Case Law Details
IN THE ITAT MUMBAI BENCH ‘L’
Assistant Director of Income-tax (International Taxation)
Versus
Credit Lyonnais
IT APPEAL NOs. 5318 and 5344 (MUM.) OF 2001
& 5018, 6401 & 6516 (MUM.) OF 2004
CO NOs. 133 (MUM.) OF 2002. 186 (MUM.) OF 2005 & 30 (MUM.) OF 2007
[ASSESSMENT YEARs 1998-99 to 2000-01]
OCTOBER 10, 2012
ORDER
Per Bench – These cross appeals and cross objections relate to assessment year 1998-1999 to 2000-2001. Since common issues are raised in these appeals and cross objections, we are therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
Assessment Year 1998-1999
2. First ground of the assessee’s appeal is against the direction of the learned CIT(A) for charging business income at the rate of 48%, being the rate applicable to foreign companies. It has been fairly conceded by the learned Counsel for the assessee that the Tribunal has decided this issue against the assessee in earlier years. We find that similar issue came up for adjudication before the Tribunal in the case of M/s. Credit Agricole Indosuez. The Tribunal vide its order dated 12.09.2012 in ITA No.6615/Mum/2003 & Ors. also decided the issue against the assessee. In view of these facts we uphold the impugned order on this issue. This ground is not allowed.
3. Second ground of the assessee’s appeal and first ground of the Revenue’s appeal are against the direction of the learned CIT(A) to tax interest income of Rs. 4,88,47,308 on NOSTRO and overseas placements maintained with branches outside India and also grant deduction towards interest expenditure on such accounts. Briefly stated the facts of this ground are that the assessee reduced Rs. 4.88 crore as interest received from NOSTRO account. On being called upon to furnish the explanation for seeking exclusion of such interest, the assessee stated that it was carrying on banking business and for that purpose it needed to maintain NOSTRO accounts for receipt/payment of money in foreign currency. It was also claimed that the NOSTRO accounts maintained by the assessee were with its head office and own branches outside India. The Assessing Officer observed that the NOSTRO account was nothing but the bank account of the Indian branch in the Head office and hence interest earned on the balances in the NOSTRO account was income of Indian branch. In view of these facts, he taxed this interest income u/s 9(1)(v). No relief was allowed in the first appeal as regards interest income and also the ld. CIT(A) directed to allow deduction in respect of interest paid by the assessee to its HO/overseas branches. Both the sides are in appeal against their respective stands.
4. Having heard the rival submissions and perused the relevant material on record it is observed from the assessment order that the NOSTRO accounts were maintained by the assessee with its overseas branches and Head office abroad. This fact has been recorded by the A.O. in para 4.2 by mentioning : “Nostro account is nothing but the Bank Account of the Indian Branch in the Head Office”. Similar fact has been recorded in para 4.5 of the assessment order by noting that : “The NOSTRO account is nothing but the bank account of the Indian Branch in the Head Office”. In view of these recording by the Assessing Officer, it becomes apparent that the NOSTRO accounts were maintained by the assessee with its head office and its own overseas branches. In other words these NOSTRO accounts were not maintained with other banks. Now the question arises as to whether there can be any taxation of interest earned by the assessee from its Head office or overseas branches under the provisions of the Act. Before deciding this controversy, we will like to make it clear that the present dispute centers around the assessability/deductibility or otherwise of the interest income/expenditure from/to its own Head office/overseas branches only under the Income-tax Act, 1961. There is no reference to the provisions of the Double Taxation Avoidance Agreement (hereinafter called ‘the DTAA’). The learned AR was fair enough to concede that this claim needs to be examined only under the provisions of the Act and not under the DTAA.
5. The Special Bench of the Tribunal in the case of ABN Amro Bank NV v. Asstt. DIT [2005] 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. 4.88 crore which has resulted only from the assessee’s dealings with its Head office or overseas branches cannot be charged to tax on the principle of mutuality will apply. Accordingly no tax can be levied on the interest earned by the assessee from its Head office or overseas branches.
6. At this stage we will like to mention that the learned Departmental Representative has relied on the order passed by the Tribunal in the case of Asstt. DIT v. Credit Agricole Indosuez (ITA No. 6615/Mum/2003) dated 12.09.2012 in which interest on NOSTRO account has been held to be taxable. We have perused this order passed by the Mumbai Bench of the Tribunal. Relevant discussion about the taxability of interest on NOSTRO account has been made in paras 2 to 5 of this order. In this case it has been held that interest on NOSTRO account is chargeable to tax in the hands of an Indian branch. However, the distinguishing feature in the case of Credit Agricole Indosuez vis-à-vis the present case is that in the earlier order, the NOSTRO account was maintained with certain outside banks outside India and not the assessee’s own overseas branches or Head office. Further, the principle of mutuality on the question of no deduction of interest expenditure and no income towards interest earned by the assessee from/to its Head office/overseas branches was also the subject matter before the Tribunal in the case of Credit Agricole Indosuez and it has been laid down that there can be no interest income or expenditure from transactions with assessee’s own overseas branches or Head office on the principle of mutuality. Thus it is obvious that there is a clear distinction between the NOSTRO interest earned/paid by the assessee from/to its own Head office/overseas branches and NOSTRO interest paid/earned to/from other than assessee’s own Head office or branches. Whereas in the first situation, the principle of mutuality will apply and in the later case it will not.
7. Insofar as the grievance of the Revenue on this issue is concerned, it is noticed that the ld. CIT(A) has directed the A.O. to allow deduction of interest on borrowings from its own Head Office/overseas branches. The principle of mutuality will apply not only qua the interest income but the interest expenditure as well. Resultantly no deduction on account of interest expenditure can be allowed which has been incurred by the assessee in relation to its own Head office and overseas branches. We, therefore, overturn the impugned order on this issue. Both the grounds are allowed.
8. Ground no.3 of the assessee’s appeal and ground no.2 of the Revenue’s appeal are against the sustenance of disallowance of Rs. 50,000 on account of entertainment expenses u/s 37(1) of the Act. The facts apropos this ground are that the assessee debited a sum of Rs. 8,26,620 to its Profit and loss account towards entertainment expenses. The Assessing Officer noticed that no disallowance on this score was made by the assessee suo moto in its computation of income. On being called upon to explain the reasons for not offering any disallowance, the assessee stated that the disallowances used to be made by the assessee voluntarily in the past due to operation of section 37(3) read with Rule 6D and Rule 6B which provisions came to be deleted with effect from 01.04.1998 relevant to the assessment year 1998-99. The Assessing Officer observed that the omission of provisions of section 37(2) should not mean that no disallowance should be made on the expenses otherwise covered under such sections. In his opinion such disallowances hitherto included in section 37(2) would henceforth be covered u/s 37(1). He, therefore, made the entire addition of Rs. 8,26,620. The learned CIT(A) restricted this addition to Rs. 50,000 on account of the benefit of entertainment expenses availed by the employees of the assessee. Both the sides are in appeal against their respective stands.
9. After considering the rival submissions and perusing the relevant material on record it is observed that section 37(2) inter alia provided for disallowance of entertainment expenses. The said provision has been omitted with effect from 01.04.1998. The fact of this omission is that from assessment year 1998-99 no disallowance in respect of entertainment can be made if the expenses are otherwise incurred for the business purposes. Importing of the crux of section 37(2) by the A.O. in section 37(1), is obviously not the mandate of the omission of the provision. Once the legislature has deleted certain artificial disallowances, those cannot be again covered by the Assessing Officer in section 37(1). As such this view point of the AO cannot be upheld.
10. Coming to the decision of the learned CIT(A) in sustaining the addition at Rs. 50,000, it is observed that he has upheld the addition to this extent by recording that : “If the expenditure was incurred by an employee …. for his own benefit then such an expenditure if not covered by the contract between the appellant and its employees cannot be allowed as a business expenditure”. We are not convinced with the view canvassed by the learned CIT(A). The obvious reason is that if an expenditure to employee has been sanctioned by the assessee, there can be no reason to disallow it on the ground that the employee is otherwise not entitled to such an expenditure. So long as an expenditure has been genuinely incurred for the business purposes, the same cannot be disallowed. Resultantly the ground raised by the assessee is allowed and that by the Revenue is dismissed.
11. Ground no.4 of the assessee’s appeal is against the confirmation of disallowance of Rs. 2,99,61,465 being the loss on valuation of shares in Patheja Brothers. Ground no.4 of the Revenue’s appeal is against the deletion of disallowance of loss on valuation of other securities of Rs. 2,41,06,535. Briefly stated the facts of these ground are that the assessee claimed deduction on account of loss on valuation of securities to the tune of Rs. 5,40,68,000. In support of its claim for deduction, the assessee relied on its proceedings for assessment year 1996-97. The Assessing Officer disallowed this loss of Rs. 5.40 crore. There is no discussion in the assessment order, though addition has been separately made for Rs. 2,99,61,465 being loss in revaluation of shares held in Patheja Brothers. The learned CIT(A) observed that the loss on account of valuation of securities as at the end of the year is deductible in view of the similar view having been taken in earlier assessment years. He, therefore, deleted the disallowance to the tune of Rs. 2.41 crore, representing excess of Rs. 5.40 crores over Rs. 2.99 crore being the loss on valuation of securities held in Patheja Brothers. The learned CIT(A) observed that no relief can be allowed for Rs. 2.99 crore because the assessee offered this amount for taxation voluntarily. Both the sides are in appeal in so far as the ld. CIT(A) has decided this issue to their prejudice.
12. We have heard the rival submissions and perused the relevant material on record. It is clear that the Assessing Officer made disallowance of Rs. 5.40 crore which amount also included a sum of Rs. 2.99 crore towards loss on revaluation of shares held in Patheja Brothers. It is further not in dispute that all these shares/securities in respect of which loss has been recorded by the assessee on valuation as at the year end represented its stock-in-trade. The Tribunal in assessee’s own case for assessment year 1996-97 in ITA No.5055/ Mum/2000 has held, vide its order dated 19.08.2005, that there can be no addition in respect of loss on valuation of securities. In this view of the matter it becomes apparent that the assessee is entitled to value its securities held in stock-in-trade on the basis of market price, if it is less than its cost price. The impugned order to the extent of allowing deduction of Rs. 2.41 crore is, therefore, upheld.
Insofar as the sustenance of addition of Rs. 2.99 crore is concerned, we find that the nature of this loss is similar to that of Rs. 2.41 crore which has been allowed by the learned CIT(A). The only distinguishing feature which weighed with the ld. CIT(A) for not accepting the assessee’s claim in this regard is that the assessee voluntarily offered such amount for taxation. The Hon’ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders [2012] 23 taxmann.com 23 has held that the assessee is entitled to raise before the appellate authorities an additional claim which was not made in the return filed by it. Even though the assessee initially voluntarily offered an income under some misconception, that cannot be a reason to put such amount to tax if it later on turns out to be not chargeable to tax. We have seen that the Tribunal has consistently decided that the loss on valuation of securities held as stock-in-trade is deductible. In that view of the matter the mere fact that the assessee voluntarily offered Rs. 2.99 crore to tax, cannot come in the way of allowing deduction for such loss on valuation of shares of Patheja Brothers. Since the facts of this issue are not properly emerging from the orders of the authorities below, we set aside the impugned order and direct the Assessing Officer to consider the correct position in this regard and allow the loss on valuation of shares of Patheja Brothers if, in fact, there is any reduction in its value as at the year end. It is made clear that the Assessing Officer, while accepting the assessee’s claim in respect of loss on valuation of securities in total, will also accordingly reduce such value of securities, so that when such securities come up for sale in a subsequent year, it is this reduced value which is taken into consideration for computing the profit or loss from the sale of such securities. Ground taken by the assessee is allowed for statistical purposes and that of the Revenue is not allowed.
13. Ground no.5 of the assessee’s appeal is against direction of the learned CIT(A) for not excluding the estimated profit of Rs. 10,45,64,546 on unmatured forward exchange contracts credited to the Profit and loss account. It was fairly admitted by the learned AR that the principle of consistency will apply and when deduction on account of loss towards unmatured forward exchange contract is allowed, then the profit from such unmatured forward exchange contract should also be taxed. It is noticed that similar view has been taken by the Tribunal in the case of Credit Agricole Indosuez (supra) also. As we are consistently allowing deduction on account of loss on unmatured forward exchange contract, the profit on such unmatured forward exchange contract is also consequently liable to tax. We, therefore, uphold the impugned order in taxing Rs. 10.45 crore on unmatured forward exchange contract. This ground is not allowed.
14. The only other ground taken by the Revenue in its appeal is against the deletion of addition of Rs. 10 lakh made by the A.O. in respect of expenses incurred on earning tax free income. The assessee claimed exemption in respect of dividend of Rs. 14.01 lakh and interest on tax free bonds at Rs. 8.45 lakh. The Assessing Officer opined that since the assessee has claimed exemption in respect of such incomes, there is no warrant for allowing deduction for expenses incurred in relation to such exempt income. He, therefore, disallowed a sum of Rs. 10 lakh towards interest and other expenses in relation to such exempt income. The learned CIT(A) deleted this addition.
15. After considering the rival submissions and perusing the relevant material on record it is observed that the action of the Assessing Officer in making disallowance of Rs. 10 lakh is, in fact, the essence of application of mandate of section 14A which was subsequently inserted with retrospective effect also covering the year in question. In that view of the matter it cannot be held that no disallowance on account of interest/other expenses incurred in relation to exempt income can be made. On merits of the case it is observed that the assessee made elaborate submissions before the learned CIT(A) contending that it made total investment in tax free bonds/shares from which exempt income was earned at Rs. 8.75 crore from the interest free funds available with it. It was explained that the assessee’s own capital and reserve and surplus amounted to Rs. 58.34 crore apart from additional interest free funds available at Rs. 62.28 crore. The ld. CIT(A) accepted the stand of the assessee.
16. The Hon’ble jurisdictional High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 has held that if there are interest free funds available with the assessee sufficient to meet its investment and at the same time loan has been raised it can be presumed that the investments were from interest free funds and resultantly no disallowance of interest can be made. Since the investment in tax free bonds and shares of Godrej HI CARE from which exempt dividend income was earned, constitute a very small part of total interest free funds available with the assessee, in our considered opinion, no disallowance can be made in relation to interest expenditure.
17. As regards the other administrative and management expenses are concerned, we find that the Tribunal in the case of Jt. CIT v. American Express Bank Ltd. [2012] 138 ITD 288/24 taxamnn.com 50 (Mum.) its order dated 08th August, 2012 has held that disallowance u/s 14A is called for in respect of income which is exempt u/s 10(33) and also under section 10(15)(iv)(h). Insofar as the amount of disallowance towards administrative and management expenses in relation to exempt dividend and interest income is concerned, we find that the Tribunal in Dy. DIT (IT) v. State Bank of Mauritius Ltd. in ITA No.2456/Mum/2006 & Ors. vide its order dated 03rd October, 2012 has upheld the sustenance of disallowance on account of administrative and management expenses in relation to exempt income at 2% of such exempt income. We, therefore, direct the Assessing Officer to sustain disallowance at 2% of total exempt income u/s 10(33) and also u/s 10(15).
18. The Cross objection of the assessee has become consequential to our decision rendered on the grounds raised by the assessee as well as the Revenue is their appeals.
19. In the result, both the appeals are partly allowed and cross objection filed by the assessee has become consequential to our decision on the appeals by both the sides above.
Assessment Year 1999-2000
20. First ground of the Revenue’s appeal is against the deletion of disallowance of expenses in relation to income u/s 10(33) and 10(15)(iv)(h). It is observed that the Assessing Officer made disallowance of interest in this year unlike the disallowance of other expenses also in the preceding year. The learned CIT(A) on appreciation of the factual position, indicated by the assessee, observed that the assessee had sufficient interest free funds available with its disposal for making investment in such tax free securities/shares from which dividend income was earned. The learned Departmental Representative could not controvert the factual position recorded by the learned CIT(A) in this regard. As the assessee has made investment in such securities/shares from which exempt income was earned, out of its own interest free funds, there can be no disallowance u/s 14A in that case. This is in accordance with the view taken up by us for assessment year 1998-99 above. Since the A.O. did not make any disallowance on account of other expenses in relation to exempt income, there cannot be any question of sustaining any such disallowance when the A.O. himself has not made it. This ground is, therefore, not allowed.
21. Second ground of the Revenue’s appeal is against the deletion of addition of Rs. 4,34,54,000 on account of valuation of securities. Both the sides are in agreement that the facts and circumstances of this ground are mutatis mutandis similar to those of the preceding year. In such earlier year i.e. assessment year 1998-99, we have held that the loss on account of securities is allowable deduction. Following the precedent we uphold the impugned order on this issue. This ground is not allowed.
22. Last effective ground of the Revenue’s appeal is against the exclusion of income of Rs. 1,10,61,554 on unmatured foreign exchange contract. The facts and circumstances of this ground are also similar to those considered and decided by us for the preceding year. The impugned order on this issue is overturned and the view taken by the AO is restored. This ground is allowed.
23. The cross objection of the assessee is in support of the order passed by the learned CIT(A) which, in view of our decision, has become infructuous.
24. In the result, the appeal of the Revenue is partly allowed and the cross objection is dismissed as infructuous.
Assessment Year 2000-2001
25. First ground of the assessee’s appeal against the application of high rate as applicable to foreign companies is not allowed in view of our decision for the assessment year 1998-99.
26. Ground no.2 of the assessee’s appeal is against the direction of the learned CIT(A) to tax interest of Rs. 4,23,78,618 received on NOSTRO account and overseas placement with branches outside India. Here again both the sides are in agreement that the facts and circumstances of this year are similar to assessment year 1998-99. Following the view taken hereinabove we allow this ground of appeal.
27. Ground no.3 is against not allowing of deduction of Rs. 12,12,993 being interest paid to Head office/overseas branch. Following the principle of mutuality as discussed for assessment year 1998-99, this deduction of Rs. 12.12 lakh, being the interest paid to Head office/other overseas branches of the assessee, is not allowed. This ground fails.
28. Ground no.4 is against the confirmation of the action of the A.O. for not charging interest of Rs 9,83,865 u/s 234C of the Act. This ground is the outcome of ground no.1 of assessee’s appeal as has been mentioned in the appeal memo itself. Since we have dismissed ground no.1, this consequential ground is also liable to be dismissed. We order accordingly.
29. Ground no.1 of the Revenue’s appeal is against deletion of addition towards the expenses disallowed by the A.O. in relation to exempt income. It is seen that for this year also the Assessing Officer disallowed interest in respect of exempt income. There is no separate disallowance in relation to administrative/management expenses. The learned CIT(A), on appreciation of the factual position, observed that the interest free funds available with the assessee were much more than those invested in such tax free securities and accordingly no disallowance could be made. This factual position has remained uncontroverted by the learned Departmental Representative. Following the view taken in earlier years in assessee’s own case, we uphold the impugned order. This ground is not allowed.
30. Ground no.2 of the Revenue’s appeal is against the direction of the learned CIT(A) that the assessee’s claim for loss of Rs. 4,02,75,000 arising on account of valuation of securities be allowed. In this year the assessee wrote back a provision in respect of revaluation of securities to the extent of Rs. 4.02 crore. It was submitted that for assessment year 1999-2000 loss on valuation of investment amounting to Rs. 4,34,54,000 was disallowed. It was, therefore, prayed that the write back of Rs. 4.02 crore in this year should be allowed. The Assessing Officer rejected this contention. The learned CIT(A) upheld the assessment order.
31. After considering the rival submissions and perusing the relevant material on record it is observed that the assessee’s contention for allowing of loss on revaluation of securities for assessment year 1999-2000 has been accepted by us. In that view of the matter, there cannot be any scope for claiming separate deduction of Rs. 4.02 crore in this year. It was stated on behalf of the assessee that no such deduction was claimed in the computation of income. The Assessing Officer is directed to verify the facts in this regard and add back this amount, if the assessee has claimed deduction for it in its computation of income.
32. Ground no.3 of the Revenue’s appeal is against the direction of the learned CIT(A) to exclude profit of Rs. 2,11,65,231 on unmatured foreign exchange contract. Following the view taken by us in earlier years, we overturn the impugned order on this issue and allow this ground of appeal.
33. The cross objection of the assessee is consequential to our decision on the grounds taken by both the sides in their respective cross appeals.
34. In the result, both the appeals are partly allowed and the cross objection is dismissed as infructuous.
