Case Law Details
IN THE ITAT MUMBAI BENCH ‘L’
Deputy Commissioner of Income-tax, Special Range 27, Mumbai
Versus
Banque Indosuez (Known as Credit Agricole Indosuez)
IT Appeal Nos. 3098 (Mum.)
of 2000, 4520, 5040, 7919 and 7993 (Mum.)
of 2004 & 2270 & 2464 (Mum.) of 2005
CO. NO. 156 (Mum.) of 2000
[Assessment years 1994-95, 1998-99 to 2000-01]
Date of Pronouncement – September 21, 2012
ORDER
1. This batch of eight appeals involves assessment years 1994-95, 1998-99, 1999-2000 and 2000-2001. Since some of the issues raised in these appeals are common we are, therefore, disposing them off by this consolidated order for the sake of convenience.
2. At the very outset we will like to mention that cross appeals of this assessee for the assessment year 1997-1998 along with one cross objection by the assessee for the same year came up for hearing on 03.09.2012. Such appeals have been disposed off vide our separate order dated 12.09.2012 . The issues similar to those involved in the appeals for A.Y. 1997-98 were not separately argued by the rival parties in the course of the arguments for the appeals under consideration by accepting that the facts and circumstances are similar, unless otherwise separately submitted, which we will advert to distinctly.
Assessment Year : 1994-1995
3. First ground of the Revenue’s appeal is against the deletion of addition of Rs. 15,57,491 being the net interest and commission received by the assessee from head office. Briefly stated the facts of this ground are that the assessee received certain interest/commission from its HO/overseas branches and also simultaneously paid interest/commission to its HO/overseas branches. Such income/expenditure was credited/debited to the profit and loss account of the assessee. However, while computing the total income the assessee excluded the interest/commission income and also added back the interest/commission expenditure. The Assessing Officer held that the interest/commission income was chargeable to tax. This resulted into an addition of Rs. 15,57,491. The learned CIT(A) overturned the assessment order on this point. It is observed that similar issue was raised in the appeals for assessment year 1997-98. Relying on the Special Bench order in the case of Sumitomo Mitsui Banking Corpn. v. Dy. DIT (IT) [2012] 136 ITD 66, the Tribunal has held that neither any interest/commission received by the Indian PE from HO/other overseas branches can be charged to tax, nor there can be any deduction towards interest/commission expenditure incurred by the assessee towards HO /overseas branches. We have restored the matter to the file of Assessing Officer with a direction to exclude the amount of interest/commission received by the Indian PE from its HO/overseas branches and also not to grant deduction in respect of interest/commission received from the overseas HO/branches. Following the precedent, we set aside the impugned order and restore the matter to the file of A.O. for deciding this issue accordingly.
4. Ground no.2 is against the disallowance of Rs. 64,76,781 being broken period interest on PSU bonds. The facts apropos this ground are that up to assessment year 1993-94 the assessee was following the practice of including broken period interest paid on the purchase of all securities and bonds in the cost of the security and computing its gain/loss on sale of securities accordingly. In the previous year relevant to the assessment year under consideration, the assessee modified its accounting policy in relation to valuation of public sector bonds by directly charging broken period interest to the profit and loss account, thereby deviating from its earlier position of including such interest in the purchase price of PSU bonds. The auditor reported that due to change in the accounting policy, the interest income was declared lower by a sum of Rs. 64.76 lakh. On being called upon to justify its stand on this issue, the assessee submitted that it has switched over from one accepted method to another accepted method insofar as valuation of PSU bonds is concerned and this changed method has been consistently followed in the later year as well. The Assessing Officer rejected this contention by observing that the assessee had valued all other government securities etc. as per the unchanged method and such change in the method of valuation was only in respect of PSU bonds. He, therefore, disallowed broken period interest of Rs. 64.77 lakh on purchase of PSU bonds which was debited to the profit and loss account. The learned CIT(A) overturned the assessment order on this point.
5. After considering the rival submissions and perusing the relevant material on record it is observed from the order passed by the Tribunal in assessee’s own case for assessment year 1996-1997 in ITA No.3121/Mum/2000, a copy of which has been placed on record, that similar issue was raised in that year as well. After considering the earlier order passed by the Tribunal in assessee’s own case for assessment year 1991-92, the Tribunal decided it in favour of the assessee by holding that interest paid on broken period was liable to be allowed as deduction against the interest received in respect of the broken period. From para no.25 of the Tribunal order for assessment year 1996-97 it can be seen that the Tribunal, while following the order for assessment year 1991-92, also took into consideration the view taken by the Tribunal for assessment years 1987-88 and 1988-89. Be that as it may it is palpable that the assessee switched over from one recognized method of valuation of bonds and securities to another recognized method in the previous year relevant to the assessment year under consideration in respect of PSU bonds. Broken period interest which was hither to capitalized came to be considered as deduction in the year of purchase. This changed method has been undisputedly followed by the assessee consistently in subsequent years. In view of these facts we find no reason to disturb the view canvassed by the learned CIT(A) on this issue. Rather such view is supported by the Tribunal order passed for the earlier years in assessee’s own case. This ground is not allowed.
6. Cross objection of the assessee for the year is only in support of the order passed by the learned CIT(A).
7. In the result, the appeal of the Revenue is partly allowed for statistical purposes and the cross objection of the assessee is dismissed as infructuous.
Assessment Year 1998-99
8. Ground no.1 of the Revenue’s appeal is against the direction of the learned CIT(A) to delete the charging of interest on NOSTRO account amounting to Rs. 3.98 crore. Ground nos.1 to 4 of the assessee’s appeal are against the enhancement by the learned CIT(A) to the tune of Rs. 27,31,95,602 u/s 14A in respect of the interest income of Rs. 3.98 crore which was held by him to be not chargeable to tax. Both the sides are in agreement that the facts and circumstances of these grounds are mutatis mutandis similar to those for assessment year 1997-98. This issue has been discussed by the Tribunal for assessment year 1997-98 in paras 2 to 5. It has been held that interest on NOSTRO account is chargeable to tax and consequently no disallowance u/s 14A is called for. In view of the fact that there is no difference in the facts and circumstances of these grounds for the year under consideration vis-à-vis those for assessment year 1997-98 as discussed above, following the precedent, we hold that interest of Rs. 3.98 crore is chargeable to tax and resultantly the disallowance u/s 14A made to the tune of Rs. 27.31 crore is deleted. Accordingly grounds raised by the assessee as well as Revenue in this regard are allowed.
9. Ground no.5 of the assessee’s appeal is against taxability of income of the assessee at the rate of 48% as applicable to non-resident company. The learned Counsel for the assessee fairly admitted that this issue has been decided against the assessee in earlier years. We find that similar ground was also there in the year relevant to the assessment year 1997-98. Relevant discussion has been made in para 13 of the said order. After considering the decision taken in earlier years, the Tribunal has not allowed this ground. In view of the foregoing discussion we uphold the impugned order on this issue for the current year as well and dismiss this ground.
10. Ground no.6 of the assessee’s appeal is against the direction of the learned CIT(A) that interest/commission received from HO/branches should not be charged to tax.
11. After considering the rival submissions, we find that similar issue was there in appeal for the assessment year 1997-98. After considering the decision of the Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corpn. (supra), the bench has directed the Assessing Officer to exclude the amount of interest/commission received by Indian PE from its HO/overseas branches and also not to grant deduction in respect of interest/commission incurred towards HO/overseas branches. We follow the same view for this year as well and direct the Assessing Officer accordingly.
12. Ground no.7 of the assessee’s appeal is to the effect that interest amounting to Rs. 11,02,79,210 received from branches on placement of overseas deposits should not be charged to tax. The learned Counsel for the assessee contended that though this issue does not arise out of the impugned order but the facts are available on record inasmuch as the assessee credited such amount of interest to its Profit and loss account. It was, therefore, prayed that the assessee be allowed to argue this ground even though it does not arise out of the impugned order. The learned Departmental Representative opposed the taking up of this ground.
13. Having regard to the facts and circumstances of the case it is found that the issue of non-taxability of interest/commission received by Indian PE from its overseas branches/HO is consistently arising in all the earlier years which has been decided in assessee’s favour. Since the adjudication of this ground does not require any fresh investigation of facts, we admit this ground for disposal on merits. The case of the assessee is that the interest of Rs. 11.02 crore received from branches should not be charged to tax as it is a transaction with self. In principle, we agree with this contention, which view has consistently been taken in earlier years. Since the exact amount of interest received by the assessee from its HO/overseas branches is not emanating from record, we direct the Assessing Officer to find out such amount of interest received from HO/overseas branches and exclude it from the computation of total income. In the same breath, it is also directed that the interest/commission paid by the assessee to its HO/overseas branches should also not be allowed as deduction. This ground is, therefore, allowed for statistical purposes.
14. Ground no.8 is against the disallowance of loss on revaluation of unmatured forward foreign exchange (Forex) Contracts as on 31.03.1998 amounting to Rs. 7,14,63,831. The assessee claimed deduction amounting to Rs. 7.14 crore towards loss on revaluation of Forex contracts as at the year ending on 31.03.1998. In support of the deduction it was stated that the foreign exchange transactions were required to be valued at the market price of foreign exchange as at the end of the year as per the rules of FEDAI and the loss on such revaluation was deductible. The Assessing Officer held such loss to be contingent and did not allow any deduction by holding that the liability on such issue will arise only on the date of maturity of the contract. The learned CIT(A) upheld the assessment order on this point.
15. After considering the rival submissions and perusing the relevant material on record we find that the assessee entered into forward foreign exchange contract during the year. In respect of the unmatured contracts as at the year end, the assessee valued such unmatured forward foreign exchange contracts at the rate of exchange prevailing as at the end of the year which resulted into loss of Rs. 7.14 crore. It can be considered by way of simple example. If the assessee undertakes a forward foreign exchange contract as on 18th January, 1998, on which the rate of dollar is Rs. 42. Further suppose that the contract is to mature on 30th April at the price of Rs. 46 per dollar. Suppose at the end of the year 31st March, the rate of dollar has gone up to Rs. 43, the assessee’s claim is that the difference of Rs. 1 (Rs. 43 – 42) as on 31st March, 1998 should be taken as loss and allowed deduction accordingly. The Special Bench of the Tribunal in the case of Dy. CIT (International taxation) v. Bank of Bahrain & Kuwait [2010] 41 SOT 290 (Mum.) has held that the loss incurred by the assessee on account of evaluation of the contract on the last day of the accounting year i.e. before the date of maturity of the forward contract, is allowable as deduction. In that view of the matter this loss of Rs. 7.14 crore representing difference of Rs. 1 (Rs. 43 – 42) is liable to be allowed as deduction.
16. At this juncture, the learned Departmental Representative argued that if this loss of Rs. 1 in the hypothetical example is to be allowed in this year, then in the subsequent year when the contract actually matured, the loss should be computed at Rs. 3 (Rs. 46 – 43) and not at Rs. 4 (Rs. 46 – 42). The learned Departmental Representative raised an oral ground in this regard for suitable direction to be given for the subsequent year that the loss allowed in the current year amounting to Rs. 7.14 crore should be taken into consideration while computing the loss. The learned Counsel for the assessee was fair enough to admit that if the loss of Rs. 7.14 crore is allowed in this year then suitable amendment be made in the assessment order for the subsequent year so that the assessee does not get deduction of Rs. 7.14 crore twice.
17. In the light of the afore-noted Special Bench order in the case of Bank of Bahrain & Kuwait (supra) it is apparent that the assessee is entitled to deduction of Rs. 7.14 crore towards loss on revaluation of unmatured forward foreign exchange contract for the year under consideration. It is observed from the order passed by the learned CIT(A) for assessment year 1999-2000 that vide para 10 page 12 of his order it has been directed that : “income/loss in respect of such forex contracts as have matured during the year should be computed without considering the revaluation effected in the books of account in assessment year 1998-99 is acceptable and the A.O. is directed to calculate accordingly”. With the allowing of ground no.8 of the assessee’s appeal for assessment year 1998-99, this direction given by the learned CIT(A) in his order for assessment year 1999-2000 shall automatically stand vacated. The Assessing Officer is, therefore, directed to allow loss of Rs. 7.14 crore in this year and compute loss/profit on Forox contract maturing in the previous year relevant to the assessment year 1999-2000 by considering the impact of allowing of loss of Rs. 7.14 crore. In other words, the Assessing Officer should ensure that the loss of Rs. 7.14 crore is not once again allowed in the previous year relevant to the assessment year 1999-2000. This ground raised by the assessee for the current year is allowed.
18. Ground no.2 of the Revenue’s appeal is against the direction of the learned CIT(A) to allow the broken period interest paid of Rs. 4,35,90,306 as an expense. This issue has been discussed by us in our order for assessment year 1997-1998 and the decision has been taken for allowing broken period interest as an expense. This ground is accordingly not allowed.
19. Ground no.3 is against the allowing of exemption in respect of gross interest earned from tax free securities u/s 10(15) of the Act. The learned Departmental Representative fairly submitted that this is also a recurring issue. He however argued that the expenditure in connection with the earning of such tax free interest income should be disallowed u/s 14A.
20. Having heard the rival submissions and perused the relevant material on record we find that the facts and circumstances of the ground as well as the arguments raised by the learned Departmental Representative in respect of disallowance u/s 14A are similar to those for assessment year 1997-98. While disposing off this ground for assessment year 1997-98 we have held that exemption u/s 10(15) is to be allowed on gross interest and not on the net interest. Further, it has been held by the ld. CIT(A) that investment in tax free securities was made by the assessee out of interest free funds available at its disposal. Such contention has remained oncontroverted by the learned Departmental Representative. Following the precedent we sustain the impugned order on this issue by holding that exemption u/s 10(15) is to be allowed on gross interest. The further contention raised by the learned Departmental Representative about the disallowance u/s 14A is not acceptable in view of the detailed reasons given in our order for assessment year 1997-98.
21. Ground no.4 of the Revenue’s appeal is against the direction of the learned CIT(A) to disregard the refund while calculating the interest u/s 234B of the Act. The learned CIT(A) vide para 9.3 of the impugned order held that section 234D was brought into the statute by the Finance Act, 2003 with effect from 01.06.2003 and as such the Assessing Officer was not justified in charging interest u/s 234B with reference to the fund issued u/s 143(1)(a) earlier.
22. Having heard the rival submissions and perused the relevant material on record it is observed that the learned CIT(A) has rightly considered the mandate of sections 234B and 234D. Obviously, the interest u/s 234B is required to be calculated on the basis of total income computed without considering the refund determined u/s 143(1) of the Act. We, therefore, uphold the impugned order on this issue. This ground is not allowed.
23. Ground no.5 is against the direction of the learned CIT(A) for giving deduction of Rs. 24,11,100 independent of the provisions of section 44C.
24. After considering the rival submissions and perusing the relevant material on record we find that it is an undisputed position that the facts and circumstances of this ground are similar to those prevailing in the earlier years in which it has been held that the deduction has to be allowed independent of the provisions of section 44C. The learned Departmental Representative could not point out any distinguishing feature in the facts of the current year vis-à-vis the earlier year. Following the precedents we uphold the impugned order on this issue. This ground is not allowed.
25. Ground no.6 is against the deletion of disallowance of Rs. 1,05,18,450. The Assessing Officer noted that the assessee had borrowed funds by way of FCNR-B Deposit and these funds were kept by the HO in US$ account. The balance to the credit of this account was available as US$ Float to the HO to be drawn as and when required. The A.O. observed that the interest earned from HO was lower as compared to interest paid for FCNR-B Deposit. Such excess interest of Rs. 1,05,18,450 was held by the Assessing Officer to be not deductible. The learned CIT(A) deleted this addition.
26. Having heard the rival submissions and perused the relevant material on record it is seen that the assessee kept certain deposits received from clients abroad in NOSTRO account maintained with the BTC by the HO to be used as Dollar Float Fund for its global operations. Whether and at what point of time such deposits were to be brought into India was a decision to be taken by the assessee taking into consideration various factors such as the foreign exchange rate prevailing at the time of receipt of deposits. Such deposits were not with the HO of the bank but were in NOSTRO account. Simply because the assessee paid interest on domestic deposits at a little higher rate than that it received on FCNR-B Deposits, it cannot be said that the interest paid should be disallowed to that extent. In our considered opinion there is no force in the submissions advanced by the learned Departmental Representative in this regard. This ground is not allowed.
27. In the result, both the appeals are partly allowed.
Assessment Year 1999-2000
28. First ground of the Revenue’s appeal is against the deletion of charging of interest on NOSTRO account amounting to Rs. 92,69,377 and first four grounds raised by the assessee are on account of enhancement made by the learned CIT(A) amounting to Rs. 5.11 crore u/s 14A in respect of such interest income. Both the sides are in agreement that the facts and circumstances of these grounds are similar to those for the earlier years. Following the view consistently taken by us from the assessment years 1997-98 onwards, we hold that the interest of Rs. 92.69 lakh is chargeable to tax and at the same time no disallowance u/s 14A amounting to Rs. 5.11 crore is warranted. The grounds raised by the assessee as well as Revenue in this regard are allowed.
29. Ground no.5 of the assessee’s appeal is about taxability of its income at the rate of 48% as applicable to non-resident company. The facts and circumstances of this ground are also similar to those disposed off earlier. Following the view taken hereinabove, we dismiss this ground of appeal.
30. Ground nos.6 and 7 are against the direction of the learned CIT(A) to tax interest/commission received from HO/branches and also considering the interest/commission paid to the HO/branches. The facts and circumstances of these two grounds are similar to those discussed above. We have held in relation to earlier years that the interest/commission received by the PE from its HO/overseas branches is not chargeable to tax and simultaneously the assessee is not entitled to deduction in respect of interest paid to HO/overseas branches. The AO is directed to give effect to this direction. These grounds are disposed off accordingly.
31. Last ground of the assessee’s appeal is against the direction of the learned CIT(A) in allowing write off of premium paid on purchase of securities amortised over the life of investments. The Assessing Officer disallowed a sum of Rs. 3,27,85,891 being amortization of premium on investment. The learned CIT(A) upheld the disallowance of premium paid on investments. He however agreed with the alternative plea of the assessee that : “as and when these securities are sold, income from them should be computed with reference to the cost of purchase of securities by ignoring adjustment made in books of account in this respect by the appellant. The A.O. is directed accordingly”. The facts of this ground are that the assessee wrote off premium paid on purchase of securities which was amortized over the life of investment. The learned CIT(A) held that when securities are purchased from market at market value, there can be no question of carrying the stock at a lower price by writing off the premium paid on purchase of securities, as done by the assessee. We are in agreement with the view canvassed by the learned CIT(A) for the obvious reason that when the assessee is purchasing securities as stock-in-trade, there can be no question of amortizing the premium paid for the purchase of securities over the life of such securities. The purchase price so paid has to be taken as such by disregarding the assessee’s view point that the premium on purchase of securities should be amortized over the life of investment. To this extent we approve the view taken by the learned CIT(A). The learned AR argued that if this was to be upheld then the direction of the learned CIT(A) be modified in the sense that not only when the securities are not only sold but also even when these get matured, income from then should be computed with reference to the cost of purchase of securities. We are agreeable with this contention. The obvious reason is that the securities can be sold or mature over the period. Once the amortization is not allowed, purchase price is to be taken as such irrespective of the fact whether the securities are sold or get matured. The direction given by the learned CIT(A) to the alternative plea of the assessee, is accordingly modified.
32. Second ground of the Revenue’s appeal is against the direction of the learned CIT(A) to allow broken period interest paid of Rs. 2,77,10,645 as an expense.
33. We find that the issue raised in this ground has been dealt with by us in earlier year as well. We have held that such interest is allowable as deduction. In the absence of any distinguishing feature having been brought to our notice, we approve the view taken by the learned CIT(A) on this issue. This ground is not allowed.
34. Ground no.3 of the Revenue’s appeal is against the granting of exemption on gross interest u/s 10(15). The learned Departmental Representative fairly conceded that the facts and circumstances of this ground are similar to those of earlier years with the exception that the assessee did not furnish any evidence about the investment in such tax free securities as is borne out from page 12 of the assessment order.
35. After considering the rival submissions and perusing the relevant material on record we find that insofar as the question of granting exemption u/s 10(15) is concerned, it has been decided by us in earlier years by holding that exemption is to be allowed on gross interest. As regards the contention of the learned Departmental Representative that the assessee did not furnish any evidence before the A.O. towards the purchase of tax free securities, we find from the statement of facts filed before the learned CIT(A) that the assessee filed such details before the A.O. vide its letter dated 24th January, 2002. It is on the basis of these details that the learned CIT(A) has recorded a categorical finding in para 6 of his impugned order that the aggregate investment in tax free securities has remained unchanged though there is switch over from one tax free securities to another tax free securities. We are unable to see as to how this contention advances the case of the Revenue. Once the source of tax free securities is interest free funds, it makes no difference when there is change in tax free securities from one to another. The relevant criteria is to see the source of investment. We, therefore, find no reason to disturb the finding given by the learned CIT(A) in this regard. This ground is not allowed.
36. Ground no.4 is against the direction of the learned CIT(A) to allow deduction of Rs. 3.50 crore independent of the provisions of section 44C. The A.O. discussed this issue on page 13 of his order. He noted that these expenses were claimed to have been incurred by the HO, “which are again claimed to be specific to the Indian operations, the correctness of which cannot be verified”. The learned CIT(A) accepted the assessee’s stand.
37. After considering the rival submissions and perusing the relevant material on record it is observed that the assessee did furnish its explanation to the A.O. vide its letter dated 6th March, 2002 about the details of expenses incurred and the reason as to why these expenses were allowable independent of section 44C. This fact is borne out from the statement of facts filed before the learned CIT(A). The learned Departmental Representative has not brought any material on record to indicate that the expenses claimed by the assessee as allowed by the learned CIT(A) independent of section 44C were specific to Indian operations. In view of these facts we are of the considered opinion that the learned CIT(A) was justified in directing to allow the deduction of Rs. 3.50 crore independent of the provisions of section 44C.
38. Ground no.5 of the Revenue’s appeal is against the direction of the learned CIT(A) to reduce the taxable income by Rs. 13,37,157 being the amount of gain on Forex Contract. This issue has been discussed by us in an earlier para of the order. In the said earlier year, there was loss on the Forex unmatured contract. We have held that such loss is to be allowed as deduction as the assessee is consistently following this practice of valuing unmatured foreign exchange contracts at the prevailing rate of exchange at the year end. Though in the earlier year there was a loss which has been held to be allowable, in the current year there is a profit on the unmatired Forex contract. Following the view and by adopting the principle of consistency, the impugned order is reversed and it is directed to include Rs. 13.37 lakh in the total income of the assessee. This ground is allowed.
39. In the result, both the appeals are partly allowed.
Assessment Year 2000-2001
40. Ground no.2 of the Revenue’s appeal is against the direction of the learned CIT(A) to delete the charging of interest on NOSTRO account amounting to Rs. 44,80,914. Ground nos. 1 to 4 of the assessee’s appeal are against the enhancement of the assessment by the learned CIT(A) to the tune of Rs. 1,85,43,259 u/s 14A in respect of interest on NOSTRO account held by him to be not chargeable to tax. This issue is consistently coming in all the years. We have held that interest on NOSTRO account is chargeable to tax and resultantly no disallowance u/s 14A is warranted. Following the same view we allow ground no.2 of the Revenue’s appeal and ground nos.1 to 4 of the assessee’s appeal.
41. Ground nos. 5 and 6 of the assessee’s appeal are against taxing interest/commission from HO/branches and also justifying the A.O.’s stand in considering interest/commission paid to HO/branches in computing income.
42. While disposing off the appeals for earlier years we have held that the interest/commission received by the assessee from HO/overseas branches is not chargeable to tax and in the same manner the interest/commission paid to HO/overseas branch is not allowable as deduction. The same view is reiterated here. The AO is directed to give effect to this direction. These grounds are, therefore, disposed off accordingly.
43. Ground nos. 7 and 8 of the assessee’s appeal are against making of disallowance u/s 40(a)(i) in respect of deduction u/s 55,82,037 being interest paid to HO and Rs. 42,539 being the interest paid to overseas branches. While disposing off ground nos.5 and 6, we have held that the assessee is not entitled to deduction in respect of interest/commission paid to Ho/overseas branches. Once the assessee is not entitled to deduction, there can be no question of making any disallowance u/s 40(a)(i) as the deduction is denied at the very outset itself.
44. Ground no.9 of the assessee’s appeal is against the direction of the learned CIT(A) not to allow loss on revaluation of unmatured forward foreign exchange contracts as on 31st March, 2000 amounting to Rs. 1,56,70,296. The facts and circumstances of this ground are similar to those discussed in the earlier part of this order. Following the view taken hereinabove we hold that the assessee is entitled to deduction of loss of Rs. 1.56 crore against the income for the current year. At the same time, the A.O. is directed not to allow such loss of Rs. 1.56 crore in the succeeding year when the Forex contract get matured. As the learned AR has agreed to forego its claim of deduction of Rs. 1.56 crore in the succeeding year subject to the condition of allowability of such loss in the current year, we direct the Assessing Officer to allow deduction for this Forex loss in the current year and make corresponding addition in the subsequent year.
45. Ground no.10 about the application of rate of 48% is not allowed in view of similar stand taken in earlier part of this order. The impugned order is upheld on this issue.
46. Ground no.1 of the Revenue’s appeal is against the direction of the learned CIT(A) to allow exemption u/s 10(15) on gross interest. Both the sides are in agreement that the facts and circumstances of this ground are similar to those for earlier years. Following the view taken hereinabove, we hold that the gross interest is eligible for exemption u/s 10(15). Further no disallowance u/s 14A can be made in respect of such exempt income.
47. Ground no.3 of the Revenue’s appeal is against the deletion of broken period interest claimed as exempt from the total taxable income. The learned Departmental Representative fairly accepted that the facts and circumstances of this ground are mutatis mutandis similar to those for the earlier years. Following the view taken hereinabove we uphold the impugned order on this issue. This ground is not allowed.
48. Last ground of the Revenue’s appeal is against the direction of the learned CIT(A) to delete the expenses claimed by the assessee on account of HO expenses independent of the provisions of section 44C. The assessee claimed deduction for HO expenses at Rs. 1,06,49,590. The entire expenditure was claimed by way of deduction on the ground that it was directly attributable to the Indian branch. It was claimed that the ceiling provided u/s 44C shall not apply. The A.O. observed from invoices submitted by the assessee that these expenses were “allocated” to the assessee. It was further observed that in some cases even the basis of allocation was not given. In the light of these facts the A.O. held such amount to be covered within the ceiling prescribed u/s 44C. The learned CIT(A) directed to allow independent deduction distinct from section 44C.
49. After considering the rival submissions and perusing the relevant material on record it is observed that the A.O. has made out a case that the expenses to the tune of Rs. 1.06 crore were allocated to the assessee and are not incurred exclusively by the HO for the assessee. The A.O. observed these features from the invoices submitted by the assessee. The learned AR has invited our attention towards the statement of facts filed before the learned CIT(A) in which it has been submitted that the details of expenses and reason as to why such expenses were allowable independent of section 44C were made available to the A.O. vide its letter dated 19th March, 2003. The learned AR submitted that as per the terms of Article 7 of the DTAA, all the expenses incurred by the assessee for business purposes were to be allowed as deduction.
50. We are not convinced with the submission made by the learned AR in this regard for the reason that as per the mandate of Article 7, the deduction is to be allowed in conformity with the provisions of the Income-tax Act, 1961. Once section 44C is there, there can be no escape unless it is proved that the expenses incurred are not covered within the mandate of section 44C of the Act. The term “head office expenses” has been defined in Explanation to section 44C to mean “executive and general administration expenditure incurred by the assessee outside India”. It is axiomatic that where HO incurs expenses exclusively for its Indian PE, those are to be allowed as deduction independent of section 44C. Where, however the expenses of the nature defined in Explanation to section 44C are allocated or apportioned to the assessee, then such apportioned expenses would fall within the ambit of section 44C. Unless it is proved that the expenses incurred by the HO were exclusively for the assessee and thus apportioned, these will be covered by section 44C. Since the assessee could not adduce any detail in this regard nor produce a copy of its letter dated 19th March, 2003 claimed to be containing details of expenses, we are of the considered opinion that the impugned order on this issue cannot be upheld. We, therefore, set aside the impugned order and restore the matter to the file of A.O. for deciding this issue as per law after allowing a reasonable opportunity of being heard to the assessee. It is made clear that if during the fresh examination, the Assessing Officer finds that the expenses of Rs. 1.06 crore or any part thereof represent apportionment of HO expenses as per Explanation to section 44C, such allocated expenses will not be allowed as deduction independent of section 44C. To the extent the expenses are found to be exclusively incurred by HO for the assessee, they will not fall within the definition of HO expenses and accordingly allowed as deduction independent of section 44C. This ground is, therefore, allowed for statistical purposes.
51. In the result, both the appeals are partly allowed.
