DOHA BANK , INDIA BRANCHES,MUMBAI vs. DCIT (IT)4(2), MUMBAI

The captioned appeals filed by the assessee are directed against the respective orders passed by the CIT(A)-56, Mumbai, dated 26.02.2016 for A.Y. 2009-10 and A.Y. 2010-11. As the issues involved in the captioned appeals are inextricably interlinked or in fact interwoven, the same are therefore being taken up and disposed off by way of a consolidated order. We & 3685/Mum/2016 2 A.Ys. 2009-10 & 2010-11 Doha Bank QSC Vs. The DCIT (IT)-2(2)(2) shall first take up the appeal of the assessee for A.Y. 2009-10 wherein the impugned order has been assailed on the following grounds of appeal before us:

Observing, that the assessee had carried out international transactions during the year under consideration, the A.O made a reference to the Transfer Pricing Officer (for short „TPO‟) under Sec. 92CA(1) for benchmarking the said transactions. As the assessee had debited an amount of Rs.96,28,769/- as interest paid on borrowings raised from its Head Office (for short “H.O”), the TPO vide his order determined the Arm‟s Length Value (for short „ALV‟) of the interest so paid at Rs.80,15,666/- and worked out an adjustment of Rs.16,13,103/- in the hands of the assessee. As the assessee taking cognizance of the fact that interest paid to its H.O was in fact a payment to self had already disallowed the same in its computation of income, therefore, no ALP adjustment was made by the A.O. On the other hand, it was observed by the A.O that the assessee in its computation of income had reduced from its income the amount of interest received from its H.O on the ground that the same was an income received from self. After deliberating on the aforesaid facts, the A.O called upon the assessee to explain that now when the H.O and the branch office were separate entities, then why the aforesaid interest income of Rs.3,49,939/- received by it from the H.O may not be considered as part of its taxable income. In reply, it was submitted by the assessee that the ITAT vide its order dated 29.06.2012 in its own case for A.Y 1996-97 and A.Y 1997-98, had held, that the interest received by the Indian branch from its H.O could not be treated as the income of the Indian branch since it was received from self. Although, the ITAT, Mumbai as well as the Hon‟ble High Court in the & 3685/Mum/2016 4 A.Ys. 2009-10 & 2010-11 Doha Bank QSC Vs. The DCIT (IT)-2(2)(2) assessee‟s own case for the earlier years, had held, that interest received by the assessee i.e the India branch from its H.O would not be taxable in the hands of the assessee, the A.O however taking note of the fact that the department had not accepted the aforesaid decisions and had carried the same further in appeal, declined to accept the assessee‟s claim that the interest of Rs.3,61,762/- (as per the order of the TPO) received from the H.O was not taxable in its hands and added the same to the returned income of the assessee. Alternatively, it was observed by the A.O, that in case the interest income received by the assessee from its H.O was held as not taxable, then, the provisions of Sec. 14A would be applicable. On the basis of his aforesaid observations the A.O worked out the disallowance under Sec. 14A r.w. Rule 8D at an amount of Rs.64,605/-, as under :

On a perusal of the assessee‟s financial statements, it was further observed by the A.O that the assessee had reduced a sum of Rs. 25,25,634/- being 5% of the “adjusted total income” under Sec. 44C of the Act. It was observed by the A.O that from the details filed by the assessee it was not clear as to whether the expenses incurred by the H.O were in respect of the Indian branch i.e the assessee, the liability in respect of which was borne by & 3685/Mum/2016 5 A.Ys. 2009-10 & 2010-11 Doha Bank QSC Vs. The DCIT (IT)-2(2)(2) the H.O. In the backdrop of his aforesaid observation the A.O disallowed the assessee‟s claim for deduction under Sec. 44C on the following grounds:

Aggrieved, the assessee assailed the assessment framed by the A.O before the CIT(A). However, the CIT(A) not finding favour with the claim of the assessee insofar the aforesaid issues were concerned, viz. (i) disallowance under Sec. 14A; and (ii) declining of the assessee‟s claim for deduction under Sec. 44C, therein upheld the same.

The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. At the very outset of the hearing of the appeal the ld. A.R took us through the facts relevant for disposal of the same. It was submitted by the ld. A.R that the Hon‟ble High Court of Bombay in the assessee‟s own case for A.Ys 1996-97 to 1999-2000 had upheld the order of the Tribunal and had approved the assessee‟s claim for deduction of interest received by its Indian branch from its H.O. It was submitted by the ld. A.R that both the Tribunal and the Hon‟ble High Court had in the assessee‟s own case held that the interest income received by the assessee‟s Indian branch from its H.O was not to be subjected to tax. In order to buttress his aforesaid claim, the ld. A.R had drawn our attention to the order passed by the Tribunal in its own case for the aforementioned preceding years. At the same time, it was fairly stated by the ld. A.R that the Tribunal had in its aforesaid orders observing that the provision of Sec. 14A would be applicable to the exempt & 3685/Mum/2016 6 A.Ys. 2009-10 & 2010-11 Doha Bank QSC Vs. The DCIT (IT)-2(2)(2) interest income earned by the assessee from its H.O/overseas branch had thus restored the matter back to the file of the A.O for quantification. Adverting to the disallowance made by the A.O under Sec.14A, it was submitted by the ld. A.R that as the A.O had failed to record his satisfaction before working out the disallowance under Sec.14A r.w. Rule 8D, therefore, the same was liable to be vacated on the said count itself. However, the ld. A.R fairly admitted that the issue as regards recording of satisfaction by the A.O, in the backdrop of identical facts had been decided by the Tribunal against the assessee while disposing off its appeal for A.Y 2011-12.(copy placed on record). It was further submitted by the ld. A.R that the disallowance of the interest expenditure under Sec. 14A r.w Rule 8D(2)(ii) was to be carried out after netting of the interest income and the interest expenditure. As regards the disallowance pertaining to the administrative expenses worked out by the A.O under Sec. 14A r.w Rule 8D(2)(iii), it was submitted by the ld. A.R that as the assessee had not made any investment for earning of the interest income from its head office, thus, no disallowance of any part of the administrative expenses was called for in its hands. Assailing the disallowance of the assessee‟s claim for deduction under Sec. 44C, it was submitted by the ld. A.R that the same was based on misinterpretation of the said statutory provision by the lower authorities. It was submitted by the ld. A.R that the assessee‟s claim for deduction of Rs. 25,25,634/- i.e 5% of the “adjusted total income”, being lower than the proportionate amount of the H.O expenditure that was attributable to the business of the assessee in India, was rightly claimed by the assessee. In order to buttress his aforesaid claim the ld. A.R took us through the aforesaid statutory provision. It was further submitted by the ld. A.R that in the subsequent years i.e A.Y 2010-11 and A.Y 2011-12 the assessee‟s claim for deduction under Sec. 44C had been accepted by the department.

Per contra, the ld. Departmental Representative (for short „D.R‟) had relied on the orders of the lower authorities. Insofar the netting of the interest income and interest expenditure for the purpose of working out the & 3685/Mum/2016 7 A.Ys. 2009-10 & 2010-11 Doha Bank QSC Vs. The DCIT (IT)-2(2)(2) disallowance under Sec. 14A r.w Rule 8D(2)(ii) was concerned, the ld. D.R fairly accepted the claim of the counsel for the assessee. As regards the disallowance made by the A.O under Sec. 44C of the Act, it was submitted by the ld. D.R that as there was no mention of any H.O expenses attributable to the business of the assessee in India, either in the notes to accounts or the audit report of the assessee‟s India branch, therefore, the lower authorities had by rightly drawing support from sub-section (c) of Sec. 44C, therein concluded, that in the absence of any such H.O expenditure attributable to the assessee‟s business in India, the claim of the assessee under Sec. 44C was liable to be rejected.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements that have been pressed into service by them. As regards the interest income received by the assessee from its H.O is concerned, we find, that it is matter of fact borne from the records that the Tribunal and also the Hon‟ble High Court of Bombay had in the assessee‟s own case for A.Ys. 1996-97 to 1999-2000 held, that the interest income received by the assessee from its H.O could not be brought to tax in its hands, for the reason, that one cannot earn income from self. But then, at the same time, we find that the Tribunal while disposing off the appeals of the assessee for the aforesaid preceding years was of the view that as the provisions of Sec.14A would be applicable to the exempt interest income earned by the assessee from its H.O/Overseas branches, had thus, restored the matter to the file of the A.O for quantification. Admittedly, the aforesaid facts are not in dispute before us. Insofar, the claim of the ld. A.R that the disallowance made by the A.O under Sec.14A was liable to be vacated, for the reason, that he had failed to record his satisfaction prior to working out of the aforesaid disallowance, we find, that the said issue as fairly admitted by the ld. A.R had been decided against the assessee by the Tribunal while disposing off its appeal for A.Y.2011-12, wherein identical facts & 3685/Mum/2016 8 A.Ys. 2009-10 & 2010-11 Doha Bank QSC Vs. The DCIT (IT)-2(2)(2) were involved. Accordingly, finding no reason to take a different view, we respectfully follow the order of the Tribunal for A.Y 2011-12 and reject the aforesaid claim of the assessee. As regards the claim of the ld. A.R that the disallowance of the interest expenditure under Sec. 14A r.w Rule 8D(2)(ii) was to be worked out by the A.O after netting of the interest income received and interest expenditure incurred, we find substantial force in the same. Admittedly, the disallowance of the interest expenditure under Sec. 14A r.w Rule 8D(2)(ii) has to be carried out after netting of the interest income and interest expenditure. Our aforesaid view is fortified by the order of the Hon’ble High Court of Bombay in the case of CIT, Central-III Vs. Jubiliant Enterprises Pvt. ltd. [ITA No. 1512 of 2014, dated 28.02.2017]. In the said case, the Hon‟ble High Court approving the view taken by the Tribunal that the disallowance made under Sec.14A r.w Rule 8D was to be carried out on the basis of netting of the interest expenditure had dismissed the appeal of the revenue. Also, a similar view had been taken by the Hon’ble High Court of Gujarat in the case of PCIT-3, Vs. Nirma Credit and Capital (P. Ltd.) (2018) 300 CTR 286 (Guj). It was observed by the Hon‟ble High Court that for the purpose of working out the disallowance under Rule 8D(2)(ii) the amount of expenditure by way of interest would be interest paid by the assessee on borrowings minus taxable interest earned during the year. In terms of our aforesaid observations, we find ourselves to be in agreement with the claim of the ld. A.R that the disallowance under Sec. 14A r.w Rule 8D(2)(ii) as regards the interest expenditure has to be carried out after netting of the interest paid by the assessee on borrowings and the taxable interest income earned during the year under consideration. Accordingly, we direct the A.O to recompute the disallowance under Sec. 14A r.w Rule 8D(2)(ii) in terms of our aforesaid observations. We shall now advert to the claim of the ld. A.R that as the assessee had not made any investment for earning of the interest income from its H.O, therefore, no disallowance of any part of the administrative expenses was called for under Sec. 14A r.w Rule 8D(2)(iii). We find that a somewhat similar claim was raised by the assessee in its appeal before the & 3685/Mum/2016 9 A.Ys. 2009-10 & 2010-11 Doha Bank QSC Vs. The DCIT (IT)-2(2)(2) Tribunal for A.Y. 2011-12, which, however, was rejected by the Tribunal. In its case for the aforementioned preceding years, it was the claim of the assessee that the disallowance of administrative expenses under Rule 8D(2)(iii) may be restricted to the extent of 1% to 2% of its exempt income. However, the Tribunal taking cognizance of the fact that from A.Y. 2008-09 onwards disallowance under Sec. 14A was to be computed in accordance with Rule 8D, had thus, rejected the aforesaid claim of the assessee. In our considered view as there is no substance in the claim of the assessee that de hors any investment made for earning of the interest income from its H.O no disallowance was called for under Sec. 14A r.w. Rule 8D(2)(iii), we decline to accept the same.

We shall now advert to the claim of the assessee that the lower authorities had erred in disallowing its claim for deduction under Sec. 44C of the Act. Before dealing with the said issue, we shall briefly cull out the facts leading to the controversy in hand. On a perusal of the records, we find, that the assessee had claimed deduction of Rs. 17,60,878/- on account of expenses that were incurred in respect of Ms Laila Ali Obaid Al- Mujaini, employee of the assessee bank who was deputed to India. Being of the view that the aforesaid expenditure was in the nature of a H.O expense, the A.O disallowed the same on the ground that the same would be subject to the ceiling of the deduction contemplated in Sec. 44C of the Act. It was further observed by the A.O that the assessee had claimed a deduction of Rs. 25,25,634/- being 5% of the “adjusted total income” under Sec.44C of the Act. Observing, that the assessee had not shown any expense under the head “Head Office Expenses” either in its audit report or the notes to accounts, the A.O was of the view that no part of the H.O expenses was attributable to the business of assessee in India. Apart from that, the A.O was of the view that as the quantum and nature of the expenses were not known, therefore, for the said reason also the assessee was not entitled for claim of deduction under Sec.44C of the Act. On the basis of his aforesaid observations the A.O & 3685/Mum/2016 10 A.Ys. 2009-10 & 2010-11 Doha Bank QSC Vs. The DCIT (IT)-2(2)(2) disallowed the aforesaid claim of expenditure by the assessee aggregating to an amount of Rs. 42,33,512/- [Rs.17,07,878/- (+) Rs.25,25,634/-]. On appeal, the CIT(A) finding no infirmity in the view taken by the A.O upheld the aforesaid disallowance made by him.

Before us, it is the claim of the ld. A.R that both the lower authorities had misconceived or in fact misinterpreted the scope of Sec.44C of the Act. On a perusal of the orders of the lower authorities, we find, that the A.O had primarily emphasised on sub-section (c) of Sec.44C, to conclude, that as no part of the H.O expenditure was attributable to the business of the assessee in India, therefore, the assessee‟s claim for deduction under Sec.44C worked out to an amount of Rs.nil.

We have given a thoughtful consideration to the aforesaid issue and find substantial force in the claim of the ld. A.R that the lower authorities had failed to appreciate the scope and gamut of Sec.44C in the right perspective. For a fair appreciation of the issue under consideration we shall briefly cull out Sec.44C of the Act, which reads as under (relevant extract) :

The appeal of the assessee is partly allowed in terms of our aforesaid observations. A.Y. 2010-11 14. We shall now take up the appeal of the assessee for A.Y. 2010-11. The assessee has assailed the impugned order on the following grounds of appeal before us:

Without prejudice to (1) above, the CIT(A) erred in not appreciating that since the bank had not incurred any expenditure for the purpose of earning the interest amount, provisions of section 14A are not applicable.

Per contra, the ld. Departmental Representative (for short „D.R‟) did not object to the aforesaid claim of the counsel for the assessee.

We have given a thoughtful consideration to the aforesaid issue before us, and find substantial force in the claim of the ld. A.R that the amount of the disallowance under Sec. 14A is liable to be restricted to the extent of the exempt interest income. Our aforesaid view is fortified by the judgments of the Hon’ble High Court of Delhi in the case of JCIT Vs. Joint Investments Pvt.ltd. (2015) 372 ITR 694 (Del) and Cheminvest Ld. Vs. CIT 378 ITR 33 (Del). Accordingly, in terms of our aforesaid observations, the A.O is directed to restrict the disallowance under Sec.14A to the extent of the amount of the exempt income of the assessee for the year under consideration. Before parting, we may herein observe that the concession on the part of the assessee for not pressing the other grounds of appeal

Resultantly, the appeals filed by the assessee are partly allowed in terms of our aforesaid observations. Order pronounced in the open court on 06.11.2020