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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
disposed off vide this consolidated order for the sake of convenience.
2.0 The Ld. Authorised Representative (AR), at the outset, submitted that the issues involved in these appeals are covered by the order of this Tribunal (ITAT) in assessee’s own case for AYs 1997-1998 and 1998-1999. She also filed a paper book containing chart of issues and orders of the ITAT from which they are covered. It was accordingly submitted that appeals raised may be decided in the light of the earlier orders of the Tribunal.
3.0 The Ld. Departmental Representative (DR) on the other hand did not dispute the factual position to this effect and stated that grounds being raised in the cross appeals are identical to that dealt with by the ITAT in earlier years.
4.0 Assessment Year 1999-2000 - Assessee’s appeal (ITA No. 2238/Del/2006) : The appeal filed by the assessee is against the order passed u/s 250 of the Income Tax Act, 1961 (hereinafter called ‘the Act’) by the Ld. Commissioner of Income Tax (Appeals)-XXIX, New Delhi {CIT (A)} vide order dated 26/04/2006.
4.1 The assessee has raised the following grounds of appeal:
“1. The learned CIT (A) had erred in law and on facts in surmising that 20% of NRI expenses amounting to Rs. 27,43,010 incurred on personnel, telephone and travelling were in the nature of head office expenses, and hence disallowable. 2. The learned CIT(A) had erred in sustaining the dis- proportionate and excessively exaggerated estimate of indirect expenses attributable to earning income on foreign currency loans taxable u/s. 115A of Rs. 2,71,28,450/- despite the fact that a properly allocated amount was already offered to tax by the appellant u/s. 115A(3) of the Act.
3. The learned CIT(A) had erred in law and on facts in upholding an estimated disallowance of managerial and administrative expenses of Rs. 1,20,000/- for earning dividend income by treating this as tax free income, whereas dividend income is actually subject to tax at source before distribution by the company which pays the dividends.
The learned CIT(A) had erred in law and on facts in upholding an ad hoc addition of Rs. 35,00,000/- on account of expenses incurred on earning foreign currency syndicated term loans.
The appellant craves leave to add, alter and. or amend all or any of the grounds in appeal at the time hearing.”
4.2.0 Ground no. 1 is directed against 20% disallowance of NRI expenses as confirmed by the Ld. CIT (A). It is noted that the Assessing Officer (AO) considered the disallowance of Rs. 1,74,64,029/- in respect of claim of NRI expense incurred outside India for soliciting and mobilizing of deposits in foreign currency on the ground that these expenses were not booked in the Profit & Loss a/c. Further, the assessing officer also held that the deduction in respect of these expenses has already been allowed u/s 44C of the Act. The Ld. first appellate authority allowed 80% of the expenses and upheld the balance 20% in respect of personnel, telephone and travelling expenses.
4.2.1 We have considered the rival submissions and have gone through the material available on record. We find that this issue had earlier come up for consideration before the Coordinate Bench in appeals for immediately preceding year (AY 1998-1999) in and 1459/Del/2006 vide order dated 28.02.2018 wherein the matter was set-aside to the file of the assessing officer after following the earlier order of the ITAT for AY 1996-1997. The relevant finding recorded by Tribunal in AY 1998- 1999 is reproduced hereunder:
“7. After hearing the rival submissions and perusing the relevant material on record, we find that this issue has been decided by the Tribunal in its order for the immediately preceding assessment year. Relevant discussion has been made in para 15. The Tribunal followed its earlier order passed for the assessment year 1996-97, in which the matter was remanded to the file of Assessing Officer with a direction to the assessee to furnish details as to what was the amount of deposits raised and how the same was brought into India and, thereafter, the Assessing Officer was directed to examine the details of expenses and the basis of allocation of such expenses for considering the allowability of the same. Such direction given by the Tribunal has been reproduced on page 12 of the Tribunal order for the immediately preceding assessment year. In the absence of any distinguishing facts and circumstances, respectfully following the precedent, we set aside the impugned order on this score and send the matter back to the file of the Assessing Officer for deciding it in conformity with the directions given by the Tribunal for the assessment year 1996-97, which have been extracted verbatim on page 12 of the Tribunal order for the immediately preceding year.”
4.2.2 Respectfully following the order of the Coordinate Bench, we hereby set-aside and restore this issue to the file of the assessing officer to decide the matter in the light of the directions given by the ITAT in AY 1996-1997 after giving due opportunity to the appellant. Accordingly, Ground No. 1 is allowed for statistical purposes.
4.3.0 Ground No. 2 is directed against the order of the Ld. CIT (A) confirming the disallowance of administrative expenses to the extent of Rs. 2,71,28,450/- u/s 115A(3) of the Income Tax Act, 1961. The assessee, during the year, earned interest income of Rs. 9,16,35,000/- on foreign currency loan which was taxable on special rate u/s 115A of the Act. The assessing officer was of the view that disallowance of interest outgo, as made by the assessee in terms of provisions of section 115A (3), is understated and that the claim of administrative expenses also needs to be disallowed. The disallowance was computed in ratio of expenditure to gross receipt (87%) as per Profit & Loss a/c.
4.3.0 We have considered the facts of the case and gone through the orders passed by the ITAT in assessee’s own case.
The Coordinate bench, while deciding the appeals for AY 1997-1998 in and 1345/Del/2006, vide order dated 30/11/2017 has adjudicated with this very issue and the matter was set-aside to the file of assessing officer with specific directions.
The said observations of the Tribunal are extracted hereunder:
“42. The issue for our adjudication relates to the disallowances to be worked out for indirect expense incurred by the assessee in relation to such impugned income of interest. On perusal of the AO order we observed that he has made the disallowance on proportionate basis between the total operating expenses viz a viz gross receipt of the assessee. In our considered view the method adopted by the AO suffers from several infirmities as detailed below:- i) The lower authorities have worked out the ratio between total expenses viz a viz total receipt and that ratio has been applied to the impugned interest income on the same gross revenue. (ii) The product of foreign currency loan was in operation only for four months effective from December 96 to March 97 for the year under consideration. (iii) There are certain costs which are fixed in nature and therefore all such costs cannot be attributable to this product.
In view of above, we direct the AO to adopt the following method for working out the disallowance of indirect expenses incurred in relation to such impugned interest income. i) Work out the ratio between the total revenue viz a viz the gross income earned by the assessee on foreign currency loan. (ii) Based on the above ratio the indirect expenses will be determined for four months for the purpose of disallowance u/s 115A of the Act.
We further find that there is no dispute with regard to the expenses already disallowed by the assessee in its income tax
return. In view of the above we direct the lower authorities to make the disallowance u/s 115A of the Act in the light of above discussion. Thus the ground of appeal of the assessee is allowed for statistical purpose.”
4.3.1 The Tribunal has passed similar order in appeal for immediately preceding AY 1998-1999. We find no reason to deviate from the directions given by the Coordinate bench and respectfully following the same, we remand back this issue to the file of assessing officer with the direction to work out the disallowance in accordance with order of ITAT in AY 1997-1998.
This ground is allowed for statistical purpose.
4.4.0 Ground No. 3 is against the upholding of disallowance of Rs. 1,20,000/- u/s 10(33) of the Act. The assessee has claimed exempt dividend income to the extent of Rs. 15,26,663/- in respect of which the assessing officer has computed disallowance of Rs. 1,20,000/- on account of management/administrative expense on estimate basis.
4.4.1 The Ld. AR disputed the disallowance on the ground that since the dividend paid by the company are post tax, the exemption in the hands of receipt u/s 10(33) is merely to avoid double taxation and as such there is no question of any disallowance.
4.4.2 The Ld. DR supported the order of the Ld. CIT (A) and argued that as per the express provisions of section 14A, the assessing officer has rightly made the disallowance of administrative expenses.
4.4.3 We have considered the rival submissions and have perused the orders passed by lower authorities. We find that provisions of section 14A were introduced vide Finance Act, 2001 with retrospective effect from 01/04/1962. It clearly means that the Statute does not intend to allow claim of expenses incurred in relation of exempt income earned by the assessee. In the present case, the assessee has failed to demonstrate any infirmity with the estimation of disallowance of Rs. 1,20,000/- made by the assessing officer which, in our view, is reasonable. Accordingly, we uphold the disallowance and reject ground No.3 of the assessee’s appeal.
4.5.0 Ground No. 4 of the assessee’s appeal is directed against the upholding of disallowance of expenses to the tune of Rs. 35,00,000/- in terms of provisions of section 10(15)(iv) of the Act. The assessee has claimed exempt income aggregating to Rs. 3,22,21,592/0 u/s 10(15)(iv) of the Act being fee in respect of foreign currency loans. The assessing officer considered disallowance of Rs. 35,00,000/- on estimate basis. The Ld. CIT (A) has concurred with the order of assessing officer.
4.5.1 We find that that similar issue has been decided by the Coordinate bench in the immediately preceding AY 1998-1999 wherein it was held that as per provisions of section 14A, certain disallowance is required to be made in the hands of the assesssee. However, the issue was set-aside to the file of the assessing officer for computing disallowance on a reasonable basis.
The finding of the Tribunal is as under:
“12. We have heard both the sides and perused the relevant material on record. There is no dispute that the assessee claimed exemption of the gross amount u/s 10(15)(iv) of Rs.4.59 crore. It is, but, natural that the expenses incurred in respect of such exempt income cannot be allowed u/s 14A of the Act. The assessment year under consideration is 1998-99. Hence, the provisions of Rule 8D cannot be invoked for computing the amount of disallowance u/s 14A. Under these circumstances, we are of the considered opinion that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of Assessing Officer for determining the amount disallowable u/s 14A on some reasonable basis. It is, however, made clear that such fresh disallowance in the consequential proceedings should not exceed the amount disallowed in the original order.”
4.5.2 The facts of the present case are identical to that in AY 1998-1999 except for the quantum of disallowance which is Rs. 35,00,000/- in the year under consideration as against Rs. 50,00,000/- in that year. It is further noted that the assessing officer has not given any justifiable basis for estimating disallowance of Rs. 35,00,000/- and as such we deem it proper to restore back this issue to the file of the assessing officer to work out the disallowance in accordance with the direction of the ITAT in AY 1998-1999 after giving due opportunity to the assessee. Thus, Ground No. 4 is allowed for statistical purpose.
5.0 Assessment Year 1999-2000 – Revenue’s appeal (ITA No. 2381/Del/2006): The revenue has challenged the order of the Ld. CIT (A) on the following grounds:
“1. On the facts and in the circumstances of the case, ld. CIT (A) has erred- (i) in deleting the expenses of Rs. 1,39,71,223/- incurred by various units outside India for mobilization of NRI deposits for the purpose of assessee’s business in India. (ii) in deleting the addition of Rs. 10 crores on account of commission earned by foreign branches of ANZ Grindlays Bank on their Credit Card business overseas where transactions were completed in India. (iii) in disallowing the expenditure of Rs. 35.31 lakhs on the payments made to clubs. (iv) in disallowing the provision made for bad and doubtful debts in accordance with section 36(1)(vii)(a) of the Act, 1961 amounting to Rs. 15,97,20,374/-.
2. The appellant prays for leave to add, alter, amend or vary from the grounds of appeal at or before the time of hearing.”
5.1.0 Ground No. 1(i) of the revenue’s appeal is against deletion of 80% disallowance of claim of expenses incurred for soliciting and mobilizing of deposits in foreign currency from NRIs. This ground is connected with Ground No. 1 of the assessee’s appeal. As we have set-aside this entire issue to the file of assessing officer for fresh determination of disallowance, accordingly, this ground of the revenue also stands allowed for statistical purposes.
5.2.0 Vide Ground no.1(ii), the revenue is aggrieved against order of the Ld. CIT (A) deleting addition of Rs. 10,00,00,000/- in respect of taxation of commission earned by foreign branches on credit cards issued outside India. The assessing officer on the basis of findings recorded in AY 1998-1999 was of the view that commission on transactions done in India on credit cards issued outside India is taxable under the provisions of Income Tax Act, 1961. However, in absence of any detail, the addition of Rs. 10,00,00,000/- was made on estimate basis. The Ld. CIT (A) deleted the addition.
5.2.1 We have considered the facts of the case and material available on record. It is noted that the assessing officer has based the disallowance on the basis of assessment order passed for AY 1998-1999. We find that in AY 1998-99, this issue came up for consideration before the Coordinate bench and after referring to the order of Tribunal for AY 1996-1997 in the issue was decided in favour of the assessee by holding that the commission earned by branches is not taxable in India. The finding recorded by Tribunal for AY 1996-1997 is reproduced hereunder:
“We have considered the rival submissions. We are in agreement with the finding of the learned CIT (A). Where the foreign branch has issued credit card and even if the transaction takes place in India, the credit is given to the customer outside India and the debt has also arisen outside India. The merchant shipment in India may receive the payment but the merchant shipments do not incur any debt. They merely receive charges for the goods sold or services rendered. However, the charges are received by foreign branches for providing credit to their card holders outside India. The amount payable by the card holders who have acquired the credit card from branches outside India incur the debt outside India. Therefore, the fees in respect of such transaction are not taxable in India. We, therefore, uphold the deletion of addition of Rs. 10 crores”
5.2.2 In absence of any distinguishing fact, we respectfully follow the order of the coordinate bench for AY 1996- 1997, 1997-1998 and 1998-1999 and uphold the order of the Ld. CIT (A) deleting the addition of Rs. 10,00,00,000/-. Accordingly, Ground no. 1(ii) of the revenue’s appeal is dismissed.
5.3.0 Ground No. 1(iii) is directed against deletion of disallowance of Rs. 35,31,343/- being charges paid for membership of various clubs. The assessing officer considered the disallowance on the ground of lack of business expediency.
5.3.1 We find that it is a recurring disallowance made year after year and the matter has travelled to the ITAT in earlier years. The coordinate bench has deleted the disallowance in all the earlier years including immediately preceding AY 1998-1999 and there is no change in facts in the year under consideration warranting us to take different view. Thus, respectfully following the precedent, we uphold the deletion of disallowance by the Ld. CIT (A). The Ground No. 1(iii) is dismissed.
5.4.0 The last ground (Ground No. 1(iv)) is against deletion of disallowance of provisions for bad and doubtful debts of Rs. 15,97,220,374/- under section 36(1)(viia) of the Act. The assessing officer considered the disallowance by relying on the assessment order passed for AY 1998-1999. However, no independent finding with regard to facts of the current year has been recorded by the assessing officer. The Ld. CIT (A) allowed the claim of the assessee.
5.4.1 We have heard the rival submissions and gone through the orders passed by lower authorities and coordinate bench of the ITAT in assessee’s own case. The Tribunal, while deciding the appeal for AY 1997-1998 and 1998-1999, has restored back this issue to the file of the assessing officer to re-examine the claim in the light of provisions of section 36(1)(viia) of the Act. In the impugned order, the Ld. CIT (A) has directed the assessing officer to allow the claim of provisions for bad and doubtful debts subject to a ceiling of 5% of total income as per section 36(1)(viia) of the Act. The finding and direction of Ld. CIT (A) is in line with the order passed by the Tribunal for AY 1997-1998 and 1998-1999. Accordingly, we find no reason to interfere with the order of the Ld. CIT (A). Thus, Ground No. 1(iv) is also dismissed.
5.5.0 As a result, cross appeals in and 2381/Del/2006 are partly allowed. 6.0 Assessee’s Appeal (ITA No. 2239/Del/2006) Assessment Year 2000-01: The grounds raised are:
“1. The learned CIT (A) had erred in law and on facts in surmising that 20% of NRI expenses amounting to Rs. 18,03,764 incurred on personnel, telephone and travelling were in the nature of head office expenses, and hence disallowable.
2. The learned CIT(A) had erred in sustaining the dis- proportionate and excessively exaggerated estimate of indirect expenses attributable to earing income on foreign currency loans taxable u/s. 115A of Rs. 2,24,18,955/- despite the fact that a properly allocated amount was already offered to tax by the appellant u/s. 115A(3) of the Act.
The learned CIT(A) had erred in law and on facts in upholding an estimated disallowance of managerial and administrative expenses of Rs. 10,00,000/- for earning dividend income by treating this as tax free income, whereas dividend income is actually subject to tax at source before distribution by the company which pays the dividends.
4. The learned CIT(A) had erred in law and on facts in upholding an ad hoc addition of Rs. 10,00,000/- on account of expenses incurred on earning foreign currency syndicated term loans. 5. The appellant craves leave to add, alter and. or amend all or any of the grounds in appeal at the time hearing.”
7.0 Revenue’s Appeal (ITA No.2382/Del/2006) – Assessment Year 2000-2001: The grounds raised are:
“1. On the facts and in the circumstances of the case, ld. CIT (A) has erred- (i) in deleting the expenses of Rs. 87,12,458/- incurred by various units outside India for mobilization of NRI deposits for the purpose of assessee’s business in India. (ii) in deleting the addition of Rs. 10 crores on account of commission earned by foreign branches of ANZ Grindlays Bank on their Credit Card business overseas where transactions were completed in India. (iii) in disallowing the expenditure of Rs. 7.73 lakhs on the payments made to clubs. (iv) in disallowing the provision made for bad and doubtful debts in accordance with section 36(1)(vii)(a) of the Act, 1961 amounting to Rs. 23,52,79,666/-.
The appellant prays for leave to add, alter, amend or vary from the grounds of appeal at or before the time of hearing.”
8.0 It is seen that the grounds of appeals for AY 2000-2001 are verbatim the grounds raised in appeals for AY 1999- 2000 in and 2381/Del/2006). Further, both the parties before us submitted that the issues involved in AY 2000-2001 are exactly same to that involved in cross appeals for AY 1999-2000.
8.1 In view of the above, it is ordered that the finding recorded and directions contained in aforesaid Para, while deciding the cross appeals for AY 1999-2000, are applicable mutatis mutandis to the grounds raised in appeals filed by assessee and revenue for AY 2000-2001 with an exception to Ground No. 3 of the assessee’s appeal in ITA 2239/Del/2006 which we are adjudicating separately hereunder.
8.2 Ground No. 3 is against upholding of disallowance to the extent of Rs. 10,00,000/- u/s 10(33) on ad-hoc basis by the Ld. CIT (A). The assessee has earned exempt dividend income of Rs. 82,28,000/- u/s 10(33) of the Act. It is noted that this ground is pari materia to corresponding ground in assessee’s appeal for AY 1999-2000. However, there is a change in method adopted by the assessing officer in making the disallowance. It is noted that the assessing officer has computed disallowance to the extent of Rs. 72,14,310/- by applying ratio of expenditure to gross receipt (87.68%) as per Profit & Loss a/c to the dividend income in order to derive the figure of inadmissible expenses. The Ld. CIT (A) reduced the disallowance to Rs. 10,00,000/- on estimate basis. The methodology adopted by the assessing officer in the year under consideration is at variance with AY 1999-2000 wherein the assessing officer estimated disallowance at Rs. 1,20,000/- without applying any formula which has been upheld by us in view of the spirit and purpose of section 14A of the Act. Accordingly, we feel that the conclusion reached by us in AY 1999-2000 cannot be applied to the year under consideration. We find that disallowance computed by the assessing officer cannot be considered as reasonable as we fail to find any rationale behind the formula used for determining inadmissible expenses from dividend income. We are also aware of the fact that Rule 8D cannot be applied in the year under consideration as same was made effective from AY 2008- 2009. Further, the ad-hoc disallowance upheld by the Ld. CIT (A) is excessive and not in conformity with past history. In these circumstances, we deem fit that the ends of justice will be met if the disallowance is restricted to Rs. 2,00,000/-. Accordingly, the disallowance to the extent of Rs. 8,00,000/- is deleted. Thus, ground no. 3 is partly allowed.
9.0 As a result, the cross appeals in AY 2000-2001 are partly allowed. 10.0 In the final result, all the four appeals stand partly allowed. Order pronounced on 2nd March, 2021.