IN THE ITAT MUMBAI BENCH ‘L’
Assistant Director of Income-tax (International Taxation) 3(1)/2(2)
Oman International Bank S.A.O.G
IT Appeal Nos. 2518 & 2675 (Mum.) of 2004
AND 4492 & 4756 (Mum.) of 2005
[Assessment years 2000-01 and 2001-02]
October 10, 2012
1. These sets of cross appeals by the assessee and the Revenue relate to assessment years 2000-2001 and 2001-2002. Since some of the issues raised in these appeals are common, we are therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
Assessment Year 2000-2001
2. First ground of the assessee’s appeal is against the taxation of interest of Rs. 5,61,68,345 received from head office. Briefly stated the facts of the case are that the assessee claimed exemption in respect of interest income of Rs. 5,61,68,345 earned from its head office in the revised return. The Assessing Officer did not allow any exemption and accordingly taxed this amount. The learned CITA) upheld the assessment order on this issue.
3. After considering the rival submissions and perusing the relevant material on record we find that the assessee is a non-resident carrying on banking business in India. During the course of its business it placed certain funds with its head office and earned the said amount of interest which was claimed as exempt. The Special Bench of the Tribunal in the case of ABN Amro Bank NV v. Asstt. DIT  97 ITD 89 (Kol) (SB) has held that the branch of the assessee bank cannot be treated as a separate entity. The transactions between the Head office and branch resulting into interest income or interest expenditure are to be viewed as transaction with self. On the basis of mutuality, it has been held that there can be neither any income in respect of interest earned from its overseas branches, nor there can be deduction for interest expenditure paid by the Indian branch to Head office or the other overseas branches. We want to make it clear that we have adopted the ratio of special bench decision in so far it concerns the examination under the provisions of the Act and not the DTAA. It is different matter that the decision of the special bench rendered in this case in the context of the DTAA has been reconsidered by a larger bench, with which we are not presently concerned. Respectfully following the ratio of this decision in the context of the Income-tax Act, 1961, we hold that the interest income of Rs. 5.61crore which has resulted only from the assessee’s dealings with its Head office cannot be charged to tax on the principle of mutuality. Accordingly no tax can be levied on the interest earned by the assessee from its Head office or overseas branches. At the same time we want to make it clear that the principle of mutuality will extend equally in respect of interest paid by the assessee to its head office or other overseas branches. The assessee cannot claim deduction in respect of interest paid to its head office and overseas branches. The Assessing Officer is directed to allow exemption in respect of interest income and also not to grant any deduction in respect of interest expenditure.
4. The other contention raised by the learned Departmental Representative for making any disallowance u/s 14A in respect of interest income does not merit acceptance. We have perused the assessment order. It is observed that the Assessing Officer has proceeded with the presumption that the interest income is not exempt. He has not made any disallowance of expenses incurred in relation to such exempt income presumably u/s 14A of the Act. Neither it is the learned CIT(A) who considered and decided the question of disallowance u/s 14A. As this issue does not emerge out of the orders of the authorities below, we desist from examining it. This ground is allowed.
5. Ground no.2 is against the direction of the learned CIT(A) regarding section 44C of the Act. Ground nos. 1 and 2 of the Revenue’s appeal are also in relation to deduction u/s 44C. Briefly stated the facts of these grounds are that the assessee claimed deduction of specific expenses incurred by head office on behalf of Indian branch at Rs. 20,09,376 as per the revised return u/s 37 of the Act as against Rs.19,24,206 claimed as per the original return of income. The AO opined that such expenses were deductible in terms of section 44C. Considering the assessee’s separate claim for HO expenses, the AO did not allow this claim. In para 4.3 of the order, the AO observed that : ‘Assessee has claimed deduction u/s HO at Rs.19,24,206 in the original return filed. In the revised rerun such claim is made at Rs. 26,00,621. Considering the fact that appeal are pending for earlier years the claim made as per original return is allowed subject to rectification of the figure on finalization of appeals.’ That is how, the AO allowed deduction of Rs. 19,24,206 in the final computation of income towards ‘Head Office Administrative Expenses (as per Revised Annexure II) as discussed.’ It was contended before the learned CIT(A) that the Assessing Officer ought to have considered the amount of deduction u/s 44C by the assessee in the revised return which was made at Rs. 26,00,621. The learned CIT(A) concurred with the submission advanced on behalf of the assessee and found that the A.O. had not considered the revised return wherein the assessee had claimed deduction u/s 44C at Rs. 26,00,621 as against the deduction u/s 44C in the original return at Rs. 19,24,206. The learned CIT(A) directed the Assessing Officer “to consider the deduction u/s 44C on the basis of revised return filed u/s 139(5) of the I.T. Act subject to verification of the correctness of revised return filed within time. Appellant’s appeal on this ground is partly allowed”.
6. Now the grievance of the assessee is that the direction given by the learned CIT(A) is correct in principle but the last line being “Appellant’s appeal on this ground is partly allowed” is unwarranted. On the other hand, the department is against the direction given by the CIT(A) in principle about the allowability of expenses. It is obvious that when the assessee revised its return and claimed deduction u/s 44C at higher level than that claimed in the original return, it was the duty of the Assessing Officer to consider the higher claim u/s 44C and not to restrict himself to the claim made in original return. We fail to find any absurdity in the direction of the learned CIT(A) to the AO to consider deduction u/s 44C on the basis of revised return subject to verification of the correctness of the revised return. When the matter has been restored by the learned CIT(A) for applying provisions of section 44C correctly, we do not think any harm has been caused to the Revenue by this direction. We, therefore, uphold the impugned order on this issue except for the removal of the last sentence from para 6.1., which is contrary to his conclusion on the point. The grounds raised by the Revenue are not allowed and the assessee’s ground is accepted to the extent of the removal of the last sentence.
7. Ground no.3, about not considering the claim for deduction of Rs. 21.75 lakh being bad debt written off in the previous year relevant to the assessment year 1995-96, was not pressed by the learned AR. The same is, therefore, dismissed as not pressed.
8. The last effective ground of the assesee’s appeal is against the confirmation of disallowance u/s 43B of Rs. 38,561 paid during the financial year in respect of employer’s contribution to provident fund. The Assessing Officer made disallowance for the said sum on the ground that it was not paid before the due date under the EPF Act. The learned CIT(A) sustained the disallowance accordingly. We have observed from the details filed by the assessee that the said amount of Rs. 38,561 was paid before the due date of filing return u/s 139(1) of the Act. In view of the judgment of the Hon’ble Supreme Court in the case of CIT v. Alom Extrusions Ltd.  319 ITR 306 read along with the judgment of the Hon’ble Delhi High Court in the case of CIT v. AIMIL Ltd.  321 ITR 508, it becomes apparent that no disallowance can be made if the employer’s contribution or the employees’ contribution is paid before the due date of filing return of income as per section 139(1) of the Act. Accordingly the assessee’s claim on this score is allowable. This ground of appeal is allowed.
9. Ground no.3 of the Revenue’s appeal is against allowing deduction by the learned CIT(A) to the tune of Rs. 2,60,02,975 on account of bad debt written off. The facts apropos this ground are that the assessee wrote off such sum and claimed deduction for it as bad debt. The Assessing Officer made the disallowance by holding that the assessee could not prove that the amount had become bad in the year. The learned CIT(A) accepted the assessee’s claim.
10. After considering the rival submissions and perusing the relevant material on record we find that there is no dispute on the fact that the said amount of bad debt was claimed as deduction by the assessee in its annual accounts. It is not the case of the Revenue that the conditions of section 36(2) are not complied with. The Hon’ble Supreme Court in the case of T.R.F. Ltd. v. CIT  323 ITR 397 has held that after 01.04.1989 the assessee is not required to prove that the debt has become bad in the previous year u/s 36(1)(vii) and deduction is allowable on a simple write off. It is observed that the Hon’ble Bombay High Court in assessee’s own case in DIT (International taxation) v. Oman International Bank SAOG  313 ITR 128 has held that the deduction of bad debt is allowable on a simple write off and it is not for the assessee to prove that the debt had become bad. In view of the ratio decidendi of the Hon’ble Supreme Court and the Hon’ble jurisdictional High Court, we find that the view taken by the learned CIT(A) on this issue is without exception. This ground is not allowed.
11. In the result, the assessee’s appeal is partly allowed and that of the Revenue is dismissed.
Assessment Year 2001-2002
12. First ground of the assessee’s appeal is against the taxability of interest income of Rs. 3,85,14,641 received from head office. Both the sides are in agreement that the facts and circumstances of this ground are mutatis mutandis similar to those for the preceding year. Following the view taken hereinabove we hold that such interest cannot be taxed on the principle of mutuality. In the like manner, the deduction claimed by the assessee, if any, towards interest paid to head office or other overseas branches also cannot be allowed. Further the provisions of section 14A cannot be argued for the first time by the learned Departmental Representative when the A.O. has not made any disallowance in this regard.
13. Ground no.2 is against the confirmation of disallowance u/s 43B of Rs. 18,102 paid during the financial year in respect of employees and employers contribution to the provident fund. In view of the above discussed judgment of the Hon’ble Supreme Court in the case of Alom Extrusions Ltd (supra) and that of the Hon’ble Delhi High Court in the case of AIMIL Ltd. (supra), we allow this ground of appeal because admittedly the amount in respect of EPF contribution was deposited before the due date u/s 139(1) of the Act. This ground is allowed.
14. Ground no.3 about bringing to tax the provision of Rs. 4,88,623 made for expenses was not pressed by the learned AR. The same is dismissed.
15. Ground no.4 about not considering the claim for deduction of Rs. 21.75 lakh being bad debt written off in the previous year relevant to assessment year 1995-96 was also not pressed by the learned AR. The same is also dismissed.
16. First ground of the Revenue’s appeal is against the direction of the learned CIT(A) to allow deduction of Rs. 32.64 lakh u/s 37(1) of the Act. Both the sides are in agreement that the facts and circumstances of this ground are mutatis mutandis similar to those for assessment year 2000-2001 concerning the deduction of head office expenses u/s 44C of the Act. Following the view taken hereinabove we uphold the impugned order on this issue and dismiss this ground of appeal.
17. Last ground is against the deletion of disallowance of Rs. 13,47,430 in view of section 40(a)(i) of the Act. The assessee paid transaction charges on NOSTRO account with banks outside India. In the absence of assessee having deducted any tax at source on such payments, the A.O. made disallowance u/s 40(a)(i). The learned CITA) deleted the addition.
18. Both the sides are in agreement that this issue has been decided by the Tribunal in earlier years in assessee’s favour. Respectfully following the same, we uphold the impugned order on this issue. This ground is not allowed.
19. In the result, the appeal of the Revenue is dismissed and that of the assessee is partly allowed.