Loading judgment…
Facts
The appeals concerned the taxability of income from foreign branches, the deduction for special reserves, disallowance of lease premium, and the allowability of interest paid for delayed TDS remittance. The appellant, Bank of Baroda, had excluded income from its foreign branches, which was added back by the AO and confirmed by the CIT(A). Similar issues had been decided against the appellant in previous years.
Held
The Tribunal held that the income from foreign branches is taxable in India, following previous decisions. The deduction for special reserves was disallowed as the conditions were not met. The lease premium paid for land was treated as capital expenditure and not deductible. The interest paid for delayed TDS remittance was also held as not allowable as business expenditure.
Key Issues
Whether income of foreign branches is taxable in India; whether deduction for special reserves is allowable; whether lease premium is a capital expenditure; and whether interest on delayed TDS payment is a deductible business expense.
Sections Cited
90(3), 143(3), 36(1)(viii), 201(1A), 37(1)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, Mumbai “B” Bench, Mumbai.
Before: Shri Narender Kumar Choudhry (JM) & Shri Omkareshwar Chidara (AM)
Per Omkareshwar Chidara (AM) :- The issues involved in all the above four appeals are common and hence they were clubbed and heard together. Accordingly, a common order is hereby passed for all the four above appeals.
The first ground of appeal
in all these appeals relates to exclusion of income of foreign branches of the appellant company for taxation purposes. The appellant has excluded the income for tax purposes earned in 19 foreign branches of bank. The Ld. AO relying on the provisions of section 90(3) with Notification No. S.O. 2123 dated 28.8.2003 and the decision of ITAT Mumbai in the case of Bank of India has added the same holding that the income of foreign branches is taxable in India. The Ld. CIT(A) has confirmed the addition made by the Ld. AO. During the hearing before the ITAT, the Ld. AR of the appellant has fairly admitted that the issue was covered against the 2. Bank of Baroda appellant bank in A.Y. 2016-17 in and a copy of the said order was furnished. In fact, this issue was finally decided against the appellant in A.Y. 2005-06 in and the ITAT followed the order of A.Y. 2005-06 in the A.Y. 2016-17 also. The relevant portion of ITAT order for A.Y. 2016-17 is reproduced below :-
1. “9. The issue arising in ground No. 2, raised in assessee's appeal, pertains to the exclusion of income of foreign branches situated in countries with whom India has entered into the Double Taxation Avoidance Agreement.
The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee has excluded the income from the branches located in Fiji, Seychelles, Nassau (OBU), Hongkong, Bahrain, Thailand, Australia, Mumbai (OBU), Mauritius, U.A.E, Oman, Belgium, South Africa, U.K., U.S.A., Mauritius, (OBU), China, Singapore (OBU), and Malaysia on the basis of Double Taxation Avoidance Agreement entered into by India with these countries. Vide assessment order passed u/s 143(3) of the Act, the AO by referring to the provisions of section 90(3) of the Act and notification dated 28.08.2008 issued by the Central Government held that the claim of the assessee to exclude the business profit/income of foreign/overseas branches from its total income for the purpose of the Act, is not allowable and accordingly, the same was added to its total income.
11. The Ld. CIT(A), vide impugned order, following the decision of the Co- ordinate Bench in assessee's own case dismissed the ground raised by the assessee and upheld the addition made by the AO. Being aggrieved, the assessee is in appeal before us.
During the year, the Ld. Authorized Representative ("Ld. AR") fairly agreed that this issue has been decided against the assessee in its own case by the Co-ordinate Bench of the Tribunal in preceding years. We find that the Co-ordinate Bench of the Tribunal in assessee's own case in M/s Bank of Baroda v. DCIT, in & 1121/Mum/2018, vide order dated 22.05.2019 for the assessment years 2014-15 and 2015-16, following the & 2777/M/2019 Bank of Baroda 9 decision rendered in preceding years upheld the addition made on the similar issue, by observing as follows: -
"10. Another common issue raised in assessee's appeals is that learned CIT(A) ought to have allowed assessee's claim in respect of exclusion of income of foreign branches situated in countries where there is double tax avoidance agreement based on Article 7 of the respective agreements which provides that business profits is to be taxed in respective countries. It has further been submitted that learned CIT(A) failed to note that Notification No. 91 of 2008 relied upon by ITAT does not apply to business profit but only to other sources of income.
3 Bank of Baroda
On this issue learned Counsel of the assessee fairly conceded that the issue has been decided against the assessee by the ITAT in assessee's own case for A.Y. 2011-12 in vide para 19 of the said order.
12. Accordingly following the precedent as above, we uphold the order of learned CIT(A) on this issue."
Thus, respectfully following the decision of the Co-ordinate Bench of the Tribunal rendered in assessee's own case (cited supra), the addition made on account of income earned by the foreign branches is upheld. Thus, the ground no.2 raised in assessee's appeal is dismissed.
2.1 Respectfully following the orders of the ITAT in earlier years, this ground of appeal of the appellant is dismissed.
The second ground of appeal deals with taxability of income of foreign branches. The appellant submitted before the Ld. AO that notwithstanding its contention that the income of foreign branches is not taxable in India, if the same is to be taxed, it should be based on the income computed as per the provisions of Income Tax Act of the respective foreign countries i.e., it should be based on the income returned to tax in the respective countries. This is for the reason that as per the Department, even though income was not chargeable to tax based on DTAA, the above notification makes the income chargeable to tax. The Ld. AO interpreted the Notification in such a way that the income of foreign branches is taxed in those countries will be includible in taxable income in India and taxed the same. On this issue, the appellant filed an appeal before Ld. CIT(A) and this first appellate authority has confirmed the addition made by Ld. AO. Aggrieved by the orders of the Ld. AO and Ld. CIT(A), the appellant filed an appeal before ITAT. During the hearing before the ITAT, the Ld. AR of the appellant has fairly conceded that this issue was held against appellant by ITAT in A.Y. 2016-17 vide and a copy of the same was submitted to the Bench. The ITAT followed the order for A.Y. 2011-12 which in turn followed the order in A.Y. 2009-10 in dated 17.2.2017. The relevant portion of order of A.Y. 2016-17 is reproduced below :-
4 Bank of Baroda
“24. We have carefully considered the submission and perused the record we find that the ITAT in the aforesaid decision has duly considered the said notification referred by the Ld. Counsel of the assessee. We may carefully refer to the contents of the said notification as under;
"In exercise of the powers conferred by sub-section (3) of section 90 of the Income-Tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the 16 Government of any country outside India for granting relief to tax, or as the case may be, avoidance of double taxation, provides that any income of a resident of India "may be taxed" in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-Tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement."
We find that after taking into account the aforesaid notification the Tribunal in the aforesaid order has concluded as under.
` "In view of the aforesaid findings/conclusion, we hold that the income of the branches of the assessee shall also taxable in India i.e., it would be included in the return of income filed by the assessee in India and whatever taxed have been paid by the Branches in the other contracting States i.e., the source country, credit of such taxes shall be given."
A reading of the above makes it clear the Tribunal had held that the income of the foreign branches of the assessee shall also be taxable in India, that is, it would be included in the return income filed by the assessee in India and whatever taxes have been paid by the branches in the other countries credit of such taxes shall be given. We find that the Tribunal as above has not held that it is only that income of the foreign branches which was taxed in that foreign country which is to be included in the return of income filed by the assessee. Hence, we are in agreement with the revenue plea that Ld. CIT-A has not properly followed the Tribunal decision as referred by him. A reading of the notification canvassed by the Ld. Counsel by the assessee also does not help the case of assessee. The notification also does not support the direction of Ld. CIT-A. The doctrine of stare decisis mandates that we follow the coordinate bench decision as above and hold that the income of the branches of assessee situated abroad shall also be taxable in India and whatever tax have been paid by the branches in the foreign country, credit of such taxed shall be given. Accordingly, we allow the ground raised by the revenue.”
3.1 Respectfully following the decision of ITAT of A.Y. 2016-17, this ground of appellant bank is dismissed.
The third issue relates to restriction of deduction under section 36(1)(viii) of the Act by the Ld. AO in his assessment order. The Ld. AR of the 5 Bank of Baroda appellant has stated that the appellant is allowed a deduction in respect of any special reserve created and maintained by it an amount not exceeding twenty percent of the profits derived from long term loans given for specific purposes. The appellant in the relevant assessment years did not create the full amount of special reserve required for the eligible deduction (the special reserve was created only for Rs. 350.92 crore as against the eligible deduction claim of Rs. 728.95 crore). The AO disallowed the differential amount of Rs. 378.04 crore.
4.1 The Ld. CIT(A) dismissed the ground raised by the appellant by following the decision of ITAT in appellant’s own case for A.Y. 2016-17 in and the decision of ITAT Pune in the case of Shree Sharda Sahakari Bank Ltd. (69 SOT 178).
4.2 During the hearing before the ITAT, the Ld. AR of the appellant has submitted that the appellant submits that the main submission is that the appellant had sufficient balance in revenue reserve created out of the profits for the relevant assessment year and transfer to special reserve is only an act of making an accounting entry and the eligible deduction should not be denied merely because the reserve was not christened as special reserve. But, the ITAT has already decided similar ground of appeal against the appellant in A.Y. 2016-17 in and the relevant findings of the ITAT are reproduced below :-
“7. The jurisdiction u/s 263 in AY 2016-17 has been invoked in view of the fact that the assessee claimed deduction u/s 36(1)(viii) for Rs.426.81 crores which was accepted by Ld. AO disregarding the fact that the assessee did not create special reserve to that extent as per the requirement of Section 36(1)(viii). Failure on the part of Ld. AO to consider the same, in the opinion of Ld. Pr.CIT, has rendered the order erroneous as well as prejudicial to the interest of the revenue. In defense, the assessee submitted that the reserve created in subsequent years would amount to fulfillment of the condition of Sec. 36(1)(viii). However, Ld. Pr.CIT, upon perusal of statutory provisions of Sec. 36(1)(viii), observed that the amount claimed as deduction should have been carried to such reserve account during the relevant previous year. Reliance was placed on the decision of Hon'ble Madras High Court in CIT V/s Tamil Nadu Industrial Investment Corp. Ltd. (240 ITR 573) for the said conclusion.
6 Bank of Baroda Therefore, applying the provisions of Sec. 263 read with Explanation-2, Ld. AO was directed to disallow the deduction u/s 36(1)(viii) and determine the total income accordingly. Aggrieved, the assessee is under appeal before us challenging the validity of jurisdiction u/s 263.
Upon due consideration, we find that it was obligatory on the part of assessee to fulfil the conditions as envisaged by Sec. 36(1)(viii) before claiming deduction therein. Non-fulfillment of these conditions would certainly disentitle the assessee to claim the said deduction. The Ld. Pr.CIT has brought on record sufficient factual matrix to demonstrate that the Bank of Baroda Assessment Years-2015- 16 & 2016-17 assessee did not fulfil these conditions. Therefore, we are not impressed with the arguments of Ld.AR and find no infirmity in the directions issued by Ld. Pr. CIT. Accordingly, the appeal stands dismissed.”
4.3 Following the judicial discipline, in view of the above detailed observations of ITAT for A.Y. 2016-17, this ground of appeal of appellant dealing with restricting the deduction under section 36(1)(viii) of the Act is dismissed.
5. The fourth issue in these above appeals relate to disallowance of lease premium paid by appellant Bank. This issue relates to and 1243/Mum/2005. The appellant bank had taken land on lease on which buildings were constructed for office purposes. The terms of the lease provided for payment of a lump sum consideration upfront and a nominal annual rent. In the books of account, the lump sum lease premium that was paid was amortised over the period of lease. .The same was also claimed as tax deductible. The AO held that the above amount as capital expenditure and the same being paid for land cannot be allowed as deduction.
5.1 Aggrieved by the addition of Ld. AO, an appeal was instituted by appellant before Ld. CIT(A) and this first appellate authority confirmed the addition and dismissed this ground of appeal by placing reliance on the decision of Hon'ble Supreme Court in the case of R.K. Palshhikar HUF (172 ITR 311 (SC) where it was held that such expenditure of lump sum payment for construction of office is in the nature of capital expenditure.
7 Bank of Baroda 5.2 Aggrieved by the disallowance of lump sum payment of appellant and order of Ld. CIT(A) confirming the addition of Ld. AO, the appeal was escalated to ITAT. During the hearing before the ITAT, the Ld. AR of appellant has submitted that in the earlier, the appellant lost the case on this ground before ITAT. In the earlier year, the ITAT Mumbai decided the case against the appellant. The relevant portion of the ITAT order for A.Y. 2014-15 is reproduced as under :-
6.2 The assessee's second ground qua amortization of lease premium stands dismissed in view of Tribunal's order for AY 2013-14 wherein it has been held as under: - 9. The second issue in the grounds of appeal of the assessee is relating to amortization of lease premium. The Learned Counsel for the assessee fairly submitted that, identical issue has been decided against assessee by the Tribunal for the Assessment Year 2012-13 in ITA.No.5175/MUM/2016 dated 30.11.2018 at paras 12 to 17. Respectfully following the said decision we uphold the disallowance made by the Assessing Officer. This ground is rejected.
5.3 The Ld. AR of the appellant had submitted that after the decision of ITAT on this issue, the ITAT Mumbai has remitted back similar issue to the file of AO in the case of National Stock Exchange 2023 and Ld. AR submits that the ITAT order in its own case should not be followed. After giving thoughtful consideration to his submission, it is observed that the Ld. CIT(A) has followed the decision of Hon'ble Supreme Court and dismissed the ground of appeal and also in view of the observations made by ITAT in earlier order, in appellant’s own case, the Bench decided to follow the earlier year order of ITAT since there is no change in facts and circumstances. Accordingly, this ground of appeal of appellant bank is also dismissed.
5.4 The fifth issue relates to the lease premium paid by appellant bank may be treated as intangible asset and then they would be entitled to depreciation. This issue relates to and 1243/Mum/2015 only.
8 Bank of Baroda 5.5 The Ld. AR of the appellant has stated that the amount paid towards intangible asset should be allowed as Revenue expenditure and alternatively, if the same is treated as capital expenditure, depreciation on the same should be allowed to appellant. As this alternate claim of depreciation was not claimed before Ld. AO, there was no discussion on this same issue in the assessment order. The Ld. CIT(A) has relied on the decision of ITAT Cuttack Bench in the case of Mahanadi Coalfield Ltd. (ITA No. 325/CTK/2013 and held that the claim of appellant is not allowable.
5.6 Before ITAT, Ld. AR of the appellant argued that the leasehold rights acquired by appellant constitutes an intangible asset entitled for depreciation and the same was upheld in the decisions of ITAT Bangalore and ITAT Ahmedabad in the case of Bangalore International Airport Ltd. (146 taxman.com 206) and Adani Ports Ltd. (157 taxman.com 106) respectively. This alternate ground was not taken before the Ld. AO and hence he has not discussed in the assessment order. As the facts were not discussed in the assessment order, this issue of alternate ground is remanded to the file of Ld. AO, where the appellant can raise this ground afresh. This alternate ground, accordingly is set aside to the file of AO. The AO is directed to take the submissions of appellant Bank and also the findings of Ld. CIT(A) and then pass the order.
The last issue to be adjudicated is whether interest paid for delayed remittance of TDS is allowable as business expenditure. The Ld. AO disallowed the same as penal in nature. The Ld. CIT(A) confirmed the addition. Before ITAT, the Ld. AR of the appellant placed reliance on the decision of ITAT Mumbai in case of Mukund Ld. (101 Taxman.com 214) and the decision of Kolkata Bench of ITAT, Welkin Telecom Infra (142 taxman.com 146), stating that interest paid under section 201(1A) is an allowable deduction under section 37 of the Act.
9 Bank of Baroda 6.1 But, the Hon'ble Bombay High Court in the case of Ferro Alloys Corporation Vs. Ld. CIT(A) (196 ITR 406) (Bom) has decided that the interest under section 201(1A) of the Act is not allowable as business expenditure under section 37(1) of the Act, where it was held that the said claim is against the basic undisputed background. It was also mentioned at para 3 that the point stands concluded against appellant by the consistent view of this Court right from Aruna Mills Ltd. (31 ITR 153)(Bom) to CIT Vs. Ghatkopar Estate & Finance Corporation (177 ITR 222) (Bom), the Hon'ble Delhi High Court in the case of Bharat Commerce Industries Ltd. Vs. Ld. CIT(A) (180 ITR 37), it was mentioned. It is also observed that Hon'ble Madras High Court in the case of Chennai Properties & Investment Ltd. (239 ITR 435) (Mad) also held that interest under section 201(1A) of the Act is not deductible. Both the Hon'ble Bombay High Court and Hon'ble Madras High Court have placed reliance on the decision of Hon'ble Supreme Court in the case of Bharat Commerce Industries (230 ITR 733 (SC), while coming to the conclusion that interest under section 201(1A) of the act is not deductible expenditure. In the case of Martin & Harris (P) Ltd. (73 Taxman 555), Hon'ble Kolkata High Court also held the same is not deductible.
6.2 Similarly, ITAT Delhi in the following cases held that interest paid under section 201(1A) of the Act is not allowable as business expenditure :- a) New Modern Bazaar Departmental Store (P) Ltd. Vs. ITO (ITA No. 590/Del/2018) b) Universal Energies Ltd. Vs. DCIT (ITA No. 2761/Del/2018) 6.3 The ITAT Bangalore also held that interest under section 201(1A) is not deductible in the following cases :- a) Jindal Aluminium Ltd. Vs ITO (ITA No. 31/Bang/2019) b) Velankani Information Systems Ltd. Vs. DCIT (2018) 97 Taxman.com 599 (Bang)
6.4 The ITAT Hyderabad in the case of Analogies Tech India Ltd. (ITA No. 247/Hyd/2023) also confirmed the disallowance of expenditure claimed for payment of interest under section 201(1A) of the Act.
10 Bank of Baroda 6.5 In view of the Hon'ble Jurisdictional High Court decision of Ferro Alloys (supra), other High Court decisions and ITAT decisions, the disallowance made by the Ld. AO with respect to interest paid under section 201(1A) of the Act is confirmed.
The appeals of the appellant are partly allowed for statistical purposes. 7. Order pronounced in the open Court on 26/08/2025.