No Disallowance U/s 14A if investment been made by assessee out of its own interest free funds

HIGH COURT OF BOMBAY

Director of Income-tax (IT)-II

versus

BNP Paribas SA

J.P. DEVADHAR AND M. S. SANKLECHA, JJ.

IT Appeal (L) No. 1776 of 2012

FEBRUARY 14, 2013

JUDGMENT

1. Office objections waived.

2. In this appeal by the revenue following substantial questions of law have been raised for our consideration.

(a) Whether the ITAT is correct in deleting the addition made by the A.O. on account of interest paid by Indian Branch of the assessee bank to its head office and other overseas branch without considering the fact that the payments made by the branch to the Head office is considered interest and such interest is taxable under Article 13?

(b) Whether the Tribunal is correct in upholding the decision of CIT(A) in deleting the addition made by the A.O. on account of expenditure incurred in earning exempt income without appreciating the fact that assessee did not demonstrate before the A.O. that the funds used for acquiring shares of LVL were its own funds and also that section 10 of the Act provides for a deduction of net income and not gross income?

(c) Whether the Tribunal is correct in upholding the decision of CIT(A) in directing the A.O. to accept the method followed by the assessee without considering the fact that the commission received is in nature of a fee for issuance of guarantee and is not a contingent receipt and thus not returnable at the end of guarantee period?

3. So far as question (b) is concerned, the Tribunal in the impugned order upheld the finding of the CIT(A) wherein a finding of fact has been reached that the dividend earned on shares by the respondent assessee is from its investments in shares out of the respondent- assessee’s own funds. Consequently, the question of invoking Section 14A of the Income Tax Act,1961 to disallow expenditure would not arise. Before the Tribunal, the revenue did not challenge the finding of fact recorded by the CIT(A) in the impugned order. In this view of the matter, we see no reason to entertain question (b).

4. So far as question (c) is concerned, the issue is whether the commission received by the respondent from its client to provide Guarantee is to be taxed in the year of the agreement (the year of the receipt) to provide the guarantee or to be spread over the period for which the guarantee is provided. In the present facts, CIT(A) has come to a finding of fact that the guarantee which has been issued for a certain period of time are cancelled by the client before the expiry of the tenure of the guarantee, resulting into the respondent- assessee returning to its clients the part of the guarantee commission attributable to the unexpired period of the guarantee. This finding of fact was upheld by the Tribunal while following the decision of the Calcutta High Court in the matter of CIT v. Bank of Tokyo Ltd. [1993] 71 Taxman 85 wherein it has been held that the income earned from deferred guarantee commission did not accrue or arise to an assessee in the year in which the guarantee agreements were entered into but should be spread over the period of the guarantee proportionally. In these circumstances, the decision of the Tribunal in upholding the order of the CIT(A) is a conclusion based on a finding of fact and hence, we do not see any reason to entertain question (c).

5. Appeal is admitted on question (a).

6. To be heard along with Income Tax Appeal Lodging No. 2078 of 2012.