STANDARD CHARTERED BANK,MUMBAI vs. DDIT (IT) 2(1), MUMBAI

PER GAGAN GOYAL, A.M: These cross appeals by Assessee and Revenue are directed against the order of Ld. CIT (A)-XXXI, Mumbai, dated 26/03/2009 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’) for A.Y. 2000-01. The assessee has raised the following grounds of appeal:-

1.2 The learned CIT (A) ought to have appreciated that the taxes has been paid by the Master card and Visa International and hence the provisions of section 40(a) (i) of the Act cannot be invoked and accordingly disallowance should be deleted. 2. 2.1 The learned CIT(A) erred in law and on facts to treat Y2K expenditure (being staff cost, maintenance charges, and other related cost), directly attributed to the operations carried on in India, as Head Office expenses covered under section 44C of the Act.

2.2 The learned CIT(A) ought to have appreciate that expenses directly attributable to operation carried out in India cannot fall under purview of s. 44C of the Act and hence should be allowed in full. 3. 3.1 The leaned CIT(A) erred in law and on facts to disallow interest payable to head office/ overseas branch under section 40(a)(i) of the Act on the ground of no withholding of tax.

3.2 The learned CIT (A) ought to have considered that the interest payable is not taxable in the hands of the head-office and hence section 40(a) (i) of the Act is not applicable and accordingly disallowance should be deleted.

Page 2 of 72

4.2 The learned CIT (A) ought to have considered that the interest income is not taxable in the hands of the head-office accordingly no tax should be levied in the hands of the head- office. 5. 5.1 The learned CIT (A) erred in law and on facts to disallow loss of Rs. 5, 48, 60,450/- on outstanding forward foreign exchange contracts.

5.2 The leaned CIT (A) ought to have allowed the loss since the same were in accordance with the FEDAI guidelines and mercantile system of accounting regularly· employed by the Appellant and accordingly disallowance should be deleted.

6.2 The learned CIT (A) ought to have allowed the said expenditure as revenue in nature and accordingly disallowance should be deleted. 7. 7.1 The learned Commissioner of Income Tax (Appeals) (CIT (A)) erred in assuming that appellant had incurred expenditure to earn tax free income, and accordingly calculating disallowance u/s. 14A of the Act and as per Rule 8D at Rs. 1,01, 20,545/-.

7.2 The learned CIT (A) ought to have considered the appellant's submission that the expression "in relation" to" u/s. 14A of the Act means dominant and immediate connection, as has been judicially defined by the Supreme Court in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of Gwalior & Others v UOI (1971) 1 SCC '85, and Appellant had not incurred any expenditure in relation to exempt income.

7.3 The learned CIT (A) ought to have not disallowed the expenditure u/s. 14A of the Act and accordingly disallowance should be deleted. 8. 8.1 The CIT(A) erred in law in confirming the action of the Assessing officer in not allowing set off of brought forward loss against income of the Head Office.

8.2 The learned CIT(A) ought to have appreciated that the assessment is completed in the name of Standard Chartered Bank as a non resident assessee and hence brought forward losses ought to have been set off against the income of Standard Chartered Bank, including the income of head office.

Page 3 of 72

9.2 The learned CIT (A) failed to appreciate that:  Section 90(2) and Circular No. 333 dated April 12, 1982 issued by the Central Board of Direct Taxes (CBDT) provides that the provisions of the Act shall apply to the assessee, who is otherwise eligible for double tax treaty relief only to the extent that they are more beneficial to him.  The DTAA specifically lays down the method determination of profits of the PE and therefore, it overrides the provisions of Section 1I5JA of the Act (which stipulates the presumptive rate of profits) and to which therefore, no recourse need to be had in view of the CBDT CircularNo.333 referred to above.  Section 115JA (4) of the Act provides that, save, as otherwise provided in Section 115JA of the Act, all other provisions of the Act shall apply to every company mentioned in the said section. It therefore, appears that there is no intention of the Legislature to specifically override the provisions of Section 90 of the Act and therefore, by implication, the provisions of applicable tax treaties by the introduction of Section 115JA of the Act. 9.3 The learned CIT (A) ought to have not applied the provisions of section 115JA of the Act as they are not attracted to the facts of the case.

10.2 The CIT (A) failed to appreciate that  The decision of the Supreme Court in the case of Goetz (India) Ltd. v CIT (2006) 284 ITR 323 (SC) can be applied only when the claim for deduction was made first time during the course of assessment. In the present case, the Appellant had already claimed deduction for Head Office Expenditure in the Return of Income, but the same was restricted u/s. 44C. Further the said decision of Supreme Court deals with the power of the Assessing officer and not that of Appellant Authority.  The said claim was revised during the course of appellant proceeding in view of the decision of Mumbai tribunal in the case of Metchem Canada Inc. vis. DCIT [284 ITR (AT.) 196], wherein the Hon'ble Tribunal, after referring to Article on non-discrimination, has held that provisions of section 44C will have no application. The tax authorities are

Page 4 of 72

under an obligation to compute the income in accordance with the law as interpreted by the judicial authority. ·

10.3 The learned CIT (A) ought to have not restricted the claim of head-office expenses to 5% and accordingly should have allowed the head-office expenses in entirety.

Additional Grounds Additional Ground No. 1A

The Interest on income-tax refund ought to be excluded from taxable income and should be taxed, if necessary, only when the issue of income-tax refund reaches finality.

Additional Ground No. 1B

In addition, and without prejudice to the Additional Ground 2A above, in case it is held that interest on income-tax refund is taxable, it should be taxed only at the rate of 10% in accordance with provision of Article 12 of the Tax Treaty between India and United Kingdom and not at the maximum marginal rate tax.

2.On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in allowing the additional claim of direct expenses incurred outside India of Rs.13,03,60,455/-, contrary the decision of the Hon'ble Supreme Court in its judgment in the case of Goetze (India) Ltd. -Vs- CIT {(2006)284 ITR 323 (SC)} wherein it is held that the Assessing Officer has no power to entertain a claim made otherwise than by filing a revised return of income.

Page 5 of 72

premises of Rs.7,14,62,191/- claimed by the assessee. The ld. CIT (Appeals) ought to have upheld the order of the Assessing Officer.

4.On the facts and in the circumstances of the case and in law, the Id. CIT (Appeals) erred in directing that 75% of the expenses of Rs.7,14,62,191/- {incurred on refurbishment of leasehold premises} be treated as revenue expenses and 25% of the expenditure be considered as capital expenses. There is no provision under the Act to estimate certain percentage of the total expenditure related to a particular asset as revenue expenditure or capital expenditure. The expenditure incurred in relation to any particular asset is either entirely on capital account or on revenue account.

5.On the facts and in the circumstances of the case and in law, the ld. CIT (Appeals) erred in directing deletion of Rs. 79,92,431/- treated as indirect income earned by the Head Office by relying on submissions admitted in contravention to Rule 46A of the Income-tax Rules, 1962.

6.On the facts and in the circumstances of the case and in law, the Id. CIT (Appeals) erred in directing deletion of disallowance {made in accordance with CBDT's Instruction dated 23.01.2001} of extraordinary cost of Rs. 18,66,82,000/- being payment to LIC towards cost of annuity for payment of monthly pension to bank retirees under 'Early Separation Scheme'.

Page 6 of 72

The Appellant has filed the legal and factual paper books with respect to both the appeals (i.e., the Appellant’s as well as the department’s appeal) on 12 October 2022.

The Appellant submits the brief synopsis of facts and submission on the grounds of appeal raised by the Appellant / Department before the Hon’ble ITAT for A.Y. 2000- 01 as under: Bank’s appeal no. 3458/Mum/2009

Ground No. 1: Payment to Master card International Incorporated, USA (‘MasterCard’) /Visa International Services Association, USA *‘Visa International’+ 1.1 Ground The learned Commissioner of Income Tax (Appeals) (CIT (A)) erred in law and on facts to confirm the disallowance of payments made to Master Card and Visa International. The learned CIT (A) ought to have appreciated that the taxes has been paid by the Master card and Visa International and hence the provisions of section 40(a)(i) of the Act cannot be invoked and accordingly disallowance should be deleted.

1.2 Brief facts: Page 7 of 72

During the year consideration, the Appellant has made payment to Master Card and Visa International on which tax was not deducted by the Appellant on the contention that the income of Master Card and Visa International is not taxable in India due to following:

 Visa International and Master Card does not have a PE in India. Visa International has only a liaison office in India. As per Article 5 of the India-US tax treaty, the term ‘PE’ shall not include the maintenance of fixed place of business solely for the purpose of collating / supplying information.  Even otherwise, Visa International and Master Card are not profit making bodies. Both these entities are acting on the principal of mutuality. It has been judicially recognized that surplus accruing to a mutual concern cannot be regarded as income.  Under section 195(1) of the Act, the person responsible for paying is required to deduct tax only if the sum is chargeable under the provision of the Act.

1.3 AO’s contention (Page2, Para 3):

 The AO relied on the Appellant’s own case. Assessment order passed u/s. 143(3) for the A.Y. 1996-97 and held that the services rendered by Visa International and Master Card to the Appellant are technical services in nature and hence the Appellant was liable to deduct tax on the same. Since the Appellant failed to deduct tax u/s. 195 of the Act, the payment made to Visa International and Master Card is disallowed under section 40(a) (i) of the Act.

Page 8 of 72

 Also, the AO mentioned that in case of the Appellant, the issue of TDS on payments to Visa International and MasterCard has been examined in detail by DCIT in detail in his order u/s. 201(1) of the Act and has held that income of Visa International and MasterCard is taxable in India. Therefore, in absence of TDS, the sum is disallowed under section 40(a) (i) of the Act.

1.4 CIT’s decision (Page 3, para 1.3.1) Visa International and Master Card have gone before competent authority under Mutual Agreement Procedure (‘MAP’), wherein it was ruled that they are liable to pay tax, hence, the Appellant was required to deduct tax at source on payments made to Visa International and Master Card.

Further, the payment of taxes by Visa International and Master Card has not been made during the A.Y. under consideration, hence same also cannot be allowed as deduction during the year under consideration.

1.5 Appellant’s submissions  The Appellant submitted the copy of the order under section 154 of the Act, dated 29 August 2005, in case of MasterCard for A.Y. 2000-01 (copy enclosed at page 6 of the Bank’s appeal Factual paperbook) and copy of PWC certificate, dated 10 November 2008, in case of Visa International (copy enclosed at page 9 of the Bank’s Appeal factual paperbook) confirming the details of taxes paid by Visa International and MasterCard.

Page 9 of 72

 Further, the Appellant submitted that this issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the assessment year 1999-2000, wherein the Tribunal followed the decision of Hon’ble Mumbai ITAT in the case of Celltick Mobile Media (India) (P.) Ltd., vs. DCIT[2021] (188 ITD 883) (Copy of the decision is enclosed in the Bank’s appeal legal paperbook at page no.49), wherein it was held that the amendment in the provision of section 40(a)(i) of the Act, which states that no disallowance u/s. 40(a)(i) of the Act is warranted in the hands of payer of income where payee has already discharged the tax liability on the said income, is retrospective in nature (copy of A.Y. 1999-00 ITAT order dated 17 October 2022 was handed over during the hearing on 27 September 2023- refer page 27, para 37) which read as under:

“37. From the above decision of the Coordinate Bench it is clear that the amendment provision u/s. 40(a) (i) of the Act is retrospective in nature. Therefore, the provisions of section 40(a) (ia) of the Act are equally applicable u/s.40 (a) (i) of the Act, with that above discussion we are inclined to accept the first proposition made by the assessee and accordingly, Ground No.3 raised by the assessee is allowed and we do not wish to consider the proposition No. 2 raised by the assessee at this point of time.”

In view of the above, the Appellant submits before the bench to follow its own case, ITAT order for A.Y. 1999-00, dated 17 October 2022, and delete the disallowance of INR 4,91,19,238/- made under section 40(a)(i) of the Act. Revenue is not able to produce any argument to controvert the facts of the ground raised

Page 10 of 72

by the assessee and also not able to controvert the stand taken by the coordinate bench in assessee’s own case. Hence, in the given situation respectfully following the decision of coordinate bench in assessee’s own case for A.Y. 1999-00, dated 17 October 2022, ground raised by the assessee is allowed.

Ground No. 2: Y2K Expenses 2.1 Ground 2.1 The learned CIT(A) erred in law and on facts to treat Y2K expenditure (being staff cost, maintenance charges, and other related cost), directly attributed to the operations carried on in India, as Head Office expenses covered under section 44C.

2.2 The learned CIT(A) ought to have appreciate that expenses directly attributable to operation carried out in India cannot fall under purview of s. 44C and hence should be allowed in full.”

2.3 Brief facts: During the year, the Appellant incurred substantial expenditure on work performed to ensure that its computer systems were 2000 compliant (‘Y2K expenditure'). The expenditure was attributable to the review, testing and modification of the Appellant’s computer system. The expenditure comprises staff cost, expenditure related to the premises, maintenance charges. Etc. These expenditure incurred outside India is related to the operations of Indian business and the same is certified by the external Auditors.

2.4 AO’s contention (Page14):

Page 11 of 72

The AO held that the expenses are in the nature of royalty, on which the Appellant has not deducted tax u/s. 195 of the Act and hence the expenditure is disallowed u/s. 40(a) (i) of the Act.

2.5 CIT’s decision (page 11, para 5.3.2)  The CIT(A) held that the expenditure pertaining to salaries and travel cost of employees of Head office attributable to India operations cannot be considered as payment for the use of any copyright nor can it be considered as payment for the use of industrial, commercial or scientific equipment. Hence, such expenditure does not fall within the definition of 'royalties' under Article 13 of DTAA.

 Further, by incurring such expenditure no technical knowhow was made available to the Appellant and for the same it will not fall within the definition of fees for technical services. Accordingly, the provisions of section 40(a) (i) of the Act cannot be invoked.

 However, the expenses are in the nature of head office expense and hence would fall u/s. 44C of the Act.

2.6 Appellant’s submissions  The Appellant submits that this issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the A.Y. 1999-2000, wherein the Tribunal followed its order for the A.Y. 1997-98 and dismissed the ground raised by the Revenue (Copy of A.Y.

Page 12 of 72

1999-00 ITAT order was handed over during the hearing on 27 September 2023- refer Page 43, para 34) which reads as under:

“34. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 1997-98 and also following rule of consistency, we dismiss the grounds raised by the revenue.”

 Also, copy of relevant extract of the Hon’ble CIT (A) order for the A.Y. 1999-00 was handed over to the Hon’ble members during hearing on 27 September 2023, highlighting that the Y2K expenditure was also there in the A.Y. 1999-00 favorable order.

In view of the above, the Appellant submits before the Hon’ble ITAT to follow the own case ITAT order for A.Y. 1999-00 dated 27 September 2022 and allow the deduction of INR 14,35,16,865/-. Revenue is not able to produce any argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken by the coordinate bench in assessee’s own case. Hence, in the given situation respectfully following the decision of coordinate bench in assessee’s own case for A.Y. 1999-00, dated 17 October 2022, ground raised by the assessee is allowed.

Page 13 of 72

Ground No. 3: Interest paid to Head office / Overseas Branches

3.1 Ground

(a) The leaned CIT(A) erred in law and on facts to disallow interest payable to head office/ overseas branch under section 40(a)(i) of the Act on the ground of no withholding of tax. (b) The learned CIT (A) ought to have considered that the interest payable is not taxable in the hands of the head-office and hence section 40(a)(i) of the Act is not applicable and accordingly disallowance should be deleted.

3.2 Brief Facts  During the year under consideration, the Appellant had paid interest of INR 6, 66,000/- to Head Office (HO)/ Overseas Branch (OB) on overdrawn Nostro accounts.  As the interest paid by the Appellant to HO / OB is not taxable in India, the Appellant had not deducted tax at source while crediting/paying the interest to HO / OB.

3.3 AO’s contention (Page 21, para 9) The AO disallowed the interest payment on the ground that interest payable to HO/ OB is taxable in India on which the Appellant was required to deduct tax under section 195 of the Act. Since the Appellant had not deducted tax under section 195 of the Act, the same is disallowed under section 40(a) (i) of the Act.

Page 14 of 72

3.4 CIT(A)’s Decision (Page 22, para 9.7) The interest payable to HO/OB is taxable in India on which the SCB was required to deduct tax u/s 195. Since SCB has failed to deduct tax u/s 195 of the Act, the expense is not allowable u/s. 40(a) (i) of the Act

3.5 Appellant’s submissions The Appellant submits that this issue is covered in favor of the Appellant by the decision of the Mumbai Special Bench of the Tribunal in case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66) (SB-Mumbai ITAT), wherein the Hon’ble Special Bench of the Tribunal has inter alia held that since the interest payment by branch to HO is in the nature of payment to self, (the HO and branch being one legal entity), the same should not be chargeable to tax in the hands of the HO under the provisions of the Act. It was also held that this interest cannot be taxed in the hands of the HO / overseas branch of the Bank even under the provisions of the tax treaty and hence the same should not be subject to TDS / consequent disallowance under section 40(a) (i) of the Act. (Copy enclosed at page 134 of the Bank’s Appeal, legal paperbook), which read as under:

“88. Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of domestic law as well as that of the treaty as discussed above, we are of the view that although interest paid to the head office of the assessee bank by its Indian branch which

Page 15 of 72

constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of article 7(2) & 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law. Even otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue. This position applicable in the case of interest paid by Indian branch of a foreign bank to its Head Office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the Head Office. At the time of hearing before us, the learned representatives of both the sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee Bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of section 195 of the Act would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, the question of disallowance of the said interest by invoking the provisions of section 40(a)(i) of the Act does not arise. Accordingly we answer question No.1 referred to this Special Bench in the negative i.e. in favour of the assessee and question No.2 in affirmative i.e. again in favour of the assessee.

Page 16 of 72

Page 17 of 72

considered by us. We take this opportunity to place on record our appreciation for the assistance provided by the learned representatives of both the sides by making elaborate submissions which has helped us to analysis the legal position emanating from the interpretation of the relevant provisions of the domestic law as well as the relevant tax treaties and apply the same to the facts of the cases before us. 91. The matter will now go before the respective Division Bench for disposing off the appeals keeping in view our decision rendered above.”

In view of the above, the Appellant submits before the Hon’ble ITAT to allow the deduction of interest paid of INR 6, 66,000/- to HO/OB in line with the decision of the Mumbai Special Bench in case of in case of Sumitomo Mitsui Banking Corporation (supra). Further, the Appellant submit that Special Bench decision in case of Sumitomo (supra) is not only dealing with India-Japan Tax Treaty but also dealt with India-Netherland Tax Treaty. Your Honour will appreciate that the language of India-UK Tax Treaty (applicable in case of the Appellant) is in line with India-Netherland Tax Treaty. Revenue is not able to produce any argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken by the special bench in the case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66) (SB-Mumbai ITAT). Hence, in the given situation respectfully following the decision of special bench (supra), ground raised by the assessee is allowed.

Page 18 of 72

Ground No. 4: Interest income of Head Office / Overseas Branch 4.1 Ground: (a) The leaned CIT(A) erred in law and on facts to hold that interest payable by branch to head office is subject to tax in India in the hands of head office. (b) The learned CIT (A) ought to have considered that the interest income is not taxable in the hands of the head-office accordingly no tax should be levied in the hands of the head-office.

4.2 Brief Facts  During the year under consideration, the Appellant had paid interest of INR 6, 66,000/- to Head Office (HO)/ Overseas Branch (OB) on overdrawn Nostro accounts.  As the interest paid by the Appellant to HO / OB is not taxable in India, the Appellant had not deducted tax at source while crediting/paying the interest to HO / OB.

4.3 AO’s contention (Page 24, para 10): The Ld. AO relied on the circular No. 740 dated 17 April 1996 and the commentary of Klaus Vogel and taxed the interest paid by the Appellant to HO/OB and held that the said income is taxable as per Article 12 of the tax treaty between India and UK.

4.4 CIT(A)’s Decision (Page 24, para 10.3)

Page 19 of 72

The Hon’ble CIT(A) relied on circular 740 dated 17 April 1996 and decision of ITAT in case of Dresdner Bank AG vs. Addl. CIT (2007)(108 ITD 375) and held that interest earned by the HO/OB is taxable in India.

4.5 Appellant’s submissions The Appellant submits that this issue is covered in favor of the Appellant by the decision of the Special bench of the Mumbai Tribunal in case of Sumitomo Mitsui Banking Corporation vs. DDIT (2012) (136 ITD 66). The Hon’ble Tribunal has inter alia held that since the interest payment by branch to HO is in the nature of payment to self, (the HO and branch being one legal entity), the same should not be chargeable to tax in the hands of the HO under the provisions of the Act. It was also held that this interest cannot be taxed in the hands of the HO / overseas branch of the Bank even under the provisions of the tax treaty. (The relevant portion of Mumbai Special Bench order is already reproduced at para 3.5 of Ground 3 above.)

In view of the above, the Appellant submits before the Hon’ble ITAT to delete the addition of interest income of INR 6, 66,000/- in the hands of HO/OB in line with the decision of special bench in case of in case of Sumitomo Mitsui Banking Corporation (supra). This issue has already been decided in favour of assessee relying on the principle laid down by Sumitomo Mitsui Banking Corporation (supra), we do not see any force in the arguments of the revenue and based on our findings in ground no. 3 (supra), this ground of appeal raised by the assessee is also allowed.

Page 20 of 72

Ground No.5: Loss on unmatured forward contracts 5.1 Ground 5.1 The learned CIT (A) erred in law and on facts to disallow loss of Rs. 5, 48, 60,450/- on outstanding forward foreign exchange contracts.

5.2 the leaned CIT (A) ought to have allowed the loss since the same were in accordance with the FEDAI guidelines and mercantile system of accounting regularly· employed by the Appellant and accordingly disallowance should be deleted.” 5.2 Submission

The Appellant submits that this loss on unmatured forward contract of A.Y. 2000- 01 has already been allowed by the Learned AO in the assessment order of A.Y. 2001-02 and hence, the Appellant does not wish to press this ground in A.Y. 2000- 01. As this ground of appeal not pressed effectively before us based on its own assessment findings, same is dismissed as not pressed.

Ground No. 6: Expenditure on refurbishment of premises

6.1 Ground 6.1 The learned CIT (A) erred in estimating 25% of Rs. 7, 14, 62,191/-, being the expenditure incurred on refurbishment of leasehold premises, as capital in nature. Accordingly, expenditure of Rs. 1, 78, 65,548/- was disallowed as capital expenditure on which depreciation at the eligible rate was allowed.

Page 21 of 72

6.2 the learned CIT (A) ought to have allowed the said expenditure as revenue in nature and accordingly disallowance should be deleted”

6.2 Brief Facts  During the F.Y. under consideration, the Appellant has incurred expenditure on renovation of its various leasehold premises. The expenses incurred are mainly on account of interior works, electrical works, cabling and wiring, carpets, etc.

 These expenses have been accounted as deferred revenue expenditure and amortized over a period of three years in the books of account. However, in the computation of income, the entire expenses were claimed as deduction.

6.3 AO’s contention (Page 28) The AO disallowed the entire expenses holding that the expenditure is incurred for creating assets of enduring benefits and the same cannot be allowed as revenue expense. Also, by amortising these expenses in the books, the Appellant itself is admitting the fact that these expenses are creating assets of enduring benefit and not revenue in nature.

6.4 CIT(A)’s decision(Page 28, para 12.3) The CIT(A) followed its decision the decision of predecessor CIT(A) in the Appellant’s own case of for the earlier years, wherein 25% of the expenditure incurred were held to be capital nature and balance 75% expenses is allowed as

Page 22 of 72

revenue deduction. Also, depreciation was allowed by the Hon’ble CIT (A) on 25% expenses characterized as capital in nature.

6.5 Appellant’s submissions  The Appellant submits that this issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the assessment year 1999-2000, wherein the Tribunal following the decision of Hon’ble Supreme Court in the case of Madras Auto Service Pvt. Ltd. [233 ITR 468] (Copy of decision is enclosed in the Bank’s legal paper book at page 305) allowed the deduction for the entire refurbishment expenses (Copy of A.Y. 1999-00 ITAT order was handed over during the hearing on 27 September 2023- refer page 9, para 13 and 14) which reads as under:

“13. Considered the rival submissions and material placed on record, we observed that Hon'ble Supreme Court in the case of Madras Auto Services Pvt. Ltd., (supra) on similar issue adjudicated in favour of the assessee. While holding so Hon'ble Supreme Court held as under: -

“The assessee is a limited company carrying on the business of sale of motor parts. Its head-office is at Madras. It has a branch at Bangalore. Under an agreement of lease dated 1st of February, 1966, the assessee obtained from M/S. Hajira Comer and Mrs. Rabia Bai Razack a lease of premises Nos. 64 and 64/1 situated at Sri Narasimharaja Road, Bangalore for a period of 39 years commencing from 1st of January, 1966. Under the terms and conditions of the lease, the lessee (that is to say the assessee), had the right to demolish at its

Page 23 of 72

own expense the existing premises and appropriate to itself all the material thereof without paying to the lessors any compensation and construct a new building thereon to suit the purpose of their business as per the plan approved by the lessors. Under Clause 2 of the lease deed, the lessee was required to pay a rent of Rs. 1000/- per month for the first fifteen years, Rs. 1500/- per month for the next ten years, Rs. 1650/- per month for the next ten years and Rs. 2000/- per month for the remaining years. The lease deed further provided that the new construction shall, right from the commencement of the work, be the property of the lessors; and upon completion of the work of construction the lessee will have only the right to be a tenant for a period of 39 years under the existing lease subject to the payment of rent and observation of other terms and conditions of the lease. The lessee shall not be entitled under any circumstances for any compensation whatsoever on account of its putting up the new construction in the place of the old.

Acting under the lease agreement the assessee invested a sum of Rs. 1, 62, 835/- in the previous year relevant to the assessment year 1968/69 and Rs. 50, 937/- during the succeeding year in constructing a new building on the said land. The assessee claimed before the Income-tax Officer the expenditure of the said sums of Rs. 1, 62,835/- and Rs. 50, 937/- in the relevant assessment years as capital loss. In the alternative, the assessee claimed depreciation on capital investment; in the alternative, the assessee claimed deduction of the payments as business expenditure or as extra rent for the lease. Ultimately, the Income-tax Tribunal has held that the expenditure of the said two amounts for the construction of a new building is in the nature of business expenditure for

Page 24 of 72

proper carrying on of the business of the assessee. The Tribunal has, therefore, treated these amounts as revenue expenditure and allowed a deduction in that regard to the assessee. The claim of the department that the expenditure was capital expenditure and was, therefore, not deductible was negatived by the Tribunal.

On the application of the department the Tribunal referred the following question to the High Court for its determination under Section 256(1) of the Income-tax Act, 1961:

"Whether on the fact and in the circumstances of the case the Appellate Tribunal was right in holding that the building expenses of Rs. 1,62,835/- are not liable to be taken into account as deductible expenditure in arriving at the real income of the assessee for the assessment year 1968-69?"

For the next assessment year, a similar question was raised in regard to the second sum of Rs. 50,937/-The High Court has, by the impugned judgment, upheld the view of the Tribunal and has held that the two amounts constitute revenue expenditure for the concerned assessment years and are deductible in order to arrive at the income of the assessee for the said assessment years. The present appeals are filed by the department from the impugned judgment of the High Court.

The assessee in the present case has spent the amounts in question in order to construct a new building after demolishing the old building. The new building,

Page 25 of 72

however, from inception was to belong to the lessor and not to the assessee. The assessee, however, had the benefit of the existing lease in respect of the new building at the agreed rent for a period of 39 years. The Tribunal has found, as a fact, that the rent as stipulated in the lease was extremely low. It rental rate for the area in which the building was situated was much higher and would be not less than Rs. 12,000/- as against which the maximum rent the assessee would be paying was only Rs. 2,000/-. This concessional rent was on account of the fact that the new building was constructed by the assessee at its own cost.

In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was saving in revenue expenditure in the form of rent. Whatever, substitutes for revenue expenditure, should normally be considered as revenue expenditure. Moreover, assessee in the present case did not get any capital asset by spending the said amounts. The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the

Page 26 of 72

assessee obtained in a commercial sense, expenditure appears to be revenue expenditure.

The test for distinguishing between capital expenditure and revenue expenditure in our country was laid down by this Court in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax, West Bengal (27 ITR 34). In that case, the appellant-company had acquired from the Government of Assam lease of certain lime-stone quarries for a period of 20 years for the purpose of manufacture of cement. The lessee had, inter alia, agreed to pay an annual sum during the whole period of the lease as a protection fee and in consideration of that payment, the lessor undertook not to grant to any person any lease, permit or prospecting license for lime-stone. This Court examined tests laid down in various cases for distinguishing between capital expenditure and revenue expenditure. One of the standard tests now in use was laid down in the case of Atherton v. British Insulated and Helsby Cables Ltd. ([1925] 10 Tax Cases 155). It said: "When an expenditure is made, not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as properly attributable not to revenue but to capita." Whether by spending the money any advantage of an enduring nature has been obtained or not will depend upon the facts of each case. Moreover, as the above passage itself provides, this test would not apply if there are special circumstances pointing to the contrary. This Court in the above case summarised the tests as follows :( p. 44):

Page 27 of 72

Relying upon the second test enumerated above, learned counsel for the appellant has submitted that the assessee got enduring benefit of a capital nature by spending the amount because the assessee obtained a new building for a period of 39 years. The difficulty, however, in the present case, arises from the fact that this building was never to belong to the assessee. Right from inception, the building was of the ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view,

Page 28 of 72

therefore, the assessee got the benefit of reduced rent. The High Court has, therefore, rightly considered this as obtaining a business advantage. The expenditure is, therefore, to be treated as revenue expenditure.

Although there are a number of cases dealing with this question, we will limit ourselves to examining a few cases where the assessee, by expending money, created and asset of an enduring nature. However, the asset so created did not belong to the assessee. In such a situation the courts have held that the expenditure was for better carrying on of the business of the assessee and could be allowed as revenue expenditure, looking to the circumstances of each of those cases. Thus in Lakshmiji Sugar Mills Co. P. Ltd. v. Commissioner of Income-tax, New Delhi (82 ITR 376) the assessee company was carrying on the business of manufacture and sale of sugar. It paid to the Cane Development Council certain amounts by way. of contribution for the construction and development of roads between various sugarcane-producing centers and the sugar factories of the assessee. The roads remained the property of the Government. This Court held that the expenditure was not of a capital nature and had to be allowed as an admissible deduction in computing the profits of the assessee's business. The expenditure was incurred for the purpose of facilitating the running of the assessee's motor vehicles and other means employed for transportation of sugarcane to its factories.

In the case of L.H. Sugar Factory and Oils Mills (P) Ltd. v. Commissioner of Income-tax, U.P. (125 ITR 293), the assessee was carrying on the business of manufacture and sale of sugar. It has its factory in U.P. The assessee paid a

Page 29 of 72

contribution towards meeting the cost of construction of roads in the area around its factory under a sugarcane development scheme. The question was whether this amount was deductible in computing the assessee's profits. The Court held that it was. Because although the advantage secured was of long duration, it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee; nor was there any addition to or expansion of the profit making apparatus of the assessee. The amount was contributed for the purpose of facilitating the business of the assessee and making it more efficient and profitable. It was, therefore, revenue expenditure.

In the case of Commissioner of Income-tax, Bombay City- I v. Associated Cement Companies Ltd. (172 ITR 257) the respondent-company entered into an agreement to supply water to the municipality and provide water pipelines as also to supply electricity for street lighting and put up a transmission line for that purpose. The assessee also agreed to concrete the main road from the factory to the railway station. The amounts expended for these purposes were held to be revenue expenditure since the installations and accessories were the assets of the municipality and not of the assessee. The expenditure, therefore, did not result in creating any capital asset for the company. The advantage secured by the respondent was immunity from liability to pay municipal rates and taxes for a period of 15 years. This Court said that had these liabilities been paid, the payments would have been on revenue account. Therefore, the advantage secured was in the field of revenue and not capital.

Page 30 of 72

In the case of Commissioner of Income-tax v. Bombay Dyeing and Manufacturing Co. Ltd. (219 ITF 521) the company contributed to the State Housing Board certain amounts for construction of tenements for its workers. The tenements remained the property of the Housing Board. It was held that the expenditure was incurred wholly and exclusively on the welfare of the employees and, therefore, constituted legitimate business expenditure. As the assessee company acquired no ownership rights in the tenements, this Court said that the expenditure was incurred merely with a view to carry on the business of the company more efficiently by having a contented labour force.

All these cases have looked upon expenditure which did bring about some kind of an enduring benefit to the company as revenue expenditure when the expenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expense has been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure. In the premises, the appeals are dismissed with costs.”

Page 31 of 72

In view of the above, the Appellant submits before the Hon’ble ITAT to follow the own case ITAT order for A.Y. 1999-00 dated 27 September 2022 and allow the entire amount incurred on refurbishment of premises. Revenue is not able to produce any argument to controvert the facts of the ground raised by the assessee and also not able to controvert the stand taken by the coordinate bench in assessee’s own case. Hence, in the given situation respectfully following the decision of coordinate bench in assessee’s own case for A.Y. 1999-00, dated 17 October 2022, ground raised by the assessee is allowed.

Ground No. 7: Expenses attributable to exempt income

7.1 Ground “7.1 The learned Commissioner of Income Tax (Appeals) (CIT (A)) erred in assuming that appellant had incurred expenditure to earn tax free income, and accordingly calculating disallowance u/s. 14A as per Rule 8D at Rs. 1,01, 20,545/- .

7.2 The learned CIT (A) ought to have considered the appellant's submission that the expression "in relation" to" u/s. 14A of the Act means dominant and immediate connection, as has been judicially defined by the Supreme Court in the case of H.H. Maharajadhiraja Madhav Rao Jivaji Rao Scindia Bahadur of

Page 32 of 72

Gwalior & Others v UOI (1971) 1 SCC '85, and Appellant had not incurred any expenditure in relation to exempt income. 7.3 the learned CIT (A) ought to have not disallowed the expenditure u/s. 14A of the Act and accordingly disallowance should be deleted.” 7.2 Brief facts  During the year under consideration, the Appellant had claimed the total interest received on tax free securities of INR 21,64,09,575/- as exempt u/s. 10(15)(iv) of the Act and divided received of INR 19,17,247/- as exempt under section 10(34) of the Act.

 The Appellant has not incurred any expenses that could be directly attributable to earning tax free income. 7.3 AO’s contention (page 30, para 13)  The Appellant cannot take exemption of gross receipts as well as claim deduction of the expenditure incurred  The Appellant is involved in various business activities which are separately identifiable  What is exempt u/s. 10 of the Act is the income and not the gross receipt  Unintended benefit of double deduction cannot be allowed to the Appellant on the plea that separate accounts for various ventures are not prepared and the business is interlinked.  The AO disallowed the INR 1,40,30,575/- as being expenditure attributable to earning the tax free income on the basis of ratio of the total interest

Page 33 of 72

expended and indirect expenditure to total interest earnings of the Appellant for the year. 7.4 CIT(A)’s decision (Page 35, para 15.3.1) Relying on the below decisions, the Ld. CIT (A) held that it may be impossible that the Appellant has not incurred any expenditure to the earn tax free income and therefore confirmed the disallowance made by the AO. However, the Ld. CIT(A) restricted the disallowance to INR 1,01,20,545/- as per Rule 8D of the Income-tax Rules, 1962 (‘the Rules’) as against INR 1,40,30,575/- made by the AO.  Citicorp Finance (India) Ltd [2007] (108 ITD 471) (Mumbai ITAT)  Gujarat Gas Financial Services Ltd v ACIT [2008] (14 DTR 481) (Ahmadabad SB)  ITO v. Daga Capital Management (P) Ltd 119 TTJ 289 (Mumbai SB)

7.5 Appellant’s submissions  The Appellant submits that this issue is covered in favor of the Appellant by a decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the A.Y. 1999-2000, wherein the Tribunal followed the Appellant’s own case Tribunal order of A.Y. 1997-98 and dismissed the ground raised by Revenue (Copy of A.Y. 1999-00 ITAT order was handed over during the hearing on 27 September 2023-refer page 8, para 10) which reads as under:

Page 34 of 72

“10. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 1997-98, we allow ground raised by the assessee”

 Further, the Appellant submits that the Hon'ble Supreme Court in the case of South Indian Bank Ltd [2021] (130 taxmann.com 178) held that disallowance u/s. 14A of the Act is not warranted for investments made in tax-free bonds/ securities which yield tax-free dividend and interest in those situation wherein interest free own funds available to the assessee exceeded their investments (Copy of decision is enclosed in the Bank’s Appeal legal paperbook - refer para 27, page 381), which reads as under:

“27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favoring the assesses”

In view of the above, the Appellant submits before the Hon’ble ITAT to follow the own case ITAT order for A.Y. 1999-00, dated 27 September 2022, and delete the disallowance of INR 1,01,20,545/- made by the Ld. CIT(A).

Page 35 of 72

Without prejudice to the above, if the Hon’ble ITAT do not agree with the above plea of the Appellant, it is submitted that the disallowance be restricted to 1% of the exempt income. We have gone through the entire material and case laws relied upon. Assessee’s own case pertains to A.Y. 1997-98 and A.Y. 1999-00, as there is no change in the facts of the case and law laid down by the Hon’ble Apex court in the case of South Indian Bank Ltd [2021] (130 taxmann.com 178) is squarely applicable to the assessee, we agreed with the plea taken by the assessee and to be just and fair in the matter, disallowance is restricted upto 1% of the exempted income. Ground raised by the assessee is partly allowed.

Ground No. 8: Set off of brought forward losses against income of Head Office

8.1 Ground “8.1 The CIT(A) erred in law in confirming the action of the Assessing officer in not allowing set off of brought forward loss against income of the Head Office.

8.2 The learned CIT(A) ought to have appreciated that the assessment is completed in the name of Standard Chartered Bank as a non resident assessee and hence brought forward losses ought to have been set off against the income of Standard Chartered Bank, including the income of head office.

8.2 Brief facts:  The AO made an addition of INR 41,69,17,532/- alleging the following income as taxable in India in the hands of Head Office: Page 36 of 72

o Royalty income of INR 41,62,51,532/-; o Interest income of INR 6,66,000/-

 Subsequently, the Ld. CIT (A) held that the direct costs attributable to the Indian operations are not in the nature of Royalty and deleted the addition of INR 41, 62, 51,532/-. However, the addition of INR 6, 66,000/- towards the interest income in the hands of HO was confirmed.

 With respect to addition of interest income of the HO of INR 6,66,000/- confirmed by the CIT(A), the Bank has filed an appeal before the Tribunal (refer discussion above for Ground no.4)

8.3 Appellant’s submissions The Appellant submits that if it is held in ground no. 4 of the Bank’s Appeal that the payment of interest by the branch to the Head Officer is not taxable as income in the hands of the HO, then the question of set off of loss against such income does not arise and hence, this ground would become academic and need not be adjudicated.

Without prejudice, even on a merit, the Appellant submits that the set off of brought forward loss should be allowed as against the alleged income of Head Office, if held taxable in India, as under the provision of the Act, the assessable entity is only one i.e. there is no separate assessment for the branch and the HO. Therefore, irrespective of whether, the income is taxable as income of the Page 37 of 72

branch or the HO, set off of the carry forward loss is required to be allowed to the bank. As Ground No. 3 & 4 already decided in favour of assessee, hence this ground of appeal became academic in nature, requires no further adjudication.

Ground No. 9: Taxability under section 115JA of the Act 9.1 Ground 9.1 The learned CIT (A) erred in law in confirming the action of the Assessing Officer in applying the provisions of section 115JA of the Act which stipulates the presumptive rate of profits. The learned CIT (A) failed to appreciate that the provisions of section 115JA of the Act were not attracted to the facts of the case.

9.2 The learned CIT (A) failed to appreciate that:  Section 90(2) and Circular No. 333 dated April 12, 1982 issued by the Central Board of Direct Taxes (CBDT) provides that the provisions of the Act shall apply to the assessee, who is otherwise eligible for double tax treaty relief only to the extent that they are more beneficial to him.  The DTAA specifically lays down the method determination of profits of the PE and therefore, it overrides the provisions of Section 1I5JA of the Act (which stipulates the presumptive rate of profits) and to which therefore, no recourse need to be had in view of the CBDT Circular No. 333 referred to above.

Page 38 of 72

 Section 115JA (4) of the Act provides that, save, as otherwise provided in Section 115JA of the Act, all other provisions of the Act shall apply to every company mentioned in the said section. It therefore, appears that there is no intention of the Legislature to specifically override the provisions of Section 90 of the Act and therefore, by implication, the provisions of applicable tax treaties by the introduction of Section 115JA of the Act.

9.3 The learned CIT (A) ought to have not applied the provisions of section 115JA of the Act as they are not attracted to the facts of the case.” 9.2 Brief facts During the year under consideration, the Appellant claimed before the AO that its income is taxable basis the tax treaty between India and UK. Article 7 of the tax treaty provides mechanism for computation of profit of the PE and therefore, the provisions of section 115JA of the Act are not applicable to the Appellant.

9.3 AO’s contention (Page 37, para 17)  The AO held that Article 7 of the DTAA between India and UK clearly provides that the profit of the PE is to be computed subject to limitation of the domestic law.

 Section 115JA of the Act is part of domestic law and hence applicable to PE also.

9.4 CIT(A)’ decision (Page 48, para 22.3.1)

Page 39 of 72

Reliance is placed on Ld. CIT (A) order for the A.Y. 1997-98 and the A.Y. 1998- 99 and the decision in case of Dresdner Bank AG (2007) (11 SOT 158) (Mumbai ITAT), wherein it was held that once non-resident chooses to be assessed as per provisions of the Act, in preference over provisions of tax treaty, it cannot be open to the Appellant to seek treaty protection in respect of one aspect (115JA of the Act) of assessment of income. Accordingly, the applicability of section 115JA of the Act is upheld.

9.5 Appellant’s submissions  The appellant relies on the following decisions, wherein it was held that provisions of section 115JA of the Act are not applicable to the Banking companies which are not required to prepare its books of accounts under the Companies Act:

o The Appellant’s own case ITAT order dated 12 April 2019 for the A.Y. 1997-98 [2019] (104 taxmann.com 236) – (Mumbai ITAT) [refer para 8, page 113 of the Bank’s Appeal legal Paper book] which reads as under:

“8.We have considered rival submissions and perused material on record. The main plank of assessee' argument against applicability of section 115JA of the Act is, assessee being a banking company maintaining its accounts under the Banking Regulations Act, 1949, the provision contained under section 115JA of the Act will not apply. Undisputedly, the assessee is a banking company and has opened its branches in India after obtaining permission of the RBI. Therefore, the Page 40 of 72

assessee is governed under the Banking Regulations Act, 1949. Section 115JA of the Act provides for computation of total income chargeable to tax to be an amount equal to 30% of the book profit in case such income is less than 30% of the book profit. However, subsection (2) of section 115JA of the Act mandates that the company for the purpose of section 115JA of the Act has to prepare its Profit & Loss Account in accordance with the provisions of Part-II & III of Schedule- VI of the Companies Act, 1956. Undisputedly, the assessee being governed under the Banking Regulations Act, 1949, is not required to prepare its Profit & Loss Account under the provisions of Part-II & III of Schedule-VI of the Companies Act, 1956. That being the case, the provisions of section 115JA of the Act are not applicable to the assessee. The Tribunal, Mumbai Bench, in Krung Thai Bank (supra) has held that the provisions of section 115JB of the Act, which is more or less pari-materia to section 115JA of the Act, can only come into play when the assessee is required to prepare its Profit & Loss Account in accordance with the provisions of Part-II & III of Schedule-VI of the Companies Act, 1956. It was observed by the Branch that the starting point of computation of minimum alternate tax (MAT) is the result shown by such Profit & Loss Account. Since, in case of Banking company, the provisions of Schedule-VI of the Companies Act, 1956 are not applicable, as, they are required to prepare their accounts under the provisions of Banking Regulations Act, the provision of section 115JB will not be applicable. The other decisions cited by the learned Sr. Counsel for the assessee also support this view. Further, the Tribunal, Mumbai Bench, in MSEB (supra), has held that

Page 41 of 72

since the assessee is not constituted as a company under the Companies Act, 1956, the provisions of section 115JA of the Act cannot be applied. While doing so, the Bench further observed that since the assessee Corporation is not required to distribute any dividend, it cannot be considered to be a company under the Companies Act, 1956. The facts involved in assessee's case are more or less identical to the facts of MSEB (supra). In view of the aforesaid, we hold that the provisions of section 115JA of the Act are not applicable to the assessee. This ground is allowed.”

o Appellant’s own case ITAT order dated 27 September 2022 for the A.Y. 1999-00 [2022] (ITA No. 803/ Mum/ 2009) – (Mumbai ITAT) [Copy of A.Y. 1999-00 ITAT order was handed over during the hearing on 27 September 2023- refer para 18, page 19] which reads as under:

“18. Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 1997-98, we allow the ground raised by the assessee”.

o CIT vs. Union Bank of India [2019] (105 taxmann.com 253) (Bombay HC) [para 21, page 407 of the Bank’s Appeal legal paper book]

Accordingly, the Appellant submits that the provisions of section 115JA are not applicable in the Appellant’s case. Respectfully following the decision of Coordinate Bench in assessee’s own appeal and relying on the decision of

Page 42 of 72

Hon’ble Jurisdictional High Court in the case of CIT vs. Union Bank of India [2019] (105 taxmann.com 253) (Bombay HC), this ground of appeal raised by the assessee is allowed.

Ground No. 10: Head Office Expenditure

10.1 Ground: 10.1 The learned CIT(A) erred in holding the claim of the appellant for allowing Head Office Expenditure of Rs. 23,28,71,503/- in entirety on the ground that no revise return was filed for such claim and has restricted the claim under section 44C of the Act.

10.2 The Ld. CIT (A) failed to appreciate that

 The decision of the Supreme Court in the case of Goetz (India) Ltd. v CIT (2006) 284 ITR 323 (SC) can be applied only when the claim for deduction was made first time during the course of assessment. In the present case, the Appellant had already claimed deduction for Head Office Expenditure in the Return of Income, but the same was restricted u/s. 44C of the Act. Further the said decision of Supreme Court deals with the power of the Assessing officer and not that of Appellant Authority.

 The said claim was revised during the course of appellant proceeding in view of the decision of Mumbai tribunal in the case of Metchem Canada Inc.

Page 43 of 72

vis. DCIT [284 ITR (AT.) 196], wherein the Hon'ble Tribunal, after referring to Article on non-discrimination, has held that provisions of section 44C of the Act will have no application. The tax authorities are under an obligation to compute the income in accordance with the law as interpreted by the judicial authority. ·

10.3 The learned CIT (A) ought to have not restricted the claim of head-office expenses to 5% and accordingly should have allowed the head-office expenses in entirety.

10.2 Brief facts  For the F.Y. under consideration, the Head Office (‘HO’) allocated Head Office Expenditure (‘HOE’) of INR 47, 42, 26,130/- to the Appellant on the basis of the external Auditor’s certificate.

 The Appellant, in its return of income, had claimed a deduction of HOE under section 44C of the Act (being 5% of Adjusted Total Income)

 The Appellant had raised the additional ground before the Hon’ble CIT (A) that in view of express provisions of Article 26 of DTAA, section 44C of the Act will have no application since the provisions of section 44C are discriminatory in the favour of an Indian enterprise vis-à-vis Permanent Establishment of a UK enterprise.

Page 44 of 72

10.3 CIT(A)’s decision (page 49): The Hon’ble CIT (A) held that this claim was not made in ROI or during the course of assessment proceedings. This being a new claim can only be considered if the Appellant would have made this claim by way of filing revised ROI before the assessment is made. The Hon’ble CIT (A) relied on the judgment of Goetz (India) ltd V/S (2006) 284 ITR 323 and dismissed the additional ground of appeal.

10.4 Appellant’s submissions The Appellant submits that this issue is covered in favor of the Appellant by the decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the A.Y. 1999-2000 wherein the Tribunal, following the decision of the Mumbai ITAT in the case of Metchem Canada Inc. v DCIT 284 ITR (AT) 196 (copy of decision enclosed in the Appellant’s legal paper book at page 415), has held that in view of Article 26 of the India-UK DTAA, provisions of section 44C of the Act will not be applicable to the Appellant (copy of A.Y. 1999-00 ITAT order handed over during the hearing on 27 September 2023- refer page 20, para 21), which reads as under:

Page 45 of 72

Article 7 - Business profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a PE situated therein. If the enterprise carries on or has carried on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to : (a) That PE, and (b) Sales of goods and merchandise of the same or similar kind as those sold, or From other business activities of the same or similar kind as those effected, through that PE.

Page 46 of 72

Article 24 - Non-discrimination 2. The taxation on a PE which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State

Page 47 of 72

than the taxation levied on enterprises of that other State carrying on the same activities. 5. The core issue, as we have noted earlier as well, is whether or not the limitation on deduction of head office expenditure, as set out in Section 44C of the Indian IT Act, will apply in the case of non-resident companies governed by the India Canada DTAA, particularly in the light of non-discrimination clause in the said DTAA. As a corollary to this question, we must decide whether restriction on admissibility of deduction on account of head office expenditure, as contemplated by Section 44C of the Act, constitutes "taxation on a PE which an enterprise of a Contracting State has in the other Contracting State" as "less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities". Another aspect which requires to be considered by us is whether the provisions of computation of business profits in Article 7 are to viewed as subject to the application of non- discrimination clause in Article 24(2), or is it the other way round i.e., non- discrimination clause to be read as subject to the clause regarding computation of business profits. There are other peripheral or subsidiary issues raised before us, such as, whether the provisions of Section 44C of the Act can be viewed as a restriction on admissibility of deduction of head office expenditure at, and, whether the provisions of Section 44C of the Act, only provide for a fair method of estimation of deductible head office expenses and are enabling provisions in nature. 6. Article 24(2) of the Indo-Canadian DTAA is worded on the lines of Article 24(3) of the OECD Model Convention. In fact, it is verbatim extract from the Model

Page 48 of 72

Convention. While elaborating upon the scope of the said clause the OECD Model Convention Commentary, inter alia, states as follows: 24. Effect of tax bases With regard to the basis of assessment of tax, the principle of equal treatment normally has the following implications: (a) PE must be accorded the same right as resident enterprises to deduct the trading expenses that are, in general, authorized by the taxation law to be deducted from taxable profits in addition to the right to attribute to the PE a proportion of overheads of the head office of the enterprise. Such deductions should be allowed without any restriction other than those imposed on the resident enterprise. (b)... It is thus clear that according to the scope of this clause as explained by the OECD Commentary, includes the deduction on account of head office expenditure. In addition to the deduction of normal business expenditure of a PE as permissible under the domestic taxation laws, the deduction is also required to be allowed for a proportion of overheads of the head office and such a deduction is to be allowed without any restriction other than those imposed on the resident enterprise. This makes two things clear-(a) that the restriction on admissibility of expenditure in accordance with the domestic law is, according to the OECD Commentary, is in respect of the normal business expenditure incurred by the PE; and (b) that the deduction on account of overheads of the head office is to be allowed without placing any restriction on such deduction save and except such restrictions as may also be placed on the resident enterprises. As the provisions of Article 24(2) of Indo-Canadian DTAA and of the provisions of Article 24(3) of the OECD Model Convention are in pari materia,

Page 49 of 72

the OECD Model Convention Commentary has a key role in determining the scope and connotations of art 24(2) of the Indo- Canadian DTAA. Hon'ble Andhra Pradesh High Court in the case of CIT v. Vishakhapatnam Port Trust (1983) 144 ITR 146 (AP), referred to the OECD Commentary on the technical expressions and the clauses in the model conventions, and referred to, with approval, Lord Radcliffe’s observation in Ostime v. Australian Mutual Provident Society (1960) 39 ITR 210, 219 (HL) which have described the language employed in those documents as the 'international tax language'. These documents are thus in the nature of contemporanea exposition in as much as the meaning indicated in these documents to the clauses and expressions in the tax treaties can be inferred as the meaning normally understood in, to use the words of Lord Redcliff, 'international tax language' developed by the organizations like OECD. This is so held in the case of Graphite India Ltd. v. Dy. CIT (2003) 78 TTJ (Cal) 418 : (2003) 86 ITD 384 (Cal).

When an expression or a clause is picked up from the OECD Model Convention, the normal presumption is that the persons using the said clause or expression are also aware about the meanings assigned to the said clause or expression by the OECD and have used it in the same sense and for the same purpose. Unless a contrary intention is specifically expressed, say by a protocol attached to the DTAA, it is only axiomatic that the clause or the expression will have the same meaning as normally assigned in the tax literature by the OECD. Therefore, when an expression or a clause from the OECD Model Convention is used even in a bilateral tax treaty involving a non OECD country, one has to proceed on the basis that it is used in the same meaning and with the same connotations as

Page 50 of 72

assigned to it by the OECD Model Convention Commentary. As per the OECD Commentary, placing a restriction on the deduction on account of overheads of the head office, except when the same restriction is also placed on the resident enterprises, does constitute discrimination under Article 24. The taxation on a PE of a Canadian company, by the reason of placing a restriction on deduction of head office expenditure which is not applicable in the case of resident companies, does, therefore, constitute less favorable tax treatment in India than the taxation levied on Indian enterprise carrying on the same activities in India. Viewed in this perspective, it is clear that the limitation on deduction of head office expenditure, as stipulated by Section 44C of the Act, will be hit by the non- discrimination clause in the Indo-Canadian DTAA. In any event, on a plain reading of the provisions of the Article 24(2), we are of the considered view that a restriction on admissibility of head office overheads of PE of a Canadian company constitutes discrimination against such a PE vis-a-vis a domestic Indian entity because no such restriction is applicable for deduction of head office or controlling office overheads of an Indian entity. It puts PE of a Canadian company to an unfair disadvantage in as much as even legitimate business expenses attributable to the PE and deductible under Section 37(1) of the Act cannot be allowed as a deduction in the light of restriction placed under Section 44C of the Act, whereas all the legitimate business expenses of the Indian entity operating in India will be allowed as a deduction. The scope of deduction under Section 37(1) of the Act thus stands curtailed for PE of a Canadian company.

Page 51 of 72

contained in Chapter III titled "taxation of income". It is thus clear that the provisions of Article 24 are specific provisions whereas the provisions of Article 7 are in the nature of general provisions. While taxation of business profits under Article 7 refers to the general principles on the basis of which the business profits are to be computed, Article 24(2) refers to the specific provision that the PE of the residents on one State shall not be subjected to any taxation which is less favorable vis-a-vis the taxation levied on enterprises of that other State carrying on the same activities. On the issue whether the general provisions will prevail over the special provision or vice versa, the law is fairly well settled. As aptly conveyed by the legal maxim generalia specialibus non derogate', i.e., special things derogate from general things. As observed by a co-ordinate Bench, in the case of ITO v. Titagarh Steels Ltd. (2001) 73 TTJ (Cal) 297 : (2001) 79 ITD 532 (Cal) and relying upon Hon'ble Supreme Court judgment in the case of South India Corporation (P) Ltd. v. Secretary, Board of Revenue AIR 1964 SC 207, 'a special provision normally excludes the operations of general provision'. The provisions of Article 7 being general in nature are therefore, required to be read as subject to the provisions of Article 24. Revenue's argument that since the business profits are to be computed "in accordance with the provisions of and subject to the limitations of the taxation laws of that State" under Article 7(3) and, therefore, limitation placed under Section 44C of the Indian IT Act cannot be ignored, cannot, therefore, be accepted. What Article 24(2) seeks to remove is the discrimination to the permanent residents of Indian and Canadian residents in the other States visa-vis the domestic business entities of that other State. When domestic tax laws permit such discrimination, such legal provisions have to be treated as overridden by the provisions of the Indo-Canadian DTAA. There

Page 52 of 72

is no dispute about the fact that when the provisions of the IT Act and the DTAA are in conflict, the provisions of the Act will be applicable only to the extent the same are more beneficial to the assessee. In other words, the provisions of the treaty prevail over the provisions of the Act. Therefore, the restriction placed on the allowability of the head office expenditure by Section 44C of the Act is to be ignored in the light of the provision of Article 24(2) of the Indo-Canadian DTAA.

Page 53 of 72

In view of the above, the Appellant submits before Hon’ble ITAT to follow the own case above ITAT order for A.Y. 1999-00 and allow the head office expenditure in entirety under the provisions of Article 26 of the tax treaty without applying restriction under section 44C of the Act. Respectfully following the

Page 54 of 72

decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the A.Y. 1999-2000 wherein the Tribunal, followed the decision of the Mumbai ITAT in the case of Metchem Canada Inc. v DCIT 284 ITR (AT) 196, ground raised by the assessee is allowed.

Additional ground raised vide letter dated 12 September 2012 - Taxability of interest on IT refund 11.1 Additional ground:

Additional Ground No. 1A

The Interest on income-tax refund ought to be excluded from taxable income and should be taxed, if necessary, only when the issue of income-tax refund reaches finality.

Additional Ground No. 1B

In addition and without prejudice to the Additional Ground 1A above, in case it is held that interest on income-tax refund is taxable, it should be taxed only at the rate of 10% in accordance with provision of Article 12 of the Tax Treaty between India and United Kingdom and not at the maximum marginal rate tax.”

Page 55 of 72

11.2 Brief facts During the year under consideration, the Appellant received interest on IT refund of INR 3, 47, 21,262/- for A.Y. 1994-95 and INR 375, 41,827/- for A.Y. 1997-98.

11.3 Appellant’s submissions In this connection, the Appellant submit as under:

Interest is taxable in the year of finality / final output of the appellant proceedings

The Appellant submit that the amount of interest to be taxed in the assessment year under consideration should be the amount of interest on income-tax refund basis the final outcome of the appellate proceedings. In other words, the Appellant submit that the learned AO be directed to tax interest on income-tax refund which is based on the finality / final outcome of the appellate proceedings this is because of the fact that the said interest may get reduced depending upon the final outcome.

Rectification of taxability of interest income due to subsequent development

In this regard, the Appellant relies on the decision of Mumbai ITAT in the case of Avada Trading vs. ACIT (284 ITR (A.T.) 73 (refer page 433 of the Bank’s Appeal legal paperbook), wherein it was held that if interest granted under section 244A (1) is varied under sub-section (3) of such section, then interest

Page 56 of 72

originally granted would be substituted by the reduced/ increased amount as the case may be. Thus, income on account of interest if assessed can be rectified under section 154.

Interest is taxable at the rate of 10% if taxable in A.Y. 2000-01

 Further, the Appellant submits that the interest on income-tax refund received by the Appellant is taxable at the rate of 10% in accordance with provisions of Article 12(3) of the Treaty as the said interest on income-tax refund cannot be said to be effectively connected to a PE / India Branch.

 This issue is covered by the decision of the Jurisdictional High Court/ ITAT in the following cases:

o DIT vs. Credit Agricole Indosuez [2015] [377 ITR 102] [Bom-HC](refer page 357 of the Bank’s Appeal legal paperbook) wherein the Hon’ble Bombay HC upheld the decision/ruling of Hon’ble Delhi ITAT in the case of ACIT vs. Clough Engineering Ltd [2011] [11 taxmann.com 70] [Delhi Special Bench](refer page 425 of the Bank’s Appeal legal paperbook).

o Covered in Appellant’s own case:

The Appellant submits that in the A.Y. 1999-00, the Hon’ble Mumbai ITAT vide its order dated 27 September 2022 (ITA No. 803/Mum/2009) admitted the similar additional ground relying on the decision of

Page 57 of 72

Hon’ble SC in the case of National Thermal Power Co., Limited Vs. CIT 229 ITR 383 as the additional ground is legal and no fresh investigation of facts are required [Page 6, para 6] which read as under:

“6. Considered the rival submissions and material placed on record, we observe that as the said additional grounds are legal grounds, wherein, the facts are on record and facts do not require fresh investigation, following the decision of Hon’ble Supreme Court in the case of National Thermal Power Co., Limited v. CIT 229 ITR 383 (SC), we admit the said additional grounds of appeal.”

Further, the Hon’ble ITAT in A.Y. 1999-00, by following the Mumbai ITAT decision in the case of Avada Trading Vs. ACIT 284 ITR (A.T) 73 has held that the interest on IT refund would be assessable in the year in which it is granted [Page 36, para 26], which read as under:

With regard to the applicable rate, the Hon’ble ITAT followed the Bombay HC decision in the case of DIT vs. Credit Agricole Indosuez [377 ITR 102] and held that interest should be taxable as per the DTAA at the rate of 10%. The observation of the Tribunal at page 36, para 27 are as under:

Page 58 of 72

“27. With regard to Additional ground (ii) which in respect of “interest on tax refund be taxed at 10% as per India-UK Treaty”, we observe that the Hon'ble Bombay High Court in the case of Director of Income-tax (IT) v. Credit Agricole Indosuez [377 ITR 102] held as under: - “2. at the hearing Mr. Tejveer Singh, learned counsel for the Revenue urges the following questions of law for consideration. “(1) …….. (2) Whether, on the facts and in the circumstances of the case and in law, the Hon'ble ITAT was right in holding that the income chargeable at special rate u/s. 10(15) of the Act would be on gross basis and not on net basis? (3) …… (4) Whether, on the facts and in the circumstances of the case and in law, the ITAT has erred in directing the A.O. to tax the interest received u/s. 244A of the Act at the rate prescribed in Article 12 of DTAA between India and France?

(5) ……..” ………… “4 Regarding Question 2 – The Tribunal records in the impugned order that the Revenue has before it accepted the position that the exemption under Section 10(15) (iv) (h) of the Act is to be allowed on gross basis and not on net basis. In spite of having accepted that exemption under Section 10(15)(iv)(h) of the Act is to be allowed on gross interest before

Page 59 of 72

the Tribunal, the Revenue has proposed to above question for consideration without pointing out in any manner the basis for withdrawing the concession made before the Tribunal. In any case in terms of Section 10(15)(iv)(h) of the Act, it is a self evident position that interest payable by any public sector company is not to form part of the total income. Further the Tribunal in the impugned order has relied upon its own decision in other cases to hold in favour of the Respondent- assessee and decisions in those cases have not been shown to be inapplicable to the present facts and/or disturbed in appeal. Accordingly, Question 2 does not raise any substantial question of law to be entertained. ….. 6. Regarding Question 4 – (a) The Tribunal by the impugned order restored the issue of the rate at which interest is to be charged to tax on income-tax refund received under Section 244A of the Act to the Assessing Officer to be decided in the light of Indo-France DTAA and the decision of the Special Bench of the Tribunal in the matter of Assistant Commissioner of Income Tax vs. Clough Engineering Ltd. [130 ITD 137]. (b) The grievance of the Revenue is with the impugned order following the decision of the Special bench in Clough Engineering Ltd. (supra). (c) However we find that the decision in Clough Engineering (supra) of the Special Bench had been followed by the Tribunal in ITA No.183/Mum/2010 [M/s DHL Operations B.V., the Netherlands vs. Dy. Director of Income Tax]. The issue before the Tribunal was the rate of tax

Page 60 of 72

on which Income tax refund is to be taxed i.e. on the basis of the Articles of DTAA or under the Act. The Tribunal on examination of the DTAA in the above case concluded that interest on income tax refund is not effectively connected with the PE (Permanent Establishment) either on asset test or activity test. Therefore, taxable under the Article 11(2) of Indo-Netherlands tax treaty. The Revenue carried the aforesaid decision of M/s. DHL Operations B.V. (supra) in appeal to this Court, being Income Tax Appeal No.431 of 2012. This Court by order dated 17 July 2014 refused to entertain the appeal. In the circumstances no fault can be found with the impugned order of the Tribunal in restoring the issue to the Assessing officer to determine / adopt the rate of tax on refund in the light of the relevant clauses of Indo-France DTAA and the decision of Special Bench in Clough Engineering (supra) Accordingly, question 4 does not raise any substantial question of law so as to be entertained.” 28. Respectfully following the above decision of the Hon'ble Bombay High Court, we allow the additional ground (ii) raised by the assessee.”

In view of above, the Appellant submits before the Hon’ble ITAT that the above additional ground involves question of law and calls for being admitted. Further, basis the above submissions, the Appellant humbly submits before your Honors that the learned AO be directed to tax the interest on income tax refund once it reaches finality and not in A.Y.2000- 01 i.e., A.Y. under consideration. Without prejudice, if the interest is taxed in A.Y. 2000-01 then the Appellant submit that the aforesaid interest should be taxed at the rate of 10% in accordance with provisions of Article 12 of

Page 61 of 72

the Tax Treaty (mentioned supra). Law on this issue is crystal clear that interest on income tax refunds can be charged to tax only in the year in which the amount of refund and interest thereon is crystallized permanently till that time; the same is not chargeable to tax on the ground of uncertainty. Respectfully following the decision of Coordinate Benches mentioned (supra) in the case of assessee, we direct the AO to consider the same whether amount of interest in the case of assessee became final or not. If yes, same will be chargeable to tax @ 10% as specified in the treaty itself. In the result the ground raised by the assessee is allowed.

In the result, the appeal of the assessee is partly allowed.

Department’s Appeal (ITA No. 3810/Mum/2009)

Ground 1 and 2: Direct expenses incurred outside India

1.1 Grounds:

Page 62 of 72

1.2 Brief facts:

 During the F.Y. under consideration, the Appellant had claimed the deduction of on account of direct expenses attributable to the Indian Branches basis the auditor’s certificates.  The Appellant has incurred the cost at different locations which are solely attributable to its Indian operations. These costs includes: (a) Costs of office of the Special Representative In India; (b) Singapore IT Hubbing/ IT Cable (c) Bank Master

1.3 AO’s contention (Page 14): The AO held that the expenses were for payments which are in the nature of royalty on which SCB has not deducted tax u/s. 195 of the Act and hence the expenditure is disallowed u/s. 40(a) (i) of the Act.

1.4 CIT(A)’s decision (Page 11, para 5.3.2)

Page 63 of 72

Relying on Ld. CIT (A) order in the Appellant's own case for A.Y. 1994-95 to 1999-2000, Ld. CIT (A) held that expenditure is not in nature of head office expenses covered u/s. 44C of the Act. The expenditure does not fall within the definition of 'royalties' under Article 13 of DTAA. Further, by incurring such expenditure no technical know-how was made available to SCB and for the same it will not fall within the definition of fees for technical services. Accordingly, the provisions of section 40(a)(i) of the Act cannot be invoked.

1.5 Assessee’s submissions: The Assessee submits that this issue is covered in favor of the Assessee by a decision of the Co-ordinate bench of the Tribunal in the Assessee’s own case for the assessment year 1999-2000, wherein the Tribunal followed the Assessee’s own case Tribunal order of A.Y. 1997-98 and dismissed the ground raised by the Revenue (Copy of A.Y. 1999-00 ITAT order was handed over during the hearing on 27 September 2023- refer Page 43, para 34) which reads as under:

“34. since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 1997-98 and also following rule of consistency, we dismiss the grounds raised by the revenue.”

In view of the above, the Assessee submits before the Hon’ble ITAT to follow the own case ITAT order for A.Y. 1999-00 dated 27 September 2022 and upheld the decision of the CIT(A) by dismissing the ground raised by the Revenue. This issue raised by the revenue has already been decided in favour Page 64 of 72

of assessee in its appeal vide our order mentioned (supra), this ground of appeal raised by the revenue is dismissed.

Ground No. 3 and 4: Expenditure on refurbishment of premises

3.1 Grounds 3.On the facts and in the circumstances of the case and in law, the Id. CIT(Appeals) erred in allowing relief of Rs. 5,35,96,643/- out of expenses related to refurbishment of leasehold premises of Rs. 7,14,62,191/- claimed by the assessee. The ld. CIT (Appeals) ought to have upheld the order of the Assessing Officer.

4.On the facts and in the circumstances of the case and in law, the Id. CIT (Appeals) erred in directing that 75% of the expenses of Rs.7,14,62,191/- {incurred on refurbishment of leasehold premises} be treated as revenue expenses and 25% of the expenditure be considered as capital expenses. There is no provision under the Act to estimate certain percentage of the total expenditure related to a particular asset as revenue expenditure or capital expenditure. The expenditure incurred in relation to any particular asset is either entirely on capital account or on revenue account. 3.2 Assessee’s submissions The Assessee submits before the Hon’ble ITAT to refer the submission made under Ground 6 of the Assessee Appeal.

Ground No. 5: Indirect Income 5.1 Ground

Page 65 of 72

On the facts and in the circumstances of the case and in law, the ld. CIT (Appeals) erred in directing deletion of Rs. 79,92,431/- treated as indirect income earned by the Head Office by relying on submissions admitted in contravention to Rule 46A of the Income-tax Rules, 1962.

5.2 Brief facts  The Assessee submits that the indirect income falling within the scope of Article 7 of the India UK tax treaty has been offered for tax.

 The Assessing Officer considered INR 79,92,421/- as indirect income arising to the Appellant on the similar activities as that of Indian Permanent Establishment undertaking by the Head Office directly with the Indian customer as taxable under Article 7 of India-UK tax treaty under the “force of attraction “rule.

 The said income was already forming part of profit and loss account and offered to tax in the computation of income.

5.3 AO’s contention (Page 34, para 14) Relying on International Taxation Commentaries, Klaus Vogel, and AO held that the income of the head office would be taxable in India even when the head office is engaged in the same or similar activities even though it might not be attributable to the PE and taxable under Article 7 of the tax treaty. Accordingly, taxed the said income in the hands of the Appellant.

Page 66 of 72

5.4 CIT(A)’s Decision (Page 39, para 16.3) The Hon’ble CIT(A) deleted the additions made by the AO as the said income of INR 79,92,421/- was already offered by the Appellant and addition made by the AO amounts to double taxation of the same income.

5.5 Assessee’s submissions The Assessee rely on the submission made before the Hon’ble CIT(A) (refer page 1 of the Department’s Appeal factual paper book) and submit that since the indirect income of the Head Office already forms part of profit and loss account of the Assessee and offered to tax in the computation of income, the same should not be taxed again. In view of the above, the Assessee submits before the Hon’ble ITAT to dismiss the ground raised by the Revenue.

We have gone through the order of Ld. CIT (A) and the contentions raised by both the parties, it is found that order of Ld. CIT (A) is factually correct fully complied with the Law applicable, hence we are not inclined to interfere with the same, and resultantly ground raised by the revenue is dismissed.

Ground No. 6 and 7: Extra Ordinary Cost - Early Separation Scheme 6.1 Ground 6. On the facts and in the circumstances of the case and in law, the Id. CIT (Appeals) erred in directing deletion of disallowance {made in accordance with CBDT's Instruction dated 23.01.2001} of extraordinary cost of Rs. 18,66,82,000/-

Page 67 of 72

being payment to LIC towards cost of annuity for payment of monthly pension to bank retirees under 'Early Separation Scheme'.

6.2 Brief facts  During the financial year under consideration, the Assessee made a payment of INR 18,66,82,000/- to LIC towards the cost of annuity for monthly pension to the Bank’s retirees under ‘Early separation scheme’.

 The Assessee had claimed the said expenditure as the same are revenue in nature and have been incurred wholly and exclusively for the purpose of the business.

6.3 AO’s contention (Page 35, para 15) AO relied on the Central Board of Direct Tax (‘CBDT’) instruction dated 23 January 2001, wherein the CBDT directed the Department to disallow VRS payments on the basis of various judicial pronouncements that such expenditure gives the benefit of enduring long-term nature of the payer and disallowed the same treating it as capital expenditure.

6.4 CIT(A)’s Decision (Page 41, para 17.3)

Page 68 of 72

The Hon’ble CIT (A) deleted the additions made by the AO by relying on the decision of the Hon’ble Bombay High Court in case of CIT vs. Bhor Industries Ltd (264 ITR 180).

6.5 Assessee’s submissions  The Assessee submits that this issue is covered in favor of the Assessee by the decision of the Co-ordinate bench of the Tribunal in the Appellant’s own case for the assessment year 1999-2000, wherein the Tribunal following the decision of Hon’ble Bombay High Court in the case of CIT vs. Bhor Industries Ltd (264 ITR 180) (Copy of decision is enclosed in the Department’s legal paper book at page 41) allowed the deduction of early separation scheme (Copy of A.Y. 1999-00 ITAT order dated 17 October 2022 was handed over during the hearing on 27 September 2023- refer page 23 and para 35) which reads as under:

“35.---- With regard to early separation scheme, Ld. DIT by relying heavily on the letter issued by CBIT to all the Chief CIT’s to consider the facts of the cases and disallow the schemes involving voluntary retirement where the expenditures are incurred which increases the nature of treatment, benefits of enduring nature which can be classified as capital in nature. However, we observe that the Hon'ble Jurisdictional High Court decided and held the similar issue in favour of the assessee in the case of CIT v. Bhor Industries Ltd., (supra) wherein the Voluntary Retirement Scheme expenditure allowed as revenue expenditure based on the criteria commercial expediency. These expenditure does not have enduring nature. Further, we observe that Ld. DIT has observed Page 69 of 72

in his order that Hon'ble High Court decision was not accepted by the revenue and an SLP has been filed before Hon'ble Supreme Court. Since the matter has not reached finality, therefore this expenditure on VRS is not allowable expenditure. We are not inclined to accept the arguments proposed by the Ld. DIT and at that point of time or even now there was no decision contrary to the decision of the Hon'ble Jurisdictional High Court in the case of CIT v. Bhor Industries Ltd., (supra) is submitted before us or any contrary decision brought to our notice by the revenue. Therefore, we are inclined to accept the submissions made by the assessee that this expenditure on early separation scheme is favorable to the assessee on merit. Therefore, Ground No. 2 raised by the assessee is accordingly, allowed.”

In view of the above, the assessee submits before the Hon’ble ITAT to uphold the decision of the Ld. CIT (A) by dismissing the ground raised by the Revenue. Respectfully following the decision of Coordinate Bench in the case of assessee relying on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Bhor Industries Ltd (264 ITR 180), we do not find any legal inconsistency in the order of Ld. CIT (A). In the result, ground raised by the revenue is dismissed.

Ground No.7: Adjustment to book profit u/s 115JA of the Act

7.1 Ground

Page 70 of 72

On the facts and in the circumstances of the case and in law, the ld. CIT (Appeals) erred in holding that in computing the book profit under section 115JA of the Act amount is referable to earning income exempt under section 10 of the Act. The ld. CIT (Appeals) in the order on another ground of appeal has directed that disallowance under section 14A of the Act in respect of expenses attributable to exempt income be taken at Rs.1,01,20,545/- {computed under Rule 8D} instead of Rs. 1,40,30,575/-.

7.2 Assessee’s submissions The Assessee request before the Hon’ble ITAT to refer the submission made under Ground 9 of the Assessee Appeal. This issue has already been decided in favour of assessee vide our order (supra) in the appeal of assessee; ground raised by the revenue is dismissed.

In result, the appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 13th day of November, 2023. Sd/- Sd/- (VIKAS AWASTHY) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, दिन ांक/Dated: 13/11/2023 Dhananjay., Sr. PS

Copy of the Order forwarded to: अपील र्थी/The Appellant , 1. प्रदिव िी/ The Respondent. 2. आयकर आयुक्त CIT 3.

Page 71 of 72

दवभ गीय प्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 4. ग र्ड फ इल/Guard file. 5.

BY ORDER, //True Copy// (Asstt. Registrar) ITAT, Mumbai

Page 72 of 72