M/S CHINA TRUST COMMERCIAL BANK,NEW DELHI vs. ADIT, NEW DELHI

Brief facts of the case are that the assessee, a non-resident banking company, filed its return of income at a loss of Rs. 114915148/- on 10.11.2006. The assessment u/s 143(3) was made on 26.12.2008 where the income computed in the normal method was determined at Rs. (-) 104433143/- and u/s 115JB of the Act book profit determined at Rs. 18031766/-. Mainly the ld Assessing Officer disallowed expenses of Rs. 364264/- incurred in earning tax free interest income from investment of Rs 2 cr. in HUDCO bonds. Further disallowance of Rs. 8456510/- was made on account of interest paid to the Head Office outside India. The assessee submitted that same have been remitted after deducting TDS of Rs. 1793135/-. The ld Assessing Officer held that it is interest paid to self and is not an allowable deduction. Further, expenses of Rs. 1661289/- were disallowed u/s 44C of the Act as assessee did not submit the actual benefit received on account of expenses incurred by the head office as well as no debit notes or any other evidence of incurring the expenses were submitted. While computing the book profit the ld Assessing Officer made an adjustment of Rs. 21769446/- on account of provision of bad and doubtful debts for computation of book profit.

relates to disallowance of expenditure of Rs. 3642006/-. The ld Assessing Officer has held that assessee has invested Rs 2 Crs. in 10% HUDCO tax free bonds and earned interest of Rs. 1550685/-. The ld Assessing Officer was of the view that dividend income received from HUDCO is exempt from tax but assessee borrowed funds at various rates of interest. The assessee could not also show before the ld AO to which of the funds were deployed in tax free investments. Hence, the ld Assessing Officer disallowed the proportionate interest out of the total deposit/ borrowing to the amount invested in HUDCO for proportionate period of investment. Accordingly, Rs. 364206/- was disallowed and confirmed by the ld CIT(A).

6. The ld Authorised Representative submitted that this issue is squarely covered in favour of the assessee by the decision of the coordinate bench. But He further stated that even otherwise assessee has huge capital reserve and surplus of Rs. 35.14 crores, which is interest free. Therefore, presumption is available in favour of the assessee that amount invested in the bond is out of interest free funds. He relied upon the decision of Hon’ble Bombay High Court in case of HDFC Securities. He further stated that interest disallowance is also not made u/s 14A of the Act but the sum is disallowed with reference to section 36(1)(iii) of the Income Tax Act.

7. The ld Departmental Representative vehemently stated that the ld Assessing Officer has disallowed the above expenses which are incurred for earning exempt income i.e. u/s 14A of the Act. He further relied upon the decision of lower authorities. He further referred to the decision of the coordinate bench in assessee’s own case for Assessment Year 2003-04 to 2005-06, wherein the issue is decided in para No. 17 against the assessee vide order dated 03.07.2017. In view of this, he submitted that the issue is required to be decided against the assessee.

8. We have carefully considered the rival contentions and also perused the orders of the coordinate bench in assessee’s own case for Assessment Year 2003-04 to 2005-06 in wherein, it has been held that even in the remand proceedings the assessee failed to furnish any corroborative evidence to show how investment were made by it and through which funds. Therefore, it was held that in absence of discharge of onus the expenditure had to be disallowed. Therefore, the disallowance of Rs. 752494/- were disallowed in that year. For this year, the assessee has relied on the decision of Hon'ble Bombay High Court in CIT Vs. HDFC Bank Ltd 366 ITR 505 wherein it has been held that if assessee is having more interest free funds then interest bearing funds , presumption would be available that investment in tax free securities has been made from interest free funds and no disallowance would be permissible u/s 14A of the Income Tax Act on account of interest. The above decision was not available before the coordinate bench while deciding issues in earlier years, no such grounds was also raised therein, During the year assessee has made investment in HUDCO of Rs. 2 crores as mentioned at page No. 3 of the assessment order whereas, interest free funds available with the assessee of share capital and reserve and surplus of Rs. 42.28 crores as at 31.03.2006. Further, as at 31.03.1999 the available interest free funds in the form of share capital and reserve and surplus was Rs. 35.14 crores. In view of this the presumption would lie in favour of the assessee that assessee has made investment out of its own tax free funds. Therefore, following decision of the Hon'ble Bombay High Court in HDFC Bank Ltd Vs. DCIT 383 ITR 529 we reverse the finding of the lower authorities and direct the Ld AO to delete the disallowance of Rs. 364206/- on account fo interest expenses being allegedly paid on pro rata basis relating to earning of tax free interest income of Rs. 15.50 lacs on tax free HUDCO bonds of Rs. 2 crores. In the result ground No. 1 of the appeal is allowed. 9. Ground No. 2 of the appeal is relating to disallowance of interest paid on borrowings from Head Office amounting to Rs. 8456510/-. Assessee has borrowed from its head office the sums and paid interest of Rs. 84.56 lacs and deducted tax at source of Rs. 17.93 lacs. The ld Assessing Officer disallowed the above interest relying on the decision of Special Bench of Page | 3 ITAT, Kolkata of Tokyo Mitsubishi Vs. CIT 97 ITD 89 holding that interest paid to self is not allowable as deduction. The ld AO was of the view that branch is paying interest to its head office and this branch is part of that head office and therefore, it amounts to interest paid to self, hence, not allowable. The ld CIT(A) confirmed the above disallowance and therefore, assessee is in appeal before us.

10. The ld Authorised Representative relied upon the decision of Hon’ble Kolkata High Court in case of ABN Amro Bank Vs. CIT ( dated 23.12.2010) . He specifically referred to page No. 2 of that decision where the issue before the Hon’ble Court was that whether interest payment made by an Indian Branch of the assessee to its Head office abroad is to be allowed as deduction in computing the profits of the appellant’s branch in India.

11. The ld Departmental Representative vehemently submitted that the above decision does not apply to the facts of the case as, assessee has paid interest to its head office in Taiwan with which there is no Double Taxation Avoidance Agreement. Therefore, according to him, the provisions of double taxation avoidance are absent and only domestic tax law is to be seen. He vehemently referred to the provisions of section 9(1)(v) © of the Act where it is stated that in case of an nonresident banking company any interest paid by the permanent establishment in India of such nonresident to the head office shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India. He therefore, submitted that above expenditure has rightly been added to the total income of the assessee. He further referred to the provisions of section 115A of the Income Tax Act under which the ld Assessing Officer taxed the above income @20%.

12. We have carefully considered the rival contentions and perused the orders of the lower authorities. Apparently, assessee has paid interest to its head office which is in Taiwan and with that country India does not have any Double Taxation Avoidance Agreement. Further, the explanation to section 9(1)(v) has been inserted w.e.f. 01.04.2015, therefore, the situation arises is that the assessee a branch of a foreign bank of non treaty jurisdiction who has paid interest to its foreign head office is allowable as deduction or not. Prior to 01.04.2015 if interest is paid by the assessee to its Taiwan Head Office it is payment to self. In para no 50 of the decision of the Sumitomo Mitusi banking cop V DDIT 136 ITD 66 (SB) (mum) while dealing with domestic tax law this issues has been discussed that in domestic tax law there is no question of granting deduction of interest paid by the assessee to its HO , because it is payment to self. The issue of any applicability of any DTAA is not before us, therefore various case laws cited before us are not relevant as they deal with various DTAAs. In the result we do not find any infirmity in the orders of lower authorities in denying deduction of interest paid to HO by the assessee. In the result ground No. 2 of the appeal is dismissed.

13. Ground No.3 of the appeal is with respect to the disallowance of sum of Rs. 1661289/- incurred by the HO , claimed to be attributable to the branch and allowable u/s 44C of the act was disallowed by the ld Assessing Officer. Assessee submitted that Head Office has incurred various executives and general administrative expenditure for its office in India in the form of stationary, allocation of various general management and administrative expenses and training expenses. It was stated that such expenses are borne by the HO and attributable to the assessee branch. The total cost incurred by the head office was attributed on the standard parameters applied by the head office in the number of branches on the basis of operating revenue of the each branch. The ld Assessing Officer disallowed the above expenditure for the reason that the actual benefit received by the assessee on account of such expenses was not submitted and further, assessee has also not submitted the copy of debit note of the expenses. On appeal before the ld CIT(A) assessee remained unsuccessful. Therefore, assessee is in appeal on this ground.

14. The ld Authorised Representative submitted that complete details was submitted before the ld Assessing Officer and he referred to para No. 7 of the assessment order to demonstrate that various expenditure have been incurred by the assessee. He further stated that the ld CIT(A) has ignored the submission of the assessee that above expenditure has been attributed by the head office. He stated that complete break up was provided to the ld Assessing Officer as well as ld CIT(A).

15. The ld Departmental Representative submitted that no evidence has been submitted by the assessee. He referred to page No. 271 of the paper book which is stated to be the details submitted before the ld Assessing Officer. He stated that the above listing is merely the indirect allocation details provided which cannot be said to be the details of expenditure in term of section 44C of the Act. He further stated that provisions of section 44C provides that such expenditure shall be attributable to the business or profession of the assessee in India. The assessee has failed to provide any details of such expenditure which are been incurred by the assessee outside India. In nut shell, he stated that no details of such expenditure are available before the lower authorities as well as before the tribunal. He therefore, supported the orders of the lower authorities.

16. We have carefully considered the rival contentions and perused the orders of the lower authorities. According to the provisions of section 44C of the Act in case of a non-resident assessee the head office expenditure are allowable which are incurred by the assessee as is attributable to the business of profession of the assessee in India. The head office expenditure Page | 5 are further defined in explanation (iv) to that section which provide that such expenditure means executive and general expenditure incurred by the assessee outside India including the specified expenditure which are used for the purpose of business or profession. Further, salary expenditure etc as well as travelling of those employees are allowable in case they are incurred for managing the office of the assessee outside India. Before us, assessee has submitted the same chart, which is placed at page No. 271 of the paper book. The actual expenditure said to be borne by the head office is Rs. 3781095880/-. However due to the restriction placed u/s 44C of the Act the above expenditure claim were restricted to Rs. 1661289/- for the purpose of section 44C of the act . The assessee has not produced details of the expenditure incurred by the assessee, which are attributable to the business of the assessee either before lower authorities as well as before us. In the present case the total expenditure incurred by the head office of NTD 27056314/- as well as pension of NTD 4481126/- was said to be attributable to the assessee’s business. The details of the expenditure with respect to nature of such expenditure, purpose of such expenditure and actual incurring of such expenditure were neither provided before the lower authorities as well as before us. In view of this, we do not find any infirmity in the order of the lower authorities in denying the claim of the assessee u/s 44C of the Act. In the result ground No. 3 of the appeal of the assessee is dismissed.

17. Ground No. 4 of the appeal of the assessee is with respect to the addition of provision for bad and doubtful debts of Rs. 21769446/- to the book profit u/s 115JB of the Act.

18. The ld Assessing Officer has made the addition of the above sum to the book profit which was also confirmed by the ld CIT (A) relying on the decision of Hon'ble Madras High Court.