IN THE ITAT MUMBAI
Abu Dhabi Commercial Bank Ltd.
V/s.
ADIT (IT) – 1(1), Mumbai
IT APPEAL NOS. 1996, 2205, 2851, 3925, 4304
& 5017 (MUM.) OF 2004
AND 3462, 3857 & 4022 (MUM.) OF 2010
C.O. NOS. 115 & 414 (MUM.) OF 2004
AND 48 (MUM.) OF 2005
[ASSESSMENT YEARS 1995-96 TO 2000-01]
July 20, 2012
ORDER
Per Bench – These are bunch of cross appeals and cross objections filed by the assessee for the assessment years 1995-1996 to 2000-2001. Since the issues in all the appeals are common, therefore, for the sake of convenience, all these appeals are being disposed of by this consolidated order.
ITA No.3462/M/2010 (AY: 1995-1996) (By Assessee) :-
2. In this appeal the assessee is aggrieved by the order dated 8-2-2010, passed by the CIT(A)-10, Mumbai on the following grounds :-
“1. The Commissioner of Income-tax (Appeals)-10, Mumbai [hereinafter referred to as the CIT(A)] erred in confirming the action of Assessing Officer (AO) of restricting the deduction for head office expenses by applying the provisions of section 44C of the Act, as against the appellants claim that the entire amount of Rs. 40,04,788 allocated to the Indian branches should be allowed as a deduction as per the provision of Article 7(3) of the convention between the Govt of UAE and the Government of India (hereinafter referred to as the Tax Treaty).
The appellants submit that in computing the taxable business income in India, the treaty allows a deduction for all expenses wherever incurred and reasonably allocable to the permanent establishment, including its share of executive and general administrative expenses. As the treaty overrides the domestic law, the amount allocated by the Head Office should be allowed as a deduction in full.”
3. Briefly stated the relevant facts of the case for adjudication of the solitary issue involved is that the assessee is a Banking Company incorporated in UAE and is having two branches in India i.e. in Mumbai and Bangalore. The income from banking operations in India is offered for tax in India. The Government of UAE and Government of India have entered into DTAA, which is applicable from this year i.e., from assessment year 1995-1996. The business profit of the bank related to its Indian operations required to be computed in accordance with the provisions of Article 7 of the convention. In computing the total income, the assessee after taking into consideration the provisions of Article 7(3), had taken a stand in the return of income that the various provisions of income tax relating to computation of business income which restricts the allowance of expenses, will not be applicable. In short the assessee’s contention is that the provision of Section 44C will not be applicable. The assessee had claimed ‘head office expenses’ of Rs. 40,04,788, which were incurred and were attributable to Indian operation. The administrative cost incurred by the head office was thus, allocated to its branches. The Assessing Officer vide order dated 20-2-1998, assessed the head office expenses by applying the provisions of section 44C of the Income Tax Act. However, the learned CIT(A), vide order dated 12th June, 2000, allowed the entire expenditure of Rs. 40,04,788/-, after following the jurisdictional High Court judgment in the case of CIT v. Deutsche Bank A.G., reported 284 ITR 463 and also various Tribunal’s orders rendered in assessee’s own case for the assessment years 1984-1985 to 1992-1993. Against the said order, the revenue came in appeal before the ITAT. The Tribunal vide order dated 14-2-2007, restored the matter back to the file of the Assessing Officer for fresh adjudication on the ground that the amendment in section 44C has come in the statute w.e.f. 1-4-1993 and all the judgments rendered were prior to the assessment years in question and, therefore, will not be applicable. Thus, the matter was restored back to decide this issue afresh as per the amended provisions of Section 44C and in accordance with the provisions of law.
4. Before the Assessing Officer in the set aside proceedings, the assessee claimed that the deduction for head office expenses, which was attributable to Indian branches should be allowed in full, in view of the Article 7(3) of the Treaty between India and UAE. The Assessing Officer observed that there is no dispute that this deduction for head office expenses should be allowed to the permanent establishment, albeit within the limits specified under the Income Tax Act i.e. under Section 44C. The Assessing Officer while arriving to this conclusion, referred to commentaries of UN Model convention and OECD convention that the intention of the Article 7 is to ensure the correct profit is brought to tax. He also referred to CBDT circular No.202, which was rendered at the time of introduction of Section 44C by the Finance Act, 1976. Lastly, he extensively referred and relied upon the decision of CIT(A) rendered in the case of the assessee for the assessment year 1997-1998 vide order dated 18-1-2001. Following the said decision, he held that ‘head office expenses’ will be allowed only as per the limit prescribed under section 44C.
5. Before the CIT(A), the assessee made elaborate submissions, contending, inter alia, that the total income of the PE should be computed as per the provisions of Article 7(3), where there is no restriction clause for applying the tax laws of the Contracting State. It was further submitted that such a restriction in Article 7(3) has come by way of the amendment brought through Protocol dated 3-10-2007 with effect from 1st April, 2008. Thus, prior to the amendment such a restriction clause cannot be read into. The assessee also relied upon the decision of ITAT Mumbai Bench in the case of Bank International Indonesia, Mumbai ITA No. 303/M/2001 (vide order dated 14.1.2004) and Metchem Canada Inc. 100 ITD 251 (Mum.), wherein the Tribunal came to a view in the light of non-discrimination clause in DTAA, that the entire ‘head office expenses’ are permissible as deduction. The CBDT Circular No. 202 as have been relied upon by the Assessing Officer would be applicable where the claim has been made under the IT Act and not in those cases, where the provisions of DTAA are applicable, which overrides the provisions of Income Tax Act.
6. The ld. CIT(A) after considering the finding of the Assessing Officer and the submission of the assessee, held that even though Article 7(3) of Indo-UAE Treaty, does not contain any express provision for applying “Indian Taxation Law” for computing of profits of PE, however, the provisions of Article 25(1) of the treaty relating to elimination of double taxation would prevail and, therefore, in view of such article, laws in force in India should continue to govern the taxation of income of PE situated in India. Further he held that the amendment brought by Protocol dated 3-10-2007 w.e.f. 1-4-2008, strengthens the department’s case, as it has clarified the matter that expenses pertaining to executive and administrative are to be allowed in accordance with the provisions of domestic law only. Thus, the provision contained in Article 25(1) has been ratified by this amendment. Following the CIT(A)’s order for the assessment years 1998-1999 to 2003-2004, he thus, upheld the finding of the Assessing Officer and dismissed the assessee’s ground on this score.
7. Learned Senior Counsel appearing on behalf of the assessee submitted before us that in absence of limitation clause in Article 7(3), the provision of section 44C cannot be applied in the assessee’s case. The amendment brought by way of protocol in the Indo-UAE Treaty w.e.f. 1-4-2008 only strengthens the assessee’s case that earlier such a limitation clause cannot be read into in Article 7(3). On the issue that the limitation clause can be said to be imported by virtue of Article 25(1), he submitted that it is a general article dealing with elimination of double taxation and credit of taxes and does not provide any restriction to article 7(3). He referred to similar provisions in various treaties and their interpretation as per OECD convention, UN Model etc. He submitted that wherever there is a limitation clause, this has been expressly provided in the Article 7 and Articles similar to Article 25 that has also been defined with regard to mode of giving credit of taxes in various treaties. He cited example of Indo-German DTAA and Indo-Japan DTAA, wherein article 23(3) and 23(1), which is similar to Article 25(3) of Indo-UAE Treaty have been interpreted to be not providing any clause of limitation in Article 7(3). In support of his contention that view taken by ITAT in Mitsui Bank PSC (supra) has been impliedly observed by recent decision of ITAT Mumbai Special Bench in the case of M/s Sumitomo Mitsui Banking Corporation v. DDIT (IT), passed in ITA No. 5402/M/2006, vide order dated 30-3-2012 and drew our attention, specifically to paras 60 to 63. Lastly, he submitted that in a latest decision by the ITAT Ahmedabad Bench in the case of ADIT(IT) v. M/s Dalma Energy LLC, passed in ITA No. 1664/Ahd/2008, vide order dated 23-4-2012, have discussed this issue of Article 7(3), 25(1) of Indo-UAE Treaty with specific reference to amendment brought by way of Protocol w.e.f. 1-4-2008 and submitted that in this case it has been held that the amendment would be applicable prospectively and not retrospectively.
8. Per Contra, learned CIT DR submitted that this issue is squarely covered by the decision of ITAT Mumbai Bench in the case of Mashreqbank Psc. v. DDIT(IT), passed in 2153/Mum/01, vide order dated 13-4-2007. He submitted that in this case, the Tribunal has categorically held that in view of the provision of Article 25(1) of Indo-UAE Treaty, limitation clause gets applicable in Article 7(3). The Tribunal has analysed the provisions given in Articles 7(3) and 25(1) in a great detail, after referring to various commentaries. He further submitted that the decision of Special Bench in the case of M/s Sumitomo Mitsui Banking Corporation (supra), is entirely distinguishable on facts and was rendered in altogether on a different issue and the decision of the Special Bench does not overrule the decision of case of Mashreqbank Psc. (supra). He also brought to our notice that the assessee had earlier filed a miscellaneous application against the order of the ITAT dated 14-2-2007, wherein the matter was remanded back to the Assessing Officer, The Tribunal, in its order passed in M.A., has discussed this issue and the matter was decided against the assessee. He also tried to distinguish the decision of the ITAT Ahmedabad Bench in the case of M/s Dalma Energy LLC (supra), on the ground that impact of Article 25(1) has not been considered at all. On the issue that amendment was only clarificatory, he relied upon the decision of ITAT which has been reported in 13 SOT 95, wherein it was held that amendment in Article 4, was clarificatory, and therefore, the same logic should be imported to Article 7(3) vis-à-vis protocol brought with effect from 1st of April, 2008. Lastly, he extensively referred to findings and the reasoning given by the CIT(A) and the Assessing Officer.
9. In rejoinder, learned Senior Counsel submitted that purpose of Article 25(1) of Indo-UAE Treaty, which is similar to Article 23(3) of Indo-Japan Treaty has been specifically interpreted by the Special Bench in the case of M/s Sumitomo Mitsui Banking Corporation (supra). He referred to various paragraphs in the said judgment wherein this issue has been clarified. Regarding the case of Mashreqbank Psc. (supra) as relied upon by the learned CIT DR he submitted that in view of the Special Bench decision, Mashreqbank Psc. (supra) cannot be held to be good law as on date. He further submitted that this decision was rendered prior to the amendment brought by way of Protocol w.e.f. 1-4-2008. Once the protocol has been brought from a specific period, no hidden meaning can be assigned in the article 7(3) and it can never be held that it has a retrospective effect. He cited examples of various protocol wherein chargeability of a tax from a particular date, cannot be said to be retrospective. Regarding order of the Tribunal in miscellaneous application, he submitted that when the miscellaneous application has been dismissed, it is dismissed in toto, which inter alia, means original order stands as it is and it does not amend the original order. Lastly, he submitted that the case of M/s Dalma Energy LLC (supra), which has considered that the protocol should be applied.
10. We have heard the rival submissions and perused the material placed on record. Here in this case, the entire controversy is whether in determining the profits of PE in India, the expenses incurred for the purpose of PE is to be computed by applying the provisions of section 44C of the Act (i.e., under the domestic law in which PE is situated) on an interpretation of Article 7(3) r/w Article 25(1) of the India-UAE DTAA as was prevalent in the relevant assessment year. The other corollary to this issue are:-
(i) Whether on a true and correct interpretation of Article 7(3), (at the relevant time), the limitation clause of applicability of domestic laws of the State in which PE situated, (herein in this case, India), should be construed to be available from Article 25(1);
(ii) Whether the limitation clause inserted in Article 7(3), by way of amendment brought by Protocol vide notification No.282/2007 , dated 28-11-2007, w.e.f. 1.04.2008, regarding applicability of domestic law, can be said to have come into force, w.e.f. 1st day of April, 2008 or can be held to be clarificatory in the nature, hence, to have retrospective effect.
10.1 The department’s case has been, wherever, there has been no specific provision in Article 7(3) for computing the profit of PE as per domestic laws, the same should be interpreted in view of the provisions of Article 25(1) of the DTAA which provides that the laws in force in either of the contracting States shall continue to govern the taxation of income in the respective contracting State except for expressly provided in the agreement. The ld. CIT(A) has observed that most of the Treaties entered into by India with various countries, it has been specifically provided that computation of profit of PE in Article 7(3) would be as per domestic laws of that State in which PE is situated and wherever there is no such specific provision, Article 25(1) enables the applicability of the domestic law. He has referred to commentary by ‘Klaus Vogel’, wherein he mentions that “while explaining the provision of Article 7(1) of the OECD/UN Model Convention that the meaning of term profit of a permanent establishment and how the profits are determined is always governed by the domestic laws of the contracting state concerned, though it may happen sometimes that certain provisions of domestic law do not apply to the foreign permanent establishment.” He also relied upon the CBDT Circular No. 202, which lays down intention behind interpretation of Section 44C. The protocol dated 3-10-2007, which has amended the Article 7(3) w.e.f. 1-4-2008 only clarifies the department’s stand that the expenses pertaining to executive and administrative nature are to be allowed in accordance with the provisions of domestic law i.e. 44C and this amendment is only clarificatory in nature. The assessee’s stand on the other hand, has been that in the relevant assessment year, the Article 7(3) as it stood, cannot be interpreted in such a manner that the limitation clause of applicability of domestic law should be read into. The protocol amending Article 7(3) has been brought w.e.f. 1-4-2008 which cannot have a retrospective effect. Before us, both the parties have given decision of ITAT in their favour on this point. The Department has heavily relied upon the judgment of Mashreqbank Psc (supra), and the assessee has relied upon the case of M/s Dalma Energy Ltd. (supra).
11. The relevant provisions contained in Article 7(3) of Indo-UAE DTAA prior to 1-4-2008 which was based on OECD model, reads as under :-
“3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.”
From the above, it is apparent that in determining the profits of PE,
(i) all expenses incurred for the purposes of the business of the PE shall be allowed as a deduction in determining profits of PE;
(ii) such expenses include executive and general administrative expenses; and
(iii) such expenses could be incurred within or outside the state in which the PE is situated.
Thus, there is no restriction on allowing of head office expenses and other expenses attributable to PE. The said article has now been amended by the Protocol entered into by the India-UAE on 3-10-2007 which has been notified on 28-11-2007, effective from 1st April, 2008. The Article 2 of the Protocol, has amended the Article 7(3),which reads as under :
“3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether 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 tax laws of that State.”
11.1 Now, with the insertion of phrase, “in accordance with the provisions of and subject to the limitations of the tax laws of that State”, the mandate of applicability of the domestic law has been provided, in allowing the deduction of expenses of the PE and determination of profit under the Income Tax Act. Consequently section 44C becomes applicable. The issue before us is, whether such a limitation clause can be said to have retrospective effect. It is a cardinal principle, when two sovereign nations enter into an agreement and have come to an understanding regarding the terms, views expressed in the agreement, such terms cannot be unilaterally changed. Once the Government of India and Government of UAE had not used the limitation clause of applicability of domestic law in determining the profits and deduction of expenses of PE under Article 7(3), the same cannot be read into even impliedly, that such a provision existed. One has to see the merits of the word and its meaning understood when the two high contracting parties, herein in this case, two sovereign nations entered into an agreement. When a particular provisions in the agreement has been brought from a particular date, it has to be, prima facie, taken to be prospective in operation, unless it is expressly or by necessary implication provided or made to have retrospective operation, because the parties interpreting such agreement gets vested right under such existing agreement and any such interpretation giving retrospective effect not only impairs the vested right but attracts the new disability in respect of transactions already entered in the past. Here in this case, if any such interpretation is given for retrospective operation of this Article, it creates new obligation and disturbs the assessability of the profit of the PE. The retrospective operation cannot be taken to be intended unless by necessary implication it has been made to have the retrospective effect. Thus, the amendment brought in Article 7(3) w.e.f. 1-4-2008, will not apply retrospectively, prior to such date as it would impose a new obligation or a liability to tax which was not made by the two Contracting States.
12. A lot of stress has been given by the department and the learned DR that such an exception already existed by virtue of Article 25(1) which provides that :
“The laws in force in either of the Contracting States shall continue to govern the taxation of income and capital in the respective Contracting States except where express provisions to the contrary are made in this Agreement.”
Article 25 which is similar to Article 23 of other treaties, deals with the Elimination of double taxation and it is for this purpose, it has been provided that the ‘laws in force’ in either of the Contracting States shall continue to govern the taxation of the income unless express provision to the contrary are made in this Agreement. Further paragraphs of Article 25 provide for deductions or credit of the taxes paid in either of the states. Various countries in their agreements based on different models have adopted different method of credit of taxes or deductions or exemptions to eliminate the incidents of double taxation in their domestic laws. Article 25 per se does not provide any rules on the mechanism for computing relief. Hence for this purpose, the domestic laws may have to be referred. Interpretation of Article 25 that it extends to Article 7 for applicability of domestic law will not be correct. If a computation of profit has been provided in a certain manner in Article7, restrictions cannot imported therein by virtue of Article 25.
13. The case of Mashreqbank Psc (supra), which has been relied upon heavily by the department, first of all, was rendered prior to the amendment brought by the Protocol. However in this case it has been interpreted that Article 25(1) of Indo-UAE Treaty should be read in Article 7(3) for applicability of domestic law. After detail analysis and discussion, the relevant observations given in the said decision are as under :-
“21. In view of the above discussions, and particularly bearing in mind the provisions of Article 25(1) of the India UAE tax treaty, we are of the considered view that the limitations under the domestic tax laws are to be taken into account for the purposes of computing profits of a PE under Article 7(3) of the India UAE tax treaty. The plea of the assessee is incompatible with overall scheme of the tax treaties, particularly India UAE tax treaty. Accordingly, the conclusion arrived at by the CIT(A) meets our approval. We confirm the same and decline to interfere in the matter.”
This view of Mashreqbank psc (supra), stands impliedly overruled by the latest decision of ITAT Special Bench in the case of M/s Sumitomo Mitsui Banking Corp.(supra), wherein while interpreting a similar provision of Article 23(1) of Indo-Japan DTAA, which is materia to Article 25(1) of Indo-UAE Treaty, has observed and held as under :-
“60. First we shall deal with the arguments of Shri Girish Dave based on the relevant provisions of the Indo-Japanese treaty. He has, inter alia, relied on article 23 of Indo-Japanese treaty which provides that the laws in force in either of the contracting State shall continue to govern the taxation of income in respective contracting state except where express provisions to the contrary are made in the convention. According to him, article 11 read with article 7 of the treaty contains such express provision and make the interest payable by the PE in India to the GE abroad the income of the GE chargeable to tax in India. Before we consider this argument of Shri Girish Dave in the light of the relevant provisions of the article 7 and 11 of the Indo-Japanese treaty, it is pertinent to discuss certain basic aspects of the matter which are relevant in this context.
61. Section 90(2) of the Income-tax Act, 1961 provides that where the Central Government has entered into an agreement with the Government of any country outside India or specific territory outside India, as the case may be, section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. This specific provision contained in section 90(2) makes it abundantly clear that in relation to the assessee like the one in the present case to whom the double tax avoidance treaty entered into by the Indian government applies, the provisions of Income-tax Act shall apply to the extent they are more beneficial to him. It, therefore, follows that if the provisions of the domestic law are more beneficial to the assessee than the provisions of the relevant tax treaty, the provisions of the domestic law shall override and prevail over the provisions of the treaty. Article 23 of the Indo-Japanese treaty therefore cannot be interpreted in a way as sought by Shri Girish Dave because if such interpretation is assigned to article 23 and the interest income which is otherwise not taxable in India as per the domestic law is held to be taxable relying on the provisions of the treaty, the same will run contrary to the provisions of section 90(2). Such interpretation, therefore, cannot be assigned to article 23 and the only interpretation which, in our opinion, can be assigned to the said article so as to make the provisions thereof in consonance with section 90(2) of the domestic law is that if there is an express provision made in the convention giving benefit to the assessee which is contrary to the domestic law, then the provisions of treaty can be relied upon which shall override and prevail over the provisions of the domestic law to give any benefit expressly given to the assessee under the treaty. The decision of Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra) fully supports this view.”
13.1 The view taken by the Special Bench in a way negates the view of Mashreq Banks case. If such an interpretation of Article 25(1) is to be given in Article 7(3), then there was no need of bringing the amendment by way of protocol from a particular date. The amendment itself shows there was no such intention by the two Contracting States at the time when they entered into the agreement. This amendment by way of protocol and Article 7(3) has been duly considered by the ITAT Ahmedabad Bench in the case of Dalma Energy LLC (supra), wherein the applicability of Section 44C in Article 7(3) for the earlier assessment years has been interpreted in the following manner :-
“14. To conclude the legal aspect of this issue, we have already reproduced Article 7 (in para 12.1 above) and on careful perusal, we have noted that in determining the profits of a PE the expenses which are incurred for the purposes of the business of the said PE, including general administrative expenses is to be allowed. At this stage of argument, we have categorically raised a question that if executive and general administrative expenses of a PE is to be allowed having been incurred for the purposes of the business of a PE, then what is the utility of the introduction of section 44C of the IT Act. Ld. AR Mr. Milin Mehta has answered that keeping in mind the controversy an amendment took place in the Articles and vide a protocol amending the agreement between the Government of the Republic of India and the Government of United Arab Emirates vide Notification No.282/2007, dated 28/11/2007 which is effective from 1st day of April, 2008, paragraph 3 of Article 7 (Business Profits) has been replaced by the following :-
“3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment, including executive and general administrative expenses so incurred, whether 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 tax laws of that State.” (emphasis given)
14.1 In view of the aforesaid amendment, now the admitted legal position is that the admissibility of expenditure is to be governed by Article 7(3) of the Treaty upto the date from which the new amended provisions of the Treaty shall be applicable i.e. w.e.f. 1.4.2008. It can, inter alia, be summed-up that the contracting States and to avoid any conflict in the provisions of the tax laws vis-à-vis the provisions of Treaty, as also to streamline the applicable provisions of law, it was decided to incorporate that, for the purposes of determining the profits of a permanent establishment, there shall be allowed deduction of expenses incurred for the purposes of the business of the permanent establishment including general administrative expenses but in accordance with the provisions and also subject to the limitations of the tax laws of that State. Therefore, by this amendment in the Article the applicability of provision of section 44C has been enforced, nevertheless with effect from 1st day of April, 2008.”
14. Thus, in view of our above finding, we hold that, firstly, in the assessment year involved, limitation clause of applicability of income-tax Act will not apply in Article 7(3) and consequently provisions of sections 44C will not be applicable; secondly, the amendment brought by way of Protocol by which article 7(3) has been amended and limitation clause has been brought in, will apply from 1st April, 2008 and will not have any retrospective effect; thirdly, the judgment of Mashreqbank psc (supra), is no longer relevant in view of the decision of the Special Bench in the case of M/s Sumitomo Mitsui Banking Corp.(supra).and Lastly, from the above conclusions, it is held that computation of income and disallowance of expenses relating to head office cannot be made by invoking the provisions of Section 44C of IT Act. Thus, in view of the above conclusions, we hold that income of the PE of the assessee should be computed as business income after allowing all the expenses attributable to its business in India including the head office expenses.
15. In the result, grounds taken by the assessee is allowed.
ITA NO.3857/M/2010 (AY:1996-97) (By Assessee):
16. This appeal has been filed against the order dated 5.3.2010 passed by CIT (A)-10, Mumbai.
17. In ground no.1 assessee has challenged the restriction of deduction for head office expenses by applying the provisions of sec. 44C of the Act as against the assessee’s claim that the entire amount of Rs. 39,47,623/-allocated to the Indian branches should be allowed as deduction as per provision of Article 7(3) of India-UAE DTAA.
18. This issue has already been decided in favour of the assessee in the aforesaid appeal for the Assessment Year 1995-96 in ITA No.3462/M/2010. The finding given in the above appeal applies mutadis-mutandis in this ground also. Thus, ground no.1 as raised by the assessee stands allowed.
19. In ground no.2, the assessee has challenged calculation of interest u/s 244A in the following manner:
“2(a) The CIT(A) ought to have directed the AO to recomputed interest under section 244A at Rs. 1,17,83,506/- (per computation enclosed) as against Rs. 85,50,458/- (incorrectly mentioned as Rs. 8,55,05,458/- by the CIT(A) in the order dated 5th March, 2010 for the assessment year 1996-97) being interest granted by the AO vide order under section 154 dated 3rd December, 2008.
(b) The CIT(A) ought to have directed the AO to recomputed the interest under section 244A based on the outcome of the appeal. The appellants pray that the AO be directed to recomputed the interest under section 244A.
(c) The CIT(A) ought to have directed the AO to grant interest up to date of receipt of refund by the appellants.
(d) The CIT(A) ought to have appreciated the fact that interest under section 244A should be computed on the tax refund excluding interest already granted to the appellants.”
20. The Ld CIT (A) has rejected the assessee’s ground on the score that this issue is not arising out of order impugned before him but from order u/s 154.
21. At the very outset, learned Sr. Counsel on behalf of the assessee submitted that this issue stands covered by the decision of ITAT in assessee’s own case for the assessment year 1990-91 passed in ITA No.5136/M/2009 vide order dated 2.7.2010. He also referred to calculation of interest which has been given in the paper book from pages 98 to 102. On the other hand, Ld CIT-DR submitted that the issue of interest u/s 244A is arising out of the order u/s 154 passed by the AO and, therefore, the same cannot be adjudicated upon.
22. After carefully considering the rival submissions and perusing the material on record, we find that the issue of interest u/s 244A is a part of working of demand determined by the AO in pursuance of the assessment order. Therefore, same can very well be challenged in the present appellate proceedings. As stated by the learned Counsel, this issue has come up for consideration before this Tribunal in assessment year 1990-1991 wherein this issues was decided in favour of the assessee after observing and holding as under:
“We have considered the rival contentions and relevant record. It is evident from the orders of the lower authorities that the AO has calculated the interest u/s 244A by reducing the refund of tax already granted to the assessee. In the amount of refund the interest which was granted earlier occasions also included. Therefore, the AO has reduced the total refund granted which consists refund of tax and interest already granted u/s 244A. Therefore, we find force in the contention of the learned AR that while computing the interest u/s 244A, the AO has reduced both the refund of tax as well as interest granted u/s 244A from the refund due to the assessees. In order to compute the interest u/s 244A, the amount balance refund due to the assessee has to be determined after deducting the amount of that tax already refunded and not amount of interest already granted u/s 244A. Thus the interest component in the refund already granted should be excluded while the same is to be reduced from the refund due to the assessee for the purposes of section 244A for future interest on the balance refund due amount. Accordingly, we are of the view that the method adopted by the AO suffered from grave error as the same has resulted the reduction of interest payable to the assessee because the principal amount is reduced by interest component already granted and then future interest is computed. The interest already granted up to a date is relevant only for exclusion of period for which it is granted and the future interest has to be granted from the subsequent period. Therefore, the interest already granted cannot reduce the principle refund due to the assessee but the amount which represents the tax already refunded has to be reduced from the total refund due to the assessee for computation of interest u/s 244A. We note that the CIT (A) has decided the issue in para 2.2 of the impugned order as under:
“2.2 I have considered the appellant’s request and examined the facts. In view of the facts above, I find that the issue relates to calculation method adopted by the department and assessee. It is seen that method adopted by the AO is being consistently followed in respect of all assessees. Therefore, I am of the view that method adopted by the AO as per provisions of the Act cannot be faulted. I therefore, inclined to agree with the computation method adopted by the AO. Accordingly, the ground under appeal is dismissed.
From the above it is clear that the CIT (A) has not gone into the question of correctness of method adopted by the AO but decided the issue on the ground that the method adopted by the AO is being consistently followed in respect of all assessees. Therefore, the impugned order of the CIT (A) qua this issue is not sustainable in law and liable to be set aside. We accordingly decide this issue in favour of the assessee and direct the AO to calculate the interest on the refund due to the assessee without reducing the interest under section 244A which is part of the refund earlier granted from the refund due.”
23. Thus, respectfully following the aforesaid decision, we direct the AO to calculate the interest on the refund due to the assessee without reducing the interest u/s 244A which is a part of the refund earlier granted from the refund due. The AO is also required to examine the calculation of interest as submitted by the assessee.
24. Thus, this ground is restored back to the AO to give consequential relief in calculation of interest u/s 244A. In the result, this ground is treated as allowed, but for statistical purposes.
ITA NO.4022/M/2010 (AY: 1997-98) (By Assessee):
25. In this appeal, ground no.1 is similar to ground no.1 in ITA No.3462/M/2010 dealing with applicability of sec.44C vis.a.vis Article 7(3). The issue raised in this ground has been discussed in detail in the assessment year 1995-1996 in ITA No.3462/M/2010 and the finding given therein, squarely applies in this year also. Thus ground no.1 as raised by the assessee is allowed.
26. In ground no.2, the assessee has challenged the disallowances in respect of the following expenses.
