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Income Tax Appellate Tribunal, “L” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA & SHRI RAVISH SOOD
These are c roos-appeals by the revenue and assesseee directed against the order of Ld. CIT-A dated 29.03.2011 and pertain to assessment year 2009-10. 2.
Assessee Appeal Bank of Baroda & 3081/Mum./2015 The grounds of appeal read as under: - i) The Ld. CIT(A) erred in confirming the disallowance of provision towards liability arising on of wage revision payable to employees. The Ld. CIT(A) failed to appreciate that provision had been made based on a reasonable estimate of the imminent liability consequent on the bipartite settlement talks that were being-held between the Indian Banks Association (IBA) and various Employee Unions. ii) The Ld. CIT(A) failed to appreciate that once liability for an expenditure which is contractual in nature is foisted on appellant the same is allowable as deduction though the same could be quantified based on reasonable estimate only. Reliance is placed on the decision of Jurisdictional ITAT Mumbai in TATA Communications Ltd. V JCIT (ITA 3062/Mum/2003 dated 05-12-2012) and other decisions. The Ld. CIT (A) erred in confirming the disallowance u/s iii) 14A computed as per rule 8D at Rs.85.90 crore on a tax free income of Rs. 58.43 crore over looking fact that the appellant had himself quantified the disallowance at Rs.7.94 crore being 05% of average investments earning tax free income. The CIT (A) should have appreciated as Bank of Baroda ITA no.2480 & 3081/Mum./2015 all the assets from which the tax free income has been earned are stock in trade as held in the case of CCI Ltd (250 CTR 291). iv) Without prejudice to the above contention, even if is to be applied, the disallowance can only be nil since the appellant does not hold any investment the income from which does not or shall not form part of total income arid the appellant only holds stock in trade. v) Without prejudice to the above contention, the question of disallowance of interest expenditure under rule 8D does not arise since the interest free funds held by the appellant far exceed the amount of investments in assets earning tax free income. The CIT(A) ought to have followed the ratio laid down by Jurisdictional High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340 and held that no disallowance of interest as contemplated in rule 8D was warranted. vi) The CIT (A) ought to have allowed the appellants claim in respect of exclusion of income of foreign branches situated in countries where there is a Double tax Avoidance Agreement based on Article 7 of the respective agreements which provides that the business profits is to be taxed in the respective countries. The CIT (A) failed to note that notification 91 of 2008 relied upon by Hon’ble ITAT does not apply to business profits but only to other sources of income. 3 Bank of Baroda & 3081/Mum./2015 vii) The Ld. CIT (A) erred in confirming the taxability of Management fee and Dividend from foreign subsidiaries at 30% instead of 10% as provided for in the Double Tax Avoidance agreements. The CIT (A) had considered the provisions of section 91 which will apply only when there is no DIAA and where there is a DTAA, the rates prescribed in DTAA should have been the basis. Your appellant craves leave to add, to amend and or vary the grounds of appeal
before or during the time of hearing.
3. Apropos ground number (i) & (ii) of assessee’s appeal; This ground relates to provision made for pay revision. On this issue the assessing officer held that there was no certainty for the liability as at 31 three 2009, as the final settlement between the employees union and the IBA was entered into subsequently. Before the learned CIT-A assessee counsel claimed that facts and circumstances for assessment year 2008- 2009 and assessment year 2009— 10 are identical. Ld. CIT-A noted that identical issue was decided against the assessee by the Ld. CIT-A for assessment year 2008-09. Following the same Ld. CIT-A upheld the disallowance.
4. Against above order assessee is in appeal before us. We have heard both the counsel and perused the records. Ld. Counsel of the assessee submitted that the issue is squarely covered in favour of the assessee by this tribunals decision in assessee's own case for earlier assessment year.
Bank of Baroda & 3081/Mum./2015 Per Contra Ld. DR, did not dispute the submission of the Ld. Counsel of the assessee.
Up on careful consideration we find that this tribunal in assessee's own case in ITA number 4619 and 4873/M/2012 for assessment year 2008- 09 has adjudicated identical issue as under; “Ground Nos.3.1 & 3.2 relate to the disallowance of provision towards liability arising on account of wage revision payable to employees. According to the assessee the provision made for excess payment of wages payable to the employees was towards the ascertained liability. It was submitted that after every five years, charges are revised as per the policy and agreement reached with the unions. Therefore, the wage revision for the year under consideration was must and certain. However, the negotiation was going on with the union and the agreement was signed with the union oil only. The Ld. CIT(A), however, rejected the claim oil ground that it was a contingent liability. He held that no agreement was signed by the assessee during the year under consideration, hence the assessee was not entitled to create provision for the wage revision. Being aggrieved, the assessee has come in appeal before us. The Ld. A.R. of the assessee, at the outset, has submitted that the issue is squarely coveted by the decision of the co-ordinate bench of the Tribunal in the case of "Tata Communications Ltd. vs. DCIT" ITA Nos.3062 & 34381M/2003 vide order dated 05.12.12 wherein the Bank of Baroda & 3081/Mum./2015 Tribunal has taken a view that in ease of salary/wage revision, what is important is not the date of signing the agreement nor the date of approval granted by the DRE, what is important is the effective (late of commencement. The Tribunal, while relying upon the decision of the Hon'ble Supreme Court in the ease of "Bharat Earth vs. CIT" 245 ITR 428, held that in such a case the incurring of liability was certain and the same could also be estimated with reasonable certainty, although, the actual quantification may not be possible. In the case in hand also as per the agreement and the policy, the wage revision was certain and it could have been reasonably estimated also. Hence, the provision made by the assessee towards wage revision was allowable. Respectfully following the decision of the coordinate bench of the Tribunal in the case of "Tata Communications Ltd." (supra), this issue is accordingly decided in favour of the assessee and the AO is directed to allow the claim of the provision on account of wage revision.”
Since it is undisputed that the facts for assessment year 2008-09 and assessment year 2009-10 are identical, following the aforesaid precedent we set aside the order's of authorities below on this issue. Hence this issue is decided in favour of the assessee and against the revenue.
Apropos Ground number (iii) & (iv) in assessee’s appeal.
This issue relates to disallowance under section 14 A.
On this issue the assessing officer noted that assessee has claimed a large amount of exempt income on investments in tax-free bonds and Bank of Baroda & 3081/Mum./2015 dividend from companies. On assessing officer enquiry in this regard the assessee responded as under; “As regard second point on disallowance u/s. 14A of the I.T. Act, 1961 we are directed to inform you that our client has disallowed has 0.5% of average investment. Income of which is exempt u/s. 10 of the I.T. Act, 1961. As per Rule 8D formula interest proportionate is disallowable. However, in our client’s case there are sufficient own funds by way of Share Capital of Rs.365.52 crores, Reserve & Surplus of Rs.12514.19 Crores and demand deposit of Rs.11696 crores. These funds are sufficient to invest in investments, income of which is exempt amounting to Rs.14451.22 Crores. Our client, therefore has disallowed 0.5% of investments u/s. 14A of the I.T. Act, 1961 of Rs. 7,94,39,436/-.”
However the assessing officer was not convinced. He proceeded to make disallowance under section 14 A as per the provisions of rule 8D.. and made disallowance of Rs.85,90,80,262.
Upon assessee's appeal learned CIT-A inter-alia noted that in the preceding assessment year learned CIT-A has, affirmed the disallowance. Referring to several case laws learned CIT-A affirmed the disallowance. Against above order assessee is in appeal before us.
We have heard both the counsel and perused the records. Ld. Counsel of the assessee submitted that the investments in this case held by the bank are actuality its stock in trade. Hence referring to several case laws Bank of Baroda & 3081/Mum./2015 he submitted that in such cases no disallowance under section 14 A is called for.
Up on careful consideration we find that this tribunal in assessee's own case for earlier assessment year (supra) has adjudicated identical issue as under; i) “Ground No.4 is relating to the disallowance under section 14A. The lower authorities have computed the disallowance under section 14A as per the provisions of rule 8D of the Income Tax Rules. The Ld. A.R. of the assessee, before us, has submitted that the AO has straightway applied rule 8D without considering the computation working/working given by the assessee. He has further relied upon the decision of the Hon'ble Bombay High Court in the case of "CIT vs. Reliance Utilities and Power Ltd." (2009) 313 ITR 340 (Born) to stress that if the own funds of the assessee are available, then the presumption will he that the assessee had used the own funds for making the investment and no interest disallowance is required to be made in relation to the investments made by the assessee out of his own funds. In relation to the disallowance of administrative expenses under rule 8D(2)(iii), the Ld. A.R. has submitted that the AO had included the investments which were taken as stock in trade in the accounts while computing the disallowance under rule 8D(2)(iii) of the Act. He had relied upon the decision of the Hon'ble Bombay High Court in the ease of "CIT vs. India Advantage Securities Ltd." in ITA Bank of Baroda & 3081/Mum./2015 No. 1131 of 2013 vide order dated 17.03.2015 wherein the Hon'ble Bombay High Court has upheld the finding of the Tribunal holding that while making the disallowance tinder rule 8D, the shares held as stock in trade should not be considered, only the shares taken as investment in the account be considered for computation of disallowance of expenditure under rule 8D. The Ld. A.R. has submitted that the dividend earned in respect of shares held in stock in trade is incidental to the business of the assessee and the investment in the shares held as stock in trade was not made for earning of exempt income. ii) We have considered the rival submissions. It may be observed that in the case of 'Godrej & Boyce Manufacturing Co. Ltd.' 328 ITR 81, the Hon’ble Bombay High Court has held that Rule SD r.w.s. 14A(2) is not arbitrary or unreasonable and also not retrospective and applies from A.Y. 2008-09. It has been further held that under section 14A of the Income Tax Act, resort can be made to Rule 8D of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect such expenditure Bank of Baroda & 3081/Mum./2015 is correct. The satisfaction of the Assessing Officer must be arrival at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee. iii) However, a perusal of the assessment order reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the Hon'ble Bombay high Court in the case of Godrej & Boyce (supra) while making the disallowance. He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule SD against the mandate of the provisions of section 14A of the Income Tax Act. The Id. CIT(A) also ignored the mandate of the provisions of section 14 A, while confirming the disallowance. iv) Further, we find that the Hon'ble Bombay High Court in the case of "CIT' vs. Reliance Utilities and Power Ltd." (2009) 313 1W 340 (Born) has held has held that if there are funds available, both interest free and over draft and/or loans taken, then a presumption Bank of Baroda & 3081/Mum./2015 would arise that investments would be out of the interest free fund generated or available with the company, if (he interest free funds were sufficient to meet the investment. Similar view has been taken in the case of "CIT vs. HDFC Bank Ltd." in ITA No.330 of 2012 decided on 2311 July 2014 by the Hon'ble Bombay High Court. V) Further, we find that this Tribunal in the case of 'DCIT vs. India Advantage Securities Ltd." in ITA No.671 l/M/201 I vide order dated 14.09.2012 while relying upon the decision of the Hon'ble Kerala High Court in the ease of "CIT vs. Smt. Leena Ramachandran (339 ITR 296) and further on the decision of the Hon'ble High Court of Karnataka in the ease of "CCL Ltd. vs. JCIT" 250 CTR 291 has held that disallowance under section 14A in relation to dividend received from trading shares cannot be made. The said finding of the Tribunal has been upheld by the Hon'ble Jurisdictional Bombay High Court in the case of "CIT vs. India Advantage Securities Ltd." in ITA No. 1131 of 2013 vide order dated 17.03.2015 (supra). The said decision holds binding precedent upon this Tribunal. In view of our above discussion of the matter, we direct the AO to decide this issue afresh in the light of the our observations made above and taking into consideration the judicial pronouncements in the case of "Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT" (supra), "CIT vs. Reliance Utilities and Power Ltd." (supra), "CIT vs. HDFC Bank Ltd."(supra) and in the case of "India Advantage Securities Ltd." (supra). Needless to say, the AO will give proper Bank of Baroda & 3081/Mum./2015 opportunity to the assessee to present its case and furnish working/computation etc. and then to decide the case in accordance with law.”
We find that facts and circumstances of the case in the present year are similar except that learned counsel of the assessee has submitted that several more decisions have come which have upheld the view that disallowance under section 14 A is not required when the investment is held as stock in trade. In our considered opinion we should follow the doctrine of stare decisis. Accordingly following the same directions as above we remit this issue to the file of the assessing officer. Assessing officer is directed to consider the issue in light of the directions as above after giving the assessee adequate opportunity of being heard. Assessee is at liberty to canvas further case laws as it deems appropriate.
Apropos ground number (vi) of assessee’s appeal.
On this issue Ld. Counsel of the assessee fairly agreed that this issue is covered against is the assessee by Tribunal decision in assessee’s appeal. Hence this ground Stands dismissed.
Apropos ground number (vii) of assessee’s appeal.
On this ground learned counsel of the assessee submitted that he doesn't have any cogent submission to make hence he did not substantiate the ground raised
19. Upon hearing both the counsel and perusing the records we do not find any infirmity in the order of learned CIT-A on this issue. Accordingly, we uphold the same. Hence this ground raised is dismissed.
Bank of Baroda & 3081/Mum./2015 In the result this appeal by the assessee is partly allowed for statistical purposes.
Revenue Appeal; Grounds raised
in the revenues appeal read as under:- On the facts and iii the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below: i) The order of CIT(A) is opposed to law and facts of the case. ii) On facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that only that income of the foreign branches is to be included in the total income which was taxed in that foreign country ignoring the fact that the Hon'ble ITAT in the assessee's own case in ITA No.2927/Mum.201 I dated 25.07.20 14 for A.Y.2005-06 had held that income of all the foreign branches shall also be taxable in India and credit of taxes, if any, paid by the branches in the foreign country would be allowed.
21. This issue relates to claim for exclusion of profits of foreign branches. On this issue Ld. CIT-A has adjudicated as under; Having carefully and dispassionately considered the rival submissions, it is noted that the Hon'ble ITAT Mumbai in the case of the some appellant in ITA 2927/Mum/2011 for the A"/ 2005-06 vide Bank of Baroda & 3081/Mum./2015 order dated 25/07/2014, has decided this issue against the appellant and has held as under: We have heard the rival contentions and perused the decisions relied upon by both the parties. The issue of interpretation of phrase "may be taxed in other contracting States'; as used in different Articles inducing Article - 7 in the OTAA has been discussed in detail by the Tribunal in Essar Oil Ltd (supra) after taking into consideration various decisions of the High Court, Supreme Court, affect of amendment in section 90(3) and notification dated 28'h August, 2008, issued by the Central Government The conclusion arrived by the Tribunal after discussing various aspects are as under:- i) The ratio of all the judgements rendered by the Hon'ble High Courts, as discussed herein above and confirmed by the Hon’ble Supreme Court specifically in the case of Turquoise Investment, on the interpretation of the expression "may be taxed'; that once the tax is payable or paid in the country of source, then country of residence is denied of the right to levy tax on such income or the said income cannot be included in return of income filed in India, would no longer apply after the insertion of provision of sub-section(3) of section 90 w.e.f 1st April, 2004, i.e., assessment year 2004-05. The said provision as conferred upon the Central Government a power to issue notification, assigning meaning to the terms used in the DTAA, which has neither been defined under the Act nor in the agreement Bank of Baroda & 3081/Mum./2015 provided that such a meaning should not be inconsistent with the provisions of the Act or agreement. In pursuance of such a statutory empowerment, Central Govt has issued a notification on 26n August, 2008, dearly specifying that where the DTAA entered into by the Central Govt with the Govt. of any other country provides that any income of a resident of India "may be taxed" in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income Tax Act, 1961 and relief shall be granted in accordance with the method for elimination of avoidance of double taxation provided in such agreement. This meaning assigned to the term "may be taxed" has changed its complexion; ii) The notification dated August 2008, reflects a particular intent and objective of the Government of India, as understood during the course of negotiations leading to formalisation of treaty. Therefore, such a notification has to be reckoned as clarificatory in nature and hence interpretation given by govt. of India through this notification will be effective from 7 April, 2004 i.e., from the date when provision of section 90(3) was brought in the statute, giving a Legal frame work for clarifying the intent of one of the negotiating parties; iii) The phrase "may be taxed" is not appearing in the statute, but it is appearing in the agreement and therefore, the Bank of Baroda ITA no.2480 & 3081/Mum./2015 interpretation as understood and intended by the negotiating parties should be adopted. Here one of the parties i.e., Government of India has clearly specified the intent and the object of this phrase. If phrase is used in a statute, then "any interpretation given by the High Court or the Supreme Court is binding on all the subordinate Courts and has to be reckoned as law of the land. However, the meaning assigned by Government of India for a phrase or term used in the agreement through notification will prevail at least from the assessment year 200405. Because, while interpreting the treaty, the intention of the parties to the agreement has to be given primacy and has to be understood in that manner only. Therefore, the notification is not contrary to the provisions of the Act. consequently, the earlier judgements rendered in assessee’s case prior to assessment year 2004-05, will not have binding precedence in this year or subsequent year; iv) In view of the aforesaid findings/conclusion, we hold that the income of the branches of the assessee shall also taxable in India i.e., it would be included in the return of income filed by the assessee in India and whatever taxed have been paid by the Branches in the other contracting States i.e., the source country, credit of such taxes shall be given.” v) Respectfully following the aforesaid decision in the case of the same appellant and from the jurisdictional bench of ITAT and Bank of Baroda & 3081/Mum./2015 upholding the rule of judicial discipline, it is held that the income of the foreign branches is to be taxed in India and as per the notification, the income that is to be included in the total income is such income of foreign branch that was taxed in that foreign country. The relief of tax will be allowed based on the tax paid in the foreign country.
Against the above decision of the Ld. CIT-A the grievance of revenue is that ITAT had held that income of all the foreign branches shall also be taxable in India and credit to taxes if any paid by the branches in the foreign country would be allowed. However, the Ld. CIT-A has held that only that income of foreign branches is to be included in the total income if the same was taxed in the foreign country. Ld. DR, has submitted that this is not at all as per the decision of the ITAT referred by the LD. CIT-A in his order.
Per contra Ld. Counsel of the assessee submitted that there is no infirmity in the direction of Ld. CIT-A and the same is accordance with CBDT notification no. 91/2008 dt. 28/08/2008.
We have carefully considered the submission and perused the record we find that the ITAT in the aforesaid decision has duly considered the said notification referred by the Ld. Counsel of the assessee. We may carefully refer to the contents of the said notification as under; “In exercise of the powers conferred by sub-section (3) of section 90 of the Income-Tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country Bank of Baroda ITA no.2480 & 3081/Mum./2015 outside India for granting relief to tax, or as the case may be, avoidance of double taxation, provides that any income of a resident of India “may be taxed” in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-Tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.”
We find that after taking into account the aforesaid notification the Tribunal in the aforesaid order has concluded as under. “In view of the aforesaid findings/conclusion, we hold that the income of the branches of the assessee shall also taxable in India i.e., it would be included in the return of income filed by the assessee in India and whatever taxed have been paid by the Branches in the other contracting States i.e., the source country, credit of such taxes shall be given.”
A reading of the above makes it clear the Tribunal had held that the income of the foreign branches of the assessee shall also be taxable in India that is it would be included in the return income filed by the assessee in India and whatever taxes have been paid by the branches in the other countries credit of such taxes shall be given. We find that the Tribunal as above has not held that it is only that income of the foreign branches which was taxed in that foreign country which is to be included in the return of income filed by the assessee. Hence, we are in agreement with the revenue Bank of Baroda & 3081/Mum./2015 plea that Ld. CIT-A has not properly followed the Tribunal decision as referred by him. A reading of the notification canvassed by the Ld. Counsel by the assessee also does not help the case of assessee. The notification also does not support the direction of Ld. CIT-A. The doctrine of stare dicisis mandates that we follow the coordinate bench decision as above and hold that the income of the branches of assessee situated abroad shall also be taxable in India and whatever tax have been paid by the branches in the foreign country, credit of such taxed shall be given. Accordingly, we allow the ground raised by the revenue. In the result of appeal by the assessee is partly allowed for the statistical purposes and the appeal of the revenue stands allowed.