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Facts
The assessee, Indian Bank, filed two appeals. The assessee challenged the addition of income from foreign branches (Singapore & Sri Lanka) amounting to ₹33.13 crore, claimed as exempt, and foreign currency fluctuation of ₹56.67 crore, claimed as not taxable. The Revenue challenged the allowance of education cess amounting to ₹25.99 crore as a business deduction by the CIT(A).
Held
The Tribunal dismissed the assessee's claim regarding foreign branch income, holding it taxable in India with only credit for foreign taxes. The issue of foreign currency fluctuation was remanded to the AO for fresh adjudication due to a violation of natural justice. The Tribunal allowed the Revenue's appeal, disallowing education cess as a deduction, citing the Finance Act, 2022 amendment and a Supreme Court decision.
Key Issues
Whether income from foreign branches is exempt under DTAA or subject to the credit method for double taxation relief; whether foreign currency fluctuation reserve constitutes taxable income; and whether education cess is an allowable business deduction.
Sections Cited
143(2), 142(1), 90, 90A(3), 40(a)(ii), 37(1), 30, 38, 43A, Rule 115
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Income Tax Appellate Tribunal, B BENCH: CHENΝΑΙ
Before: SHRI ABY T. VARKEYAND
Year: 2020-21 Indian Bank, Vs. The Deputy Commissioner of Accounts Department – Corporate Income Tax, Office, 254-260, Avvai Shanmugam Corporate Circle 1(1), Salai, Royapettah, Chennai 600 014. Chennai 600 034. [PAN:AAACI1607G] (अपीलाथ�/Appellant) (*+थ�/Respondent) आयकर अपील सं./ITA No.1527/Chny/2024 िनधा'रण वष'/Assessment Year: 2020-21 The Assistant Commissioner of Vs. Indian Bank, Income Tax, Accounts Department – Corporate Corporate Circle 1(1), Office, 254-260, Avvai Shanmugam Chennai 600 034. Salai, Royapettah S.O, Royapettah, Chennai 600 014. Assessee by : Shri Sanjeev Aditya, C.A. Department by : Shri N. Balakrishnan, CIT सुनवाईकीतारीख/Date of Hearing : 05.11.2024 घोषणाकीतारीख /Date of Pronouncement : 08.01.2025 आदेश / O R D E R PER ABY T. VARKEY, JM:
Both the appeals preferred by the assessee Bank and the Department respectively are against order of the Ld. Commissioner of Income Tax (Appeals), NFAC, (hereinafter in short “CIT(A)") dated 09.01.2024 for assessment year 2020-21 (hereinafter in short “AY").
& 1527/Chny/2024 (AY 2020-21 ) Indian Bank 2. At the outset, we note that there is a delay of 60 days in filing of appeal by the Revenue [ITA No. 1527/Chny/2024]. On perusal of the application filed for condonation of delay, and submissions of the Ld. DR, we find there is reasonable cause for delay, which prevented the Department in filing the appeal in time. Thus, the delay of 60 days in filing the appeal is condoned and proceed to hear the appeal on its merit.
The first ground raised by the assessee is against the action of the Ld. CIT(A) confirming the action of the Assessing Officer adding the income of the foreign branches at Singapore and Sri Lanka amounting to ₹.33,13,96,009/-, which was claimed as an exempt income of the assessee.
Brief facts of the case are that the assessee is a Scheduled National Bank i.e., it is a banking company under the Banking Regulation Act, 1949 engaged in the business of banking, trading in shares and securities etc.
The assessee filed its return of income [RoI] for the AY 2020-21 on declaring income of ₹.30,17,04,74,740/- Later, the RoI was selected for scrutiny under CASS. Accordingly, notices under section 143(2) and 142(1) of the Income Tax Act, 1961 [“Act” in short] were issued along with questionnaire, which were complied by submitting reply and documents as & 1527/Chny/2024 (AY 2020-21 ) Indian Bank called for by AO. From perusal of submissions made by the assessee, ITR & computation of income, audited financial statement & Form 3CD, the Assessing Officer noted that that the assessee claimed exempt income in terms of its income from foreign branches [Singapore & Sri Lanka] (i) Income from its foreign branches: ₹. 33,01,53,608/- & (ii) Recovery from Foreign Branches: ₹.12,42,401/-. Such claims of the assessee were not accepted by the AO. According to him, it is trite law that for a Resident in India, the global income is taxable in India. On this basic principle, according to him, the foreign income may suffer double taxation in India as well as abroad. And in order to tackle this problem, Sec. 90 provides for relief, and by virtue of which, the provisions of DTAA have to be looked into to give appropriate relief. According to AO, the relief could be on Income Exclusion Method (where the foreign income itself is not taxed in the resident country) or Tax Credit Method (where the foreign income is taxed in the resident country also, but the tax paid in the foreign country is given credit in the tax computation in the resident country). Thereafter, the AO noted the assessee’s claim that its foreign income from Singapore and Sri Lankan branches are taxed in those countries and therefore, exempt in India. The AO took note of the provisions of the respective DTAAs with those countries to choose the appropriate method provided for in those treaties. According to the AO, Article 7(1) did not take away the rights of the & 1527/Chny/2024 (AY 2020-21 ) Indian Bank taxation in India but it only restricts the taxability of the Indian profits in the hands of Singapore and Sri Lankan tax authorities. As per this Article, according to the AO, the profits of Indian Bank foreign branches may be taxable in Singapore and Sri Lanka, but should be restricted to the profits attributable to the permanent establishments in those countries. In this context, the AO noted that the Central Office in India exercised control and management over the foreign branches. According to the AO, Article 7 of the DTAA with Singapore says that 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 permanent establishment (PE) situated therein. And if the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of it as are directly or indirectly attributable to, that permanent establishment. The AO noted that income of PE may be taxed in the source country, but it does not say shall be or only be. Further, according to the AO, the Treaty follows credit method for relieving taxation as against exemption method and that the treaty does not give exclusive right of taxation to the source country. Therefore, according to the AO, it is erroneous to say the income of PE can be taxed only in the country in which it is situated. The AO further observed that Article 25(2) of Singapore DTAA and Article 24(2) of Sri Lanka DTAA apply only to entities which do & 1527/Chny/2024 (AY 2020-21 ) Indian Bank not have PE. According to AO, Article 25(1) of DTAA with Singapore clearly states. "The laws in force in either of the Contracting States shall continue to govern the taxation of income in the respective Contracting States except where express provision to the contrary is made in this Agreement. Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Singapore, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Singapore tax paid, whether directly or by deduction".
Similarly, according to the AO, Article 24(1) and 24(2) of DTAA with Sri Lanka also provide for only credit method of relieving double taxation as evident.
5. And AO noted that subject to the provisions of the law of India regarding the allowance as a credit against Indian tax of tax-payable in a territory outside India (which shall not affect the general principle hereof)
Sri Lanka tax payable under the law of Sri Lanka and in accordance with this convention whether directly or by deduction on profits income or chargeable gains from sources within Sri Lanka (excluding) in the case of a dividend, tax payable in deduction of the profits out of which the dividend is paid) or capital in Sri Lanka shall be allowed as a credit against any Indian & 1527/Chny/2024 (AY 2020-21 ) Indian Bank tax computed by reference to the same items of income or capital as referred to which the Sri Lanka tax is computed.
The AO noted that the issue as to whether credit method or exemption method shall apply in the case of a resident Indian, where he has an permanent establishment outside India also in respect of its business has been decided by the jurisdictional ITAT in the case of Data Research Software Company P Ltd in for the A.Y.2003-04 (Order dated 27.11.2007). In that case, the appellant had a branch at USA and claimed the income from that branch as not taxable in India. The ITAT after considering the issue with respect to the relevant DTA with USA has held that Article 7 should not be viewed in isolation and other provisions of the DTA should be taken into account while deciding whether credit method or exemption method shall apply in a particular case. It has held that the Income of the branch in USA is taxable in India in view of Article 25 of DTA with USA and that the appellant would be entitled only for relief by way of credit for the taxes paid in USA under the credit method.
The Article 24 of DTA with Sri Lanka and Article 25 with Singapore clearly provide for credit method only. In the view of fact that the decision of the Supreme Court in 267 ITR 654 would not apply to the facts of the case and that the respective DTAAs clearly provide for inclusion of the appellant's global income in India, the appellant's claim was disallowed. The AO & 1527/Chny/2024 (AY 2020-21 ) Indian Bank furthermore stated that the CBDT, vide their notifications under section 90(3) in S.No. 2123(E) dated 28th August, 2008 and under section 90A(3) in S.No. 2124(E) dated 28th August, 2008, had clarified that double taxation relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement. In view of the above, the Assessing Officer disallowed the income from foreign branches amounting to ₹.33,13,96,009/- which was claimed as exempt income and added back to the total income of the assessee for the year under consideration.
7. The assessee carried the matter in appeal before the Ld. CIT(A).
After considering the assessment order, submissions of the assessee and by following the decision of the Coordinate Bench of this Tribunal in assessee’s own case in dated 11.03.2016, the Ld. CIT(A) confirmed the order of the Assessing Officer and dismissed the ground raised by the assessee. Aggrieved the assess is before us.
We have heard both the sides, perused the material available on record and gone through the orders of authorities below. We find that the ground raised by the assessee is no longer res integra in view of the decision of the Coordinate Benches of the Tribunal in assessee’s own case & 1527/Chny/2024 (AY 2020-21 ) Indian Bank for the assessment year 2011-12 wherein vide order dated 11.03.2016 (supra), this Tribunal has held against the assessee by holding as under:
“4. The next ground raised by the assessee is as under: “3.(a) The Commissioner of Income-tax(Appeals) erred in confirming the order of the assessing authority holding that income from foreign branches are to be included in the total income and only double taxation relief s contemplated as per the agreement is allowable. (b) the Commissioner of Income-tax(Appeals) ought to have appreciated that in view of the provisions regarding business profits contained in the Double Taxation Avoidance Agreements, business profits earned through permanent establishment situated in foreign country is not to be included in the total income at all.”
5. We find that this issue was considered in assessee’s own case by the Tribunal in & Others, cited supra, wherein the Tribunal followed the decision of Mumbai Benches in the case of Bank of Baroda vs. ACIT in dated 25.7.2014 and observed as under : “94. In view of the above decision of the Mumbai Benches of the Tribunal, we are of the considered view that the decisions rendered in assessee’s own case prior to assessment year 2004-05 will not have binding precedence in the assessment year 2009-10 or subsequent years. Accordingly, we hold that the income of the assessee at Singapore and Colombo would be included in the return of income of the assessee in India and whatever taxes paid by the branches in foreign countries, credit of such taxes shall only be given. Accordingly, the ground raised by the assessee is dismissed.” In view of the above, we dismiss this ground of appeal raised by the assessee.
9. Respectfully following the above decision of the Coordinate Bench of the Tribunal in assessee’s own case cited supra, we are inclined to accept the action of the Ld. CIT(A) confirming the action of the Assessing Officer by bringing to tax the income of the foreign branches located at Singapore and Sri Lanka. Thus, this ground raised by the assessee stands dismissed.
& 1527/Chny/2024 (AY 2020-21 ) Indian Bank 10. The next ground raised by the assessee is against the action of the Ld. CIT(A) confirming the action of the Assessing Officer in adding ₹.56,67,00,000/-, which was claimed by the assessee as not taxable being foreign currency fluctuation arising on account of restatement of foreign branches of ₹.56.67 crores has not been offered to tax by the assessee bank in consonance with the accounting standards ICBS-VI.
On perusal of assessee’s audit report in Form 3CD, written submission, the Assessing Officer noted that the assessee has mentioned that Foreign Currency fluctuation arising on account of restatement of monetary items of the foreign branches of ₹.56.67 crores has not been offered to tax against the requirements of ICDS VI. This contention of the assessee was noted to be in line with the assertion of the assessee bank that as per Double Taxation Avoidance Agreement with Singapore & Sri Lanka, business income arising in a particular state would be subjected to tax in that particular state only, and hence the same be excluded while computing the total income in India. The said claim of the assessee was not accepted by the AO, since the incomes from foreign branches have been added back to the total income of the assessee for the year under consideration (supra). Hence, the said amount of ₹. 56.67 crores was also added back to the total income of the assessee for the year under & 1527/Chny/2024 (AY 2020-21 ) Indian Bank consideration. On appeal, the Ld. CIT(A) confirmed the addition made by the Assessing Officer. Aggrieved, the assessee is before us.
Before us, the Ld. AR filed detailed written submissions on this issue which is reproduced herein below:
Ground No. 2 of the Appellant Foreign Currency fluctuation - Rs. 56,67,00,000/- 24. Your appellant bank maintains branches in Singapore and Sri Lanka. During the relevant assessment year, a fluctuation reserve of Rs. 56,67,00,000/- has been created due to the restatement of those branches financial statements into reporting currency, which is in Indian rupees. This fluctuation arises solely from exchange rate movements and is not directly related to our core business activities in those countries.
We submit that foreign currency fluctuation should not be included in our taxable income in India. As submitted in Ground No.1 the provisions of the Double Taxation Avoidance Agreements of Singapore and Sri Lanka with India, specify that business income earned by a resident of one country (India, in this case) through a permanent establishment in the other country (Singapore or Sri Lanka) shall be taxable only in the latter country ie where the permanent establishment is present.
Since the DTAA stipulates that such business income earned through a permanent establishment is taxable only in the source country (Singapore or Sri Lanka), it should be excluded from our taxable income computation in India to prevent double taxation.
We submit as per AS 11- The Effects of Changes in Foreign Exchange Rates, foreign operations are classified into integral and non-integral foreign operations. Integral operations are considered an extension of the enterprise's domestic operations, and are translated as if the transactions of the foreign operation had been those of the reporting enterprise itself. Whereas, non-integral operations are considered as separate entities, and their financial statements are translated using the closing rate method, where assets and liabilities are translated at the closing exchange rate on the balance sheet date, and income and expenses are translated at the exchange rates at the date of respective transactions.
& 1527/Chny/2024 (AY 2020-21 ) Indian Bank 28. The resultant exchange differences in the case of non-integral operations are not recognized in the Profit and Loss account. Instead, these differences are accumulated in the FCTR, a component of equity. This reserve reflects the fluctuations in exchange rates but does not impact on the operational profits or losses reported in the Profit and Loss account.
Simply put, exchange differences arising on translation of non-integral foreign operation to be accumulated separately in foreign currency translation reserve till investment in foreign operation is disposed of.
The Hon'ble CIT(A) has erred in deciding disallowance based on the accumulation in the FCTR. Unrealized exchange gains and losses, which are routed through the FCTR, do not represent real income or expenditure and hence are not taxable.
Without prejudice to the above, the Hon'ble CIT(A) erred in confirming the entire reserve created during the year amounting Rs.56,67,00,000/- which includes both monetary and non-monetary items, contrary to the guidelines in "ICDS-VI Effects of changes in Foreign exchange rates, which clearly specify that only exchange difference arising from monetary items shall be recognized as income or expense for the year.
As per para 3 to 7 of Income computation and disclosure standard VI relating to the effects of changes in foreign exchange rates-
Para 3
3(1) A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
(2) An average rate for a week or a month that approximates the actual rate at the date of the transaction maybe used for all transaction in each foreign currency occurring during that period. If the exchange rate fluctuates significantly, the actual rate at the date of the transaction shall be used.
Para 4
Conversion at Last Date of Previous Year
4. At last day of each previous year:-
(a) foreign currency monetary items shall be converted into reporting currency by applying the closing rate; & 1527/Chny/2024 (AY 2020-21 ) Indian Bank (b) where the closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realized from or required to disburse, a foreign currency monetary item owing to restriction on remittances or the closing rate being unrealistic and it is not possible to effect an exchange of currencies at that rate, then the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realized from or required to disburse such item at the last date of the previous year, and (c) non-monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction.
(d) non-monetary item being inventory which is carried at net realizable value denominated in a foreign currency shall be reported using the exchange rate that existed when such value was determined.
Para 5
Recognition of Exchange Differences
(i) In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognized as income or as expense in that previous year.
(ii) In respect of non-monetary items, exchange differences arising on conversion thereof at the last day of the previous year shall not be recognized as income or as expense in that previous year.
Exceptions to Paragraphs 3, 4 and 5
Para 6
6. Notwithstanding anything contained in paragraphs 3, 4 and 5; initial recognition, conversion and recognition of exchange difference shall be subject to provisions of section 43A of the Act or Rule 115 of Income- tax Rules, 1962, as the case may be Financial Statements of Foreign Operations
Para 7
The financial statements of a foreign operation shall be translated using the principles and procedures in paragraphs 3 to 6 as if the transactions of the foreign operation had been those of the person himself.
& 1527/Chny/2024 (AY 2020-21 ) Indian Bank By following para 7 of ICDS VI, the assets and liabilities of the foreign operations would need to be classified into monetary and non-monetary items and the foreign exchange gain/loss would be recognized to profit and loss or not will be as per para 5. Therefore, the income/expenses arising from following principles as per paras 3 to 6 above for monetary and non-monetary items, as opposed to principles under AS 11 for non-integral operations, may need to be adjusted in computing the taxable income.
To conclude, even if the reserve created for foreign currency translation is disallowed, only the portion related to monetary items should be added back to the income. Non-monetary items, however, should not be added back as per the above principles. According to ICDS VI, exchange differences for non-monetary items do not even need to be recognized as income or expense in the current year.
Besides the above written submissions, the Ld. AR brought to our notice that the assessee was not afforded proper opportunity to substantiate its case before the Assessing Officer.
We have perused the orders of authorities below and written submissions of the assessee and notes that the Assessing Officer durin the course of assessment proceedings didn’t give any show-cause notice to the assessee before rejecting the claim of the assessee. Therefore, there is per-se violation of natural justice. Hence, we are inclined to remit this issue/matter back to the file of the Assessing Officer for de novo adjudication after hearing the assessee. Thus, the ground raised by the assessee is allowed for statistical purposes.
[AY 2020-21] – Revenue’s appeal:
The only ground raised by the Revenue is against the action of the Ld. CIT(A) allowing cess as deduction.
& 1527/Chny/2024 (AY 2020-21 ) Indian Bank :: 14 ::
On perusal of the ITR, computation of income, financials and submissions made by the assessee, the Assessing Officer noted that for the year under consideration, the assessee claimed deduction of ₹.25,99,22,852/- on account of Education cess under the head "Any Other amount allowable as deduction". As per the AO, the claim of deduction of education cess is not correct and not an allowable deduction. The AO observed ‘…… the Hon'ble Bombay High Court has examined the question whether 'cess' is included in Section 40(a)(ii) of the Act or not. Having answered the question in negative, the High Court has assumed that since it is not included in Section 40(a)(ii), it becomes allowable u/s 37(1) of the Act. And that the Hon'ble High Court didn’t examine the allowability of education cess in terms of the requirements of Section 37(1) at all. The AO further stated that when we look at the scheme of the Act, and examine the interplay of the provisions of Section 40(a)(ii) and Section 37(1), it becomes amply clear that in the scheme of the interplay of the twin provisions, it is the allowability of an expenditure or an item or a claim, which has to be first examined u/s 37(1), then a further examination is to be necessarily made whether the said expenditure, item or claim is hit by the embargo placed in Section 40(a)(ii) of the Act. Therefore, according to him, if a claim does not pass the criteria of allowability u/s 30 to 38 at the threshold, that is the end & 1527/Chny/2024 (AY 2020-21 ) Indian Bank of the matter and there is no need to go to section 40(a)(ii). As such according to him, the allowability of education cess shall have to be examined first under the terms of Section 37(1) i.e. whether the said expenditure has been 'laid out or expended wholly and exclusively for the purposes of business or profession'. The fundamental question, therefore, which arises for consideration is whether education cess is an expenditure 'laid out or expended wholly and exclusively for the purposes of business or profession'. The answer to that question according to AO is clearly in negative because education cess is not an expenditure at all. Rather, it is a charge upon the profits, similar to income tax. Any expenditure to earn a profit cannot be a part of the profit itself. It is an application of an income and not an expenditure laid out or expended wholly and exclusively for the purposes of business or profession so as to pass the test envisaged in Section 37(1).Further, without prejudice to the applicability of provisions of Section 37(1), the claim of deduction of 'education cess' cannot be allowed under the provisions of Section 40(a)(ii) as well. Further, according to the AO, the Education cess was introduced as an additional surcharge as explained in the Explanatory Memorandum to Finance Bill, 2012. An 'additional surcharge' is nothing but 'tax', as held by a three- judge Bench of the Hon'ble Supreme Court in CIT v. K Srinivasan [1972] 83 ITR 346 (SC).
As per the AO, it has been made clear leaving no iota of ambiguity in the & 1527/Chny/2024 (AY 2020-21 ) Indian Bank Finance Act, 2022 that education cess is not an allowable expense and hence cannot be claimed as deduction. And added back to the total income an amount of ₹.25,99,22,852/-.
On appeal, the Ld. CIT(A), by following the judgement of the Hon’ble Bombay High Court in the case of Sesa Goa Ltd v. JCIT in TA No. 17 & 18 of 2013 dated 28.02.2020, directed the Assessing Officer to allow the cess as business expenditure and allowed the ground of the assessee.
Aggrieved, the Revenue is in appeal before the Tribunal. The Ld. DR has submitted that in view of the amendment brought in by Finance Act, 2022 in section 40(a)(ii) of the Act by way of insertion of an explanation, the education cess cannot be allowed as an expenditure.
We have heard both the sides and perused the materials available on record. The Assessing Officer noted that the assessee, in its computation of income, claimed deduction of ₹.25,99,22,852/- for education cess under the head “Any other amount allowable as deduction”, which has been disallowed by the Assessing Officer. However, the Ld. CIT(A) was pleased to allow the same by placing reliance on the decision of Hon’ble Bombay High Court at Goa in the case of Sesa Goa Ltd v. JCIT (supra), which action we cannot agree since it is noted that that the Hon’ble Supreme & 1527/Chny/2024 (AY 2020-21 ) Indian Bank Court has reversed the view of the Hon’ble Bombay High Court at Goa in Sesa Goa Ltd. (supra) by order dated 15.04.2024, wherein, the Apex Court, in view of the amendment by way of insertion of an explanation brought in the Act by Finance Act, 2022 in section 40(a)(ii) of the Act (supra) held that education cess cannot be allowed as an expenditure/deduction. Therefore, we reverse the order of the Ld. CIT(A) and allow the appeal of the Revenue on this issue. Thus, the ground raised by the Revenue is allowed.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes and the appeal filed by the Revenue is allowed.
Order pronounced on 08th January, 2025 at Chennai.