. 82. The aforesaid orders of this Court could....
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....his limited issue. The Tribunal is directed to examine the expenses afresh in light of the legal principles enunciated herein, more particularly to verify whether the disputed expenditures satisfy the tripartite test necessary to qualify as 'head office expenditure' under the Explanation to Section 44C. With respect to the expenditure which the respondents do not wish to dispute, the same would fall under the ambit of Section 44C, and thereby their deduction will be governed by the limits set out therein. G. Conclusion 86. A conspectus of our legal discussion regarding Section 44C of the Act, 1961, is as under: 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 Exp....
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....ome Tax Appellate Tribunal, Mumbai, for the limited purpose of verifying whether the disputed expenditures satisfy the tripartite test necessary to qualify as 'head office expenditure' under the Explanation to Section 44C of the Act, 1961. 19. As could be seen from the aforesaid observation of Hon'ble Supreme Court, there cannot be any artificial distinction between common and exclusive head office expenditure. Hence, the line of argument taken by the assessee that direct/exclusive head office expenditure falls outside the purview of section 44C of the Act, is unacceptable. The Hon'ble Supreme Court has held that the essential conditions for applicability of section 44C of the Act are: firstly, the assessee must be a non-resident and, secondly, the expenditure incurred must be in the nature of head office expenditure. Further, as per the definition of head office expenditure under the explanation u/s. 44C of the Act, the determinative factors are, the expenditure must have been incurred for the purpose of executive and general administration and it must have been incurred outside India. Therefore, whether the expenses are common or exclusive, is irrelevant. Referring to ....
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....rred outside India and it must be in the nature of executive and general administration, the expenditure must fall within the specific species enumerated in clauses (a), (b), and (c) or expressly prescribed under clause (d). It appears from the observations of the A.O. that the direct head office expenses of Rs. 11,06,92,634/- is on account of salary, travel and other employee related expenses and relocation expenses, etc. Thus, from the aforesaid facts, it appears that if not all, but, some of the expenditures debited to the profit and loss account are covered under the definition of 'head office expenditure' as per clause (iv) of Explanation to section 44C of the Act. However, full facts relating to the nature of expenditure have either not been brought on record or have been properly dealt with by the departmental authorities. Therefore, keeping in view the ratio laid down by the Hon'ble Supreme Court in the decision referred to above, the nature and character of the expenditure has to be identified for determining whether they qualify as 'head office expenditure' in terms of clause (iv) of Explanation to section 44C of the Act. Since, such identification requires detailed f....
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.... earning of exempt income when the A.O. has not established a direct nexus between the interest bearing fund and the investment made in exempt income yielding assets. 29. Having considered rival submissions and perused the materials on record, we do not find any infirmity in the decision of the ld. First appellate authority as it is purely factual. Now, it is fairly well settled that when the assessee has kitty of mixed funds available with it comprised of both interest free and interest-bearing funds, the presumption would be the interest free funds have been utilized for investments in exempt in yielding assets. In case of South Indian Bank Ltd. vs. Commissioner of Income Tax [2021] 130 taxmann.com 178, the Hon'ble Supreme Court has approved the aforesaid line of reasoning. In view of the aforesaid, we uphold the decision of ld. First appellate authority. 30. In ground no. 4, the department has challenged the deletion of addition made on account of broken period interest amounting to Rs. 50,03,39,125/-. 31. Briefly the facts are, as part of its business and as per Reserve Bank of India guidelines the assessee invests in interest bearing government securities. Interes....
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....ee's appeal) 35. In ground no.1, the assessee has challenged the disallowance made u/s. 14A of the Act qua the interest expenditure amounting to Rs. 75,22,55,418/- and administrative cost of Rs. 5,53,45,862/-. As discussed earlier, the assessee during the year received an amount of Rs. 38,52,04,851/- from the head office and overseas branches towards interest. The assessee claimed the interest received as not taxable since it is a payment by self to self. Further, it was found that the assessee had claimed expenses of Rs. 5,53,45,863/- for soliciting NRI deposits, thought the expenditure was incurred overseas. While the A.O. treated the interest received from head office and overseas branches as taxable in India and also disallowed the expenditure of Rs. 5,53,45,863/-. However, while deciding the issue in appeal, ld. First appellate authority accepted assessee's contention that the interest received from the head office and overseas branches on nostro account being a payment from self to self is not taxable at the hands of the assessee. However, he held that since the income is treated as exempt, the provisions of section 14A would be triggered, hence, interest expenditure incur....
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....wise includable in total income as observed by Hon'ble Supreme Court in case of CIT vs M/s. Walfort Shares & Stock Brokers Pvt.Ltd., reported in (2010) 192 Taxman 211 vide paragraphs 12, 13% 14. Similar observation has been well founded by Hon'ble Delhi High Court in case of Maxopp Investments Ltd vs. CIT reported in (2011) 15 taxmann.com 390 vide paragraphs 15, 16, 17, 24 & 25. 10.12. Receipts under the principle of mutuality are of a different character. They are not exempt income but are simply not income at all. It thus naturally follows that section 14A has no application to such receipts. Thus the issue referred before this Special Bench is answered in negative. 39. Thus, respectfully following the decision of ITAT, Special Bench as noted above, we direct the A.O. to delete the disallowance. 40. In ground no. 2, the assessee has challenged the disallowance of software expenses, amounting to Rs. 2,89,80,015/-. 41. Briefly the facts are, in course of assessment proceedings, the A.O. noticed that the assessee has debited an amount of Rs. 2,89,80,015/- towards software expenses. After calling for necessary details and examining them, he found th....
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....A.O. held that the head office expenses has to be covered u/s. 44C of the Act and accordingly allowed deduction in terms with section 44C of the Act. While deciding the issue in appeal, ld. First appellate authority observed that out of the expenditure claimed, an amount of Rs. 8,88,69,204/- is in relation to the payment made towards global system charges. Relying upon the decision of the ITAT in case of Asia Satellite Telecommunications Company Ltd. v. Deputy CIT (in ITA No. 166/Del/2001 vide order dated 1.11.2002), he observed that the payment is in the nature of royalty, hence, subject to deduction of tax at source. Since, the assessee had not deducted tax at source, he held that the amount has to be disallowed u/s. 40(a)(i) of the Act. 47. Before us, ld. Counsel appearing for the assessee submitted that the provisions of section 40(a)(i) of the Act are not applicable for the payment of global system charges as the payment is made to head office which is not a separate legal entity. Hence, applying the principle of mutuality, it is not in the nature of income at the hands of head office. Without prejudice, it was submitted that payment made towards use of the system is not in....
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....,309/-, being expenditure relating to interest earned on foreign currency loan, taxable u/s. 115A of the Act. 51. Briefly stated, in course of assessment proceeding, the A.O. noticed that income which is to be taxed under the provisions of section 115A(1) of the Act has to be taxed on gross basis and expenditure incurred in relation to such income would not be allowable as deduction. He observed that identical view expressed in A.Ys. 1997-98 and 1998-99 has been upheld by ld. First appellate authority. Accordingly, he proceeded to disallow the amount of Rs. 65,30,309/-. Though, the assessee contested the disallowance before ld. First appellate authority, however, the disallowance was sustained. 52. Before us, ld. Counsel appearing for the assessee submitted that the issue is squarely covered by the decision of the ITAT in assessee's case in A.Y. 1998-99 and Hon'ble Bombay High Court. He further submitted that in case of The Bank of Nova Scotia (in ITA No.4941/Mum/2007 and others vide order dated 29.01.2024) similar view has been expressed by the Tribunal. 53 The ld. DR relied upon the observations of the A.O. and ld. First appellate authority. 54. Having considered ....
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....e allowed as deduction against the income chargeable to tax at the normal rate. In view of the above discussion it is discernible that the issue of not allowing deduction of such expenses against the income chargeable to tax at the normal rate does not emanate from the order of the authorities below. The AO, though discussed the issue in the body of the order and also computed the amount disallowable at Rs. 83.90 lac but committed a mistake by not disallowing such amount in the final computation of total income chargeable to tax at the normal rate. Then, the Id. CIT(A) also never held that such expenses are deductible against the other income. He was called upon to decide the question of gross or net amount eligible for taxation at special rate, which he decided in assessee's favour, which finding has been accepted by the Revenue. 5.3 It is therefore, palpable that the grouse of the Department through this ground in requiring us to hold that such expenses should not be allowed as deduction against the other income chargeable to tax at normal rate, does not emanate from the impugned or the assessment order. It is axiomatic that the tribunal is not a forum for rectifying....
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.... indivisible business then the entire expenditure including that which was incurred for earning the tax free income would be a permissible deduction. The legislature introduced section 14A with an intention to set at naught the ratio of this and such other judgments by providing that expenditure incurred in relation to 'income which does not form part of total income under this Act' shall not be allowed as deduction. In other words, the deductibility of expenses incurred for earning exempt income has been inhibited. But for that, the ratio of these judgments is intact. To put it simply, the decision of allowing entire expenditure incurred by the assessee in an indivisible business against the taxable income has been statutorily altered by forbidding the allowability of expenses incurred in relation to exempt income. If the income is not exempt but chargeable to tax at a lower rate, then two consequences follow. Firstly, the provisions of section 14A shall cease to apply and secondly, the position will stand covered by the judgment in the case of Rajasthan State Warehousing Corporation (supra) for allowing the expenses in full without any apportionment. Section 14A ....