Case Law Details
DCIT Vs Oman International Bank S. A. O. G. (ITAT Mumbai)
The issue under consideration is whether the disallowance u/s 14A is justified even if the bank had not incurred any expenditure for the purpose of earning the interest amount?
ITAT states that, disallowance u/s 14A is attracted only when assessee incurs any expenditure for earning the income which is not forming part of total income. He also submitted that in this AY, assessee has not incurred any interest expenditure since assessee has earned the net interest income after setting off the interest expenditure paid to Head office. He brought to our notice case law which says that only net income should be considered for disallowance u/s 14A and futher brought to our notice case law which estimates the disallowance to 1% or 2%. ITAT notice that in the earlier AY, the issue was remitted back to AO for quantification and it was not brought on record the consequential order passed by AO in those years. After considering the submissions, in our considered view, since the interest income earned by assessee dealing with HO i.e., self, the coordinate benches has already adjudicated that this income cannot be part of total income earned by the branch in India. Since, the interest income is not part of total income, any related expenses for earning this income has to be identified and disallowed. In the given case, it is dealing in banking business. Assessee has submitted that it has earned the net income which it has declared in the branch P&L and for computation, it has eliminated both receipt and payment of interest to the Head Office. In this AY, there is net interest income but it may not be the same situation in all the AYs. The transaction with the Head Office and Branch, which is dealing with themselves has to considered like Mutual Concerns and all the transaction with them should be eliminated for taxation purpose, not just the income but also the expenditure. When the whole transaction is eliminated with the Head Office, it is important to note that it is the main business of the assessee i.e., Banking, all the relevant expenditure for carrying out these transaction also to be eliminated. Therefore, ITAT do not agree with the assessee that only exempt income which is not part of total income alone should be considered to disallowance u/s 14A. As per the provision of section14A at that point of time, it clearly says that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Nowhere it says it is confine to exempt income which is not form part of total income. Therefore, ITAT are also incline to remit this issue back to AO to quantify the disallowance u/s 14A by eliminating the expenditure relevant for earning the above said income, it may not the interest expenditure alone, it will include the administrative and other expenditure. ITAT urge the AO that the disallowance cannot be more than the income earned by the assessee as it is judicial precedent that the disallowance cannot be more than the income earned by the assessee. Accordingly the ground raised by the assessee is remitted back to AO to quantify the disallowance u/s 14A based on the above direction and direction of Coordinate Bench in the earlier AYs. Accordingly, the ground raised by the assessee is allowed for statistical purpose.
FULL TEXT OF THE ITAT JUDGEMENT
The above two cross appeals have been filed by the revenue and assessee against the order of Commissioner of Income Tax (Appeals)- 15, Mumbai, dated 2212.03.2014 for AY 2007-08 respectively and further CO filed by the assessee for the revenue appeal.
2. Since the issues raised in both the appeals and CO are identical, therefore, for the sake of convenience, these appeals /CO are clubbed, heard and disposed off by this consolidated order.
3. The brief facts of the case relevant for the appeal filed by both the parties are, assessee is engaged in the business of banking including foreign exchange transaction. It has 2 branches in India and head office is based at Muscat. During assessment proceedings, assessing officer observed that assessee has credited an amount of ₹ 14,35,542/– as interest received from the head office in its profit and loss account but in the computation of income filed along with the return of income, it has reduced the above said interest income from the taxable income stating that the same is not taxable as it is received from head office (self). Assessing officer also observed that similar issue was involved in the earlier years also and he observed that the transaction is covered within the provisions of section 9 of the Act and the transaction between head office and branch is covered under Section 5 of the Act. Accordingly, he brought the above interest received from head office as taxable income of the assessee. Further, he observed that assessee has debited an amount of ₹ 1,64,68,864/– on account of interest paid to the Head Office. However in the computation of income, the assessee has added back to the total income stating that the same is not claimed a deduction in view of the fact it is a payment to self and hence no expenses incurred on amount of payment to self. However, AO observed that the dispute resolution panel in the AY 2006 – 07 has also held that the interest paid to the head office is not to be permitted as a deduction since it is payment to self. Accordingly, assessing officer treated the interest received from head office as taxable income and interest paid to head office not treated as taxable since the assessee has added back this amount to the total income, no addition is made on this amount.
4. Further, AO observed that the assessee has paid transaction charges of ₹ 4,07,474/– on Nostro Accounts. The assessee was asked to give the details of the amount of TDS u/s 195 of the Act on these expenses as it is paid outside India. In response, assessee submitted that such charges are in the nature of bank charges and are recovered directly by way of debit to the account with the banks. The transaction charges represent the business income of this bank which accrue/arise outside India. It is submitted that the transaction charges are for services rendered by the bank in the course of carrying on banking activities outside India and is therefore earned outside India and would not be chargeable to tax in India. Therefore, no tax is required to be deducted at source on the remittance made for transaction charges. The AO rejected the contention of the assessee and he observed that as per the Provisions of Section 195 of the Act, tax is to be deducted on any sum payable outside India, which is the income of a non-resident. In this case, the amount charged even income of the overseas branch and an expenditure of the assessee branch. Further he observed that section 40(a)(i) of the Act restricts such expenditure if no tax is deducted on the amount paid to non-resident. Therefore, he made the addition of ₹ 4,07,470/– under section 40(a)(i) of the Act.
5. AO observed that in return of income, vide note to the computation, assessee had claimed deduction of specifically incurred expenses by Head Office on behalf of Indian branches under section 37 of the Act. The assessee has made a claim for deduction of specifically incurred expenses by Head Office on behalf of Indian branches of ₹ 45,164/–. When the assessee was asked to justify, in response assessee submitted that expenditure of ₹ 45,614 was specifically incurred on account of travel expenses and certification fees, the travel expenses are incurred by head office staff who are visiting India and the certification fees was paid to auditors for issuance of certificate of expense incurred by Head Office. All these expenses were incurred specifically for Indian branches, these are outside the purview to Section 44C of the Act and are allowable Deduction under Section 37 of the Act. AO rejected the contention of the assessee and made the disallowance of ₹ 45,164/–.
6. Aggrieved with the above order, assessee preferred an appeal before Ld CIT(A). Before CIT(A), assessee made a detailed submission that all the above additions made were similar to the earlier assessment years and the coordinate benches of ITAT decided the above issues in favour of the assessee and filed the relevant decisions before him and also made a detailed submission relying on various decisions of the Supreme Court and jurisdictional High Court. The assessee submitted that no doubt ITAT gave the decision in favour of the assessee that the income earned from head office i.e., self and interest paid to head office also self is not chargeable to tax. However, revenue submitted before ITAT that when the income is not chargeable to tax, the provision of section 14A of the Act will be applicable. The above contention was accepted by the ITAT and decided the issue against the assessee. In this regard assessee also filed a detailed submission before Ld CIT(A) contesting that provisions of section 14A are not applicable since the provision of section 14A is applicable only on the exempt income, which is not forming part of Total Income.
7. After considering the submissions of the assessee and relying on the relevant decisions in assessee’s own case, Ld CIT(A) adjudicated the following issues by relying on assessee’s own case of assessment year 2006 – 07 in ITA No. 6800/Mumbai/2010:
a. Ld CIT(A) deleted the interest income received from head office of ₹ 14,35,542/– being income to self and holding the principle of mutuality as provided under the Act is applicable in respect of interest income earned from Head Office. For the sake of clarity, the decision of the coordinate bench is reproduced below:-
“8. We have considered the submissions of the Id. Representative of the patties and have also considered the Tribunal order doled 13.11.2013 (supra) as also the order of Special Bench order of Tribunal in the case of Sumitomo Mitsui Banking Corporation ‘supra). We observed that the Special Bench has held that Indian Branch of Foreign Bank being part of Foreign Bank was not separate and distinct taxable entity in India as per the domestic law. It was foreign Bank i.e. Head Office which was taxable entity in India. That the interest received by Indian Branch of foreign Bank from its head office, therefore, does not give rise to any income which is taxable in India because one could not make profit out of itself in view of above and allowing the decision of Special Bench of Tribunal in Sumitomo Mitsui Banking Corporation (‘supra) we delete the addition made by .40 of Rs. 24,14,208/-. on account of interest received by Indian Branch of assessee bank from its Head Office. We may stale that no deduction with respect to interest of Rs. 1,37,58,736/- paid by the assessee Branch of the assessee-company, to its Head Office is to be allowed. it is also relevant to state that assessee in Ground No I(c) has stated that 4() has made the additions of Rs. 1,37,58,736/- being interest paid by the assessee Branch to 1/cad Office which amount to double disallowance cis the assessee itself has not claimed deduction. It was also pointed out that the DRT in its direction has also directed AO to verify that The assessee itself made disallowance in the return of income filed. The ld.AR referred the assessment order and submitted that the AO while computing the income has mac/c addition/disallowance of the said amount.
9. In this regard, we direct the AO that while giving effect to this order he will comply with the directions of DRP and not make further disallowance if the assessee itself had made the said disallowance while computing its income under the Act “.
The AO is directed to follow the above observations of the Hon’ble ITAT in this year also, as the facts of the case in two years are identical.
b. Ld CIT(A) confirmed that when the income of the assessee is not taxable, the provision of section 14A is applicable for expenditure incurred on income not part of taxable income. For the sake of clarity, Ld CIT(A) has relied on the decision of coordinate bench, which is reproduced below:
23. After considering the rival submissions and perusing the relevant ‘material available on record, h is observed that a similar additional ground was raised by the Revenue in assessee’s own- case for the earlier years i.e. assessment years 1998-99, 1999-200, 2002-03 and 2003-04 and after .considering and discussing the elaborate arguments raised by both the sides on the issue of admission of the said additional ground as well as on the merit of the issue involved therein, the additional ground was admitted by the Tribunal vide its common order dated 22.03.2013 passed in ITA No. 581 & 582/Mum/2004, ITA No. 2872/Mum/2006 & 1608/Mum/2008 and the issue was also decided in principle against the assessee holding that the provisions of section 14A of the Act were applicable on the exempt interest income earned from the Head Office/overseas. branches. For the limited purpose of determining the quantum of disallowance to be made u/s. I4A, the issue was finally set aside by the Tribunal w the file of the A. O. with a direction to decide the same after giving a reasonable opportunity of being heard to the assessee. Respect/idly following the order of the Tribunal dated 22.03.2013, we admit the additional ground filed by the Revenue and deciding the issue raised therein relating to the applicability of section 14A of the Act in favour of the Revenue in principle, we restore the matter to the file of the A.O. for the limited purpose of determining the quantum of disallowance to be made u/s. 14A after giving the assessee an opportunity of being heard.”
c. Ld CIT(A) deleted the disallowance u/s 40(a)(i) by relying in assessee’s own case in ITA No. 3146/Mumbai/2009 for assessment year 2005 – 06. For the sake of clarity it is reproduced below:
“An identical issue has been decided by Hon’ble ITAT in appellant’s own case in ITA No.3146/Mum/2009 for A. Y. 2005-06 wherein vide order dated 13.11.2013 the Hon’ble /TAT have observed as under:-
“We have heard the arguments of both the sides and also perused the relevant material available on record. Ills observed that a similar issue was involved in assessee’s own case for the earlier years and the same has been decided by the Tribunal consistently in favour of the assessee in the said years including the immediately preceding year i.e. A.Y. 200405 which was decided vide order dated 13th September 2013 passed in ITA No. 1609/Mum/2008. As noted by the Tribunal in its orders, the transaction charges paid on Nostro Account were in the nature of bank charges for maintaining the accounts with banks outside India. These charges were recovered directly by way of debits to the concerned accounts of the assessee with these banks and the same represented business income of those banks which accrued/arisen outside India. As held by the Tribunal, no tax therefore was required to be deducted at source from the transaction charges paid on Nostro account and the disallowance made by the A.0 u/s. 40(a)(t) of the act was not sustainable. Respectfully, following the orders of the Tribunal on the similar issue involved in earlier years, we uphold the impugned order of the Id. CIT(A) deleting the disallowance made by the AO on account of transaction charges u/s. 40(a)(i) of the Act and dismiss ground No. 3 of Revenue’s appeal”.
ii. In view of the above observations of the Hon’ble HAT, the facts being identical, the disallowance u/s. 40(a)(i) made by the AO is directed to be deleted.”
iii. Since the grounds raised, observations of the AO and submissions of the appellant are identical to A.Y.2008-09, the AO is directed to follow the above directions in this year also and delete the additions made.
iv. Accordingly, this ground of appeal is allowed.
d. Ld CIT(A) deleted the disallowance of ₹ 45,164/- under Section 37 of the Act by relying on assessee’s own case in ITA No. 3146/Mumbai/2009 for assessment year 2005 – 06. For the sake of clarity it is reproduced below:
“17. The expenses claimed by the appellant on travelling of employees of its Head Office to monitor the operations of India branch and service fees paid to the auditors for issuance of certificate were disallowed by the A. 0. on the ground that the same were covered within the purview of section 44C of the Act and no extra/additional deduction was allowable for the said expenses under any other provisions of the Act. On appeal, the Ld. CIT”A) deleted the said disallowance made by the A. 0. following his appellate orders in assessee ‘s own case of the earlier years.
18. After considering the rival submissions and perusing the relevant material available on record, it is observed that a similar issue involved in assessee ‘s own case has been decided by the Tribunal consistently in favour of the assessee in the earlier years relying, inter alia, on the decision of Hon’ble Bombay High Court in the case of Commissioner of Income-tax Vs Emirates Commercial Bank Lid(2603) 262 ITR 55(Bom.) wherein it was held that the travelling expenses incurred by the Head Office on travelling of its own staff and directly in connection with India branch are allowable u/s. 37(l) of the Act and section 44C has no application to such expenses. The decision of the Tribunal A)’ 1996-97 deciding similar issue in favour of the assesse has also been upheld by the Hon’ble Bombay High Court vide its order di 26.02.2013 passed in Income- lax Appeal (LOD) No. 1890 of 2012. Respectfully following the decisions of the co-ordinate Bench of this Tribunal as well as that of Hon’ble jurisdictional High Court, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 4 of the Revenue’s appeal.”
8. Aggrieved with the above order, the revenue and assessee are in appeal before us raising following grounds of appeal:
Revenue’s Grounds
1) Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was correct in deleting the income received from Head Office of Rs. 14,35,542/ – being income to self and thus holding that the principle of mutuality as provided under the Act is applicable in respect of such income ?
Without prejudice to ground no. 1), if it is held that interest received by Head Office is not taxable as income of branch, provision of section 14A is applicable for expenditure incurred on income not part of taxable income.
2) Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was correct in deleting the disallowance made on account of transaction charges of Rs. 4,07,474/- due to violation made u/ s. 40(a)(i) without appreciating the law as per section 195 of the I. T. Act, 1961, taxes are to be deducted on any sum payable outside India.
3) Whether on the facts and in the circumstances of the case and in law, the id. CIT(A) was correct in holding that section 44C is not applicable and these expenses are allowable u/ s. 37(1) of the I.T. Act, without appreciating the fact that the travelling expenses are incurred on travelling of Head Office personnel, who have travelled to various Indian Branches and they are not employees of Indian Branch.”
4). The appellant craves leave to amend or alter any Ground or add a new ground which may be necessary.
Assessee’s Grounds
1. The Commissioner of Income-tax (Appeals)-15, Mumbai [hereinafter referred to as “the CIT(A)”1 erred in holding that provisions of section 14A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) are applicable with respect to interest received by the branch of the appellants from its Head Office having failed to appreciate that interest received from HO is not exempt income.
2. Without prejudice to (1) above, the CIT(A) erred in not appreciating that since the bank had not incurred any expenditure for the purpose of earning the interest amount, provisions of section 14A are not applicable.
3. The CIT(A) erred in upholding the action of the AO that transfer pricing provisions are applicable for transactions between the branch and its Head Office/overseas branches having failed to appreciate that Indian branch and the head office are one and the same persons and not separate independent enterprises.
4. The CIT(A) erred in upholding the action of the AO in accepting the addition made by the TPO of Rs.4,495 on interest received from the Head office having failed to appreciate the the fact that transaction entered into by the appellants with its HO are at arm’s length.
Your appellants crave leave to add to, alter, amend, vary, omit or substitute the aforesaid ground of appeal or add a new ground or grounds of appeal at any time before or at the time of hearing of the appeal as they may be advised.
9. The Assessee also filed Cross objection against the revenue appeal.
10. At the time of hearing, Ld AR submitted that the appeal filed by the revenue which has 3 grounds of appeal and fourth ground is general. He submitted that all the 3 grounds raised by the revenue are covered in favour of assessee, adjudicated by jurisdictional ITAT in assessee’s own case and the Hon’ble Jurisdictional High Court of Mumbai has confirmed the findings of the ITAT. Further he submitted that the revenue has filed SLP before Hon’ble Supreme Court and Hon’ble Supreme Court has dismissed the SLP filed by the revenue. The details of ground wise submission was filed by assessee in a chart form for both revenue and assessee’s appeal.
11. With regard to appeal filed by the assessee, he submitted that ground No. 1 is covered against the assessee in assessee’s own case passed by ITAT, Mumbai.
12. With regard to ground No. 2, he submitted that the disallowance of interest should be made only with reference to net interest expenditure incurred i.e., interest paid on borrowings minus taxable interest earned during the financial year. During the financial year 2006-07, the assessee has earned interest income of Rs.16,33,86,000/- and incurred interest expenditure of Rs. 12,79,38,000/-. Since there is net interest income earned by the Bank for the year under consideration, no disallowance of interest expenditure should be made u/s 14A of the Act. He also submitted that out of the total interest income credited to P&L account, interest income of Rs. 14,35,542/- pertains to interest received from Head Office/overseas branches which has been held as not taxable in India. Out of total interest expenditure debited to P&L account, interest of Rs. 164,68,864/- is paid to Head office/overseas branches and was not claimed as deduction while computing total income. He submitted that only Net interest expenditure to be considered for disallowance u/s 14A by relying on the following cases:
1. Pr. CIT vs. Nirma Credit and Capital (P) Ltd(2018) 300 CTR 286 (Guj HC)
2. Edelweiss_Financial_Services v. DCIT(2249 of 2017) (Mumbai Tribunal)
3. Morgan Stanley India Securities Private Limited(ITA Nos. 5072/M/2005 and 6774/M/2008)(Mumbai Tribunal)
4. ITO v. Karnavati Petrochem Pvt. Ltd(2228 of 2012) (Ahmedabad Tribunal)
5. Trade Apartment Ltd vs DIT(ITA No. 1277/Kol/2011)
6. DCIT v. UMIL Share & Stock Broking ServicesLimited (2018) 171 ITD 713 (Kolkata Tribunal)
13. Without prejudice to the above submission that no specific expenditure incurred by assessee for earning the exempt income, he submitted that various courts have considered 1% or 2% of exempt income as reasonable to disallow u/s 14A. He relied on the following cases:
1. CIT v. R.R. Sen & Brothers (P) Ltd (GA No. 3019 of 2012) (Calcutta High Court order dated4 January 2013)
2. DCIT v. Growmore Leasing & Investment Ltd [2017] 87 taxmann. com 294 (Mumbai – Trib.)
3. Reliance Industrial Infrastructure Limited v. Addl CIT (ITA No. 69 & 70/Mum/2009)
4. Godrej Agrovet Ltd v. ACIT (ITA No. 1629/Mum/2009)
5. Caylon Bank v. DDIT (4474 & 4649 of 2009) (Mumbai Tribunal)
6. DCIT v. Sarvodaya Sahakari Bank Limited (2014) 48 taxmann. com 82 (Ahmedabad Tribunal)
7. Godawari Power &Ispat Ltd. v. DCIT (ITA No. 365 of 2014) (Raipur Bench)
14. With regard to ground No. 3 and 4, he submitted that considering the smallness of the amount involved in disallowance, he submitted that assessee prefers not to press these grounds.
15. On the other hand, Ld DR Mr. Anand Mohan relied on the order of AO. With regard to disallowance u/s 14A, he submitted that since hon’ble ITAT relied on the assessee’s own case of AY 1998-99, ITAT has remitted the matter to AO for quantification, in this case also, it should be remitted to AO for quantification.
16. Considered the rival submissions and material on record. We notice that the grounds raised by the revenue are already adjudicated by the coordinate bench in favour of the assessee and Ld CIT(A) has only relied on these decisions and adjudicated in favour of assessee. Therefore, we do not see any reason to interfere with the findings of the Ld CIT(A). Accordingly, grounds raised by the revenue are dismissed. Assessee also filed CO against the appeal of the revenue and since we dismissed the appeal of the revenue, CO also dismissed.
17. With regard to ground no 1 raised by the assessee also decided by Ld CIT(A) relying on the decisions of the coordinate banches and accordingly, this ground also
18. With regard to ground no 2, Ld AR submitted that disallowance u/s 14A is attracted only when assessee incurs any expenditure for earning the income which is not forming part of total income. He also submitted that in this AY, assessee has not incurred any interest expenditure since assessee has earned the net interest income after setting off the interest expenditure paid to Head office. He brought to our notice case law which says that only net income should be considered for disallowance u/s 14A and futher brought to our notice case law which estimates the disallowance to 1% or 2%. We notice that in the earlier AY, the issue was remitted back to AO for quantification and it was not brought on record the consequential order passed by AO in those years. After considering the submissions, in our considered view, since the interest income earned by assessee dealing with HO i.e., self, the coordinate benches has already adjudicated that this income cannot be part of total income earned by the branch in India. Since, the interest income is not part of total income, any related expenses for earning this income has to be identified and disallowed. In the given case, it is dealing in banking business. Assessee has submitted that it has earned the net income which it has declared in the branch P&L and for computation, it has eliminated both receipt and payment of interest to the Head Office. In this AY, there is net interest income but it may not be the same situation in all the AYs. The transaction with the Head Office and Branch, which is dealing with themselves has to considered like Mutual Concerns and all the transaction with them should be eliminated for taxation purpose, not just the income but also the expenditure. When the whole transaction is eliminated with the Head Office, it is important to note that it is the main business of the assessee i.e., Banking, all the relevant expenditure for carrying out these transaction also to be eliminated. Therefore, we do not agree with the assessee that only exempt income which is not part of total income alone should be considered to disallowance u/s 14A. As per the provision of section14A at that point of time, it clearly says that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Nowhere it says it is confine to exempt income which is not form part of total income. Therefore, we are also incline to remit this issue back to AO to quantify the disallowance u/s 14A by eliminating the expenditure relevant for earning the above said income, it may not the interest expenditure alone, it will include the administrative and other expenditure. We urge the AO that the disallowance cannot be more than the income earned by the assessee as it is judicial precedent that the disallowance cannot be more than the income earned by the assessee. Accordingly the ground raised by the assessee is remitted back to AO to quantify the disallowance u/s 14A based on the above direction and direction of Coordinate Bench in the earlier AYs. Accordingly, the ground raised by the assessee is allowed for statistical purpose.
19. With regard to Ground no 3 and 4 raised by the assessee is dismissed as not pressed due to smallness of the amount involved.
20. In the net result, the appeal filed by the revenue is dismissed and appeal by assessee is partly allowed. The CO filed by the assessee is also dismissed.
