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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, HONBLE & SHRI S. RIFAUR RAHMAN, HONBLEShri P.J. Pardiwala & Shri Fenil Bhatt Shri. Soumendu Kumar Dash
IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI AMIT SHUKLA, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank v. The Director of Income-tax (IT) 3rd Floor, Tax Department 1st Floor, Scindia House 23-25, M.G. Road, Fort N.M. road Ballard Pier Mumbai - 400001 Mumbai - 400038 PAN: AABCS4681D (Appellant) (Respondent) Assessee Represented by : Shri P.J. Pardiwala and Shri Fenil Bhatt Department Represented by : Shri. Soumendu Kumar Dash
Date of Hearing : 18.07.2022 Date of Pronouncement : 17.10.2022
O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the assessee against the order of the Director of Income-tax (International Taxation), Mumbai [hereinafter in short “Ld.DIT”] dated 12.03.2004 for the A.Y. 1999-2000 passed u/s.263 of the Act.
2 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank 2. Brief facts of the case are, assessee filed its return of income on 19.12.1999 declaring total loss of ₹.39,89,75,680/-. The assessment was completed u/s 143(3) of the Income-tax Act, 1961 (in short “Act”) on 28.02.2002 assessing the total income at ₹.42,40,20,446/-. While examining the assessment records by the Director of Income-tax (International Taxation) (hereinafter “Ld. DIT”) noted that the order passed by the Assessing Officer is erroneous and is prejudicial to the interest of Revenue. Accordingly, he issued notice u/s. 263 of the Act and show-caused the assessee as to why the order passed by the assessing officer should not be revised under section 263 of the Act. In response authorised representative of the assessee attended and filed relevant information as called for.
During the proceedings, assessee filed its letter dated 22.12.2003 in response to and objecting to the initiation of the proceedings u/s. 263 of the Act, it was submitted that power u/s 263 of the Act can be exercised by the Commissioner/DIT only, and the preconditions has not been satisfied in the present case and further relied on certain case law. It was further submitted that the Assessment Order is in consonance with the decision of the Hon'ble Jurisdictional High Court. Therefore, it
3 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank cannot be said that the decision is erroneous and also submitted that the Hon'ble Calcutta High Court in the case of Jeevanial v. Addl.CIT [108 ITR 407] has held that notice u/s. 263 at the instance of Audit without exercising own discretion and judgement cannot be sustained.
Ld.DIT rejected the submissions made by the assessee and observed that on all the issues involved herein, the Assessing Officer has not even called for the relevant information/facts from the assessee and has not applied his mind to the issues involved.
Ld. DIT discussed the various issues in his order and has analysed of following issues in his order are: -
In respect of Cost of Early Separation Scheme, Ld. DIT observed that the assessee is a foreign bank operating in India. For the current Assessment Year i.e., A.Y. 1999-2000, the assessee had debited ₹.165,39,21,000/- as an extraordinary item to the Profit & Loss Account. In the assessment order u/s 143(3) of the Act, to determine the taxable income, the income as per return had been taken into account which was based on the net profit of ₹.3,66,61,000/- declared in the Profit and Loss statement and the extra-ordinary item which was VRS payment of
4 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank the bank, was not considered by the Assessing Officer for disallowance or added back.
Ld. DIT relied on the CBDT Circular letter dated 23.01.2001, according to him, which is addressed to all Chief CIT's and observed that Assessing Officer was required to disallow VRS Payments taking support of the judicial precedents, which held that it is benefits of enduring, long term nature derived by the payer, which accorded capital nature to the expenditure. Accordingly, assessee was show caused to explain, hence the above said extraordinary expenses should not be added to the income as capital in nature.
In response assessee has submitted letter dated 22.12.2003, the summary of the letter is reproduced below: - Note 13 to the computation of income and the Notes to the Accounts clearly states that during the year, Bank had offered a Voluntary Retirement Scheme called Early Separation Scheme to its employees. The matter was discussed with the AO. during the course of Assessment hearings. The expenditure has been incurred not to secure any advantage in the capital field but to enable the bank to operate its business more efficiently and competitively The payments are allowable as revenue expenditure u/s 37 (1). Bombay High Court in the case of CIT Vs. Bhor Industries Ltd. [264 ITR 180] has held that VRS Expenditure as
5 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank deductible as revenue expenditure based on the criteria of commercial expediency An order in consonance with the decision of Jurisdictional High Court cannot be erroneous so as to justify revision u's 263 of the Act. The assessee also relied uponthe following judgments (i). CIT Vs Simpson Co. Ltd. [230 ITR 749 (Mad)] (ii). CIT Vs. George Oakes Ltd [197 ITR 288 (Mad)] (iii). Sasson J David & Co. Pvt. Ltd vs. CIT [118 ITR 261 (SC)] (iv). Indian Cable Co. Ltd. vs. Their Workman AIR 1972 SC 2195 (v). Atherton vs. British Insulated &Helsby Cables Ltd. 10 TC 155, 191 H.L (vi). CIT Vs. Assam Oil Co. Ltd. [154 ITR 647 (Cal.)) (vii). K Ravindranathan Nair vs CIT (247 ITR 178 (SC)] The CBDT Circular/Letter does not lay down the correct legal position which is laid down by the Supreme Court in the case of Empire Jute Co Ltd. [124 ITR 1] The CBDT Circular cannot be binding upon Assessing Officers where judicial decisions are available. Sec. 35DDA was inserted in the statute wef 01/04/2001 by the Finance Act, 2001 for amortisation of VRS Expenditure”
After considering the submissions of the assessee, Ld. DIT by fully relying on the CBDT Circular and further observed that the decision of the Hon'ble Jurisdictional High Court was not available to the Assessing Officer at the time of passing the order, it is not the case where the
6 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank Assessing Officer followed the order of the Jurisdictional High Court in preference to the circular issued by the CBDT. Moreover, he observed that the order of the Hon'ble High Court was not accepted by the revenue and an SLP has been filed. The matter has not reached a finality. Therefore, he observed that the expenditure on VRS incurred by the assessee is not an allowable expenditure.
Next issue is relating to provisions of bad debts u/s. 36(1)(viia) of the Act, Ld. DIT observed from the final accounts for the A.Y. 1999-2000 that assessee had debited provision and contingencies at ₹.85,37,20,000/- which included provisions against advances at ₹.88,93,18,000/- with the following breakup.
Provision for B/D Debts 53,78,40,000 Debts written off without provision 43,29,97,000 Recovery of Bad Debts w/o in earlier years (8,15,19,000) 88,93,18,000
Ld. DIT observed that in the computation of income, the provision for bad debts of ₹.53,78,40,000/-had been added back by the assessee and in the assessment, the returned income has been taken as the basis for further additions and regarding bad debts and provisions against bad debts, there is no addition or change except that deduction
7 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank u/s.36(1)(viia) @ 5% had been allowed at ₹.2,23,90,550/. Further, he observed that while allowing the bad debts written off without provision in the account as above the requirement as per the proviso to section 36(1)(vii), the deduction relating to any debt or part thereof shall be limited to the credit balance under the provision account in terms of section 36(1)(vii) had not been looked into. Further, he observed that allowable deduction of bad debts written off would be to the extent or excess over credit balance available in provision account u/s. 36(1)(viia) of the Act and since ₹.2,23,90,550/-had been allowed u/s 36(1)(viia) for the current assessment year write off to that extent was required to be disallowed and added back to income.
Ld. DIT observed that assessee submitted, from A.Y. 1992-93 onwards, the assessee had returned losses and therefore no deduction u/s 36(1) (viia) of the Act was claimed. Further the effect of the CIT(A)'s orders for the A.Y. 1993-94 to 1995-96 would also result in a change in the deduction u/s 36(1)(viia) of the Act. Ld. DIT observed that in earlier years assessee has not claimed any deduction u/s 36(1)(viia) for provision for bad and doubtful debts. As per the provisions of the Act, a banking assessee gets a deduction for bad and doubtful debts to the
8 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank extent of 5% of profits irrespective of the amount of bad debts actually written off. If the amount of bad debts actually written off exceeds the 5%, the excess is also to be allowed as per sec.36(1) (vii) of the Act. In the present case, the Assessing Officer allowed the entire bad debts actually written off i.e., ₹.43,29,97,000/- instead of the excess over 5% limit. In other words, if the actual bad debts written off is much higher than the 5% limit, then total deduction u/s 36(1)(vii) and 36(1)(viia) will be restricted to the actual bad debts written off. Finally, he observed that the Assessment Order passed by the Assessing Officer erroneous and prejudicial to the interest of revenue.
The next issue is disallowance u/s. 40(a)(ia) of the Act, Ld. DIT observed that as per clause 17(f), payments to visa / master card for the period January 1999 to March 1999 aggregating to ₹.75,24,627/- was required to be disallowed u/s 40(1)(i), for non-payment of TDS. Subsequently payment of TDS on this remittance had not been indicated and this was not added back in the returned assessment. In response assessee vide letter dated 22.12.2003 submitted as under: - Visa and Mastercard have no PE in India. Visa and Mastercard are not profit making bodies. These entities are acting the principles of mutuality.
9 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank Surplus accruing to a mutual concern cannot be regarded as income. U/s 195(1), tax is required to be deducted only if the payment is chargeable to tax. Deduction of Rs. 1,30,83,741/- being payment made to Mastercard and Visa disallowed in the AY. 1997-98 to be allowed in the current year u/s 40(a) (i) of the Act.”
Ld. DIT rejected the submissions of the assessee and observed that assessee cannot unilaterally decide whether the payments being made by it to Mastercard and Visa are chargeable to tax or not as held by the Hon'ble Supreme Court in the case of Transmission Corporation of India [239 ITR 587]. He also observed that DCIT (TDS), Bangalore held that the payments received by Mastercard and Visa are chargeable to tax in India. It was also upheld by the CIT(A), Mumbai. Ld.DIT observed that Assessing Officer has disallowed the payments made during the period from 01.04.1998 to 31.12.1998 but omitted to do so for the quarter ending on 31.03.1999. Therefore, this has resulted in loss of revenue.
With regard to computation u/s. 115JAA of the Act, Ld. DIT observed that according to the provisions of sec. 115JAA, where tax is paid by a company for any assessment year in relation to the deemed income u/s 115JAA, tax credit will be allowed in subsequent assessment
10 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank year when tax is payable by the assessee as per the normal provisions of the Act. The tax credit shall be the difference between the tax paid for any assessment year u/s 115JA(1) of the Act and the tax payable on the total income computed in accordance with the other provisions of the Act. He observed that on perusal of the ITNS-150A revealed that the assessing officer had given a MAT credit of ₹.19,47,82,306/- against the demand of Rs 20,35,29,816/- He observed that the MAT credit pertained to A.Ys.1997-98 and 1998-99. Further, he observed that assessee had debited an amount of ₹.53,78,40,000/- on account of provisions for doubtful debts. The provisions for doubtful debts is an unascertained liability and therefore it is required to be added for computing the book profit.
In response, assessee submitted that provision for doubtful debts is not a provision for a liability ascertained or unascertained. It is a provision for diminution in the value of assets, therefore such provision will not fall within the scope of explanation (c) to section 115JA (2) of the Act. This was accepted in the decision of the ITAT in Steel Authority of India Ltd. v DCIT [76 ITD 69] and Maharashtra State Electricity Board v JCIT [82 TTD 422]
11 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank 17. After considering the submissions of the assessee, Ld. DIT observed that the contention of the assessee is not acceptable to the revenue and the decision of the ITAT and the interpretation was not accepted by the Department. Accordingly, he proceeded to make adjustment of book profit and accordingly, determined the liability u/s.115JAA of the Act. Hence, he directed the Assessing Officer to give effect as per the direction of his order.
Aggrieved assessee is in appeal before us raising following grounds in its appeal: - “1. Revision bad in law On facts and circumstances of the case the learned Director of Income-tax (International Taxation) (DIT) erred in law in exercising the powers u/s 263 of the Income-tax Act, 1961 when the order of the assessing officer was neither erroneous nor prejudicial to the interest of the revenue. That on facts and circumstances of the case the learned DIT erred in not accepting theappellant's contentions that the proceedings be dropped. That on facts and circumstances the learned DIT erred in holding that the proceedings were validly initiated. 2. Early Separation Scheme Expenditure The learned DIT erred in holding that the expenditure of Rs. 165.38.21,000/- incurred bythe appellant bank on its early separation scheme was capital expenditure to be disallowed.
12 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank The learned DIT failed to appreciate that the Assessing Officer in computing the appellantbank's income had correctly allowed the said expenditure. That based on facts and circumstances of the case, the learned DIT erred in holding that as per the CBDT circular letter dated 23/1/2001 addressed to all Chief CIT's, the assessing officer was required to disallow VRS payments taking support of the judicial pronouncement regarding benefit of enduring, long term nature derived by the payer which accorded capital nature to the expenditure. That the DIT erred in law in applying the said circular which did not lay down the correctlegal position on VRS compensation. On facts and circumstances of the case the learned DIT erred in law in disallowing the said expenditure when it was incurred to enable the bank to operate its more efficiently and competitively and the payment was allowable u/s 37(1). The learned DIT erred in law in not following the decision of the jurisdictional High courtin DIT V Bhor Industries Ltd.(264 TTR 180) which held the VRS expenditure was revenuein nature based on the criteria of commercial expediency. That assuming, but not admitting that the said circular letter states the correct positionlaw, the DIT erred in stating the circular enjoined assessing officers to disallow theexpenditure when the circular actually directed assessing officers to examine the nature of the expenditure based on facts and circumstances of each case. That the learned DIT erred in holding that the CBDT circular letter which was not in accordance with the laid down legal position and judicial precedents, was still binding onAssessing officers. That on facts and circumstances, the DIT failed to demonstrate how the primary test mentioned in the circular letter to show how any advantage of enduring benefit resulted to assessee stood satisfied in the appellant's case to
13 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank warrant the disallowance and hold the expenditure as being capital in nature. That the learned DIT erred on facts and circumstances of the case in applying the circularto the whole expenditure which included payment towards Gratuity, pension etc besidesthe exgratia payment under the ESS scheme. 3. Disallowance u/s 40 (a) (i) -Payment to Visa and MasterCard That on the facts and in the circumstances of the case, the learned DIT erred in holding that the payment of Rs. 75.24,627/- made to Visa and MasterCard came within the purview of section 40 (a) (i). That the learned erred in holding that the provisions of section 195(1) applied to thepayment when the section required tax to be deducted only if income was chargeable to taxin India. That the payment to Visa and MasterCard being not liable to tax in India the appellant had no legal obligation to withhold tax. 4. Adjustment to Book-Profit u/s 115JA- Provision for bad and doubtful debts That on the facts and in the circumstances of the case, the learned DIT erred in making adjustment of Rs. 53,78,40,000/- being provision made for bad and doubtful debts, to the Book Profit. That the learned DIT erred in law in holding that the above adjustment fell within the ambit of explanation c to section 115JA (2) which permits the book profit to be increased by the amount set aside to provisions made for meeting liabilities, other than ascertained liabilities. That the learned DIT erred in law as such a provision for bad and doubtful debts was a not liability. That the learned DIT should have held that the provision for doubtful debts was not a "provision" as defined by the Para 7(1)(a) of Part 111 to Schedule VI to the Companies Act, 1956.
14 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank That the decision of the learned DIT in holding that the provision for bad debts is an provision for an unascertained liability is wholly erroneous and suffers from misconception about the well settled principles of law and misinterpretation of the definition provided in the Companies Act. 5. That the learned DIT erred in not allowing a deduction for interest of Rs. 2,18,47,808/-, without mentioning or attributing any reason for the said disallowance in the subject order u/s 263, such amount being allowable and allowed by the Assessing officer in accordance with Explanation ii to section 115JA(2) being income exempt under Chapter 111. 6. That the appellant craves leave to add/ or alter, amend, rescind or modify the grounds hereinabove, before or at the hearing of this appeal.”
At the time of hearing, Ld. AR, with regard to early separation Scheme, brought to our notice findings of the Ld. DIT in its order at Page No. 3 and submitted that Ld. DIT heavily relied on the letter issued by CBDT dated 23.01.2011 and completely overlooked the findings given by Hon'ble Bombay High Court in the case of CIT v. Bhor Industries Ltd., [264 ITR 180]. By referring to the above decision, he submitted that the voluntary retirement scheme is allowable expenditure and it is not incurred for acquiring any asset but were incurred to reduce the cost and the liability stood ascertained, quantified and discharged during the accounting year. He prayed that on merit the issue is covered in favour of the assessee.
15 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank 20. With regard to bad debts, he brought to our notice Page No. 5 of the order passed u/s. 263 of the Act and brought to our notice section 36(1)(vii) and 36(1)(viia) of the Act. Further, he brought to our notice Page No. 32 of the Paper Book and relied in the decision of the Hon'ble Gujarat High Court in CIT v. UTI Bank Ltd., ([2013] 29 taxmann.com 79) and submitted that in this decision Hon'ble High Court has addressed the issue whether the closing credit balance in the provision account should be considered or the opening balance of such provision account should be considered for section 36(1)(vii) of the Act. He submitted that as per section 36(1)(vii) of the Act only opening balance of provision should be adjusted and not closing balance of such provision account, therefore, the conclusion reached by Ld. DIT (IT) is not proper. He prayed that this issue also is in favour of the assessee on merit.
With regard to issue u/s. 40(a)(i) of the Act, Ld. AR submitted that during the assessment year under consideration, the Assessee had inter alia claimed deduction of ₹.75,24,627 with respect to payments made to MasterCard and VISA. The Ld. DIT vide its order dated 12 March 2004 passed u/s. 263 of the Act disallowed inter alia the aforesaid payment/ deduction u/s. 40(a)(i) of the Act, on account of non-deduction of tax at
16 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank source allegedly deductible at source. Therefore, the Assessee has filed this appeal challenging inter alia the aforesaid disallowance.
The Assessee before us raised the following two propositions/arguments:
Proposition/Argument 1: Once the amount has been offered as income and tax has been paid by the recipient, in view of proviso to section 40(a)(i) of the Act, no disallowance can be made.
The issue, the Assessee submits, no longer remains res-integra. The Tribunal in the Assessee's own case (ITA No. 6100/Mum/02 and ITA No. 6101/Mum/92) for the captioned assessment year held the Assessee as not to be in default for the very same payments made to VISA and Mastercard. The decision of the Tribunal is at Page No. 10 to 13 of the Paper Book filed on 28 November 2008. Further, the Assessee submits that the dispute regarding payment of tax by MaterCard and VISA was resolved under the Mutual Agreement Procedure ("MAP") adopted under the Double Taxation Avoidance Agreement between India and USA ('India-USA tax treaty"). As per the same, it has been held that the fees received by MasterCard and VISA are liable to tax in India on net basis
17 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank in India. MasterCard and VISA also accepted under MAP that they have permanent establishment(s) in India. In this regard, the Assessee draws our attention to Page No. 1 to 9 of the paper-book filed before us to the certificate issued wherein it has been certified that the necessary payment of taxes has been made by VISA after considering the income received from the Assessee and copy of the assessment order passed in case of MasterCard for AY1999-2000, etc.
Ld. AR further submitted that once income has been offered to tax by the recipient, no disallowance can be made in the hands of the Assessee in view of the second proviso to section 40(a)(i) of the Act which states that if the Assessee is not deemed to be an Assessee in default as per section 201(1) of the Act, then it shall be deemed the Assessee has deducted and paid tax on such sum on the date of furnishing of return of income by the payee. First proviso to section 201(1) of the Act provides that the payer shall not be deemed to be an assessee in default if the recipient has taken into account the said income while filing return income and tax due has been paid on such income by the payee and, a certificate to that effect has been issued. The Assessee submits that the aforesaid conditions have been satisfied
18 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank in the case of the Assessee in view of the afore-stated certificate as well as the decision in the Assessee's own case of the Tribunal (ITA No. 6100/Mum/02 and ITA No. 6101/Mum/92) for the captioned assessment year holding the Assessee as not an Assessee in default for the very same payments made to VISA and Mastercard. The decision of the Tribunal is at Page No. 10 to 13 of the Paper Book. The Assessee submits that the direction given in the impugned order for making a disallowance has no legs to stand and must be set aside since the Assessee has been held not to be an Assessee in default and accordingly, first proviso to section 201(1) of the Act stands satisfied. Further, the Assessee submitted that second proviso to section 40(a)(i) of the Act has been held to be retrospective by the co-ordinate Benches of the Tribunal in the case of Celltick Mobile Media (1) P. Ltd. v. DCIT (188 ITD 883) (Mum. Trib) (copy enclosed) and Tirummathi Kannammal Education Trust v. ITO, IT (140 taxmann.com 76) (Chen. Trib.) (copy enclosed).
The Assessee further submits that in the context of identical provision contained in second proviso to section 40(a)(ia) of the Act, the Hon'ble Jurisdictional High Court in the case of Pr. CIT vs. Perfect Circle
19 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank India P. Ltd. (ITA NO. 707 of 2016 dated January 1, 2019) (copy enclosed) has held the same to be retrospective in nature.
Proposition/Argument 2: Without prejudice, the Assessee submits that it has been held in series of decisions that where an Indian resident has paid an amount to Master Card or Visa prior to insertion of section 40(a)(ia) with effect from April 1, 2005, in view of Article 26(3) of India USA Treaty disallowance under section 40(a)(i) could not be made. The Assessee submits that when payment is made by a Resident, disallowance under section 40(a)(i) is not attracted, in view of Article 26(1) & (2) of India UK Treaty which provides for non-discrimination no disallowance should be made in the case of the Assessee.
For the above proposition, Ld. AR submitted that in view of Article 26(3) of the India-USA Tax treaty, no disallowance under section 40(a)(i) of the Act can be made, as the same would amount to discrimination between a resident Assessee and a non-resident Assessee which is prohibited by the said Article. The Assessee submits that for the assessment year under consideration, there was no provision under the statute to disallow expenditure incurred/payment made / credited to a resident payee, without deduction of tax at source or deducted but not
20 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank paid to the credit of the exchequer. Section 40(a)(ia) of the Act has been brought in subsequently with effect from April 1, 2005. The Assessee submits that in view of Article 26(1)&(2) of India UK Treaty, PE cannot be discriminated with a resident Assessee whose payment to a Non-resident US entity will not be disallowed prior to insertion of section 40(a)(ia) of the Act with effect from April 1, 2005.
Therefore, in view of the provisions of Article 26(1)&(2) of the India UK Treaty and Article 26(3) of India US Treaty, Ld. AR submitted that no disallowance can be made in case of payments to the non- residents even if the amount is found taxable in India. In connection with no disallowance can be made under section 40(a)(i) of the Act, we place reliance on the following judicial precedents, wherein the above principles / arguments have been upheld.
i. DIT (IT) vs. Citibank N.A. (2016) (66 taxmann.com 373) (Bom. HC) ii. Central Bank of India vs DCIT (2010) (42 SOT 450) (Mumbai ITAT); iii. Citibank N.A. vs. ACIT (ITA No.5275 and 5276/Mumbai /2001), and iv. Herbalife International India (P.) Ltd. Vs. ACIT (2006) (101 ITD 450).
In this regard Ld. AR submitted that in view of Article 26(1)&(2) of the India UK Treaty, no disallowance can be made in the hands of the PE, as it would amount to discriminating between Indian Resident
21 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank making a payment to Master Card and VISA and non-resident making the payment to the same entities. Ld. AR prayed that impugned disallowance is not warranted in the present case of the Assessee and therefore the order of the Ld. DIT to disallow should be set aside. No other reasoning is given by the Ld. DIT with relation to disallowance of said expenditure, and therefore, the Assessee submitted that the order must not stand or fail on the basis of reasoning given in the order only.
With regard to 115JA he brought to our notice findings of Ld. DIT at Page No. 7 of the 263 order and submitted that the provision of section 115JA is not applicable to the banks. Ld. DIT has applied this provision but subsequently various courts have held that section 115JA is not applicable to the banks. In this regard he brought to our notice Page No. 21 of the Paper Book and relied on the decision of the Hon'ble Bombay High Court in the case of CIT – LTU v. Union Bank of India [2019] 105 taxmann.com 253 (Bombay) and brought to our notice the findings of the Hon'ble High Court. Further, he submitted that this provision is not applicable to the banking company as held in assessee’s own case and brought to our notice findings of the Assessing Officer in his order in which he has clearly agreed with the above said view.
22 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank 32. Considering the above submissions, Ld. AR submitted that no doubt Ld.DIT initiated the proceedings u/s. 263 of the Act but by considering the above submissions it is clear that all the issues raised by the Ld. DIT, by referring to various judicial precedents, the issues are in favour of the assessee on merit. Therefore, he prayed that the twin conditions to initiate proceedings u/s. 263 of the Act are not satisfied. Accordingly, he prayed that the 263 order may be quashed/set-aside.
On the other hand, Ld. DR, with regard to cost of early separation scheme, submitted that Ld. AR relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Bhor Industries Ltd., (supra). He submitted that in the above decision there is no clarity whether the expenses incurred by the assessee should be allowed as capital or revenue and further submitted that the revenue has not accepted the above decision. He submitted that the CBDT issued a letter dated 23.01.2011 is clearly explains the treatment / allowability of the VRS scheme and this is addressed to all the Chief commissioners. Therefore, this letter is equally applicable to the Assessing Officer and supported the findings of the Ld. DIT.
23 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank 34. With regard to payment made to Visa and MasterCard, Ld. DR submitted that these entities have rendered disbursement services therefore it is fees for services rendered by them in India. Therefore, services are not covered under Article 26(3) of the DTAA. He heavily supported the findings of the Ld. DIT. With regard to other issues he relied on the orders of the Ld. DIT.
Considered the rival submissions and material placed on record, at the time of hearing, Ld. AR submitted that all the issued raised by the Ld. DIT are covered in favour of the assessee and even on merit of the issues raised by Ld. DIT are in favour of the assessee. 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
24 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank criteria commercial expediency. These expenditure does not have enduring nature. Further, we observe that Ld. DIT has observed 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.
Coming to the Ground No. 3 which is relating to payment made to visa and master card. We observe that Ld. DIT observed from the record that assessee has not made the payments to visa and Master card and failed to deduct TDS for the fourth quarter. Therefore, it is disallowable u/s. 40(a)(i) of the Act. At this point of time, we observe
25 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank from the submissions made by the Ld. AR that no doubt assessee has deducted TDS and remitted to the exchequer but there is several amendments and judicial precedents as well as several amendments had been made in section 40(a)(i) and 40(a)(ia) of the Act as per which when payee declares the income in its return of income and offered to tax the payer is considered to be assessee not in-default. In the present case, we observe that the payees i.e., visa and master card entered into MAP under DTAA between India and USA Treaty and accordingly, they declared the income and paid the relevant taxes including the current assessment year. The assessee has submitted relevant information and brought to our notice Page No. 1 to 9 of the Paper Book filed before us which contains certificate issued in this regard which clearly shows that the payees have declared the income and paid the due taxes. Since the payee has complied with the relevant rules the assessee cannot be held as assessee-in-default. Even though this development happened in the subsequent year, the revenue is properly compensated. Accordingly, provision as held in section 40(a)(ia) are fully satisfied. However, the above said amendments were not made u/s. 40(a)(i) of the Act. However, as held in the case of Celltick Mobile Media (India) (P.) Ltd., v.
26 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank DCIT [127 taxmann.com 598 (Mumbai – Trib)] the Coordinate Bench held as under: “16. It is submitted that the 2nd proviso to section 40(a)(i) inserted with effect from 01.04.2020 as per which, where assessee fails to deduct the whole or any part of the tax in accordance with the provisions of chapter XVII – B on any such sum but is not deemed to be an assessee in default under the 1st proviso to section 201(1). It shall be deemed that the assessee has deducted and paid the taxes on such sum on the date of furnishing of return of income by the payee referred to in the said proviso. As per proviso to section 201(1), a payee shall not be deemed to be an assessee in default in respect of such tax if such payee, (a) furnished its return of income under section 139, (b) has taken into account such sum for computing income in such return of income and (c) has paid the tax due on the income declared by him in such return of income and along with such payee furnishes a certificate to this effect from an accountant as per form prescribed for this purpose. 17. In the given case, we notice that the payee has already furnished certificate from a chartered accountant, return of income and computation of income under section 139. Further we also noticed that the income of the payee is not chargeable to tax in India as per the decision of the coordinate bench. Even though as submitted by learned DR that the matter of payee is pending before High Court. In our view, as far as the current position available on record that the income of the payee is not chargeable to tax in India. Considering the facts on record and additional ground raised by the assessee. The question raised before us that whether the amendments made in Section 40(a)(i) is applicable retrospective or not. It is clear that the 2nd proviso to section 40(a)(ia) and section 40(a)(i) are evenly worded and Pari materia to each other. Both the provisions were introduced by the legislature in order to remove the anomaly and curative in nature. In the case of section 40(a)(ia) the Hon’ble Bombay High Court in the case of Perfect Circle India Pvt. Ltd. (supra) and Hon’ble Delhi High Court in the case of Ansal Land Mark Township (P) Ltd. (supra) have already held that these provisions are applicable retrospectively with effect from 01.04.2005. Since the amendment was carried out in order to remove the anomalies in the sections
27 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank similar to section 40(a)(ia) and in our considered view, the amendment in section 40(a)(i) is also made in order to remove the anomaly and it is no doubt curative in nature. Therefore, considering the findings of the Hon’ble High Courts, in our view the amendment to the section 40(a)(i) is also applicable retrospectively. 18. Considering our observation in the above paragraphs, in our considered view, the documents submitted before us clearly shows that the income of the payee is not taxable in India and assessee has already filed the relevant information u/s 201(1) of the Act which shows that the assessee cannot be regarded as ‘assessee in default’. Therefore, we set aside the order passed by the AO under section 143(3) of the Act. Considering the above discussion, the additional ground raised by the assessee is allowed and the main grounds raised by the assessee are dismissed as infructuous.”
From the above decision of the Coordinate Bench it is clear that the amendment provision u/s. 40(a)(i) retrospective in nature. Therefore, the provisions of section 40(a)(ia) 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.
We observe from the record that assessee has filed additional Ground No. 2 which is relating to deduction u/s. 36(1)(vii) of the Act to the extent of deduction u/s. 36(1)(viia) of the Act claimed during current
28 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank Assessment Year by disregarding the fact that in earlier years the assessee had incurred losses and no deduction u/s. 36(1)(viia) was claimed by the assessee in earlier years. In this regard, we observe that Ld. DIT discussed various aspects in this regard and came to the conclusion that action of the Assessing Officer in allowing the deduction u/s. 36(1)(vii) without proper verification and also assessee has not added back the provision for bad debts while computing the total income. He observed that there is no addition or change except that deduction u/s. 36(1)(viia) @5% had been allowed. Further, he observed that while allowing the bad debts written off without provision in the account which is required u/s. 36(1)(vii) of the Act. However, we observe that Ld. AR of the assessee submitted that the provisions made to determine the deductibility requirement u/s.36(1)(vii) has to be on the opening balance of the provision not on the closing balance of the provision as suggested by the Ld. DIT. We observe that the calculation submitted before us clearly indicates that assessee has calculated the bad debts allowable based on the provisions made by them in the earlier Assessment Years to the extent they have made the claim for actual bad debts after adjusting the relevant deduction u/s. 36(1)(viia) of the Act . In our considered view, this issue already settled by now that
29 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank u/s.36(1)(vii) of the Act, assessee is allowed to claim the deduction only to the extent of the provisions already made in the books of accounts. Therefore, provision already made clearly suggest that the provision has to be made in the earlier year i.e., opening balance of provision balance alone should be considered for determining the deduction u/s. 36(1)(vii) of the Act. Therefore, this issue is also covered in favour of the assessee on merit and also the Assessing Officer has considered and dealt with this deduction in detail which we infer from the submissions made by the assessee.
Coming to the next issue of determining the book profits u/s.115JA of the Act. Ld. DIT observed that assessee has failed to adjust provisions of section u/s. 36(1)(vii) and u/s. 36(1)(viia) of the Act in determining the book profits u/s. 115JA of the Act, and according to him they are unascertained liability. However, we observe that the deduction claimed u/s. 36(1)(vii) and u/s. 36(1)(viia) are not unascertained liability rather the provisions are recommended by Reserve Bank of India which has to be considered as an ascertained liability, rather the reduction of the value of the assets and which has an impact on the carryforward value assets in the Balance Sheet. On
30 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank merit this issue also covered in favour of the assessee. However, at the time of hearing, Ld. AR filed additional Ground No. 3 as well as submitted before us that the provision of section 115JA are not applicable in the case of the banking companies by referring to various case laws including the Hon'ble Jurisdictional High Court decisions. It is clear from the decision of the various High Courts that the provisions of section 115JA are not applicable to the banking companies prior to the amendment made in the Finance Act, 2012. Considering with the above discussion, we are inclined to accept the submissions of the assessee and the issue raised by the Ld. DIT relating to 115JA is also in favour of the assessee on merit.
From the above discussion it is clear that all the issues raised by the Ld. DIT in revision proceedings are covered in favour of the assessee on merit and as per the section 263 of the Act in order to initiate the proceedings there has to be a finding that the order passed by the Assessing Officer is not only erroneous as well as prejudicial to the interest of the Revenue. Both the twin conditions have to be satisfied. In the given case all the issues are in favour of the assessee on merit. Therefore, it clearly proves that there is no prejudicial to the
31 ITA NO.3345/MUM/2004 (A.Y. 1999-2000) Standard Chartered Bank interest of the Revenue as far as the issues raised by the Ld. DIT are concerned. Accordingly, we came to the conclusion that the order passed u/s. 263 is not erroneous as well as prejudicial to the interest of the Revenue, hereby set-aside.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 17th October, 2022.
Sd/- Sd/- (AMIT SHUKLA) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 17.10.2022 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.
//True Copy// BY ORDER
(Asstt. Registrar) ITAT, Mum