M/S. STANDARD CHARTERED BANK,MUMBAI vs. THE ACIT (IT)1(3), MUMBAI

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. 803/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank v. ACIT – Range-1(3) Taxation Department, 23-25 Scindia House, Ballard Estate M.G. Road, 3rd Floor N.M. Marg, Mumbai - 400038 Fort, Mumbai - 400001 PAN: AABCS4681D (Appellant) (Respondent) ITA NO. 850/MUM/2009 (A.Y. 1999-2000) ADIT (IT)– 2(3) v. Standard Chartered Bank Room No. 120, 1st Floor Taxation Department, 23-25 Scindia House, Ballard Estate M.G. Road, 3rd Floor N.M. Marg, Mumbai - 400038 Fort, Mumbai - 400001 PAN: AABCS4681D (Appellant) (Respondent) Shri P.J. Pardiwala & Assessee Represented by : Shri Fenil Bhatt Shri Soumendu Kumar Dash Department Represented by :

Date of Hearing : 20.07.2022 Date of Pronouncement : 27.09.2022

2 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank O R D E R PER S. RIFAUR RAHMAN (AM)

3 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank a) The learned CIT (A) erred in estimating 25% of the expenditure incurred on refurbishment of leasehold premises as capital in nature. Accordingly, expenditure of Rs. 1,77,56,417/- was disallowed as capital expenditure on which depreciation at the eligible rate was allowed. b) The learned CIT(A) further erred in confirming the disallowance of expenditure incurred on Software Development expenses made by the Assessing Officer aggregating to Rs. 13,14,42,560/- by treating the same as capital in nature. c) The disallowance upheld by learned CIT (A) is unjustifiable and must be quashed. 3. TAXABILITY U/S 115JA (Pages 21 to 22 of CIT(A)' order) a) The learned CIT (A) erred in law in confirming the action of the Assessing Officer in applying the provisions of section 115JA 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. b) The learned CIT(A) failed to appreciate that  Section 90(2) 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.  Circular No. 333 dated April 12, 1982 issued by the Central Board of Direct Taxes (CBDT) provides that where a Double Taxation Avoidance Agreement (DTAA) provides for a particular mode of computation of income, the same  would be followed irrespective of the provisions of the Income tax Act.  The DTAA specifically lays down the method of determination of profits of the PE and therefore, it overrides the provisions of Section 115JA (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.  Courts of many countries have held that the international binding effect of the treaty cannot be affected by such subsequent domestic legislation and such domestic legislation violates

4 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank international law and causes a breach of the international obligations brought about by the treaty  Since the tax agreements are special rules, the issue of conflict falls upon the maxim "a subsequent general law does not override a prior special law "In view of this, the tax agreements being specific rules will 'precede' tax laws and prevail upon them. • Section 115JA (4) provides that, save as otherwise provided in Section 115JA, 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.  The Memorandum explaining the provisions of the Finance Bill, 1996, explaining the introduction of section 115JA states that studies have shown that in spite of the fact that companies have earned book profits and have paid handsome dividends, no tax has been paid by them to the exchequer. In case of the Branch-PE of a foreign company, the question of payment of dividends out of book profits does not arise. For this reason also, the provisions of Section 115JA are not intended to apply to Branch-PE of foreign companies, which are governed by the tax treaty provisions. • Since the section provides for presumptive rate of profits, which is not beneficial to the Appellant, due to its carried forward losses and which, therefore has to be disregarded in view of the provisions contained in section 90(2) of the Act c) The contention upheld by learned CIT (A) is unjustifiable and must be quashed. 4. DENIAL FOR DEDUCTION OF HEAD OFFICE EXPENDITURE OF Rs.23,28,71,503/- IN ENTIRETY AND RESTRCITING THE CLAIM TO Rs. 2,43,70,712 U/S. 44C (Page 23 of CIT(A)' order) a) The learned CIT(A) erred in holding that the claim of the appellant for allowing Head Office Expenditure of Rs 23,28,71,503/- in entirety without taking recourse to section 44C cannot be accepted since appellant has not filed revised return for such claim. b) The CIT(A) failed to appreciate that

5 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank  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  The said was revised during the course of appellant proceeding in view of the decision of Mumbai tribunal in the case of Metchem Canada Inc. v/s 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 under an obligation to compute the income in accordance with the law as interpreted by the Judicial authority. c) The contention upheld by learned CIT (A) is unjustifiable and must be quashed. 5. The Appellant craves leave to add, alter and/or amend one or more of the above grounds of appeal. 6. The Appellant prays for appropriate relief.”

6 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 4. Ld. Counsel for the assessee submitted that the above additional grounds of appeal are purely legal grounds and do not require any fresh examination of facts. Therefore, Ld. Counsel for the assessee prayed it may be admitted.

7 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank are far more than the investments and no borrowed funds were utilized for the purpose of investment. Ld. AR further brought to our notice that similar ground which assessee has raised before the Coordinate Bench in ITA.No. 7891 and 9229/Mum/2014 for the A.Y. 1997-98 and the Coordinate Bench has considered and adjudicated the issue in favour of the assessee. Copy of the order is placed on record.

8 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 28. Learned Commissioner (Appeals) after considering the submissions of the assessee having found that there is no nexus between the interest bearing funds and the investment made in tax free bonds and further, the assessee had sufficient own fund to finance investment in tax free bonds, directed the Assessing Officer to delete the disallowance made. 29. We have considered rival submissions and perused material on record. As could be seen, learned Commissioner (Appeals) has recorded a categorical factual finding that the interest bearing funds have no nexus with the investment made in tax free bonds. Further, he has also recorded a finding of fact that the assessee had sufficient own fund to make investment in tax free bonds. The aforesaid factual finding of the first appellate authority has not been controverted by the Revenue through any substantive evidence brought on record. That being the case, we do not find any valid ground to interfere with the decision of learned Commissioner (Appeals) on the issue the issue. Accordingly, the ground raised is dismissed.”

9 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank Refurbishment: (i). Madras Auto Service Pvt. Ltd., [233 ITR 468 (SC) (ii). R.B Bansilal Abirchand Spg & Weaving Mills vs. CIT 31 ITR 427 (Nagpur- HC) (iii). CIT vs. Rex Talkies (18 Taxman 363 (Karnataka - HC) (iv). CIT vs. Oxford University Press 108 ITR 166 (Bom - HC) (v). ACIT vs. India United Mills Ltd (8 Taxman 182) (Bom - HC) (vi). Empire Jute Co. Ltd - 124 ITR 1 (SC) (vii). Tea Estate (P) Ltd. - 198 ITR 535 (Cal) (viii). Nila Products - 148 ITR 99 (Bom) (ix). Bhagat Industries Corporation - 126 ITR 645 (P&H) (x). Girdhari Dass & Sons - 105 ITR 339 (All) (xi). Assam Bengal Cement Co Ltd. - 27 ITR 34 (SC) (xii). Ooty Dasaprakash - 237 ITR 902 (Mad) (xiii). B and A Plantation and Industries - 242 ITR 22 (Gau) (xiv). HEDE Consultancy P Ltd. - 258 ITR 380 (Bom) Software: (xv). CIT vs. Raychem RPG Ltd. 346 ITR 138 (Bom)

10 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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 t he 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 assesee 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 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 fro the assessment year 1968-69?"

11 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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, 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 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

12 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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 licence 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) : 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. 2. Expenditure may be treated as properly attributable to capital when it 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...........If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expense, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. 3. Whether for the purpose of the expenditure, any capital was withdrawn, or, in other words, whether the object of incurring the expenditure was to employ what was taken in as capital of the business. Again, it is to be seen whether the expenditure incurred was part of

13 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank the fixed capital of the business or part of its circulating capital. (underlining ours) 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 assesseee. 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, 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 centres 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 assesee was carrying on the business of manufacture and sale of sugar. It has its factory in U.P. The assessee paid a contribution towards meeting the cost of construction of roads in the area around its factory under a

14 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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 t he 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. 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 a 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

15 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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 t he 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.”

16 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank Coordinate Bench in assessee’s own case for the A.Y. 1997-98 and decided the issue in favour of the assessee. While holding so the Coordinate Bench held as under: - “3. In ground no.3, the assessee has challenged the computation of income under section 115JA of the Income-tax Act, 1961 (for short "the Act"). 4. Brief facts are, the assessee is a foreign company incorporated by the Royal Charter under the laws of England and Wales. It carries on business of banking, financial service and allied activities. The assessee company opened branches in India to carry on such activities with the permission of Reserve Bank of India (RBI) under the Banking Regulations Act, 1949. For the impugned assessment year, the assessee filed its return of income on 28th November 1997, declaring total income of ` 2,54,830. In the course of assessment proceeding when the Assessing Officer proposed to compute assessee’s tax liabilities under section 115JA of the Act, it was contended by the assessee that as per Article–7 of India–U.K. Double Taxation Avoidance Agreement (DTAA) only business profit directly attributable to the Indian branches can be taxed in India. Thus, it was submitted, the assessee has no liability under the provisions of section115JA of the Act. It was submitted, the provisions of the Act would apply to the assessee only to the extent they are beneficial to it as provided under section 90(2) of the Act. In this context, the assessee also relied upon CBDT Circular no.333, dated 12th April 1982. Thus, in sum and substance, it was submitted by the assessee that when the India–U.K. Tax Treaty specifically provides mode of computation of profit, it will override the provisions of section 115JA of the Act. The Assessing Officer after considering the submissions of the assessee observed that under the Article–7 of the Tax Treaty no specific method of computation for calculation of tax has been provided. He observed, the said Article only provides for taxability of business profit directly attributable to Bank’s branches in India. Whereas, what section 115JA of the Act seeks to tax is nothing but the profits derived by the assessee shown in the Profit & Loss Account in respect of Indian branches. Thus, ultimately, he held that the assessee is liable to pay tax under section 115JA of the Act and computed the tax accordingly under the said provision. The assessee challenged the aforesaid decision of the Assessing Officer before the first appellate authority.

17 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 5. Learned Commissioner (Appeals) after considering the submissions of the assessee did not find merit in them. Relying upon a decision of the Authority for Advance Ruling reported in 234 ITR 335, he held that the provisions of section 115JA of the Act would apply to a non–resident company. Accordingly, he upheld the decision of the Assessing Officer insofar as applicability of section 115JA of the Act is concerned. 6. Learned Sr. Counsel for the assessee drawing our attention to the provisions contained under section 115JA of the Act submitted, as per sub–section (2) of section 115JA of the Act, the companies whose Profit & Loss Account is prepared in accordance with the provisions of Part–I & II of Schedule–VI to the Companies Act, 1956, are amenable to the provisions of section 115JA of the Act. He submitted, assessee has to prepare its accounts as per Banking Regulations Act and not as per the Companies Act. He submitted, clause (e) to Explanation to section 115JA of the Act further makes it clear that the provision of section 115JA of the Act is applicable only to domestic companies as it speaks of increasing the income by the amount of dividend paid or proposed. Learned Sr. Counsel for the assessee submitted, section 115JB of the Act, which is pari– material to section 115JA of the Act, an amendment was made by Finance Act, 2012, effective from 1st April 2013, making it mandatory for all companies including banking companies to prepare their Profit & Loss Account as per Schedule–VI of the Companies Act, 1956. He submitted, the said amendment would be applicable form assessment year 2012–13 onwards. Learned Sr. Counsel for the assessee submitted, no such corresponding amendment like section 115JB(2)(b) of the Act was made to the provisions of section 115JA of the Act. Thus, he submitted, the provisions of section 115JA of the Act cannot be applied to the assessee. In support of his contention, learned Sr. Counsel relied upon the following decisions:– ICICI Lombard General Insurance Co. Ltd. v/s ACIT, (i). 54 SOT 538 (Mum.); (ii). UCO Bank v/s DCIT, 156 ITD 146 (Kol.); (iii). State Bank of Hyderabad v/s DCIT, 58 SOT 278 (Hyd.); (iv). DCIT v/s Royal Bank of Scotland, 76 taxmann.com 91; and

18 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank (v). Bank of Tokyo Mitsubishi UFJ Ltd. v/s ADIT, 49 taxmann.com 441.” 7. The learned Departmental Representative submitted, since the assessee has a Permanent Establishment (PE) in India, its accounts have to be maintained as per the provisions of the Act. In this context, he strongly relied upon the observations of learned Commissioner (Appeals). 8. We have considered rival submissions and perused material on record. The main plank of assessee’s 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 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, sub– section (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 since the assessee is not constituted as a company under the Companies

19 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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.

20 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank (iii). Rajeev Sureshbhai Gajwani v. ACIT - 129 ITD 145 (at Paras 7 & 8.5) (SB - Ahd) - Sec 80HHE (iv). Standard Chartered Bank v. IAC - 39 ITD 57 (Mum) - Sec 36(1)(viia) - UK Treaty (v). Metchem Canada Inc. v. DCIT - 284 ITR (AT) 196 (Mum) - Sec 44C (vi). Rolls Royce Industrial Power Ltd v. ACIT - 42 SOT 264 (Del) - Sec 44AD -UK Treaty DaimlerChrysler India - 29 SOT 502 (Pune) - Sec 79 OTHER CASES-COVERED IN FAVOUR (vii). Citibank N. A. v. ACIT ITA Nos. 5275 & 5276/Mum/2001 (at para 30) (Mum) - Sec 40(a)(i) (viii). DCIT v. Lazard India (P.) Ltd - 41 SOT 72 (Mum) - Sec 40(a)(i) (ix). Central Bank of India v. DCIT - 42 SOT 450 (Mum) - Sec 40(a)(i) (x). B4U International Holdings Ltd v. DCIT - 21 taxmann.com 529 (Mum) - Sec 40(a)(i) (xi). Sandoz (P.) Ltd v. ACIT - 34 taxmann.com 280 (Mum) - Sec 40(a)(i)

21 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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. 2. Subject to the provisions of para 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a PE situated therein, there shall in each Contracting State be attributed to that PE, the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a PE. In any case, where the correct amount of profits attributable to a PE is incapable of determination or the ascertainment thereof presents exceptional difficulties, the profits attributable to the PE may be estimated on a reasonable basis provided that the result shall be in accordance with the principles laid down in this Article. 3. In the determination of the profits of a PE, there shall be allowed those deductible expenses which are incurred for the purposes of the business of the PE including executive and general administrative expenses, whether incurred in the State in which the PE is situated or elsewhere as are in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any paid (otherwise than as a reimbursement of actual expenses) by the PE to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents,

22 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank know-how or other rights, or by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the PE. Likewise, no account shall be taken in the determination of the profits of a PE, for amounts charged (otherwise than towards reimbursement of actual expenses), by the PE to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices. 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 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 can be viewed as a restriction on admissibility of

23 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank deduction of head office expenditure at, and, whether the provisions of Section 44C, 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 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, authorised 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, the OECD Model Convention Commentary has a key role in determining the scope and connotations of art 24(2) of the Indo-

24 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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 Redcliffe'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 expositio inasmuch 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 Redcliffe, '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 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 favourable 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

25 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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 inasmuch as even legitimate business expenses attributable to the PE and deductible under Section 37(1) 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) thus stands curtailed for PE of a Canadian company. 7. In the Indo-Canadian DTAA, arts. 24 to 28 are clubbed together under Chapter VI titled "specific provisions", whereas the provisions of arts. 6 to 21 are 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 hot be subjected to any taxation which is less favourable 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 derogant', 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

26 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank provisions have to be treated as overridden by the provisions of the Indo-Canadian DTAA. There 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. 8. The next contention of the Revenue is that the provisions of Section 44C are not in the nature of restriction but provide only a fair method of allocation of head office overheads. It is also contended that in the absence of the provision of Section 44C, the head office expenses cannot be allowed at all for want of verification of expenses. We see no substance in this plea either. In the case of CIT v. Deutsche Bank AG (IT Ref. No. 139 of 1997, judgment dt. 24th July, 2003), upholding the action of this Tribunal, Hon'ble Bombay High Court held that in a case where Section 44C is held to be not applicable, the head office expenditure was allowable under Section 37(1) of the Act and that Section 44C puts a ceiling on the deduction of head office expenditure. Whatever be the object of the said section, it is clear that it is in the nature of a disabling provision which puts a ceiling on the admissibility of a deduction. It does constitute a restriction-and a restriction which is not similarly placed for a domestic enterprise. The head office expenses, to the extent the same can be fairly allocated to the PE, are admissible as deduction under Section 37(1) and this is so held by the Hon'ble jurisdictional High Court in Deutsche Bank's case (supra). 9. We have noted that the CIT(A) has, in the asst. yrs. 1994-95 and 1996-97 restored the matter to the file of the AO for examining the claim of expenditure as attributable to the PE in India, and the assessee is not in appeal against these directions. Therefore, beyond dispute, only such expenses are to be allowed as a deduction on account of head office expenses as can be fairly allocated to the PE. The only impact of the applicability of non-discrimination clause will be that the scope of deduction under Section 37(1) will not stand curtailed by the restriction placed under Section 44C of the Act. In our considered view, this direction of the CIT(A) is justified and calls for no interference. 10. As far as asst. yr. 1993-94 is concerned, the CIT(A) has held that the provisions of Section 44C will apply but then, for the reasons

27 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank set out above, we are of the considered view that Section 44C has no application in the matter and that the assessee is to be allowed deduction of such head office expenses as can be fairly allocated to the PE. Accordingly, as for the asst. yr. 1993-94, the matter is to be restored to the file of the AO for adjudication de novo in the light of the above observations.”

28 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank refund” and adjudicated the issue. While deciding the issue, Coordinate Bench held as under: - “1. The Hon'ble President, Income-tax Appellate Tribunal has constituted this Bench for considering the following issue: Whether the interest payable to the assessee under Section 244A of the I.T. Act, on the tax refundable in the proceedings under Section 143(1)(a) of the Act, accrued to the assessee in the year of its receipt or in the year in which the proceedings under Section 143(1)(a) attained finality 2. This Bench has been constituted because of the cleavage of opinion between the Benches at Mumbai. In the case of Saffron Trading Co. Pvt. Ltd., "G" Bench of the Tribunal at Mumbai, took the view that the income by way of interest under Section 244A of the Income-tax Act, 1961 (Act) is assessable in the year in which it was received by the assessee. On the other hand, the Tribunal Benches at Mumbai in the case of Shrusti Trading Pvt. Ltd. and in the case of Swarna Trading Pvt. Ltd. has held that right to receive interest under Section 244A is contingent till the assessment is made under Section 143(3) of the Act or the period when limitation for taking action under Section 143(2) is expired. In view of such difference of opinion, the reference was made to the Hon'ble President. Hence, the Hon'ble President referred the issue mentioned above for the consideration of the Special Bench. 3. The contention on behalf of assessee is that right to interest under Section 244A(1) is inchoate/contingent inasmuch as quantification of the same is dependent on the final outcome of assessment under Section 143(3). So, till the assessment is made under Section 143(3), such right remains contingent. It was also argued that in case the Assessing Officer does not choose to make assessment, then such right would become absolute only when the time for issue of notice under Section 143(2) expires. In support of his contention, he relied on the Tribunal decisions which are mentioned in the earlier para. Lastly, it was argued that if interest is held to be taxable in the year of receipt, then assessee would be without remedy if the interest is reduced under Section 244A(3).

29 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 4. On the other hand, the Learned Departmental Representative has contended that an absolute right is created in favour of assessee under Section 244A(1) and, therefore, the moment a refund is issued the assessee becomes entitled to interest. There is no compulsion on the Assessing Officer to make assessment under Section 143(3) in every case. Further, the right vested in assessee is independent right and is not dependent on the assessment under Section 143(3). It is the quantification which is finally done in case assessment is made under Section 143(3). In support of his contention, he relied on the decision of Tribunal in the case of Saffron Trading Co. (supra). A query was raised whether provisions of Section 154 of the Act can be invoked in case interest is taxed in the year of receipt but varied under Section 244A(3). In response to the same, the Learned Departmental Representative did not respond but the learned Counsel for the assessee submitted that he has no objection if it is held that such assessment can be rectified under Section 154 of the Act. The hearing was concluded at this stage on 15-9-2005. 5. …… 6. ……. 7. Rival contentions have been considered carefully. The question for consideration is whether interest under Section 244A granted to assessee in the proceedings under Section 143(1)(a) of the Act is taxable in the year of its receipt or in the year in which proceedings under Section 143(1)(a) attains finality. According to the charging provisions of Sections 4 and 5 of the Act, the income is chargeable in the year in which it is either accrued or received as the case may be. The issue regarding accrual of income is concluded by the judgment of the Hon'ble Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT , wherein it has been held that income accrues when right to receive is acquired and such right can be said to have been acquired when an enforceable debt is created in favour of the assessee. This legal position has been applied by the Courts including the Apex Court in various cases. 8. Let us now look at the relevant provisions of Section 244A of the Act which for the benefit of this order are stated below: 244A. (1) Where refund of any amount becomes due to the assessee under this Act, he shall, subject to the

30 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank provisions of his Section, be entitled to receive, in addition to the said amount, simple interest thereon calculated in the following manner, namely:-- (a) Where the refund is out of any tax paid under Section 115WJ or collected at source under Section 206C or paid by way of advance tax or treated as paid under Section 199, during the financial year immediately preceding the assessment year, such interest shall be calculated at the rate of one-half per cent for every month or part of a month comprised in the period from the 1st day of April of the assessment year to the date on which the refund is granted: Provided that no interest shall be payable if the amount of refund is less than ten per cent of the tax as determined under Sub-section (1) of Section 115WE or Sub-section (1) of Section 143 or on regular assessment; (b) in any other case, such interest shall be calculated at the rate of one-half per cent for every month or part of a month comprised in the period or periods from the date or, as the case may be, dates of payment of the tax or penalty to the date on which the refund is granted. (3) Where, as a result of an order under Sub-section (3) of Section 115WE or Section 115WF or Section 115WG or Sub-section (3) of Section 143 or Section 144 or Section 147 or Section 154 or Section 155 or Section 250 or Section 254 or Section 260 or Section 262 or Section 263 or Section 264 or an order of the Settlement Commission under Sub-section (4) of Section 245D, the amount on which interest was payable under Sub-section (1) has been increased or reduced, as the case may be, the interest shall be increased or reduced accordingly, and in a case where the interest is reduced, the Assessing Officer shall serve on the assessee a notice of demand in the prescribed form specifying the amount of the demand

31 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank shall be deemed to be a notice under Section 156 and the provisions of this Act shall apply accordingly. A bare look at the provisions of Sub-section (1) reveals that as soon as any refund becomes due under any provisions of the Act, the assessee becomes entitled to receive the interest in respect of such refund calculated in the manner provided in Clauses (a) and (b) of such provisions. Therefore, the moment the refund is granted, as enforceable debt is created in favour of assessee in respect of interest due on such refund. Consequently, income can be said to accrue on the date of refund itself. Therefore, when such interest is actually granted along with the refund then, in our opinion, the requirement of Sections 4 and 5 of the Act are fully satisfied and the same can be taxed in the year of receipt. 9. The main contention of the assessee's counsel is that such right is contingent as the interest so received can be varied or withdrawn after the assessment under Section 143(3). We are unable to accept such contention of assessee for the reasons given hereafter. According to the dictionary meaning, a right or an obligation can be said to be contingent when such right or obligation is dependent on something not yet certain. According to Section 244A, the only condition for grant of interest is that there must be a refund due to assessee under any provision of the Act. There is no other condition in the said provision affecting such right. Therefore, the moment a refund becomes due to assessee, an enforceable debt is created in favour of assessee and assessee acquires a right to receive the interest. Sub-section (3) of Section 244A only affects its quantification under certain circumstances and not the right of interest. The Hon'ble Supreme Court in the case of CIT v. Shri Goverdhan Ltd. , has observed at page 681 that once a debt is created, then the liability cannot be said to be contingent merely because it is to be quantified at later date. Under Section 244A, even the interest is quantified immediately whenever a refund is issued. In our view, the right to grant interest is absolute since existence of such right is not dependent on any event. For example, assessee is granted interest of Rs. 1,000 on the date of granting refund. Subsequently, under Section 244A(3), it is reduced to Rs. 600 by

32 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank virtue of assessment under Section 143(3). Can it be said that right to interest did not accrue on the date of refund? In our opinion, the right of interest came into existence on the date of refund by virtue of Section 244A(1) though its quantification may or may not vary depending upon the outcome of assessment. 10. The view of ours is justified by the judgment of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT , approving the judgment of the Hon'ble Madras High Court in the case of Pope the King Match Factory v. CIT [1963] 50 ITR 495. In the case before the Hon'ble Madras High Court, a demand for excise duty was served on the assessee, which was objected to by the assessee before the higher authorities. However, such liability was claimed as deduction while computing its income since mercantile method of accounting was adopted. The revenue authorities did not allow the claim since such demand was subject-matter of dispute and this liability did not crystallise in the year in which demand was served. The High Court upheld the claim of assessee. This judgment was considered by the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. (supra) and the Apex Court approved the view of the Hon'ble Madras High Court by observing that assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract or retard the efficacy of the liability which had been imposed upon him by the competent Excise authority. [Emphasis supplied] 11. The Hon'ble Supreme Court in the case mentioned in the earlier para, had to consider a case where sales tax authority had served a demand notice on assessee on 21-11-1957 for payment of sales tax of Rs. 1,49,776 in respect of sale effected during the financial year ended 31-12-1954 relevant to assessment year 1955-56 without claiming any deduction on account of such liability. However, subsequently revised return was filed on 9-11-1959 claiming the aforesaid deduction even though the said demand was objected to by the assessee before the higher authority. The ITO computed the assessment on 11-3-1960 denying the claim of assessee when appeal before the Sales Tax authority was pending. The claim of the assessee was also rejected by Income-tax Tribunal as well as High

33 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank Court. On further appeal, the Hon'ble Supreme Court held that the moment a dealer makes either purchases or sales which are subject to taxation, the obligation to pay the tax arises and taxability is attracted. Although that liability cannot be enforced till quantification is effected by assessment proceeding, the liability for payment of tax is independent of assessment. In view of these observations, the Apex Court upheld the claim of assessee. It also affirmed the Madras High Court judgment in the case of Pope the King Match Factory (supra). 12. The ratio of the above judgment is clearly applicable to the present case. According to the above judgment, if an enforceable debt is created under a statute then any subsequent event would not affect the existence of such right/obligation despite the fact that such debt is subject-matter of appeal. The right to interest under Section 244A is not dependent upon any assessment inasmuch as there is no compulsion or obligation upon the Assessing Officer to make an assessment under Section 143(3). The moment the return is processed under Section 143(1)(a) and refund is issued on the basis of intimation under Section 143(1)(a), an enforceable legal right is created in favour of assessee under Section 244A and simultaneously the Assessing Officer is under legal obligation to grant the interest. Merely because quantum of such interest may vary on assessment made under Section 143(3), it cannot be said that legal right was not acquired on the date of refund. The effect of assessment under Section 143(3) would be that interest on refund under Section 244A would get substituted in terms of Sub-section (3) of Section 244A without affecting right already accrued. 13. At this stage, it would appropriate to refer to the judgment of the Hon'ble Supreme Court in the case of CIT v. Chunilal V. Mehta & Sons (P.) Ltd. . In that case, assessee was the managing agent of a company 'Century' (in short) under an agreement which provided that assessee would be entitled to compensation if its services were terminated before the period of 21 years except for the reasons mentioned in Clause 15 of the agreement. In April 1951, the services of assessee were terminated and assessee became entitled to compensation. Assessee claimed compensation of Rs. 50 lakhs but the managed company offered to pay only Rs. 2,34,000. The assessee refused to accept the same and filed suit against the said company in the High Court of Bombay. The suit was decreed on 17-

34 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 11-1955, in the sum of Rs. 2,34,000 and the decree was affirmed in appeal. Assessee received the said amount in December 1955. In the income-tax proceedings for assessment year 1956-57, this amount was considered as business profits and consequently the Assessing Officer assessed the same in that year. The assessee challenged the same before the appellate authority on the ground that compensation became due to assessee in the year 1951 when its services were terminated and, therefore, could not be assessed in the assessment year 1956-57. The matter reached the Apex Court. The Hon'ble Supreme Court rejected the appeal of the revenue by observing as under: It was urged on behalf of the department that, as the assessee A disputed the quantum of compensation to which it was entitled, we must hold that its right to get the amount arose when the dispute was determined by the Hon'ble High Court. We are unable to accede to this contention. As mentioned earlier, the right of the assessee to get compensation for unlawful termination of its services and the quantum of compensation to which it was entitled were clearly prescribed in the agreement. It was also so held by the High Court in the suit between the assessee and the managed company. The fact that the assessee was claiming an exorbitant sum to which it was not entitled will not convert its right into a contingent right. In Thiagaraja Chettiar & Co. v. Commissioner of Income-tax, the High Court of Madras held that, where a managing agent is entitled under the terms of the managing agency agreement to remuneration at a certain percentage on the annual net profits of the company, the remuneration payable to the managing agent accrued when the net profits of the company for the year are ascertained. The mere fact that, owning to disputes between the company and the managing agent the company had not credited the managing agent with the remuneration due to the latter in its accounts would not entitle the managing agent to claim that the remuneration due to him had not accrued and should not be assessed to incometax until the company had credited him in its accounts with

35 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank the amount of commission due to him. We are in agreement with the ratio of that decision and that ratio governs the facts of the present case. The ratio of the decision of the Bombay High Court in F.E. Hardcastle & Co. (P.) Ltd. v. CIT is also to the same effect. The above judgment clearly shows that once a right accrues under an agreement, then such accrual is not affected by dispute between the parties. Further, in case of dispute, the final outcome would ultimately relate back to the year of accrual. 14. It has been apprehended by assessee's counsel that assessee would be without remedy if the interest is reduced by virtue of assessment under Section 143(3). This apprehension, in our opinion, is unfounded. If interest is reduced by virtue of Sub-section (3) of Section 244A on account of assessment under Section 143(3), the interest granted in earlier year gets substituted and it is the reduced amount of interest that would form part of income of that year. Thus, it would amount to mistake rectifiable under Section 154 of the Act. In our opinion, if the basis, on which income was assessed is varied or ceases to exist, then such assessment would become erroneous and can be rectified. This can be explained with an example. For instance, land in a village belonging to various persons is acquired by Government for some development works and the compensation is awarded by the Collector with interest, if any. But one of the land holders challenges the acquisition proceedings in the High Court and later on succeeds as the acquisition is declared illegal. By virtue of such High Court order, such compensation has to be returned and Government will have to restore the land to the villagers. Therefore, if capital gain has been assessed in the hands of some of the persons where lands were acquired, such assessment would become patently erroneous, as the basis itself has ceased to exist. Such assessment would, therefore, amount to mistake, which, in our opinion, can be rectified. Similarly, any income assessed may become non-taxable by virtue of retrospective amendment and consequently, erroneous assessment can be rectified. Therefore, in our humble opinion, if the interest granted under Section 244A(1) is varied under Sub-section (3) of such section, then the interest originally granted would be substituted by the reduced/increased amount as the case may be.

36 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank Thus, income on account of interest if assessed can be rectified under Section 154. 15. In view of the above discussion, we are of the view that interest on refund under Section 244A(1) would be assessable in the year in which it is granted and not in the year in which proceedings under Section 143(1)(a) attain finality.

37 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank (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. Inspite of having accepted that exemption under Section 10(15)(iv)(h) of the Act is to be allowed on gross interest before 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 it's 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 on which Income tax refund is to be taxed i.e. on the

38 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 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.”

39 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 3. On the facts and in the circumstances of the case and in law, the Id. CIT (Appeals) erred in allowing relief of Rs.5,32,69,250/- out of expenses related to refurbishment of leasehold premises of Rs.7,10,25,666/- claimed by the assessee. The Id. 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 ld. CIT (Appeals) erred in directing that 75% of the expenditure of Rs.7,10,25,666/ (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. The Appellant prays that the order of the ld. CIT (Appeals) on the above grounds be set aside and that of the Assessing Officer restored.”

40 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank 32. Considered the rival submissions and material placed on record, we observed that similar issue was considered and adjudicated by the Coordinate Bench in assessee’s own case for the A.Y. 1997-98 and decided the issue in favour of the assessee. While holding so the Coordinate Bench held as under: - “16. In ground no.1, the Department has challenged the deletion of disallowance of expenses amounting to ₹.24,85,49,931. 17. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction of expenditure incurred outside India amounted to ₹.24,85,49,931 comprising of salaries of expatriate employees, direct expenditure attributable to Indian branches and NRI expenses. The Assessing Officer after examining the nature of expenses held that the aforesaid expenditure claimed by the assessee being part of Head Office expenses is eligible for deduction under section 44C of the Act, hence, cannot be claimed as deduction separately. Being aggrieved with the aforesaid decision of the Assessing Officer, assessee preferred appeal before the first appellate authority. 18. Learned Commissioner (Appeals) after considering the submissions of the assessee in the context of facts and materials on record found that identical disallowance made by the Assessing Officer in assessee’s own case in assessment year 1994–95 to 1996– 97 was deleted by his predecessor–in–office by holding that such expenditures are incurred by the assessee exclusively for the purpose of business of the assessee in India and are not in the nature of Head Office expenses covered under section 44C of the Act. Following the decision of his predecessor–in–office, learned Commissioner (Appeals) deleted the disallowance by holding that the expenditure is allowable under section 37(1) of the Act without imposing restrictions contained under section 44C of the Act. 19. We have considered rival submissions and perused material on record. Learned Counsels appearing for the parties have agreed before us that the issue is decided in favour of the assessee by the Tribunal in assessee’s own case for the assessment year 1994–95 and 1995–96 while disposing off Revenue’s appeal in ITA

41 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank no.1683/Mum./2003, dated 11th October 2007 and ITA no.1769/Mum./2003, dated 18th November 2011 respectively. Following the consistent view of the Co– ordinate Bench as referred to above, we uphold the decision of learned Commissioner (Appeals) on the issue. Ground is dismissed.”

42 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank expenses fails under section 44C. Accordingly, the disallowance made by the Assessing Officer was deleted. 14. The learned Departmental Representative placed reliance on the order of the Assessing Officer. On the other hand, counsel for the assessee placed reliance on the order of CIT (A). It was further submitted that in case of British Bank of Middle East in ITA No.2297/M/99 identical issue was involved and Tribunal has decided the issue in favour of assessee. Attention of the Bench was drawn towards copy of the order placed at paper-book at pages 136 to 144. Further reliance was placed on the decision considered by the CIT (A). 15. After considering the submissions and perusing the material on record we found no infirmity in the finding of the learned CIT (A) who has decided the issue in favour of the assessee following the decision of the Tribunal in the case of ABN Amro Bank NV in ITA no.692/Cal/2000 and in case of American Bureau of Shipping 19 ITD 793 (Bom). The findings of CIT (A) are given at page 9 of his order are as under: "I have carefully considered the arguments of the learned Counsel and the basis of disallowance in the assessment order. As per section 37(1) of the Act, any expenditure, which is not in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". The expenses in question incurred by the Appellant, though outside India, have been incurred for the purposes of business of the Appellant in India. The expenses are not of capital or personal in nature and therefore, allowable u/s.37(1) of the Act. The Bombay ITAT in the case of American Bureau of Shipping (Supra) has held that expenses, which are specifically incurred on account of Indian branch, cannot be held to be in the nature of Head Office expenses u/s.44C. Further expenses on expatriates' salaries are for the services rendered in India and these by no stretch of imagination can be considered and Head Office expenses falling under section 44C. These expenses are not incurred by the Appellant outside India in managing the affairs of any office outside India and therefore, no covered u/s.44C. The allowability of these expenses is also squarely covered by the decision of the Calcutta ITAT in ABN

43 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank AMRO Bank's case (supra). As far as the absence of debit in the books of accounts for these expenses is concerned, the Supreme Court in Kedamath Jute Mfg. Co's case (supra), has held that absence of entry in the books of account is not fatal to the claim otherwise allowable as business deduction under the provisions of IT Act, 1961. In view of the above, I hold that the expenses incurred by the Appellant on NRI desks and towards salaries of expatriate employees are exclusively for the purposes of business of the Appellant in India and are not in the nature of Head Office expenses covered u/s.44C The claim of the Appellant is, therefore, allowable u/s 37(1) and not to be considered u's 44C. The Assessing Officer is directed to allow the expenses of Rs. 14,61,83,854/- u/s.37(1) of the Act. This ground in appeal is allowed in favour of the Appellant. 16 This finding of CIT (A) neither could be controverted nor any material was brought on record from which it can be established otherwise. We further noted that identical issue was decided by the Tribunal in the case of British Bank of Middle East in ITA No.2297/Mum/1999 and others for assessment year 1992-93 to 1997-98 vide its order dated 28.06.2005. Copy of the same is placed in the paper-book. Following the decision of the Tribunal and on the reasoning given by CIT (A) we confirm his order in this regard also.”

44 ITA NO. 803 & 850/MUM/2009 (A.Y. 1999-2000) Standard Chartered Bank raised by the assessee and the decision taken therein shall apply mutatis- mutandis for the appeal of the revenue. We order accordingly.

Order pronounced in the open court on 27th September, 2022.

Sd/- Sd/- (AMIT SHUKLA) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai / Dated 27.09.2022 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