Credit Agricole Indosuez, V. The ADIT (IT) 1(1),

CO 283/MUM/2003

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7703 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 8 month(s) 20 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 12-09-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 04-10-2012
• Assessment Year: misc
• Appeal Filed On: 22-12-2003
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: P J PARDIWALLA
• Keywords: Double taxation relief; Earning of tax free income; Retrospective amendment; Question of law
• Section: 143(3); 244A; 234B; 14A

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L, MUMBAI .. , ! '# $% , & !, ' BEFORE SHRI R.S.SYAL, AM AND SHRI AMIT SHUKLA, JM ./ ITA NO.6615/MUM/2003 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR : 1997-1998) THE ASST.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-1(1) MUMBAI. M/S.CREDIT AGRICOLE INDOSUEZ RAMON HOUSE 169 BACKBAY RECLAMATION MUMBAI 400 020. PAN : AAACB3537A. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) -.' ./ CO NO.283/MUM/2003 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR :1997-1998) M/S.CREDIT AGRICOLE INDOSUEZ RAMON HOUSE 169 BACKBAY RECLAMATION MUMBAI 400 020. THE ASST.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-1(1) MUMBAI. ( -.' / CROSS OBJECTOR) ) ) ) ) / VS. ( -.+,/ RESPONDENT) ./ ITA NO.6400/MUM/2003 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR :1997-1998) M/S.CREDIT AGRICOLE INDOSUEZ RAMON HOUSE 169 BACKBAY RECLAMATION MUMBAI 400 020. THE ASST.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-1(1) MUMBAI. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) / / / / 0 00 0 1 1 1 1 / REVENUE BY : SHRI MAHESH KUMAR &) 2# &) 2# &) 2# &) 2# 0 1 0 1 0 1 0 1 / ASSESSEE BY : SHRI P.J.PARDIWALLA ) 0 # / / / / DATE OF HEARING : 03.09.2012 34* 0 # / DATE OF PRONOUNCEMENT : 12.09.2012 !$ !$ !$ !$ / / / / O R D E R PER R.S.SYAL, AM : THIS SET OF CROSS APPEALS ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE ALONG WITH ONE CROSS OBJECTION BY THE A SSESSEE ARISE OUT ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 2 OF THE ORDER PASSED BY THE COMMISSIONER OF INCOME-T AX (APPEALS) ON 30.05.2003 IN RELATION TO THE ASSESSMENT YEAR 1997- 1998. 2. FIRST GROUND OF THE REVENUES APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) FOR NOT CHARGING INTEREST ON NOS TRO ACCOUNT AMOUNTING TO ` 13,66,37,677. BRIEFLY STATED THE FACTS OF THIS GROU ND ARE THAT THE ASSESSEE EARNED INTEREST ON NOSTRO ACC OUNT AMOUNTING TO ` 13.66 CRORE WHICH WAS CREDITED TO THE PROFIT AND LO SS ACCOUNT. HOWEVER, WHILE COMPUTING THE TOTAL INCOME, THE SAID AMOUNT WAS REDUCED. ON BEING CALLED UPON TO EXPLAIN AS TO WHY THIS INTEREST BE NOT INCLUDED IN THE TOTAL INCOME, THE ASSESSEE MADE ELABORATE SUBMISSIONS. REJECTING SUCH CONTENTIONS, THE ASSES SING OFFICER CAME TO HOLD THAT THE INTEREST INCOME ON NOSTRO ACCOUNT WAS LIABLE TO BE INCLUDED IN THE TOTAL INCOME. THE LEARNED CIT(A) OV ERTURNED THE ASSESSMENT ORDER ON THIS POINT. HOWEVER, CONSIDERIN G THE PROVISIONS OF SECTION 14A, THE LEARNED CIT(A) HELD THAT SINCE THE INTEREST ON NOSTRO ACCOUNT WAS NOT TAXABLE, THE INTEREST EXPEND ITURE WAS ALSO NOT ALLOWABLE. HE, THEREFORE, MADE DISALLOWANCE OF ` 32,79,61,314 U/S 14A OF THE ACT. THE ASSESSEE THROUGH GROUND NOS.1, 2 AND 3 IS AGGRIEVED AGAINST THE ENHANCEMENT MADE BY THE LEARN ED CIT(A) TO THE TUNE OF ` 32.79 CRORE U/S 14A OF THE ACT. 3. BEFORE US THE LEARNED DEPARTMENTAL REPRESENTATIV E CONTENDED THAT SIMILAR ISSUE ABOUT THE TAXABILITY OF INTEREST ON NOSTRO ACCOUNT WAS THERE IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECEDING YEAR AND THE TRIBUNAL HAS DECIDED THE SAME AGAINST THE R EVENUE. IT WAS, ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 3 HOWEVER, SUBMITTED THAT THE SAID INTEREST WAS CHARG EABLE TO TAX AND THE TRIBUNAL WAS NOT JUSTIFIED IN DECIDING THIS ISS UE AGAINST THE REVENUE. HE MADE DETAILED SUBMISSIONS ON THE QUESTI ON OF CHARGEABILITY OF INTEREST. IN THE OPPOSITION, THE L EARNED SENIOR COUNSEL APPEARING FOR THE ASSESSEE FAIRLY CONCEDED THAT THE INTEREST AMOUNTING TO ` 13.66 CRORE WAS RIGHTLY CHARGEABLE TO TAX, EVEN THO UGH THE TRIBUNAL IN THE PRECEDING YEAR TOOK A VIEW IN A SSESSEES FAVOUR. IT WAS, THEREFORE, SUBMITTED THAT THE INTEREST BE HELD TO BE CHARGEABLE TO TAX AND THE CONSEQUENTIAL DISALLOWANCE U/S 14A BE D ELETED. TO THIS SUBMISSION OF THE LEARNED AR, IT WAS SUBMITTED ON B EHALF OF THE REVENUE, THAT THE DEPARTMENT HAS GONE IN APPEAL BEF ORE THE HONBLE BOMB AY HIGH COURT AGAINST THE TRIBUNAL ORDER FOR A SSESSMENT YEAR 1997-1998 AGAINST DIRECTION OF NON-CHARGEABILITY OF INTEREST ON NOSTRO ACCOUNT AMOUNTING TO ` 5.74 CRORE IN THE PRECEDING YEAR AND THE SUBSTANTIAL QUESTION OF LAW HAS BEEN ADMITT ED. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT ONCE THE ASSESSEE IS TAKING THE STAND IN THE YEAR RELEVANT TO THE ASSESS MENT YEAR 1997-98 UNDER CONSIDERATION THAT THE INTEREST BE HELD AS CH ARGEABLE TO TAX THEN IT SHOULD STRICK TO ITS POSITION BEFORE THE HONBLE BOMBAY HIGH COURT AS WELL AND AGREE FOR CHARGEABILITY OF INTEREST OF ` 5.74 CRORE FOR THE IMMEDIATELY PRECEDING YEAR. THE LEARNED AR REQUEST ED FOR SOMETIME TO SEEK INSTRUCTION FROM THE ASSESSEE. AFTER FEW MI NUTES THE LEARNED AR STATED THAT HIS INSTRUCTIONS FROM THE ASSESSEE A RE THAT IT UNDERTAKES TO ACCEPT THE CHARGEABILITY OF INTEREST OF RS.5.74 CRORE FOR ASSESSMENT YEAR 1996-1997 BEFORE THE HONBLE BOMBAY HIGH COUR T AND WILL NOT ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 4 OPPOSE THE TAXABILITY OF SUCH AMOUNT PROVIDED THE D EPARTMENTAL GROUND FOR THIS YEAR IS ACCEPTED AND THE CONSEQUENT LY THE ASSESSEES GROUNDS FOR DISALLOWANCE U/S 14A ARE ALSO ALLOWED. 4. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE DEPARTM ENTAL STAND IS THAT THE INTEREST ON NOSTRO ACCOUNT AMOUNTING TO ` 13.66 CRORE BE CHARGED TO TAX IN THE CURRENT YEAR, WHICH HAS NOT B EEN OPPOSED BY THE LEARNED AR. SIMULTANEOUSLY THE LEARNED COUNSEL FOR THE ASSESSEE, ON ORAL INSTRUCTIONS CONVEYED THE UNDERTAKING OF THE A SSESSEE NOT TO OPPOSE THE DEPARTMENTAL APPEAL ABOUT THE CHARGEABIL ITY OF INTEREST ON NOSTRO ACCOUNT BEFORE THE HONBLE BOMBAY HIGH COURT FOR ASSESSMENT YEAR 1996-97, IN RESPECT OF WHICH SUBST ANTIAL QUESTION OF LAW HAS BEEN ADMITTED. IN VIEW OF THESE RIVAL BUT C OMMON SUBMISSIONS WE ARE OF THE CONSIDERED OPINION THAT T HE ASSESSMENT ORDER ON THIS COUNT NEEDS TO BE APPROVED IN PREFERE NCE OVER THE VIEW TAKEN BY THE LEARNED CIT(A). THIS GROUND TAKEN BY T HE REVENUE ABOUT THE CHARGEABILITY OF INTEREST ON NOSTRO ACCOU NT AMOUNTING TO ` 13.66 CRORE IS, THEREFORE, ALLOWED. 5. IT IS OBSERVED THAT THE LD. CIT(A) MADE EN HANCEMENT OF INCOME TO THE TUNE OF RS.32.79 CRORE BY COMPUTING DISALLO WANCE U/S 14A IN RESPECT OF SUCH INTEREST INCOME ON NOSTRO ACCOUNT, WHICH WAS HELD BY HIM TO BE NOT CHARGEABLE TO TAX AS AGAINST THE AOS DECISION AS TO THE CHARGEABILITY OF THIS AMOUNT. WHEN THE V IEW OF THE LD. ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 5 CIT(A) ON THIS ISSUE IS OVERTURNED AND THAT OF THE AO IS RESTORED, INTEREST ON NOSTRO ACCOUNT BECOMES TAXABLE. ONCE TH E INCOME ITSELF IS CHARGEABLE TO TAX, THERE CAN BE NO QUESTI ON OF COMPUTING ANY DISALLOWANCE U/S 14A, THE MANDATE OF WHICH OPERATES TO DISALLOW DEDUCTION FOR EXPENSES INCURRED IN RELATION TO INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. ACCORD INGLY, GROUNDS RAISED BY THE ASSESSEE AGAINST THE ENHANCEMENT DONE BY THE LEARNED CIT(A) FOR ` 32.79 CRORE BY INVOKING THE PROVISIONS OF SECTION 1 4A ARE ALSO CONSEQUENTLY ALLOWED. 6. GROUND NO.2 OF THE REVENUES APPEAL IS AGAINST T HE DIRECTION OF THE LEARNED CIT(A) TO ALLOW BROKEN PERIOD INTEREST AS EXPENDITURE. THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS FAIR EN OUGH TO CONCEDE THAT SIMILAR ISSUE WAS THERE IN THE APPEAL FOR THE IMMEDIATELY PRECEDING YEAR AND THE TRIBUNAL, FOLLOWING ITS DECI SION FOR ASSESSMENT YEAR 1991-92, HAS DECIDED THIS ISSUE AGA INST THE REVENUE. IN VIEW OF THE FACT THAT THE FACTS AND CIRCUMSTANCE S FOR THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDER ATION ARE SIMILAR AND NO DISTINGUISHING FEATURE HAS BEEN BROUGHT TO O UR NOTICE BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, RESPECTFULLY F OLLOWING THE PRECEDENT, WE UPHOLD THE IMPUGNED ORDER ON THIS ISS UE BY DIRECTING THAT THE INTEREST PAID IN RESPECT OF THE BROKEN PER IOD BE SET OFF AGAINST THE INTEREST RECEIVED IN RESPECT OF THE BROKEN PERI OD. THIS GROUND IS DISPOSED OFF ACCORDINGLY. ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 6 7. GROUND NO.3 IS AGAINST THE DIRECTION OF THE LEAR NED CIT(A) TO GIVE EXEMPTION IN RESPECT OF `GROSS INTEREST EARNE D FROM TAX FREE SECURITY U/S 10(15) OF THE ACT. BRIEFLY STATED THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE CLAIMED EXEMPTION U/S 10(15)( IV)(H) ON GROSS AMOUNT OF INTEREST. THE ASSESSING OFFICER HELD THAT THE EXEMPTION CANNOT BE ALLOWED ON THE GROSS INTEREST FROM TAX FR EE SECURITIES. IT WAS OBSERVED THAT THE ASSESSEE HAD EARNED INTEREST AMOU NTING TO ` 135.71 CRORE AND INCURRED INTEREST EXPENDITURE AMOUNTING T O ` 120.04 CRORE. HE, THEREFORE, HELD THAT THE INCOME ELEMENT IN THE RECEIPTS WORKED OUT AT ` 20.70 LAKH ON A PROPORTIONATE BASIS WHICH WAS ALLOW ED AS EXEMPT U/S 10(15). WHEN THE MATTER CAME UP BEFORE THE LEARN ED CIT(A), HE HELD THAT THE ASSESSING OFFICERS FORMULA FOR WORKI NG OUT THE NET INCOME AT 11.55% WAS WITHOUT ANY BASIS. HE, THEREFO RE, HELD THAT ONLY THE NET INCOME OUT OF INTEREST ON TAX FREE SEC URITIES CAN BE ALLOWED AS EXEMPTION U/S 10(15) OF THE ACT. THEREAF TER, HE PROCEEDED TO EXAMINE THE SOURCE OF THESE SECURITIES WHICH RES ULTED INTO EXEMPT INCOME. ON THE PERUSAL OF THE DETAILS FILED BY THE ASSESSEE, THE LEARNED CIT(A) OBSERVED THAT IN EACH YEAR OF INVESTMENT IN TAX FREE SECURITIES THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS AVA ILABLE WHICH WERE UTILIZED FOR MAKING INVESTMENT IN SUCH TAX FREE BON DS. HE DEPICTED THIS POSITION THROUGH ANNEXURE-A TO HIS ORDER. IN T HE LIGHT OF THESE FACTS, IT WAS HELD THAT NO NEXUS WAS PROVED BETWEEN THE TAX FREE SECURITIES AND INTEREST BEARING FUNDS AND ON THE CO NTRARY SUFFICIENT FUNDS WERE THERE TO FINANCE THE TAX FREE SECURITIES . THUS THE ACTION OF ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 7 THE A.O. IN DISALLOWING EXEMPTION U/S 10(15) OF A P ART OF INTEREST ON TAX FREE SECURITIES WAS HELD TO BE NOT SUSTAINABLE. 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS FAIR ENOUGH TO CONCEDE THAT THE EXEMPTION U/S 10(15) NEEDS TO BE A LLOWED ON GROSS INTEREST. HE, HOWEVER, SUBMITTED THAT THE PROPORTIO NATE INTEREST DISALLOWED BY THE ASSESSING OFFICER WAS IN A WAY DI SALLOWANCE U/S 14A THOUGH THIS SECTION WAS NOT THERE ON THE STATUT E. RELYING ON CERTAIN DECISIONS, IT WAS ARGUED THAT EVEN THOUGH S ECTION 14A WAS NOT THERE ON THE STATUTE IN THE PERIOD RELEVANT TO ASSE SSMENT YEAR 1997-98, BUT ITS INSERTION WITH RETROSPECTIVE EFFECT FROM 01 .04.1961 SHOULD BE CONSIDERED AS A MANDATE FOR UPHOLDING THE DISALLOWA NCE MADE BY THE AO IN THIS REGARD. IN THE OPPOSITION, THE LEARNED C OUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER DID N OT MAKE ANY DISALLOWANCE OF INTEREST EITHER UNDER THE SPECIFIC PROVISIONS OF SECTION 14A OR IN A GENERAL MANNER. HE SUBMITTED THAT THE A SSESSING OFFICER HAD ON THE CONTRARY HELD THAT THERE WAS NO QUESTION OF MAKING ANY DISALLOWANCE OF EXPENSES IN EARNING THE EXEMPT INCO ME. IT WAS FURTHER STATED THAT THE REVENUE DID NOT TAKE UP ANY GROUND AGAINST THE DISALLOWANCE U/S 14A THOUGH AT THE TIME WHEN THE IM PUGNED ORDER WAS PASSED OR THE APPEAL WAS FILED, THE PROVISIONS OF SECTION 14A WERE VERY MUCH THERE ON THE STATUTE. IT WAS, THEREF ORE, SUBMITTED THAT THERE WAS NO QUESTION TO ACCEPT THE LEARNED DRS SU BMISSION FOR THE SUSTENANCE OF DISALLOWANCE U/S 14A IN THIS REGARD. ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 8 9. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, WE FIND IT AS AN UNDIS PUTED PROPOSITION THAT EXEMPTION U/S 10(15) IS ON GROSS INTEREST AND NOT ON THE NET INTEREST. THIS POSITION EMERGES FROM THE ORDER PASS ED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DRESDNER BANK AG, A COPY OF WHICH ORDER HAS ALSO BEEN PLACED ON RECORD AND ALS O ANOTHER ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL IN JCIT V. AMERICAN EXPRESS BANK LTD. [(2012) 24 TAXMANN.COM 50 (MUMBAI-TRIB.)] . IN VIEW OF THE CANDID ADMISSION BY THE LEARNED DEPARTMENTAL RE PRESENTATIVE, WHICH IS, IN FACT, BORNE OUT OF THE AFORESAID JUDIC IAL PRECEDENTS, IT BECOMES APPARENT THAT EXEMPTION U/S 10(15) IS TO BE ALLOWED ON GROSS INTEREST AND NOT ON THE NET INTEREST. 10. NOW WE TURN TO EVALUATE THE CONTENTION OF THE L EARNED DEPARTMENTAL REPRESENTATIVE THAT WHEN INTEREST IS H ELD TO BE EXEMPT U/S 10(15) THEN THE PROPORTIONATE DISALLOWANCE SHOU LD BE SUSTAINED U/S 14A OF THE ACT. THOUGH THE PROPOSITION PUT FORT H BY THE LD. DR IS CORRECT, BUT THE SAME CANNOT BE ACCEPTED IN THE FAC TS AND CIRCUMSTANCES AS ARE NOW PREVAILING IN THIS CASE FO R TWO REASONS. FIRSTLY, THE ASSESSING OFFICER HIMSELF MENTIONED IN THE ASSESSMENT ORDER THAT: IT IS NOT THE DEPARTMENTS CASE THAT E XPENDITURE PROPORTIONATELY INCURRED IN EARNING THE INCOME WHIC H IS EXEMPT FROM TAX SHOULD BE DISALLOWED. SECOND REASON IS THE FI NDING RECORDED BY THE LEARNED CIT(A) THAT THE INVESTMENT IN TAX FREE SECURITIES WAS MADE OUT OF SUFFICIENT INTEREST FREE FUNDS AVAILABL E WITH THE ASSESSEE. ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 9 THE LEARNED CIT(A) HAS TABULATED THIS POSITION THRO UGH ANNEXURE-A TO THE IMPUGNED ORDER. THE LEARNED DEPARTMENTAL REP RESENTATIVE COULD NOT CONTROVERT THE FACTUAL POSITION AS RECORD ED BY THE LEARNED CIT(A). AS PER THIS POSITION THE ASSESSEE UTILIZED INTEREST FREE FUNDS AT ITS DISPOSAL FOR MAKING INVESTMENT IN INTEREST F REE SECURITIES. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES AND POWER LTD. [(2009) 313 ITR 340 (BOM.) ] HAS HELD THAT IF THERE BE INTEREST FREE FUNDS AVAILABLE TO THE ASSES SEE SUFFICIENT TO MEET ITS INVESTMENT AND AT THE SAME TIME LOAN HAS BEEN R AISED, IT CAN BE PRESUMED THAT THE INVESTMENTS WERE MADE FROM INTERE ST FREE FUNDS AND RESULTANTLY NO DISALLOWANCE OF INTEREST CAN BE MADE. THE HONBLE JURISDICTIONAL HIGH COURT, IN TAKING THIS DECISION , DREW SUPPORT FROM THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CA SE OF EAST INDIA PHARMACEUTICAL WORKS LTD. [(1997) 224 ITR 627 (SC)] . IN VIEW OF THE FACTUAL POSITION AS DISCUSSED BY THE LD. CIT(A ) ABOVE, IT BECOMES APPARENT THAT THE ASSESSEE DEPLOYED INTEREST FREE F UNDS FOR THE PURPOSES OF MAKING INVESTMENT IN TAX FREE SECURITI ES. WHEN THIS IS THE POSITION, WE FAIL TO APPRECIATE AS TO HOW THE PROVISIONS OF SECTION 14A CAN BE INVOKED. TO SUM UP, WE HOLD THAT EXEMPT ION U/S 10(15) IS ON GROSS BASIS AND IN THE FACTS AND CIRCUMSTANCE S OF THE CASE, THERE CAN BE NO DISALLOWANCE U/S 14A QUA THE INVESTMENT IN TAX FREE SECURITIES. THE GROUND RAISED BY THE REVENUE IN THI S REGARD IS NOT ALLOWED. ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 10 11. GROUND NO.4 IS AGAINST THE DIRECTION GIVEN BY T HE LEARNED CIT(A) FOR GIVING DEDUCTION IN RESPECT OF BAD DEBT WRITTEN OFF U/S 36(1)(VII). AT THE VERY OUTSET, THE LEARNED DEPARTM ENTAL REPRESENTATIVE FAIRLY ADMITTED THAT THIS ISSUE IS C OVERED AGAINST THE REVENUE BY SEVERAL DECISIONS INCLUDING THAT IN THE CASE OF OMAN INTERNATIONAL BANK S.A.O.G. WITHOUT GOING INTO THE FURTHER DETAILS, WE UPHOLD THE IMPUGNED ORDER ON THIS SCORE. THIS GR OUND IS THUS, NOT ALLOWED. 12. LAST GROUND OF THE REVENUES APPEAL IS AGAINST THE DIRECTION GIVEN BY THE LEARNED CIT(A) TO ALLOW DEDUCTION OF ` 48,60,08 INDEPENDENT OF THE PROVISIONS OF SECTION 44C OF THE ACT. ON THIS ISSUE AS WELL, THE LEARNED DEPARTMENTAL REPRESENTATIVE W AS FAIR ENOUGH TO CONCEDE THAT IT WAS COVERED AGAINST THE REVENUE. WE FIND THAT THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF AMERICAN EXPRESS BANK LTD.(SUPRA) HAS ALSO TAKEN SIMILAR VIEW ON THIS ISSUE IN FAVOUR OF THE ASSESSEE. IN VIEW OF THESE FACTS WE UPHOLD THE IMP UGNED ORDER ON THIS ISSUE. THIS GROUND IS NOT ALLOWED. 13. GROUND NO.4 OF THE ASSESSEES APPEAL IS AGAINST TAXABILITY OF ASSESSEES INCOME AT THE HIGHER RATE OF 55% AS APPL ICABLE TO NON- RESIDENT COMPANY. ON THIS GROUND, THE LEARNED AR W AS FAIR ENOUGH TO ADMIT THAT THE TRIBUNAL HAS DECIDED SIMILAR ISSU E AGAINST THE ASSESSEE IN THE IMMEDIATELY PRECEDING YEAR. IN VIEW OF THIS ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 11 SUBMISSION WE UPHOLD THE IMPUGNED ORDER ON THIS ISS UE. THIS GROUND IS NOT ALLOWED. 14. GROUND NO.5 IS AGAINST THE DIRECTION OF THE LEA RNED CIT(A) THAT INTEREST RECEIVED ON INTIMATION U/S 143(1)(A) SHOUL D BE ASSESSED TO TAX. BRIEFLY STATED THE FACTS OF THIS GROUND ARE TH AT THE ASSESSEE WAS GRANTED INTEREST OF ` 80,26,069 U/S 244A ON INTIMATION ISSUED U/S 143(1)(A) FOR ASSESSMENT YEAR 1996-97. IT WAS ARGUE D BEFORE THE LEARNED CIT(A) THAT ON COMPLETION OF ASSESSMENT FOR ASSESSMENT YEAR 1996-97, INTEREST OF ` 23,48,027 WAS DETERMINED AS AGAINST ` 80,26,069 DETERMINED IN INTIMATION U/S 143(1)(A). T HE LEARNED CIT(A) REJECTED THE ASSESSEES CONTENTION THAT INTE REST SHOULD NOT BE CHARGED TO TAX IN THE YEAR UNTIL THE ASSESSMENT U/S 143(3) WAS FINALIZED. HE, HOWEVER CONCURRED WITH THE ALTERNATE CONTENTION OF THE ASSESSEE THAT ONLY THAT MUCH INTEREST RECEIVED U/S 244A CAN BE BROUGHT TO TAX WHICH IS FINALLY DETERMINED ON ASSES SMENT. 15. THE LEARNED COUNSEL FOR THE ASSESSEE CONT ENDED THAT PRIMARILY THE INTEREST ON INCOME-TAX REFUND SHOULD NOT BE CHA RGED TO TAX IN THE YEAR IN WHICH IT IS GRANTED AND SECONDLY, IF AT AL L SUCH INTEREST IS TO BE CHARGED TO TAX THEN IT SHOULD BE RESTRICTED TO THE INCOME FINALLY DETERMINED AFTER THE APPEAL EFFECT. THE LEARNED DEP ARTMENTAL REPRESENTATIVE SUPPORTED THE IMPUGNED ORDER. ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 12 16. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD WE FIND THAT THIS ISSUE HAS BEE N DECIDED BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AVADA TRADING CO. (P) LTD. V. ACIT [(2006) 100 ITD 131 (MUM.) (SB)] . IN THIS CASE IT HAS BEEN HELD THAT INTEREST ON REFUND U/S 244A(1) GRANT ED TO THE ASSESSEE IN THE PROCEEDINGS U/S 143(1)(A) WOULD BE ASSESSABL E IN THE YEAR IN WHICH IT IS GRANTED AND NOT IN THE YEAR IN WHICH TH E PROCEEDINGS U/S 143(1)(A) ATTAIN FINALITY. IT HAS FURTHER BEEN MADE CLEAR IN THIS CASE THAT, IF INTEREST IS REDUCED BY VIRTUE OF SECTION 244A(3) ON ACCOUNT OF ASSESSMENT U/S 143(3) THEN THE INTEREST GRANTED IN EARLIER YEARS GETS SUBSTITUTED AND IT IS THE REDUCED AMOUNT OF INTERES T THAT WOULD FORM PART OF INCOME OF THAT YEAR, AS IT WOULD AMOUNT TO MISTAKE RECTIFIABLE U/S 154. IN VIEW OF THE ABOVE SPECIAL BENCH DECISI ON IT IS PATENT THAT THE INTEREST ON REFUND GRANTED U/S 244A(1) IN THE P ROCEEDINGS U/S 143(1)(A) IS CHARGEABLE TO TAX IN THE YEAR OF REC EIPT RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION. THE LEARNED CI T(A) HAS DIRECTED THE ASSESSING OFFICER THAT ONLY THAT MUCH INTEREST RECEIVED U/S 244A CAN BE BROUGHT TO TAX WHICH IS FINALLY DET ERMINED ON ASSESSMENT. IN THE ABSENCE OF ANY APPEAL BY THE REV ENUE ON THIS ISSUE, RESPECTFULLY FOLLOWING THE SPECIAL BENCH ORD ER, WE HOLD THAT THE DIRECTION OF THE LEARNED CIT(A) IS TO BE IMPLEM ENTED. IT IS HOWEVER, MADE CLEAR THAT IF EVENTUALLY THE INTERES T ON INCOME-TAX REFUND IS SUBSEQUENTLY REDUCED BY WAY OF APPEALS EF FECTS ETC., THE ASSESSING OFFICER SHALL RECTIFY THE ORDER ACCORDING LY AS PER THE ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 13 MANDATE OF THE SPECIAL BENCH DECISION IN THE CASE O F AVADA TRADING CO. (P) LTD. (SUPRA) . 17. THE ASSESSEE HAS RAISED AN ADDITIONAL GROUND WH ICH READS AS UNDER:- WITHOUT PREJUDICE, THE ASSESSING OFFICER (AO) OUGH T TO HAVE TAXED THE INTEREST RECEIVED BY THE APPELLANT U NDER SECTION 244A OF THE INCOME-TAX ACT, 1961 AT THE RAT E AS PRESCRIBED IN ARTICLE 12 OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND FRANCE. 18. IT WAS SUBMITTED THAT THE ADDITIONAL GROUND SO RAISED INVOLVES QUESTION OF LAW AND NO FRESH ADJUDICATION OF FACTS IS NECESSARY FOR ANSWERING THIS QUESTION. IT WAS, THEREFORE, PRAYED THAT THIS ADDITIONAL GROUND BE ADMITTED. NO SERIOUS OBJECTION WAS RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE IN THIS REGARD. WE, THER EFORE, ADMIT THIS GROUND AND TAKE IT UP FOR DISPOSAL ON MERITS. 19. THE VIEW POINT CANVASSED BY THE LEARN ED AR IN THIS REGARD IS THAT THE INTEREST RECEIVED BY THE ASSESSEE ON IN COME-TAX REFUND SHOULD NOT BE CONSIDERED AS EFFECTIVELY CONNECTED T O THE PE AND HENCE CONSIDERED AS INDEPENDENT INTEREST UNDER ARTI CLE 12 OF DTAA BETWEEN INDIA AND FRANCE AND CHARGED TO TAX ACCORDI NGLY. FOR THIS PROPOSITION THE LEARNED AR RELIED ON THE SPECIAL BE NCH ORDER IN THE CASE OF ACIT V. CLOUGH ENGINEERING LTD. [130 ITD 137] . ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 14 20. HAVING REGARD TO THE FACTS OF THE INSTANT GROUN D IT IS SEEN THAT WHILE DISPOSING OFF GROUND NO.5 OF THE ASSESSEES APPEAL ABOVE, WE HAVE HELD THAT INTEREST U/S 143(1)(A) IS ASSESSABLE TO TAX IN THE YEAR IN QUESTION. THE PROPOSITION AS RAISED BY THE LEARNED AR IS ABOUT THE RATE OF TAX WHICH SHOULD BE APPLIED ON SUCH INTERES T. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CLOUGH ENGINEERING LTD. (SUPRA) HAS HELD THAT THE CLAIM FOR REFUND OF INCOME-TAX CA NNOT BE SAID TO BE EFFECTIVELY CONNECTED WITH THE RECEIPTS OF PERMANEN T ESTABLISHMENT AND HENCE INTEREST ON REFUND OF TAX IS TAXABLE UNDE R ARTICLE 11(2) OF DTAA BETWEEN INDIA AND AUSTRALIA AND NOT UNDER ARTI CLE 7 READ WITH ARTICLE 11(4). SINCE THE NECESSARY INFORMATION IS N OT READILY AVAILABLE, WE ARE OF THE CONSIDERED OPINION THAT IT WILL BE IN THE INTEREST OF JUSTICE, IF THE ASSESSING OFFICER IS DI RECTED TO ADOPT THE RATE AT WHICH SUCH INTEREST ON INCOME-TAX REFUND SHOULD BE CHARGED BY EXAMINING THE RELEVANT CLAUSES OF THE DTAA BETWEEN INDIA AND FRANCE, IN CONFORMITY WITH THE AFORE-NOTED SPECIAL BENCH ORDER. 21. GROUND NO.6 IS AGAINST THE DIRECTION OF THE LEA RNED CIT(A) THAT INTEREST AND COMMISSION RECEIVED FROM HO / BRANCHES SHOULD BE CHARGED TO TAX. BRIEFLY STATED THE FACTS OF THIS GR OUND ARE THAT THE ASSESSEE RECEIVED CERTAIN AMOUNT OF INTEREST AND CO MMISSION FROM ITS HO AND OTHER OVERSEAS BRANCHES AND AT THE SAME TIME ALSO PAID INTEREST AND COMMISSION TO OTHER OVERSEAS BRANCHES AND HO. THE ASSESSEE, IN ITS COMPUTATION OF TOTAL INCOME, REDUC ED THE INTEREST / COMMISSION RECEIVED AT ` 33.39 LAKH AND ADDED BACK THE INTEREST / ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 15 COMMISSION PAID AT ` 20.96 LAKH. THE ASSESSING OFFICER HELD THAT THE INTEREST / COMMISSION EARNED BY THE ASSESSEE FROM I TS HO / OVERSEAS BRANCHES SHOULD BE CHARGED TO TAX. THE LEARNED CIT( A) UPHELD IN PRINCIPLE THE ASSESSMENT ORDER ON THIS ISSUE. HE, HOWEVER DIRECTED THE AO TO RECTIFY CERTAIN INADVERTENT MISTAKES COMM ITTED BY THE LATER IN THIS REGARD. THE ASSESSEE IS IN APPEAL AGAINST THE DIRECTION THAT THE INTEREST / COMMISSION EARNED BY THE ASSESSEE FROM I TS HO / OVERSEAS BRANCHES SHOULD BE CHARGED TO TAX. 22. THE LEARNED DEPARTMENTAL REPRESENTATIVE VEHEMEN TLY RELIED ON THE ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNA L IN THE CASE OF DRESDNER BANK AG V. ADDL.CIT [(2007) 108 ITD 375 (M UM.)] TO CONTEND THAT SUCH INTEREST / COMMISSION INCOME WAS LIABLE TO TAX. THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO SUPPORTED HIS CONTENTION BY RELYING ON THE ORDER PASSED BY THE TRIBUNAL IN ASSE SSEES OWN CASE FOR ASSESSMENT YEARS 1983-84 TO 1985-86, A COPY OF SUCH ORDER DATED 9 TH MARCH, 1998 IN ITA NOS.2089 TO 2091/BOM/91 WAS PLAC ED ON RECORD. IN THE OPPOSITION THE LEARNED AR RELIED ON THE FIVE MEMBERS SPECIAL BENCH ORDER IN THE CASE OF SUMITOMO MITSUI BANKING CORPN. V. DDIT [(2012) 19 TAXMANN.COM 364 (MUM.) (SB)] TO CONTEND THAT SUCH INTEREST / COMMISSION RECEIVED FROM HO CANNOT BE C HARGED TO TAX. HE ALSO RELIED ON A SUBSEQUENT ORDER PASSED BY THE MUM BAI BENCH OF THE TRIBUNAL IN THE CASE OF OMAN INTERNATIONAL BANK S.A.O.G. V. ACIT. IN THIS ORDER DATED 29 TH JUNE, 2012, THE TRIBUNAL, AFTER CONSIDERING THE FIVE MEMBER SPECIAL BENCH ORDER IN THE CASE OF SUMITOMO MITSUI ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 16 BANKING CORPN. (SUPRA), HAS HELD THAT THE INTEREST RECEIVED FROM HO / OVERSEAS BRANCHES CANNOT BE CHARGED TO TAX. 23. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. IT IS APPARENT FROM PARA NOS.55 AND 56 OF THE SPECIAL BENCH ORDER THAT UNDER THE PROVISIONS OF TH E INCOME-TAX ACT, 1961 THE TAXABLE ENTITY IS ONLY ONE I.E. OVERSEAS G E AND THE PE IN INDIA IS A PART OF THAT ENTITY. IT IS THE OVERSEAS GE WHICH HAS BEEN HELD TO BE CHARGEABLE TO TAX IN RESPECT OF INCOME A TTRIBUTABLE TO THE PE IN INDIA. ONCE MUTUALITY IS FOUND BETWEEN OVERSE AS HO AND BRANCH IN INDIA, THERE CAN BE NO INTEREST INCOME BY THE INDIAN BRANCH FROM ITS OVERSEAS HO OR BRANCHES UNDER THE PROVISIO NS OF THE ACT. IT IS RELEVANT TO MENTION THAT THE SPECIAL BENCH OF TH E TRIBUNAL, WHILE LAYING DOWN THIS PROPOSITION, HAS DULY CONSIDERED T HE CASE OF DRESDNER BANK AG IN ITS ORDER. THE LATER ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN OMAN INTERNATIONAL BANK S.A.O.G. (SUPRA) HAS ALSO TAKEN SIMILAR VIEW. IN VIEW OF THE FACT T HAT THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SUMITOMO MITSUI BANKING CORPN. HAS HELD THAT NO INTEREST / COMMISSION RECEIVED B Y THE INDIAN PE FROM THE HO CAN BE CHARGED TO TAX, THERE CAN BE NO QUESTION OF FOLLOWING ANY CONTRARY VIEW EXPRESSED BY THE DIVISI ON BENCH OF THE TRIBUNAL PRIOR TO THE PASSING OF THE ORDER BY THE S PECIAL BENCH. 24. HERE WE WILL LIKE TO RECORD THAT THE LEAR NED AR HAS VERY FAIRLY ADMITTED THAT THE INTEREST PAID BY THE INDIAN PE TO ITS OVERSEAS HO / ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 17 BRANCHES SHOULD ALSO NOT BE ALLOWED AS DEDUCTION SO AS TO BRING SYMMETRY BETWEEN INTEREST INCOME AND INTEREST INCUR RED FROM OR TO HO. THE IMPUGNED ORDER IS, THEREFORE, SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF A.O. TO EXCLUDE THE AMOUNT OF INTEREST / COMMISSION RECEIVED BY THE INDIAN PE FROM ITS OVERS EAS HO / BRANCHES AND ALSO NOT TO GRANT DEDUCTION IN RESPECT OF INTEREST INCURRED TOWARDS OVERSEAS HO / BRANCHES. 25. GROUND NO.7 ABOUT THE CHARGING OF INTEREST U/S 234B IS CONSEQUENTIAL AND ACCORDINGLY DISPOSED OFF. 26. IN VIEW OF OUR DECISION ON THE GROUNDS TAKEN BY THE ASSESSEE / REVENUE IN THEIR RESPECTIVE APPEALS, THE CROSS OBJE CTION HAS BECOME INFRUCTUOUS. 27. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLO WED AND THE CROSS OBJECTION IS DISMISSED. ORDER PRONOUNCED ON THIS 12 TH DAY OF SEPTEMBER, 2012. !$ 0 34* 5!)6 4 0 7 SD/- SD/- (AMIT SHUKLA) (R.S.SYAL) & ! & ! & ! & ! / JUDICIAL MEMBER ! ! ! ! / ACCOUNTANT MEMBER MUMBAI ; 5!) DATED : 12 TH SEPTEMBER, 2012. DEVDAS* ITA NOS.6615, 6400 & CO. 283/MUM/2003 M/S.CREDIT AGRICOLE INDOSUEZ. 18 !$ 0 -&#'8 98*# !$ 0 -&#'8 98*# !$ 0 -&#'8 98*# !$ 0 -&#'8 98*#/ COPY OF THE ORDER FORWARDED TO : 1. +, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. : () / THE CIT(A)-XVI, MUMBAI. 4. : / CIT 5. 8=7 -&#&) , , / DR, ITAT, MUMBAI 6. 7> ? / GUARD FILE. !$) !$) !$) !$) / BY ORDER, .8# -&# //TRUE COPY// @ @ @ @/ // /A / A / A / A / ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI