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Facts
The assessee, a non-resident banking company incorporated in Canada, filed its return for AY 2020-21. The AO disallowed a deduction of INR 21,00,000 under section 80G for donations and also taxed interest income earned by its head office/overseas branches at 40% instead of the beneficial rate of 15% under the India-Canada DTAA.
Held
The Tribunal allowed the ground related to the disallowance of deduction under section 80G, remitting the issue back to the AO for fresh consideration. The Tribunal also allowed the ground related to the beneficial rate under Article 11 of the India-Canada DTAA, allowing the appeal.
Key Issues
Whether the disallowance of deduction under section 80G for donations was justified and whether the interest income earned by the foreign branches was eligible for the beneficial rate under the India-Canada DTAA.
Sections Cited
80G, 115A, 143(2), 142(1), 37(1), 115 BAA, Article 11, Article 24
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & MS. PADMAVATHY S
Per: Smt. Beena Pillai, J.M.: Present appeal filed by the assessee arises out of separate order passed by Ld. Commissioner of Income Tax, Appeal, CIT(A) 55, Mumbai, for assessment year 2020-21 vide order dated 16/05/2024 on following grounds of appeal:
“Aggrieved by the order dated 16 May 2024 passed by the Commissioner of Income-tax (Appeals) - CIT (A) 55 (hereinafter referred to as the 'learned CIT(A)'], under section 250 of the Income-tax Act, 1961 (Act) and based on the facts and circumstances of the case, Bank of Nova Scotia (hereinafter referred to as 'the Appel lant) respectfully submits that the learned CIT(A) erred in upholding the order of the Assistant Commissioner Of Income Tax Int Tax Circle 1(2) (1), Mumbai (hereinafter referred to as 'the learned AO'). In passing the aforementioned order, the learned CIT(A) erred on the following grounds:
Ground 1: Disallowance of deduction under section 80G of the Act.
On the facts and circumstances of the case, the learned CIT(A) erred:
1. In disallowing the deduction under section 80G of the Act to the extent of INR 21,00,000 [i.e 50 percent of donation amounting to INR 42,00,000 paid to Prayatna] on the ground that donation was made on 20 July 2020 and not during AY 2020-21 despite the fact that payment was done on 17 March 2020
2. In ignoring the provisions of Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 read with Notification No. 35/2020 dated 24 June 2020 wherein due date for payment of donation is extended to 31 July 2020.
Ground 2: Non-grant of beneficial rate under Article 11 of India-Canada tax treaty
On the facts and circumstances of the case, the learned CIT(A) erred:
In upholding the action of the learned AO in not granting the beneficial rate of 15% under Article 11 of India-Canada Tax Treaty for interest income earned by Head office/overseas branches from Appellant's India branch.
2. In upholding the action of the learned AO in not granting the beneficial rate of 15% under Article 11 of India-Canada Tax Treaty for interest on buyer's credit earned by overseas branches from Appellant's India branch.
In not appreciating the fact that the interest income does not pertain to the permanent establishment (PE) of the Appellant in India.
Each of the grounds of appeal referred above is separate and may kindly be considered independent of each other. The Appellant craves leave to add, alter, amend or withdraw all or any of the grounds of appeal herein above and to submit full statement, documents and papers as may be considered necessary either on or before the hearing of this appeal as per the law.”
Brief facts of the case are as under:
The assessee is a non-resident banking company incorporated in Canada carrying on with banking activities in India through its branch offices located at Mumbai and New Delhi. For the year under consideration assessee filed its return of income on 12/02/2021 declaring total income of ₹69,78,46,870/-. The case was selected for scrutiny and the assessment proceedings were initiated by issuing notice under section 143(2) and 142(1) of the act.
2.1. During the assessment proceedings the Ld. AO observed that assessee disallowed ₹82,00,000/- under section 37 in respect of expenditure for CSR activities and claimed deduction at the rate of 50% under 80G amounting to ₹41,00,000/-. The Ld.AO was of the opinion that the CSR activity came under schedule VII of section 135 of the Companies Act, 2013 and amount of ₹ 82,00,000/- was paid by the assessee on CSR activity. The Ld.AO thus called upon assessee to explain as to why the deduction of ₹41,00,000/- should not be disallowed. In response to the query raised by the Ld.AO assessee submitted that section 80G allows to clean deduction in respect of the donations made to specified relief fund and charitable institutions from the gross total income subject to the fulfilment of the conditions specified therein. The Ld. AO however rejected the contention of the assessee by stating that donation is a voluntary act however the assessee has not paid the amount voluntarily. The Ld.AO thus disallowed the said amount claimed as deduction under section 80G of the act.
2.2. The Ld.AO further observed that assessee had applied the beneficial rate of 15% as per article 11 of India Canada DTAA for interest income earned by the head office/overseas branches from assessee in India. It was observed that the assessee had filed rectification application wide submission dated 17/03/2022 according to which assessee had stated that as per article 24 of India Canada DTAA, maximum difference in tax rate charged by Indian tax department to the domestic companies and the resident of Canada would be 15%. It was submitted that as the assessee was liable to tax at the rate of 22% as per section 115 BAA and the assessee paid tax at the rate of 37% which was offered for taxation and the CPC file assessing the return completed the tax at the rate of 40%. The Ld.AO did not accept the contention of the assessee and tax the interest as business income at 40%.
Aggrieved by the order of the Ld.AO, assessee preferred appeal before the Ld.CIT(A).
3. During the appellate proceedings, the assessee filed written submissions on both the issues disallowed by the Ld.AO. The Ld.CIT(A) after considering the submissions of the assessee upheld the disallowances made by the Ld.AO.
Aggrieved by the order of the Ld.CIT(A), assessee is in appeal before this Tribunal:
At the outset, the Ld.AR submitted that, the assessee raised application for admission of additional ground, challenging the validity of the impugned assessment proceedings, to be barred by limitation by relying on the decision of Hon’ble Madras High Court in case of Roka Bathroom Products Pvt. Ltd., reported in 445 ITR 537. The Ld.AR submitted letter dated 14/01/2025, seeking withdrawal of the additional ground by the assessee. For the sake of convenience the said letter is scanned and reproduced as under:
Based on the above submissions, the additional ground raised vide application dated 28/08/2024 is allowed to be withdrawn. Accordingly the application dated 28/08/2024 is dismissed as withdrawn.
Ground No.1 raised by the assessee is on disallowance of deduction under section 80 G of the act.
The Ld.AR submitted that during the year under consideration assessee incurred expenditure of ₹ 82, 00, 000/-towards corporate social responsibilities. Pursuant to explanation 2 to section 37 (1) of the act, assessee disallowed the CSR expenditure while computing the business income for the year under consideration.
5.1. However under section 80G of the act donations made to specified relief funds and charitable institutions were allowed as deduction subject to the fulfilment of the conditions specified there was to accordingly assessee claimed the deduction of ₹41,00,000/- under section 80G of the act being 50% of the total contribution while computing total income for the year under consideration. The Ld.AR submitted that the payment made by the assessee was eligible for deduction under section 80G at 50%.
5.2. It is submitted by the Ld.AO that authorities below did not appreciate the claim by stating that the donation was not a voluntary act on behalf of the assessee. In support of the claim assessee placed reliance on the decision of Hon’ble Bangalore Tribunal in case of First American (India) Pvt.Ltd vs ACIT reported in (2022) 137 taxmann.com 229, the circumstances for claiming benefit under section 80G was analysed following the decision of Hon’ble Bangalore Tribunal Allegis Services (India)(P.) Ltd. v. Asstt. CIT in /Bang/2019, dated 29-4-2020. He submitted that thereafter coordinate benches of this Tribunal considered identical issues in following decisions:
• decision of Hon’ble Bangalore Tribunal FNF India (P.) Ltd. vs. Assistant CIT reported in (2021) 133 taxmann.com 251; • decision of Hon’ble, Kolkotta Tribunal in case of JMS Mining private Ltd vs Ld. PCIT reported in (2021) 130 taxman.com 118; • decision of Hon’ble Bangalore Tribunal in case of Sling Media private Ltd vs DCIT reported in (2022) 135 taxman.com 164 • decision of Hon’ble Mumbai Tribunal in case of FDC Ltd vs Ld. PCIT reported in (2023) 157 taxman.com 387 • decision of Hon’ble Mumbai Tribunal in case of Societe General Securities India Pvt.Ltd vs Ld. PCIT reported in (2023) 157 taxman.com 533 5.3. The Ld.AR thus submitted that, the assessee was eligible for deduction claimed under section 80G of the act towards the CSR expenses incurred by it.
5.4. On the contrary the Ld.AR relied on the orders passed by authorities below We have perused submissions advanced by both sides in the light of records placed before us.
The facts and circumstances in the present case is similar to that of the Coordinate Benchs of this Tribunal and other Benches of this Tribunals following wherein view taken in Allegis Services (India) Ltd. (supra), was followed. Taking the consistent view, we remit the issue back to the file of the Ld.AO with similar direction to the assessee to file all requisite details in order to substantiate its claim before Ld.AO. Ld.AO is directed to grant deduction to the extent of eligibility under 80G in accordance with law. Accordingly this ground raised by the assessee stands allowed.
Ground No.2 raised by the assessee is against known granting of beneficial rate under article 11 of India Canada DTAA.
7.1. The Ld.AR submitted that during the year under consideration assessee earned interest amounting to ₹ 4,15,20,582/- on foreign currency loans given to in the incorporates. It is submitted that such interest income was offered to tax at the rate of 20% under section 115A of the act as the interest earned by the assessee was against foreign currency loans to Indian concerns.
7.2. The Ld.AR submitted that the authorities below taxed the entire interest income at 40% stating that assessee is a bank and foreign loans over integral part of assessee is business activities. He submitted that the Ld.AO has expressed that the taxable rate of 20% under 115A of the act is applicable to an assessee only if the interest income is taxable under the head income from other sources And where the earning of interest income is not incidental to the business carried on by the assessee.
7.3. The Ld.AR submitted that 115A of the act, clearly stipulates the distinction between a foreign currency loan given in regular course of business and otherwise. He submitted that as per section 115A of the act granting of loans/business of lending should be a separate business activity took a claim concessional rate of 20% as provided that it. The Ld.AR emphasised that once the conditions prescribed under section 115A of the act is fulfilled, interest income has to be taxed at the special rate of 20% irrespective of the nature of business carried out by the assessee.
7.3. It is the submission of the Ld.AR that section 115A of the act is a charging provision and being specific provision should override all the general provisions of the act. In support the Ld.AR placed reliance on following decisions:
• decision of Hon’ble Supreme Court in case of CIT vs M/s. The Binani Cements Ltd & Anrs. reported in (2000 1468 VST 459; • decision of Hon’ble Supreme Court in case of Union of India vs India Fisheries Pvt.Ltd., reported in (19 6557 ITR 331 • decision of Hon’ble Madras High Court in case of CIT vs Copes Vulcan Inc. reported in (1985) 167 ITR 884 • decision of Hon’ble Mumbai Tribunal in case of LG Asian Plus Ltd vs ACIT in ITA number 2691/Mum/2008 and; • decision of Hon’ble Mumbai Tribunal in case of Platinum Investment Management Ltd vs DDIT in ITA number 3598/MU 1/2010 7.4. The Ld.AR further referring to sub-clause (B) and (D) of section 115A(1)(a) of the act submitted that where the foreign companies chargeable to tax in India and that a part of its total income is taxable at a concessional rate of 20%, then the remaining part of the total income would be taxable at the normal rate of tax applicable to the non-resident assessee. He thus submitted that the intention of the Legislature is thus clear to tax certain specific income as provided in section 115A of the act owned by the foreign assessee at a concessional rate provided under section 115A and to tax the remaining income at the normal rate as per the domestic law.
7.5. The Ld.AR further referring to finance act 2003 submitted that section 44 DA was introduced that carves out an exception to the applicability of section 115A in respect of the foreign companies which operate through a permanent establishment in India. He thus submitted that taxability of interest income earned by a foreign company even in case when such foreign company carries on business in India through permanent establishment continues to be covered under section 115A on gross basis.
7.6. The Ld.DR submitted that on identical issue for assessment year 2010-11, the revenue file appeal before this Tribunal in assessee’s own case. This Tribunal after considering identical arguments by the assessee had dismissed the revenue appeal reported in (2024) 160 taxman.com 285.
7.7. On the contrary the Ld.AR placed reliance on the orders passed by authorities below.
We have perused submissions advanced by both sides in the light of records placed before us.
Admittedly, the assessee is having an Indian branch office and it constituted PE. The case before us is that assessee earned interest on buyers credits from India. The assessee claimed the interest did not pertain to the PE in India and therefore, as per Article 11 of India Canada DTAA, the same was to be taxed at the lower rate of concessional rate applicable for the year under consideration under section 115A of the act. On a plain reading of sections 115A of the act it is clear that the assessee has to fulfil the following conditions in order to be eligible to claim benefits of concessional rate:
• the assessee is a foreign company, and: • the assessee receives interest from the government or any Indian concerns on monies borrowed or debt incurred in foreign currency.
In the present facts of the case for the above conditions stand fulfilled and the assessee is eligible to claim the concessional rate as per section 115A of the act.
8.1. The Ld.CIT(A) has upheld the action of the Ld.AO by observing that unless and until the assessee proves that the interest income did not arise through a PE to India, the provisions of clause 5 of Article 11 of India Canada DTAA cannot be applied source and the beneficial rate cannot be allowed to the assessee. The assessee was is called upon to furnish form 15CA and 15CB along with breakup of the interest income earned by the head office and the overseas branch of assessee. For the sake of convenience the breakup of the interest income earned a scandal reproduced as under:
8.2. From the above it is clear that, the amount earned by the head office/overseas branch amounting to ₹12,63,41,232/- has been already offered to tax by the assessee as reported in Form 26AS. The assessee has furnished form 26AS along with form 15CA and 15CB in support of the submission. It is noted that before Ld.CIT(A) the assessee submitted that coordinate bench of this Tribunal for assessment year 1997-98 to 2004-05 2007-08 to 2010-11 and 2014-15 held, such interest income earned on foreign currency loan to be taxable at concessional rate.
8.3. It is noted that the impugned order is a consolidated order passed for assessment year 2013-14, 2017-18, 2018-19, 2020-21 and 2021-22. At page 23 the Ld.CIT(A) observed that the issue being in favour of assessee for assessment A 2010-11 to 2013-14. While deciding this issue in the impugned order for assessment A 2013-14, reliance was placed by the Ld.CIT(A) on decision of coordinate bench of this Tribunal in assessee’s own case reported in (2024) 160 taxman.com 285. This Tribunal observed as under: 10. The ld. Counsel for the assessee submitted at the outset that the issue in ground No. 1 of appeal by the Department relates to taxability of interest income earned on foreign currency loans granted to Indian concerns @ 40% under normal provisions of the Act instead of 20% under section 115A of the Act. This issue is recurring. The CIT(A) starting from Assessment Year 2000-01 has been consistently holding that interest earned on foreign currency loans is liable to tax @20%. The CIT(A) held so following order of Tribunal in assessee's own case in IT Appeal No. 306/Mum/2001 for Assessment Year 1997-98. The CIT(A) in the impugned order followed the decision of his predecessor in Assessment Year 2008-09 holding such interest income taxable @20%.
The ld. Departmental Representative fairly stated that in the preceding Assessment Years this issue has been considered by the Tribunal in the appeals by the Revenue.
Both sides heard. We find that the issue of rate of tax on interest income from foreign currency loans is perennial. The Tribunal has consistently held that interest income earned on foreign currency loans is taxable @20%. The CIT(A) in impugned order has followed the decision of his predecessor in Assessment Year 2008-09, which in turn followed the decision of Tribunal in assessee's own case in Assessment Year 1997- 98(supra). We find no infirmity in the findings of the CIT(A) on this issue, hence, ground No. 1 of appeal is dismissed, sans-merit.
8.4 It is peculiar to know that after considering the issue in favour of the assessee in the consolidated order for a vide 2013-14, the Ld.CIT(A) upheld the action of Ld.AO for assessment year under consideration. There is nothing on record brought by the authorities below or by Ld.DR to support the addition made. We therefore do not find any reason to uphold the action of the Ld.CIT(A).
Accordingly Ground No.2 raised by the assessee stands allowed. In the result appeal filed by the assessee stands allowed. Order pronounced in the open court on 31.01.2025