DCIT (IT) 1(3)(1), MUMBAI V. BNP PARIBAS SA, MUMBAI

ITA 467/MUM/2017

AI Insights

The case involves the Revenue's appeal against the order of the CIT(A) which had held that certain payments made by the Indian Branch of BNP Paribas to its Singapore branch, and interest income received by the Head Office from its Branch Office in India, were not taxable in India. The Revenue challenged these decisions, arguing that the payments and interest should be considered taxable under the Income Tax Act. The Tribunal examined precedents and the principle of mutuality, ultimately agreeing with the CIT(A)'s application of mutuality which led to the non-taxability of the transactions in question.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 844149 (ITAT-MUMBAI)
• Duration Of Justice: 9 year(s) 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2026
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 20-01-2017
• Other Referred Cases: Sumitomo Mitsui Banking Corporation vs. DDIT, Bangalore Club Ltd vs. CIT, Dresdner Bank AG vs. Add1. CIT, ABN Amro Bank NV vs. Asst. Director of Income-tax, Oman Intl Bank SAOG vs. Joint Director of Income Tax, Societe Generale vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KRISHNA KUMAR
• Assessee Lawyers: NIRAJ SETH
• Keywords: Set aside; Retrospective amendment; Question of law; Earning of tax free income; Deemed to accrue or arise in india; Double taxation relief; Rule 8D; Non-deduction of tax; CHAPTER IV
• Section: 28; 14A

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH MUMBAI BEFORE HON’BLE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER & HON’BLE SHRI PRABHASH SHANKER, ACCOUNTANT MEMBER ITA No. 467/Mum/2017 (Assessment Year: 2011-12) DY.C.I.T. (IT)-1(3)(1), Mumbai Room No. 108, 1st Floor, Scindia House, N.M. Road, Ballard Estate, Mumbai - 400038 Vs. M/s. BNP Paribas SA French Bank Building, 62, Homji Street, Fort, Mumbai -- 400001 PAN/GIR No. AAACB4868Q (Applicant) (Respondent) Assessee by Shri Niraj Seth Revenue by Shri Krishna Kumar (Sr. DR. Date of Hearing 18.02.2026 Date of Pronouncement 17.03.2026 आदेश / ORDER PER SANDEEP GOSAIN, JM: The present appeal has been filed by the Revenue challenging the impugned order 23.06.2015 passed u/s 250 of the Income Tax Act, 1961 (‘the Act’), by the National Faceless Appeal Centre, Delhi (NFAC)/CIT(A) for the assessment year 2011-12. The following grounds are reproduced below: “1. \"Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in holding that the data processing fees paid by the Indian Branch of the Printed from counselvise.com 2 ITA No. 467/Mum/2017 assessee bank to the Singapore branch was not taxable in India following the principle of mutuality as laid down in the order of the Mumbai ITAT in the case of Sumitomo Mitsui Banking Corporation [(2012)] 145 TTJ 649 (Mum)(SB)]?\" 2. \"Whether on the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in holding that commercial transaction of payments towards data processing fees which is in the nature of Royalty and/or Fee for Technical services made by the India Branch of the assessee bank to an overseas branch Head Office could be governed by the Principles of mutuality, especially when such findings are not in conformity with the ratio of judgment of the Supreme Court in the case of Bangalore Club Ltd Vs.CIT [(2013)] 350 ITR 509 (SC)]?\" 3. \"Whether on the facts and circumstances of the case and in law, the ld. CIT(A) while allowing relief on account of the interest income received by the Head Office from its Branch Office in India on the basis of the principles of mutuality laid down by the Special Bench of the Mumbai ITAT in the case of Sumitomo Mitsui Banking Corporation, has erred in not making the disallowance u/s.14A read with Rule 8D being income which does not form part of the total income, when the HQ & BO are fungible entities? 4. The Appellant prays that the order of the Id. CIT(A) be set aside on the above grounds and that of the Assessing Officer be restored. 5. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary.\"” 2. Ground Nos. 1 and 2 raised by the Revenue are interrelated and interconnected and relates to challenging the order of the Ld. CIT(A) in holding that the data processing fees paid by the Indian Branch of the assessee bank to its Singapore branch are not taxable in India by applying the principle of mutuality, and further in holding that such payments, though in the nature of Royalty and/or Fees for Technical Services, could be governed by Printed from counselvise.com 3 ITA No. 467/Mum/2017 the principle of mutuality. Therefore, we have decided to adjudicate these grounds through the present consolidated order. 3. At the very outset it was submitted by the Ld. AR that these grounds are squarely covered by the decision of Coordinate Bench of ITAT in assesse’s own case in ITA No. 339/Mum/2010, the operative portions of the same is reproduced herein below: 5 Ground No.3 pertains to subjecting the data processing charges paid to the Singapore branch of the assessee amounting to Rs.132,335,594/- applying the provisions of Article 13(Royalties, fees for technical services and payments for use of equipment) of the India-France Tax Treaty. This issue is also covered by the order of the Tribunal in assessee's own case for AY 2001-02 to 2003-04 wherein interest paid by assessee to Head Office/overseas branches was held to be not liable to tax, following was the precise observation of the Tribunal in its order dated 20-6-2012 for AY 2002- 03:- 3. The solitary issue involved in the appeal of the assessee for, the A.Y. 2002-03 relates to the addition of Rs. 1,48,30,613/-made by the A.O. and confirmed by the Ld. CIT (A) on account of \"interest\" paid by the Indian Branches of the assessee bank to its head office and other overseas branches. 4. The assessee, in the present case is a commercial bank having its Head Office in France. It carries on the normal banking activities Including financing of foreign trade and foreign exchange transactions in India through its eight branches situated at Mumbai, New Delhi, Kolkata, Bangalore, Pune, Ahmedabad, Chennai and Hyderabad. During the previous year relevant to A.Y. 2002-03, the Indian Branches of the assessee bank have paid total interest of Rs.1,48,30,613/- to its Head office and overseas branches and the same was claimed as a deduction while determining the profits attributable to Indian Branches, which was chargeable to tax in India. The said interest was treated by the A.O. as income of the assessee's Head office /overseas branches chargeable to tax in India. This decision of the A.O. was challenged by the assessee in the appeal filed before the Ld. CIT(A) and the contention raised before the Ld. CIT (A) in this regard was that the Head office of the assessee bank as well as all its branches being the same person and one taxable entity as per the Indian Income-tax Act, interest Printed from counselvise.com 4 ITA No. 467/Mum/2017 paid by Indian Braches to head office and ocher overseas Branches was payment to self, which did not give rise to any income as per the Income-tax Act. In support of this contention, reliance was placed on behalf of the assessee on the decision of Hon'ble Supreme Court in the case of Sir Kikabhai Premchand vs. CT (Central) 24 ITR 506 as well as the decision of Kolkata Special Bench of the ITAT in the case of ABN Amro Bank NV vs. Asst. Director of Income-tax 98 TIJ 295. The contention of the assessee, however, was not accepted by the Ld. CIT (A) and relying on the decision of Mumbai Bench of the ITAT in the case of Dresdner Bank AG vs. Add1. CIT 108 ITD 375, he held that the interest paid by the Indian branches of the assessee bank to its head office and overseas branches was chargeable to tax in India. Accordingly, the addition made by the A.O. on this issue was confirmed by the Ld. CIT(A). 5. We have heard the arguments of both the sides and perused the relevant material on record. As agreed by the Ld. Representatives of both the sides, the issue involved in this appeal of the assessee now stands squarely covered by the decision of Special Bench of the ITAT in the case of Sumitomo Banking Corp. Mumbai wherein it was held, after elaborately discussing the legal position emanating from the interpretation of relevant provisions of Indian Income-tax Act as well as treaty, that interest paid to the head office of the assessee bank as well as its overseas branches by the Indian branch cannot be taxed in India being payment to self which does not give rise to income that is taxable in India as per the domestic law or even as per the relevant 'tax treaty'. Respectfully following the said decision of Special Bench of the ITAT I which is directly applicable in the present case, we delete the addition of Rs.1,48,30,613/- made by the A.O. and confirmed by the Ld. CIT (A) on this issue and allow the appeal of the assessee. 5.1 The issue has also been dealt by the Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra), wherein the observation of the Bench at para 88 is as under :- \"88. Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of domestic law as well as that of the treaty as discussed above, we are of the view that although interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to, the PE which is taxable in India as per the provisions of art. 7(2) and 7(3) of the Indo- Japanese Treaty read with, para 8 of the Protocol whish are more beneficial to the assessee, The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to' self which cannot give rise to income that is taxable in India as per the domestic law, Even Printed from counselvise.com 5 ITA No. 467/Mum/2017 otherwise, there is no express provision contained in the relevant tax treaty which is contrary to the domestic law in India on this issue, This position applicable in the case of interest paid by Indian branch of a foreign bank to its head office equally holds good for the payment of interest made by the Indian branch of a foreign bank to its branch offices abroad as the same stands on the same footing as the payment of interest made to the head office, At the time of hearing before us, the learned representatives of both the sides have also not made any separate submissions on this aspect of the matter specifically. Having held that the interest paid by the Indian branch of the assessee bank to its head office and other branches outside India is not chargeable to tax in India, it follows that the provisions of s. 195 would not be attracted and there being no failure to deduct tax at source from the said payment of interest made by the PE, the question of disallowance of the said interest by invoking the provisions of s. 40 (a)(i) does not arise, Accordingly we answer question No. 1 referred to this Special Bench in the negative i.e. in favour of the assessee and question No. 2 in affirmative i.e. again in favour of the assessee.\" As the facts and circumstances of the case during the year under consideration are peri materia, where payment made by assessee to Singapore Branch for data processing, was brought to tax. Respectfully following the order of the Tribunal in assessee's own case as well as the order of the Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corporation (supra), we hold that the department was not justified in taxing the data processing charges to the Singapore Branch of the assessee by applying the provisions of Article 13 of the India-France Tax Treaty. 4. Accordingly, having regard to the totality of the facts and circumstances of the case, and taking into consideration the decisions rendered by the Coordinate Benches of the ITAT on identical issues under similar factual circumstances in favour of the assessee, we find no reason to take a different view. Printed from counselvise.com 6 ITA No. 467/Mum/2017 Respectfully following the doctrine of binding precedent and maintaining judicial consistency, particularly when identical additions made on similar facts we uphold the order passed by the Ld. CIT(A). 5. Ground No. 3 relates to challenging the order of the Ld. CIT(A) in allowing relief in respect of the interest income received by the Head Office from its Branch Office in India by applying the principle of mutuality as laid down by the Special Bench of the Mumbai ITAT in the case of Sumitomo Mitsui Banking Corporation v. DDIT, and in not making a disallowance under Section 14A read with Rule 8D on such income which does not form part of the total income, particularly when the Head Office and Branch Office are considered fungible entities. 6. From the records we noticed that Ground No. 3 is also squarely covered by the decision of the Coordinate Bench of ITAT in the case of JP Morgan Chase Bank in ITA No. 9189/Mum/2004, the relevant portion of the same is reproduced herein below: Brief Facts leading to the issue under consideration are as under: 3. The assessee is a foreign bank, permitted by the RBI to undertake banking business in India, receives, as a part of its banking business, deposits in designated foreign currencies under various schemes stipulated by the RBI for example FCNR(B) Scheme. The RBI under the scheme permit to lend amounts so received in the overseas overnight call money market in which institutions like banks participate. It is submitted that the Indian Branch office is permitted to Printed from counselvise.com 7 ITA No. 467/Mum/2017 temporarily lend the amounts in the overseas overnight call Money Market. 3.1 During the Financial Year relevant to assessment year 1998- 99, the Indian branch office of the assessee earned Rs.2,70,56,575/- as interest on the surplus funds deposited with the overseas branches/ Head office. In the P&L account Rs.2,70,56,575/- was credited as interest received in India on short term lending to overseas Branches/Head office. The assessee was of the opinion that the aforesaid amount represents a charge from one branch to another of the same taxable entity, and it is not in the nature of income and hence is not subjected to tax in India. In the return of income filed by the assessee in India, the said interest was not treated as taxable by applying \"principle of mutuality\", on the basis that the said interest was receipt from self and therefore cannot be construed as income. 3.2 It is also noted that the assessee vide letter dated 06/11/2000 intimated the Ld.AO that though the assessee is a tax resident of US,and is eligible to claim benefit if any as per India US Double Taxation Avoidance Agreement, it has filed the return of income as per the provisions of the Income Tax Act and has chosen to be governed by the provisions of the Act and not to be governed by the provisions of the treaty. 3.3 Based on the above facts, the submission of the assessee before the Ld.AO are summarised as under: As per section 5 of the Act, any income received/accrued or deemed to be received/accrued in India by a non-resident, is taxable in India. Since the Nostro accounts and overseas placements are maintained outside India, interest cannot be said to be received/accrued in India. Section 9 of the Act provides that interest income is taxable in India if the money borrowed is used for the purpose of business or profession carried in India or for the purposes of making or earning any income from any source in India. The funds are utilised by the assessee outside India. As such, interest received on Nostro accounts from overseas placements would not be deemed to accrue or arise in India. Accordingly, the interest received on Nostro accounts/overseas placements (from own branches and other overseas banks) was claimed as not taxable in India under the provisions of the Act. Since Interest income was earned by Indian branch office from its own overseas branches/ head office, no income can accrue to an entity from transactions between its own branches. This is implied from the fact that no person can enter into transactions with oneself. Theassessee was supported by the decision of Hon'ble Calcutta High Court in the case of Betts Hartley Huett& Co. us. CIT reported in 116 ITR 425, wherein it was held that no person can enter into a contract with oneself and debiting or crediting the accounts cannot alter this position. Printed from counselvise.com 8 ITA No. 467/Mum/2017 3.4 The Ld.AO after considering above submissions disallowed the claim on the following key grounds: The reliance placed by the assessee on the decision of the Hon'ble Calcutta High Court in the case of Betts Hartley Huett& Co v CIT(supra) is misplaced because the issue in that case was different and distinguishable: The interest received by the Indian branches of the assessee is covered within the provisions of section 9 read with section 5 of the Act, since it emanates from the Indian operations; Deduction under section 44C of the Act is provided to non- resident assessees such as the assessee, in order to arrive at the true profit and gain of the Indian branches as if they were an Independent entity; and The interest received has been accounted for in the books of the Indian branch of the assessee. 4. On an appeal before the Ld.CIT(A), the observations of the Ld.AO was upheld and the addition made was confirmed. 4.1 Aggrieved by the order of the Ld.CIT(A), the assessee preferred appeal before this Tribunal. 5. One of the grounds raised in assessee's appeal is regarding taxability of interest received by the Indian branch of assessee from the overseas HO or other overseas branches. 5.1 As a consequence, the Revenue filed Cross Objection, claiming that, if in view of the decision by Hon'ble Mumbai Special Bench, in case of Sumitomo Mitsui Banking corporationreported in 136 ITD 66, the interest received by Indian branch office is held not chargeable to tax, then expenditure in relation to such tax free income should be held as disallowable u/s 14A. 5.2 Before the division bench, the Ld.Sr.Counsel on behalf of the assessee argued that, interest received is not in the nature of income in hands of Indian Branch Office (hereinafter referred to as BO) in view of the Hon'ble Mumbai Special Bench decision in Sumitomo(supra) wherein, the payment from BO to Head Office (hereinafter referred to as HO)was held to be payment in nature of self to self which is governed by 'principle of mutuality', as BO and HO are not independent entities under domestic law. It was argued that for invoking section 14A, there has to be an income chargeable to tax under section 4 of the act at the first place, which gets exempted under the Act. He submitted that once there is no income arising under section 4 due to principle of mutuality, there is no question of income being exempt, and as such, section14A cannot be invoked. 5.3 Alternatively, it was also argued by the Ld.Sr.Counsel on behalf of the assessee that, since interest expenditure was incurred by HO for purposes of its business, it is an allowable expenditure u/s 36(1)(iii) under domestic law. Printed from counselvise.com 9 ITA No. 467/Mum/2017 5.4 Per contra, the Revenue relied on the decision of coordinate bench of this Tribunal in case of Oman Intl Bank SAOG reported in (2013) 35 CCH 207 wherein, it was held that, provisions of 14A are applicable for disallowance of interest, if the interest received by BO from HO/other overseas branch or vice-a-versa is held as not taxable in view of Sumitomo Mitsui Banking corporation (supra). 5.5 Considering the view taken by the Special Bench in case of decision of Sumitomo Mitsui Banking corporation (supra) and decision of coordinate bench of this Tribunal in case of Oman Intl Bank SAOG(supra), recommendation was made by the Ld. Division Bench on 12/07/2016 to the Hon'ble President to constitute a special bench in terms of section 255(3) of the Act to decide the following question:- Whether an income which is not subject to tax on the doctrine of mutuality can be construed to be an \"income which does not form part of the total income under this Act\", as understood for the purposes of section 14A of the Act?\" 6. It emerges from the reference that, the very foundation of the Revenue's cross-objection is rooted from the ratio decidendi laid down by Hon'ble Special Bench in the aforesaid case. The question referred by the Ld. Division Bench is therefore being examined on first principles, based on the submissions of both sides. 7. The submission on behalf of the Revenue, advanced by the Ld.Standing Counsel, proceeds on the footing that, where the impugned interest income does not form part of the total income, the mandate of section 14A of the Act stands attracted so as to disallow the expenditure incurred in relation to the earning of such income. In aid of her submission, reliance has been sought to be placed on the observations of the Coordinate Bench of the Tribunal in Oman International Bank SAOG (supra). \"5. We have considered the rival submissions as well as the relevant material on record. Having held that the Interest Income received from the HO is not taxable in view of principle of mutuality, the question arises whether such Income which has to be excluded from the total Income, shall be the gross receipts or net Income after deduction of the expenditure incurred in relation to earning of such income. The aspect of total income under the scheme of Income Tax is understood as the earning of the assessee from all the sources as classified under different heads of Income reduced by the expenditure directly and Indirectly incurred in relation to the earning of the income and further deducting all the allowable claims and the Printed from counselvise.com 10 ITA No. 467/Mum/2017 exemption/deduction while computing the total Income. Thus, the total income chargeable to tax means the net income computed from the gross receipts after the deduction of the allowable expenditure and other deductions. As per the scheme of the Income Tax, the income which is chargeable to tax Is computed after the deduction of the expenditure which has been Incurred for earning such taxable Income. Therefore, the expenditure Incurred for other than the Income chargeable to tax, is not permitted to be reduced from the Income for computation of the total income. This aspect of allowing the expenditure incurred in relation to the taxable Income is embedded in the provisions of section 14A to ensure that the expenditure Incurred in relation to the income which is not chargeable to tax shall not be allowed as deduction against the income which is chargeable to tax. In other words, the income, which is chargeable to tax is taken as net income after deduction of the allowable expenditure and similarly the Income which is not chargeable to tax is also taken net and the expenditure incurred in relation to such Income is reduced from it. Thus, the Income, which does not form part of the total Income, shall also be the net Income after considering the expenditure directly or indirectly incurred in relation to earning the said income. 5.1 The term \"Income Itself under the provisions of the IT Act de notes the net Income and not gross receipt. Therefore, whether it is the Income chargeable to tax or an exempt income, the expression of income remains the same as net after deduction of the allowable expenditure and claims. 8. The next objection raised by the id AR of the assessee is that the provisions of section 14A cannot be applied in respect of Interest received from the HO, which is not an income; therefore, there is no question of exclusion of the same from the total Income. 8.1 The Id AR has contended that the Tribunal and the Hon'ble High Court have held that the interest received is not taxable because one cannot earn Income from oneself for the purpose of income tax. This issue has been considered by the Tribunal in the case as relied upon by the id DR and it has been held that the provisions of sec 14A are applicable in respect of Interest Income received from HO. Therefore, we do not agree with the contention of the Id AR that the provisions of sec. 14A are not applicable because there is no income which is contrary to the fact that the assessee itself has shown the interest received from the HO as Income in the P&L. account; but has not offered the same for taxation. Printed from counselvise.com 11 ITA No. 467/Mum/2017 8.2 In the case of M/s Societe Generale, the Tribunal has upheld the applicability of section 14A in respect of the interest which was held to be exempt on principle of mutuality. The Tribunal has given the finding in para 44 of the order as under: \"44. We have considered the rival submissions and perused the relevant material on record. We have held above that the amount of Interest at 3.97 crore received by the assessee on funds placed with head office/overseas branches is exempt from tax on the principle of mutuality. Similar view has been consistently taken for the earlier years as well. Once interest income is exempt from tax, It is but natural that the expenses incurred In relation to such exempt Income cannot be allowed as deduction u/s 14A. Sub-section (1) of section 14A unambiguously provides that no deduction shall be allowed in respect of expenditure Incurred by the assessee in relation to income which does not form part of the total Income under this Act. When we hold that the Interest earned by the assessee from placement of funds with its head office/ other overseas branches is exempt from taxation, the natural and logical conclusion which therefore has to follow is that no deduction should be allowed towards expenses incurred in relation to such exempt income. We, therefore, hold in principle that the provisions of section 14A are attracted on the interest earned by the assessee from placement of funds with its head office/overseas branches which has been claimed an d allowed as exempt on the principle of mutuality The learned AR unsuccessfully tried to argue that the funds for such placement with head office/overseas branches were made available from the assessee's own kitty of Interest free available funds. This argument runs contrary to the specific submission made by the assessee before the A.O., which has been reproduced above, by which the assessee submitted that its \"placement with the head office/Overseas branches are funded by way of deposits in the foreign currency maintained in India such as EEFC and FCNR deposits\". Once the assessee is specifically admitting the placement of funds with head office/overseas branches out of Interest bearing deposits, It cannot be argued that the source of such funds was different. We, therefore, hold that the source of the funds placed by the assessee with its head office / overseas branches is the deposits received by It. Since interest Income from placement of such fund s is exempt from taxation, any interest paid by the assessee on such deposits and other expenses cannot be allowed as deduction u/s 14A. We want to make it clear that our this conclusion is based on the appreciation of the provisions under the Act. The question of allowability or otherwise of such expenses under the governing Treaty was not argued by the Id. AR and hence the same has not been considered. Thus it is held in principle that the provisions of section 14A are applicable on the exempt interest Income earned from the head office/overseas branches. Printed from counselvise.com 12 ITA No. 467/Mum/2017 Therefore, there is no ambiguity on the issue that section 14A is applicable in respect of interest received from HO/overseas branches which is held as exempt on the principle of mutuality. 7.1 The written submissions filed on behalf of the Revenue, vide submission dated 07.08.2025, form part of the record and stand reproduced herein for ready reference IV. The sole question before this Hon'ble Bench is \"whether an income which is not subject to tax on the doctrine of mutuality can be construed to be an \"income which does not form part of the total income under this Act, as understood for the purposes of section 14A of the Act\"? V. There are two facets to the referred question. First, there exists \"an income which is not subject to tax on the doctrine of mutuality.\" Secondly, can that income be construed to be an \"income which does not form part of the total income.\" VI. The phrase \"income which is not subject to tax on the doctrine of mutuality\" employed by the Hon'ble Division Bench in its formulation presupposes the existence of an \"income\" which is not subject to tax in view of the principle of mutuality. In other words, and to put it conversely, the \"income\" would be subject to tax but for the principle of mutuality. The operation of the principle of mutuality creates a situation where an \"income\" which is otherwise subject to tax shall not be taxable or shall be exempt. Consequently, the said income does not form part of the total income. It is not the case of the assesse as it cannot be that income which is not subjected to tax\" would form part of total income under the Act. VII If a transaction gives rise to an \"income\" which it does because the reference question presupposes the existence of income and if such income is not subject or chargeable to tax for whatever reasons including by way of operation of the doctrine of mutuality and, consequently, does not form part of the total income, then it would be sequitur that section 14A would apply to disallow expenses tied to that income. For section 14A to apply, two conditions must be satisfied: first, that an expense must be incurred, and secondly, such expenses must be incurred in relation to income that is not included in the total income (1.c., exempt or non-taxable income). In fact, the very case of the assessee is that the interest received pursuant to a mutual transaction between the assessee and its Indian branch should not be included in the total income of the assessee in view of the doctrine of mutuality. VIII. The averments made hereinabove are supported by the observation made by the Hon'ble Special Bench in the case of Printed from counselvise.com 13 ITA No. 467/Mum/2017 Sumitomo Mitsui Banking Corporation vs Deputy Director of Income Tax, where the Hon'ble Special Bench categorically finds that \"the interest income in question is not chargeable to tax under the provisions of the domestic law as already held by us. Even otherwise, there are parts of the decision where the Hon'ble Special Bench consistently notes that payment to self \"cannot give rise to any income which is chargeable to tax in India as per the domestic law. Existence of income is one thing and chargeability of that income is another: what the Hon'ble Special Bench has observed is that although the assessee had earned interest income, the same is not chargeable to tax in view of the principle of mutuality. The understanding of the Hon'ble Special Bench in Sumitomo Mitsui Banking Corporation is clear interest receipt has the character of \"income\" but the said income is not chargeable to tax under the Act in view of the doctrine of mutuality IX. It is most respectfully submitted that these observations made by the Hon'ble Special Bench were binding on the Hon'ble Division Bench that made the instant reference. Additionally, the Hon'ble Division Bench in in the case of Oman International Bank SAOG us. Joint Director of Income Tax had correctly understood and applied the principle laid down in Sumitomo Mitsui Banking Corporation, in holding that income which is not chargeable to tax shall fall within the purview of section 14A of the Act. As a matter of fact, both Oman International Bank and Sumitomo Mitsui Banking Corporation proceed on the assumption that receipt or sum of money arising from a mutual transaction constitutes \"income\" except that such \"income is not chargeable or subject to tax under the Act in view of the doctrine of mutuality. Nowhere in Sumitomo Mitsui Banking Corporation does the Hon'ble Special Bench hold that receipts arising from mutual transactions do not constitute \"income\" within the meaning of section 2(24) of the Act. It is a settled principle of law that a judgment cannot be open to interpretation, and it is impermissible to draw inferences from it one way or the other. The Hon'ble Division Bench making the instant reference was bound not only by the finding of the Hon'ble Special Bench in Sumitomo Mitsui Banking Corporation but also by the finding of the Hon'ble Division Bench in in the case of Oman International Bank - being an earlier decision by a co-ordinate Bench and there was no occasion to doubt the correctness of the findings retuned by the Hon'ble Division Bench in the case of Oman International Bank. X. An argument could be made that only that income which is specifically exempt under Chapter III of the Act is covered by section 14A. That argument, however, is misplaced. Pertinently, an income that is not subject to tax may not be includible in the total income either by way of an express exemption in the statute, or by way of judicial interpretation. In the instant case, income is not includible in the total income due to the doctrine of Printed from counselvise.com 14 ITA No. 467/Mum/2017 mutuality that applies as a result, not of statute, but judicial pronouncements. There are two ways in which the language of a statute is altered one way is the formal way which is through amendments brought about through Parliament, and the other way is the informal way in which decisions of courts and tribunals are read into the statute. Judicial pronouncements exempting income in view of the doctrine of mutuality must be read into Chapter III of the Act to exempt income arising from mutual transactions. It may be noted here that the findings of the Hon'ble Special Bench in Sumitomo Mitsui Banking Corporation are currently pending for adjudication before the Hon'ble Bombay High Court and that decision has to be reconsidered in light of the decision of the Hon'ble Supreme Court in Bangalore Club, which interprets the doctrine of mutuality and lais down conditions for its application to transactions. Be that as it may, why an income is not includible in the total income is immaterial for the purposes of section 14A, so long as no tax is paid on that income. This is no longer a substantial question of law in view of the decision of the Hon'ble Supreme Court in the case of CIT us Walfort Share and Stock Brokers Pvt Ltd (2010), wherein the Hon'ble Supreme Court has unambiguously held that any income that is exempt from tax and, therefore, does not form part of total income shall be covered under the provisions of section 14A of the Act. XI. Without prejudice to the above, it is submitted that the wording in section 14A cannot be construed and applied de hors the legislative intent behind it. Section 14A embodies the fundamental principle that expenses are only allowable if they are tied to an income which is part of the total income, and not otherwise Section 14A is not concerned with whether the assessee makes a profit or loss. The emphasis is on expense and not \"income\" or \"receipt\" The objective of the section is to deny deduction of expenses that are tied to income that is not included in the total income. In other words, expenses can be allowed only to the extent that they are relatable to the earning of taxable income. The purpose behind section 14A is to ensure that the assessee does not get double benefit. Before introduction of section 14A, expenditure incurred in respect of exempt income was being claimed against taxable income. The Parliament introduced section 14A to remedy this mischief and the section must be understood, interpreted and applied in a manner that suppresses the mischief and advances the remedy (\"Heydon rule of interpretation\"). The argument that receipts arising from mutual transactions do not qualify as \"income\" under section 2(24) of the Act does not alter the fact that such receipt remains untaxed. Section 14A should apply to disallow an expense that is tied to an earning regardless of whether that earning qualifies as \"income\" under section 2(24) of the Act or not. In fact, section 14A begins with notwithstanding clause and the import of that section cannot be restricted to the definition Printed from counselvise.com 15 ITA No. 467/Mum/2017 clause under section 2 of the Act, or the charging section under section 4 of the Act. The definitional rigours of section 2 cannot restrict the understanding and interpretation of the word \"income\" occurring in section 14A of the Act. It is settled principle that context drives meaning. The meaning of income must be ascertained in light of the true purpose and objective behind introducing section 14A. That there is no requirement to earn an \"income\" for section 14A to apply is also clear from the Explanation inserted to section 14A, under which expenses shall be disallowed regardless of whether any \"income\" accrues, arises, or is received in the year under consideration. Another example would be that of \"agricultural income\" which is separately defined in section 2(1A) of the Act but would still be hit by section 14A. Pertinently, the reference representation relies upon the decision of the Hon'ble Supreme Court in the case of Bangalore Club to state that a receipt which is not income would normally fall outside the purview of section 14A of the Act. The phrase \"as understood for the purposes of section 14A of the Act occurring in the reference implies that the reference must be answered considering the purpose and objectives of section 14A of the Act, and not otherwise. In this regard, it is submitted that the views of the Hon'ble Supreme Court in the case of Bangalore Club were expressed in the context of general income tax liability and allowability or disallowability of expenses-under section 14A of the Act or generally was not in question. Nor was there any occasion for the Hon'ble Supreme Court to examine the interplay between the definition clause and the charging section with section 14A of the Act keeping in mind the notwithstanding clause contained in section 14A of the Act. XII. In conclusion, it is submitted that the assessee has not been able to make good its case by showing any judicial precedent that would allow this Hon'ble Special Bench to reformulate the question referred to it. Assuming without conceding that this Hon'ble Special Bench can reformulate the referred question, the assessee has failed to show any judicial precedent to support its contention that a receipt which does not has the character of income is not hit by section 14A. None of the decisions cited by the assessee pertain to section 14A and do not deal with the non obstante clause occurring in section 14A of the Act. On the contrary, there are decisions of this Hon'ble Tribunal in the cases of Oman International Bank and Society Generale which categorically hold that section 14A would apply to income that is not subject to tax in view of the principle of mutuality. In view of this, it is submitted that the instant reference be decided in favour of the Respondent and against the Appellant. 8. Per contra, the Ld.Sr.Counsel for the assessee reiterated, even at the cost of repetition, that the interest received is not in the nature of 'income' in the hands of the BO, in view of the decision of the Hon'ble Special Bench, Mumbai, in the case of Printed from counselvise.com 16 ITA No. 467/Mum/2017 Sumitomo(supra), wherein the payment from the BO to the HO was held to be in the nature of 'self-to-self, governed by the principle of mutuality, as the BO and the HO are not independent entities under domestic law. It was further emphasised that, where no income arises under section 4 owing to the principle of mutuality, the question of treating such receipt as exempt does not arise, and consequently the provisions of section 14A cannot be invoked. It was also submitted that, since the interest expenditure was incurred by the HO for the purposes of its business, the same is otherwise allowable as a deduction under section 36(1)(iii) of the Act under domestic law 8.1 The Ld.Sr.Counsel for the assessee submitted that the issue raised by the Revenue pertains to interest received by the Indian BO from its overseas HO or other overseas branches, which proceeds on the erroneous assumption that the HO and the Indian BO are two distinct entities. It was vehemently contended that the decision of the Coordinate Bench in the case of Oman International Bank SAOG (supra), relied upon by the Revenue, does not lay down the correct law, for the reason that the invocation of section 14A of the Act is contingent upon the satisfaction of the following two conditions: firstly, there should be an income which is to be computed under the provisions of the Act and; secondly, under the Act, such an Income should not form part of the total income, being exemption u/s. 10 of the Act. 8.2 The Ld.Sr. Counsel for the assessee submitted that the aforesaid conditions stand unfulfilled in the present case, as they presuppose the existence of a receipt which is in the nature of income but not chargeable to tax by virtue of specific provisions of the Act. According to the Ld.Sr.Counsel, the impugned receipt by way of interest from the overseas HO does not partake the character of income' at all. In other words, section 14A of the Act has no application in a situation where the receipt itself is not in the nature of income'. It was further emphasised that the Tribunal, in the case of Oman International Bank SAOG (supra), failed to appreciate the fundamental principle that no person can earn income from itself. Consequently, he submitted that, mere credit of interest in the books of the Indian Branch Office cannot confer upon it the character of 'income'. It was thus urged that, the Tribunal in Oman International Bank SAOG (supra) proceeded on an erroneous footing in holding that, the receipt of interest. constituted income, which was required to be excluded from the total income on a net basis. 8.3 The Ld.Sr.Counsel further emphasised that, once a receipt does not partake the character of income and is not in the nature of income chargeable to tax, the question of making a disallowance under section 14A of the Act does not arise. It was submitted that the provisions of section 14A are attracted only Printed from counselvise.com 17 ITA No. 467/Mum/2017 in respect of income which does not form part of the total income under Chapter III of the Act, and not in respect of receipts which are excluded at the very threshold for want of chargeability under section 4 of the Act. In support of this proposition, reliance was placed on the observations of the Hon'ble Special Bench in the case of Sumitomo (supra) 55. The first and foremost aspect which is relevant in the context of the issue involved in question No.2 is whether interest payable by the Indian PE is chargeable to tax in India in the hands of GE of which the PE is a part. In our opinion, this issue first of all has to be considered and examined from the point of view of relevant provisions contained in the Income-tax Act, 1961 so as to ascertain whether interest payable by the Indian branch of the assessee bank to its overseas HO is chargeable to tax in India as per the domestic law or not. Only when it is found that the said income is chargeable to tax in India as per the domestic law, one can refer to the relevant treaties to look for any benefits available to the assessee vis-à-vis the Income-tax Act since as per the specific provisions contained in section 90(2), provisions of DTAA override the provisions of the Act in so far they are more beneficial to the assessee. It is also to be taken into consideration that the provisions contained in tax treaties are not the charging provisions inasmuch as they do not bring to tax income which otherwise is not taxable as per the domestic law. This position is clear from the decision of Hon'ble Supreme Court in the case of Azadi BachaoAndolan (supra) wherein it was held that no provision of double taxation agreement can possibly fasten a tax liability where the liability is not imposed by the Act. It was held that if a tax liability is imposed by the Act, the agreement may be resorted to for negativing or reducing it. 56. In so far as the taxability of interest payable by PE in India in the hands of GE under the domestic law is concerned, it is relevant to note that the PE in India and the GE abroad of which the said PE is part are not independent persons under the domestic law ie. Indian Income-tax Act and they are not assessed to tax separately in India. The taxable entity is only one ie. the overseas GE which is the assessee bank in the present case who is a non resident in India and the PE in India is part of that entity which is a taxable entity in India even in respect of income attributable to the PE in India. There is thus only one person assessable to tax ie. GE and PE is not an independent person who is assessed to tax separately in India. It is a part of the GE and its income is chargeable to tax in the hands of GE which alone is the person assessable to tax in India. 57. In the case of Sir KikabhaiPremchand (supra) it was held by the Hon'ble Supreme Court that under the Income-tax Act, all that the State can tax is income, profits and gains in the relevant accounting year. It was held that it is well recognized that in Printed from counselvise.com 18 ITA No. 467/Mum/2017 revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the case before the Hon'ble Supreme Court, the business was owned and run by the assessee himself and it was held in these facts and circumstances by the Hon'ble Supreme Court that it was wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of fictional sale introduce a fictional profit which in truth and in fact was non-existent. It was held that cut away this fiction and one easily reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the fact of it is not only absurd but against all cannons of Mercantile and Income-tax Law. 58. A somewhat similar situation arose before the Hon'ble Calcutta High Court in the case of Betts Hartley Huett& Co. Ltd. (supra) wherein the assessee was non resident company with its head office in London. Its business in Calcutta was mainly that of purchasing Tea for its constituents abroad. In the relevant assessment year, the assessee had charged from its constituents in respect of Tea purchased actual cost, commission or brokerage and also a sum of Rs. 10 paise per pound of Tea on account of shipping, sampling and other miscellaneous charges. In respect of dispatch to the head office, the assessee did not charge any commission but charged all other items of expenses. The AΟ, however, held that the amount of commission which was not charged on sale to the head office as income accrued to the assessee's head office in London and estimated the profit attributable to purchase operations of the assessee's London office in India through the assessee at 1.5% of the value of Tea to compute such income assessable to tax in India u/s 9(1). On appeal, the AAC accepted the contention of the assessee that the sales to its head office having been effected on a principal to principal basis, there was no profit assessable u/s 9(1) of the Income-tax Act, 1961. Accordingly he directed the deletion of the addition made by the AO on this issue to the income of the assessee. The Tribunal, however, held that the London Office did not earn more because of its business connection through the assessee in India and by not paying commission, this earning accrued or arose to the assessee because of its business connection in India. The Tribunal accordingly set aside the order of the AAC on this issue and restored the addition made by the AO as profit in respect of purchase operation carried on in India on behalf of the London office. On reference, the question raised before the Hon'ble Calcutta High Court was whether on the facts and circumstances of the case, the Tribunal was right in holding that the amount in question was includible in the computation of assessee's income as profit in respect of sales made to its head office in London within the meaning of section 9(1) of the Income- tax Act, 1961. Their lordships answered the said question in the Printed from counselvise.com 19 ITA No. 467/Mum/2017 negative and in favour of the assessee holding that when the transaction between the London head office of the assessee and its unit in India was a transaction as between principal and principal, it cannot be held that any income arose in favour of the assessee either directly or indirectly since the gain in London office was offset by the loss incurred in the Indian branch. It was held that in law there cannot be a valid transaction of sale between the branch office of the assessee in India and its head office in London. It was held that it is a elementary proposition that no person can enter into a contract with oneself and debiting or crediting one's account cannot alter this legal position. It was held that if one unit of a business does not debit any commission to another unit of the same business then it is difficult to follow how any saving has been effected by the business. 74. In the assessment order, the AO has relied on the provisions of section 9(1)(v)(c) of the Income-tax Act to hold that interest payable by PE in India being income deemed to accrue or arise in India is chargeable to tax in India. In our opinion, such interest payable by the PE to GE being payment to self does not give rise to any income that is chargeable to tax in India as held, inter alia, by the Hon'ble Supreme Court in the case of Sir Kikabhai Premchand (supra) and the question of bringing the said income to tax by relying on the provisions of section 9(1)(u)(c) therefore, does not arise. 8.4 The Ld.Sr.Counsel submitted that, the Revenue seeks to place reliance on the third word employed in the question referred to the Special Bench, wherein the interest received has been described as 'income'. It was contended that such interest received by the Indian BO does not form part of the total income under the Act, so as to warrant invocation of section 14A. The Ld.Sr.Counsel emphasised that, the question referred to the Special Bench must be construed in the light of the relevant facts and circumstances. It was urged that a proper understanding of the real purport of the question, and the context in which the Division Bench chose to differ from the earlier view taken by the Coordinate Bench in the case of Oman International Bank SAOG (supra), becomes essential. 8.5 Adverting to the provisions of section 14A(1), the Ld.Sr.Counsel submitted that the said provision, though couched in the form of a non obstante clause, cannot be construed as dispensing with the foundational requirement that there must first be a receipt having the character of 'income' within the meaning of section 2(24) of the Act and falling within the ambit of total income as defined under section 4 of the Act. Accordingly, section 14A cannot operate in isolation, divorced from the charging provisions of the Act, and its application necessarily presupposes the existence of an income which, though otherwise chargeable, is excluded from the total income Printed from counselvise.com 20 ITA No. 467/Mum/2017 by virtue of specific provisions contained in Chapter III of the Act. 8.6 The Ld.Sr.Counsel further submitted that the decision of the Hon'ble Bombay High Court in the case of M/s. Societe Generale in ITA No. 1314 of 2013, dated 15.04.2015, relied upon by the Revenue, is clearly distinguishable on facts. It was pointed out that in the said case, the Hon'ble High Court was dealing with a claim of exemption under section 10(15)(iv) of the Act, and in that context held that the provisions of section 14A were applicable. He submitted that, in contradistinction, in the present case, the interest received by the Indian BO does not assume the character of 'income' under section 4 of the Act at the very threshold. Ld.Sr.Counsel thus submitted that, the question of exemption does not arise at all, and the ratio of the aforesaid decision can have no application to the facts at hand. Accordingly, the reliance placed by the Revenue on the said judgment is wholly misplaced. 8.7 The Ld.Sr. Counsel thus submitted that the mere credit of interest in the books of the Indian BO cannot confer upon it the character of 'income'. It was contended that the Tribunal, in the case of Oman International Bank SAOG (supra), proceeded on an erroneous foundation in treating the aforesaid receipt of interest as income which was required to be excluded from the total income on a net basis. For all the aforesaid reasons, it was urged that the decision of the Tribunal in Oman International Bank SAOG (supra) does not lay down the correct law. 8.8 The Ld.Sr.Counsel placed reliance on the decision of the Hon'ble Supreme Court in the case of Bangalore Club v. CIT reported in 350 ITR 509. It was pointed out that in the said case the Hon'ble Supreme Court was dealing with a club which claimed exemption from payment of income-tax on the interest earned on fixed deposits placed with certain banks, who were also corporate members of the assessee-club, by invoking the 'doctrine of mutuality'. Hon'ble Supreme Court, however, disagreed with the stand of the assessee therein for the reasons recorded in the judgment. The Ld.Sr.Counsel emphasised that what is material for the present controversy is the exposition of the doctrine of mutuality by the Hon'ble Court. Hon'ble Supreme Courtrecognised the principle that 'a person cannot make profit out of himself, and proceeded to hold that such receipts would not fall within the ambit of 'income' as defined under section 2(24) of the Act. It was observed that only such receipts which bear the character of income within the meaning of section 2(24) are chargeable to tax. The Ld.Sr.Counsel thus contended that receipts entitled to the benefit of the doctrine of mutuality stand excluded from the very definition of 'income' under section 2(24) of the Act. In this context, attention was invited to the following observations of the Hon'ble Supreme Court in Bangalore Club v. CIT (supra): Printed from counselvise.com 21 ITA No. 467/Mum/2017 7. Before we evaluate the rival stands, it would be necessary to appreciate the general understanding of doctrine of mutuality. The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax, only the income which comes within the definition of Section 2(24) of the Act is subject to tax (income from business Involving the doctrine of mutuality is denied exemption only in special cases covered under clause (vii) of Section 2(24) of the Act). The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable. Over time, groups which have been considered to have mutual income have included corporate bodies, clubs, friendly societies, credit unions, automobile associations, insurance companies and finance organizations. Mutuality is not a form of organization, even if the participants are often called members. Any organization can have mutual activities. A common feature of mutual organizations in general and of licensed clubs in particular, is that participants usually do not have property rights to their share in the common fund, nor can they sell their share. And when they cease to be members, they lose their right to participate without receiving a financial benefit from the surrender of their membership. A further feature of licensed clubs is that there are both membership fees and, where prices charged for club services are greater than their cost, additional contributions. It is these kinds of prices and/or additional contributions which constitute mutual income. 8.9 Relying on the aforesaid exposition of the 'doctrine of mutuality' by the Hon'ble Supreme Court, the Ld.Sr.Counsel submitted that, the same principle squarely applies to the relationship between a HO and its BO. In this regard, reliance was placed on the decision of the Special Bench in Sumitomo (supra), wherein it was held that a payment from the BO to its HO partakes the nature of 'self-to-self and, being governed by the 'doctrine of mutuality', does not give rise to income chargeable to tax under section 4 of the Act and therefore is out of the ambit of section 14A. We have perused the submissions advanced by both sides in the light of records placed before us. 9. The income of an assessee carrying on business in India is to be taxed as per the provisions of Chapter IV-D consisting of sections 28 to 43 and 44BA. A bank, a corporate body, and carrying on banking business in India is liable to be taxed in India in respect of the profit earned in India by virtue of section 5(2), read with sections 28 to 44BA. Since it carried on the business through a branch in India which was a PE, it is to be assessed only in respect of that profit which was relatable to the Printed from counselvise.com 22 ITA No. 467/Mum/2017 activities and attributable to the PE both by virtue of section 5 as well as section 9. Further in view of the existence of DTAA, the taxability is to be judged with reference to the provisions under the DTAA as well. 10. Be that as it may, it is noted that the present case involves a reverse transaction of the issue considered by the Hon'ble Special Bench in Sumitomo (supra). However, the moot question that has been placed before this Bench is to examine whether section 14A would be applicable if a receipt, falls within the ambit of \"doctrine of mutuality\" which arises with reference to the cross objection of the Department. In other words the issue before this special bench is not to determine as to whether, \"doctrine of mutuality\" applies in the instant case. The said issue is for the division bench to decide while considering assessee's appeal. 10.1 Before we advert to analyse the above issue under consideration, it is necessary to consider section 14A, that reads as under: Section 14A Expenditure incurred in relation to income not includible in total income. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. 10.2 The above section was first introduced by Finance Act 2001. It is also relevant to understand the intention of the legislature to bring in the provision to the statue with retrospective effect from 01/04/1962. The extract of the memorandum is reproduced as under: No deduction for expenditure incurred in respect of exempt income against taxable income Certain incomes are not includable while computing the total income as these are exempt under various provisions of the act's there have been cases where deductions have been claimed in respect of such exempt income this in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non- exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, Le., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the legislature since the inception of the income tax act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the income tax act. Printed from counselvise.com 23 ITA No. 467/Mum/2017 The proposed amendment will take effect retrospectively from 01/04/1962 and will accordingly, apply in relation to the assessment year 1962-1963 and subsequent assessment years. 10.3 The above memorandum makes it abundantly clear that the legislative intent behind section 14A is to apply its provisions to incomes which are exempt under various provisions of the Act and, therefore, are not includable in the total income for the purpose of computing tax in the hands of the assessee. By way of illustration, if a company engaged in business through industrial undertakings also derives agricultural income, such agricultural income would not be includable in the computation of total income under the Act, being exempt under section 10 thereof. It is to such exempt incomes that the provisions of section 14A are intended to apply. 10.4 The basic principle of taxation is to tax the net income, i.e.. gross income minus the expenditure. On this analogy the exemption is also in respect of the net income. Further the expenses can be allowed only in respect of earning of taxable income. Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. 10.5 In section 14A, the 1st phrase is \"For the purposes of computing the total income under this Chapter\", which makes it clear that various heads of income as prescribed under chapter VI would fall within section 14A. The next phrase, \"in relation to income that does not form part of total income under the act\" means that, if an income does not form part of the total income by virtue of provisions under the act, then the related expenditure falls within the ambit of applicability of section 14A. Therefore, for attracting the provisions of section 14A, there has to be proximate cause for disallowance, which is its relationship with the tax exempt income. 10.6 The provisions of the act are clear on the aspect of the receipts that partake the character of income, however not includable in computing the total income in the hands of an assessee by virtue of various provisions contained in the act. Chapter III of the income tax act deals with such receipts that partake the character of income and are exempt. Thus disallowance under section 14A of the act would apply only to such category of income that is exempt from tax by virtue of the provisions of the act. The language of section 14A are therefore similarly worded with that of the provisions under section 10 in chapter III. For the purposes of highlighting the difference between the provisions that are dealing with exemptions and the provisions that deal with deduction the Ld.Sr. Counsel on behalf of the assessee referred to the decision of Hon'ble Karnataka High Court in case of ITO vs Stumpp Schedule and Somappa Pvt. Ltd. reported in (1977) 106 ITR 399.He also relied Printed from counselvise.com 24 ITA No. 467/Mum/2017 on the decision of Hon'ble Bombay High Court in case of CIT vs Century Spg.&Mfg. Co. Ltd., reported in (1978) 111 ITR 6, approved by Hon'ble Supreme Court reported in (1991) 187 ITR 108. 10.7 The issue that was considered by Hon'ble High Courts referred to herein above was in the context of levy of surtax. Hon'able Court observed that according to the provisions of this Act charged profits, i.e., the total income of an assessee computed under the Act after making adjustments in accordance with the 1st schedule thereof was liable to surtax. And a statutory deduction was allowed being amount equal to 10% of the capital of the company in accordance with the provisions of the 2nd schedule. Hon'ble Court observed that rule 4 of the 2nd schedule provided as under: \"Where a part of the income, profits and gains of a company is not includable in its total income as computed under the income tax act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains\" 10.8 Hon'ble Court held that, \"The provisions of rule 4 will be attracted only if a part of the income, profits and gains of a company's includable in its total income\". The court further emphasised that, \"Normally, the provisions of rule 4, as stated above, will be applicable only to the items of the income which are included in chapter 3 which do not form part of the total income.\" 10.9 From the above it is clear that a distinction has to be drawn between cases where the receipt is not bearing the character of 'income' and cases where the receipt is in the nature of 'income', but is 'exempt' by virtue of various provisions under the act. Thus section 14A would apply only to cases where the receipt is in the nature of income, but is exempt from the tax by virtue of various provisions under the act. 10.10 The \"doctrine of mutuality\" relates to a notion that a person cannot make profit from himself. An amount received from oneself is not regarded as \"income\" and is therefore cannot be subjected to tax. Only such income that comes within the definition of sec. 2(24) of the Act is subject to tax. Based on the above discussion, in the present case, if the division bench takes the view that the interest received by the Indian Branch Office is covered by the \"doctrine of mutuality\", then by its very nature, such income will not fall within the scope of 'income' as defined in sections 2(24) and 4 of the Act, based on various Judicial precedents that consistently recognised this position. 10.11. Now coming to the applicability of section 14A, it is noted that section 14A, as explained in the legislative memorandum, was introduced only to deal with incomes which are exempt Printed from counselvise.com 25 ITA No. 467/Mum/2017 6. Accordingly, having regard to the totality of the facts and circumstances of the case, and taking into consideration the decisions rendered by the Coordinate Benches of the ITAT on identical issues under similar factual circumstances in favour of the assessee, we find no reason to take a different view. 7. Respectfully following the doctrine of binding precedent and maintaining judicial consistency, particularly when identical additions made on similar facts have been deleted by the Coordinate Benches we uphold the order passed by the Ld. CIT(A). 8. Therefore, we dismiss the grounds raised by the Revenue. 9. In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open court on 17.03.2026 Sd/- Sd/- (PRABHASH SHANKER) (SANDEEP GOSAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 17/03/2026 आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant Printed from counselvise.com 26 ITA No. 467/Mum/2017 2. प्रत्यर्थी / The Respondent. 3. संबंधित आयकर आयुक्त / The CIT(A) 4. आयकर आयुक्त(अपील) / Concerned CIT 5. धिभागीय प्रधतधिधि, आयकर अपीलीय अधिकरण,मुम्बई/ DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file. आदेशानुसार/BY ORDER, सत्याधपत प्रधत //True Copy// उि/सहायक िंजीकार ( Asst. Registrar) आयकर अिीिीय अतिकरण, मुम्बई / ITAT, Mumbai Printed from counselvise.com "