DDIT (I.T) 2(1), MUMBAI V. M/s. STATE BANK OF MAURITIUS, MUMBAI

ITA 3005/MUM/2005

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8484 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 25-09-2012
• Assessment Year: 1999-2000
• Appeal Filed On: 21-04-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P J PARDIWALLA
• Keywords: Business income; Business expenditure; Double taxation relief; Earning of tax free income; Permanent establishment
• Section: 43B; 14A; 28; 90

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L, MUMBAI .. , ! '# $% , & !, ' BEFORE SHRI R.S.SYAL, AM AND SHRI AMIT SHUKLA, JM ./ ITA NO.2254/MUM/2005 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR : 1999-2000) M/S.STATE BANK OF MAURITIUS LIMITED 101 RAHEJA CENTRE FREE PRESS JOURNAL ROAD, NARIMAN POINT MUMBAI 400 021. PAN : AABCS4465K. THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 2(1) MUMBAI. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) ./ ITA NO.3005/MUM/2005 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR : 1999-2000) THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 2(1) MUMBAI. M/S.STATE BANK OF MAURITIUS LIMITED 101 RAHEJA CENTRE FREE PRESS JOURNAL ROAD, NARIMAN POINT, MUMBAI 400 021. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) +, / // / 0 0 0 0 / REVENUE BY : SHRI MAHESH KUMAR -.+, / 0 / 0 / 0 / 0 / ASSESSEE BY : S/SHRI P.J.PARDIWALLA & NISHANT THAKK ER ) / # / / / / DATE OF HEARING : 26.09.2012 12* / # / DATE OF PRONOUNCEMENT : 03.10.2012 !$ !$ !$ !$ / / / / O R D E R PER R.S.SYAL, AM : THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND T HE OTHER BY THE REVENUE ARISE OUT OF THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 17.01.2005 IN RELATION TO T HE ASSESSMENT YEAR 1999-2000. ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 2 2. FIRST GROUND OF THE ASSESSEES APPEAL IS AGAINST THE DIRECTION OF THE LD. CIT(A) TO LEVY TAX AT THE RATE OF 48% APPLI CABLE TO NORMAL NON-RESIDENT COMPANIES. AT THE VERY OUTSET THE LEAR NED COUNSEL FOR THE ASSESSEE CONCEDED THAT SIMILAR ISSUE WAS THERE IN ASSESSEES APPEAL FOR ASSESSMENT YEAR 1997-98 AND THE TRIBUNAL WAS PLEASED TO DECIDE IT AGAINST THE ASSESSEE. IN VIEW OF THE FACT THAT THE CIRCUMSTANCES AND THE LEGAL POSITION CONTINUE TO RE MAIN SAME IN THE YEAR UNDER CONSIDERATION, RESPECTFULLY FOLLOWING T HE ORDER PASSED BY THE TRIBUNAL IN ITA NO.525/MUM/2001 FOR ASSESSMENT YEAR 1997-98, WE UPHOLD THE IMPUGNED ORDER ON THIS ISSUE. THIS GR OUND IS NOT ALLOWED. 3. GROUND NO.2 IS AGAINST THE CONFIRMATION OF DISAL LOWANCE OF EXPENDITURE ON PURCHASE OF FIXED ASSETS AT ` 3,43,28,114. ON THIS ISSUE ALSO THE LEARNED AR WAS FAIR ENOUGH TO ADMIT THAT T HE TRIBUNAL DECIDED SIMILAR ISSUE AGAINST THE ASSESSEE IN ITS O RDER FOR ASSESSMENT YEAR 1997-98. RESPECTFULLY FOLLOWING THE PRECEDENT, WE UPHOLD THE IMPUGNED ORDER ON THIS SCORE. THIS GROUND IS NOT AL LOWED. 4.1. GROUND NO. 3 IS AGAINST THE SUSTENANCE O F DISALLOWANCE OUT OF BONUS EXPENSE. THE FACTS APROPOS THIS GROUND ARE TH AT THE ASSESSEE CLAIMED DEDUCTION OF ` 66,500 AS BONUS. THE ASSESSING OFFICER FOUND THAT ONLY A SUM OF ` 24,000 WAS PAID BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME. AS PER THE TAX AUDIT REPORT IN FO RM NO.3CD, THE AUDITOR HAD REPORTED THAT THE REMAINING AMOUNT OF ` 42,500 WAS NOT PAID ON OR BEFORE THE DUE DATE. INVOKING THE PROVIS IONS OF SECTION ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 3 43B, THE ASSESSING OFFICER MADE DISALLOWANCE FOR ` 42,500. THE LEARNED CIT(A) UPHELD THE DISALLOWANCE. THE ASSESSE E IS AGGRIEVED AGAINST THE SUSTENANCE OF THIS DISALLOWANCE. 4.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE AB OUT THE FACT THAT THE ASSESSEE IS A BANKING COMPANY INCORPORATED IN MAURI TIUS. THE FACT THAT THE ASSESSEE IS ENTITLED TO THE BENEFIT OF DOU BLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND MAURITIUS (HE REINAFTER CALLED THE DTA), IS NOT IN DISPUTE. THE AUTHORIT IES BELOW HAVE MADE AND SUSTAINED THE SAID DISALLOWANCE BY TESTING THE FACTS OF THE CASE ON THE TOUCHSTONE OF PRESCRIPTION OF SECTION 4 3B AND ALSO THE PROVISIONS OF ARTICLE 7 OF THE DTA. 4.3. THE CLAIM OF THE REVENUE IS THAT THE PROVI SIONS OF SECTION 43B SHOULD BE APPLIED FOR THE PURPOSE OF CONFIRMING DIS ALLOWANCE AMOUNTING TO ` 42,500. ANY AMOUNT OF BONUS DEBITED TO THE PROFIT AND LOSS ACCOUNT WHICH IS NOT PAID ON OR BEFORE THE DUE DATE OF FILING OF THE RETURN, IS NOT DEDUCTIBLE AS PER THE PROVISI ONS OF SECTION 43B. THERE IS NO QUARREL ON THE FACT THAT THE ASSESSEE F AILED TO PAY THE AFORESAID AMOUNT ON OR BEFORE THE DUE DATE OF FILIN G THE RETURN OF INCOME AS PER SECTION 139(1) OF THE ACT. THUS, WHEN WE COMPUTE THE INCOME OF THE ASSESSEE AS PER THE PROVISIONS OF THE ACT, NO DEDUCTION CAN BE ALLOWED TO THIS EXTENT AND THE VIEW CANVASSE D BY THE AUTHORITIES BELOW BECOMES ACCEPTABLE. ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 4 4.4. SECTION 90 DEALS WITH THE RATIONALE AND CO NSEQUENCES OF AGREEMENT WITH FOREIGN COUNTRIES OR SPECIFIED TERRI TORIES. SUB-SECTION (1) PROVIDES THAT THE CENTRAL GOVERNMENT MAY ENTER INTO AN AGREEMENT WITH THE GOVERNMENT OF ANY COUNTRY OUTSID E INDIA OR SPECIFIED TERRITORY OUTSIDE INDIA, INTER ALIA , FOR GRANTING OF RELIEF IN RESPECT OF INCOME ON WHICH TAX IS PAYABLE BOTH IN I NDIA AND THE OTHER COUNTRY. SUB-SECTION (2) OF SECTION 90 PROVIDES TH AT WHERE THE CENTRAL GOVERNMENT HAS ENTERED INTO AN AGREEMENT WI TH THE GOVERNMENT OF ANY COUNTRY OUTSIDE INDIA OR A SPECIF IED TERRITORY OUTSIDE INDIA, AS THE CASE MAY BE, UNDER SUB-SECTIO N (1) FOR GRANTING RELIEF OF TAX, OR AS THE CASE MAY BE, AVOIDANCE OF DOUBLE TAXATION, THEN, IN RELATION TO THE ASSESSEE TO WHOM SUCH AGRE EMENT APPLIES, THE PROVISIONS OF THIS ACT SHALL APPLY TO THE EXTENT TH EY ARE MORE BENEFICIAL TO THAT ASSESSEE. IN OTHER WORDS, IF A P ARTICULAR ITEM OF INCOME IS TAXABLE UNDER THE INCOME-TAX ACT, 1961 (H EREINAFTER CALLED THE ACT), THEN IT SHALL CEASE TO BE TAXABLE IN IN DIA IF THE DTA PROVIDES EXEMPTION IN RESPECT OF SUCH INCOME. IN T HE LIKE MANNER, IF ANY EXPENDITURE INCURRED BY THE ASSESSEE IS NOT DED UCTIBLE AS PER THE PROVISIONS OF THE ACT, THE SAME SHALL STILL BE ALLO WED AS DEDUCTION IF THE DTA PROVIDES FOR SUCH DEDUCTION. THE CRUX OF TH E MATTER IS THAT THE DTA OVERRIDES THE REGULAR PROVISIONS OF THE ACT , IN SO FAR AS IT IS MORE BENEFICIAL TO THE ASSESSEE. IF THE DTA PROVIDE S FOR A MORE LIBERAL MODE OF COMPUTATION OF INCOME, THEN IT IS T HIS MODE OF COMPUTATION, WHICH NEEDS TO BE FOLLOWED NOTWITHSTAN DING ANY ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 5 CONTRARY PROVISION CONTAINED IN THE ACT. HOWEVER, IF THERE IS NO SPECIFIC PROVISION IN THE DTA CONCERNING A PARTICUL AR ASPECT, THEN IT IS THE BASIC LAW, THAT IS, THE ACT, WHICH APPLIES. 4.5. HAVING SEEN THAT THE DISALLOWANCE U/S 43B IS CALLED FOR IN THE DETERMINATION OF INCOME UNDER THE ACT, LET US SEE THE POSITION UNDER THE DTA. THE ASSESSEE IS ADMITTEDLY A TAX RE SIDENT OF MAURITIUS. THE AUTHORITIES BELOW HAVE NOT DISPUTED THE ENTITLEMENT OF THE ASSESSEE TO AVAIL THE BENEFIT, IF ANY, AVAIL ABLE TO IT AS PER THE TERMS OF DTA. RATHER, THE LD. CIT(A) HAS CONSIDERE D THE CLAIM OF THE ASSESSEE AS PER THE DTA AND THEREAFTER REJECTED IT AS HAVING BEEN NOT MAINTAINABLE. 4.6. ARTICLE 7 OF THE DTA PROVIDES FOR THE C OMPUTATION OF `BUSINESS PROFITS. IT PROVIDES THAT THE PROFITS O F AN ENTERPRISE OF A CONTRACTING STATE SHALL BE TAXABLE ONLY IN THAT STA TE UNLESS THE ENTERPRISE CARRIES ON BUSINESS IN THE OTHER CONTRAC TING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE EN TERPRISE CARRIES ON BUSINESS AS AFORESAID, THE PROFITS OF THE ENTERPRIS E MAY BE TAXED IN THE OTHER STATE BUT ONLY SO MUCH OF THEM AS ARE ATTRIBU TABLE TO THAT PERMANENT ESTABLISHMENT. THE ASSESSEE IS ADMITTEDL Y HAVING AN INDIAN BRANCH, WHICH CONSTITUTES ITS PERMANENT ESTA BLISHMENT AS PER ARTICLE5 OF THE DTA. AS THE ISSUE ROTATES AROUND T HE COMPUTATION OF BUSINESS PROFITS, LET US HAVE A LOOK AT THE RELEVAN T PARAS OF ARTICLE 7 OF THE DTA, AS UNDER : - ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 6 ARTICLE 7 BUSINESS PROFITS 1. THE PROFITS OF AN ENTERPRISE OF A CONTRACTING ST ATE SHALL BE TAXABLE ONLY IN THAT STATE UNLESS THE ENTERPRISE CA RRIES ON BUSINESS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN. IF THE ENTERPRISE CARRIES ON BUSI NESS AS AFORESAID, THE PROFITS OF THE ENTERPRISES MAY BE TAXED IN THE OTHER STATE BUT ONLY SO MUCH OF THEM AS IS ATTRIBUTABLE TO THAT PER MANENT ESTABLISHMENT. 2. SUBJECT TO THE PROVISIONS OF PARAGRAPH 3 OF THIS ARTICLE, WHERE AN ENTERPRISE OF A CONTRACTING STATE CARRIES ON BUSINE SS IN THE OTHER CONTRACTING STATE THROUGH A PERMANENT ESTABLISHMENT SITUATED THEREIN, THERE SHALL IN EACH CONTRACTING STATE BE A TTRIBUTED TO THAT PERMANENT ESTABLISHMENT THE PROFITS WHICH IT MIGHT BE EXPECTED TO MAKE IF IT WERE A DISTINCT AND SEPARATE ENTERPRISE ENGAGED IN THE SAME OR SIMILAR ACTIVITIES UNDER THE SAME OR SIMILA R CONDITIONS AND DEALING WHOLLY INDEPENDENTLY WITH THE ENTERPRISE OF WHICH IT IS A PERMANENT ESTABLISHMENT. WHERE THE CORRECT AMOUNT O F PROFITS ATTRIBUTABLE TO A PERMANENT ESTABLISHMENT CANNOT BE READILY DETERMINED OR THE DETERMINATION THEREOF PRESENTS EX CEPTIONAL DIFFICULTIES, THE PROFITS ATTRIBUTABLE TO THE PERMA NENT ESTABLISHMENT MAY BE ESTIMATED ON A REASONABLE BASIS. 3. IN DETERMINING THE PROFITS OF A PERMANENT ESTABL ISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE I NCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PERMANENT ESTABLISH MENT INCLUDING ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 7 EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES SO IN CURRED, WHETHER IN THE STATE IN WHICH THE PERMANENT ESTABLISHMENT I S SITUATED OR ELSEWHERE. 4. NO PROFITS SHALL BE ATTRIBUTED TO A PERMANENT ES TABLISHMENT BY REASON OF THE MERE PURCHASE BY THAT PERMANENT ESTAB LISHMENT OF GOODS OR MERCHANDISE FOR THE ENTERPRISE. 5. 6 4.7. A BARE PERUSAL OF PARA 1 OF ARTICLE 7 REVEALS THAT WHEN THE ENTERPRISE OF ONE CONTRACTING STATE (SAY, MAURITIUS ) CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE (SAY, INDIA ), THE PROFITS OF THE ENTERPRISE MAY BE TAXED IN INDIA BUT ONLY SO MUCH O F THEM AS ARE ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT (HEREIN AFTER ALSO CALLED `THE PE), THROUGH WHICH THE MAURITIUS ENTERPRISE C ARRIES ON BUSINESS IN INDIA. PARA 2 OF ARTICLE 7 TALKS OF ATTRIBUTION OF PROFITS TO SUCH PE BY CONSIDERING IT AS DISTINCT AND SEPARATE ENTERPRI SE DE HORS THE GENERAL ENTERPRISE FOR THE LIMITED PURPOSE OF THE C OMPUTATION OF BUSINESS PROFITS. THE PROVISIONS OF PARA 2 ARE SUBJECT TO THE PROVISIONS OF PARAGRAPH 3 OF THIS ARTICLE . WHEN WE TURN TO PARA 3 OF ARTICLE 7, IT TRANSPIRES THAT IN DETERMINING THE PR OFITS OF THE PERMANENT ESTABLISHMENT, DEDUCTION IS ALLOWED FOR ALL EXPENS ES WHICH ARE INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE PER MANENT ESTABLISHMENT INCLUDING EXECUTIVE AND GENERAL ADMIN ISTRATIVE EXPENSES WHICH ARE INCURRED IN THE STATE IN WHICH T HE PERMANENT ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 8 ESTABLISHMENT IS SITUATED OR ELSEWHERE. THE CRUX OF PARA 3 OF ARTICLE 7 OF THE DTA IS THAT FOR THE PURPOSES OF DETERMINING THE PROFITS OF THE PERMANENT ESTABLISHMENT IN INDIA, ALL THE EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS OF THE PERMANENT ESTABLISHMENT ARE TO BE ALLOWED AS DEDUCTION. IN OTHER WORDS, THE DEDUCTIBILITY OF ALL THE EXPENSES FOR THE PURPOSE OF COMPUTING THE `BUSINESS PROFITS OF THE PERMANENT ESTABLISHMENT, HAS BEEN SANCTIONED BY PARA 3 OF ART ICLE 7. 4.8. IT WAS CONTENDED BY THE LD. AR THAT SINC E THERE IS NO REFERENCE TO ANY DISALLOWANCE AS PER SECTION 43B I N PARA 3 OF ARTICLE 7 OF THE DTA, THERE CAN BE NO QUESTION OF MAKING AN Y DISALLOWANCE BY CONSIDERING SECTION 43B. ON THE OTHER HAND, THE LD. DR ARGUED THAT THE APPLICATION OF SECTION 43B IS IMPLICIT IN PARA 3 OF ARTICLE 7 DIRECTLY AND ALSO BY VIRTUE OF THE PROVISIONS OF AR TICLE 3(2) AND ARTICLE 23(1) OF THE DTA. 4.9. FROM PARA 3 OF ARTICLE 7 AS EXTRACTED A BOVE, IT IS APPARENT THAT THE BUSINESS PROFITS IMBIBE THE QUESTION OF GR ANT OF DEDUCTION OF ALL EXPENSES WHICH ARE INCURRED FOR THE PURPOSE OF BUSINESS OF THE PERMANENT ESTABLISHMENT. THERE IS NO RESTRICTION ON THE ALLOWABILITY OF SUCH EXPENSES SUBJECT TO THE LIMITATIONS OF THE TAXATION LAWS OF THE RESPECTIVE STATE. THUS IT IS DISCERNIBLE THAT THE RESTRICTIONS, IF ANY, ON THE DEDUCTIBILITY OF EXPENSES AS PER THE DOMESTIC L AW ARE NOT ENSHRINED IN THIS PART OF THE DTA. ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 9 4.10. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE THAT THERE ARE SEVERAL TREATIES CONTAINING THE RESTRICTIVE CLAUSE IN SO FA R AS THE DEDUCTIBILITY OF EXPENSES IS CONCERNED. FOR EXAMPLE, ARTICLE 7( 3) OF INDO-US DTAA PROVIDES THAT THE DEDUCTION OF EXPENSES IS TO BE ALLOWED IN ACCORDANCE WITH THE PROVISIONS OF AND SUBJECT TO TH E LIMITATIONS OF THE TAXATION LAWS OF THAT STATE. WE CAN USEFULLY REFER TO PARA 3 OF ARTICLE 7 OF INDO-US DTAA, AS UNDER :- IN THE DETERMINATION OF THE PROFITS OF A PERMANEN T ESTABLISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PERMANENT ESTABLISHMENT, INCLUDING A REASONABLE ALLOCATION OF EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES, RESEARCH AND DEVELOPMENT EXPENSES, INTEREST, AND OTHER EXPENSES INCURRED FOR THE PURPOSES OF THE ENTERPRISE AS A WHOLE (OR THE PART THEREOF WHICH INCLUDES THE PERMANENT ESTABLISHMENT), WHETHE R INCURRED IN THE STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED OR ELSEWHERE, IN ACCORDANCE WITH THE PROVISIONS OF AND SUBJECT TO THE LIMITATIO NS OF THE TAXATION LAWS OF THAT STATE . (EMPHASIS SUPPLIED BY US) 4.11. PARA 3 OF ARTICLE 7 OF INDO-US DTAA CAN BE S PLIT INTO TWO PARTS, VIZ, THE FIRST PART GRANTING DEDUCTION FOR THE EXPENSES INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PE RMANENT ESTABLISHMENT AND THE SECOND PART, TOWARDS THE END OF THE PARA, ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 10 RESTRICTING SUCH DEDUCTION `IN ACCORDANCE WITH THE PROVISIONS OF AND SUBJECT TO THE LIMITATIONS OF THE TAXATION LAWS (H EREINAFTER REFERRED TO AS `THE RESTRICTIVE CLAUSE) OF THE STATE. ON A CAR EFUL READING OF PARA 3 OF ARTICLE 7 IN ENTIRETY, IT EMERGES THAT THE DEDUC TIBILITY OF ANY EXPENDITURE HAS TO NECESSARILY PASS THE RESTRICTIVE CLAUSE, IF ANY, CONTAINED IN THE ACT. SUPPOSE THERE IS ANY PROVISI ON RESTRICTING THE DEDUCTIBILITY OF ANY EXPENDITURE OR SUCH DEDUCTION HAS BEEN MADE DEPENDENT ON THE SATISFACTION OF ANY CONDITION, THE N UNLESS SUCH CONDITION IS FULFILLED, THE DEDUCTION CANNOT BE AL LOWED AND THAT TOO, TO THE EXTENT AS PROVIDED IN SUCH PROVISION. 4.12. THIS POSITION CAN BE VIEWED FROM THE STAND POINT OF SECTION 44C OF THE ACT. THIS SECTION PUTS A CEILING ON DEDUCTION OF HEAD OFFICE EXPENDITURE, AS DEFINED IN CLAUSE (IV) OF EXPLANATION , IN THE CASE OF NON-RESIDENTS. IF ANY EXPENDITURE IN TH E NATURE OF HEAD OFFICE EXPENDITURE IS INCURRED AND SUPPOSE THERE I S A PROVISION IN THE TREATY THAT THE DEDUCTIBILITY OF EXPENSES AS PER AR TICLE 7(3) IS SUBJECT TO `THE RESTRICTIVE CLAUSE OF THE TAXATION LAWS OF THE CONCERNED STATE, THEN SUCH LIMIT AS PROVIDED U/S 44C TO RESTRICT THE DEDUCTION TO 5% OF THE ADJUSTED TOTAL INCOME, SHALL BE PRESUMED AS BO DILY INCORPORATED IN THE TREATY ALSO. IN SUCH A CASE, IT WILL BE UN DERSTOOD AS IF SECTION 44C IS INBUILT IN THE TREATY ALSO FOR THE PURPOSES OF LIMITING THE DEDUCTIBILITY OF HEAD OFFICE EXPENDITURE. ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 11 4.13. IT IS MANIFEST THAT DIFFERENCE BETWEEN TH E FULL OR PARTIAL DEDUCTIBILITY OF ANY EXPENDITURE IS DUE TO THE ABSE NCE OR PRESENCE OF THE RESTRICTIVE CLAUSE IN THE TREATY. BUT FOR SUCH RESTRICTIVE CLAUSE, ANY EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOS ES OF THE BUSINESS OF THE PERMANENT ESTABLISHMENT BECOMES DEDUCTIBLE I N FULL AS PER THE FIRST PART OF PARA 3 OF ARTICLE 7. IT IS ONLY DUE TO THE OCCURRENCE OF SUCH RESTRICTIVE CLAUSE THAT THE OTHERWISE FULL ALL OWABILITY OF DEDUCTION AS PER EARLIER PART OF THE PARA 3 OF ARTI CLE 7, GETS RESTRICTED TO THE EXTENT OF DEDUCTIBILITY AS PER THE PROVISION S OF THE ACT. THE NUTSHELL IS THAT IF THERE IS NO RESTRICTIVE CLAUSE IN THE TREATY, THEN THE EXPENDITURE INCURRED FOR THE PURPOSES OF THE BUSINE SS OF PERMANENT ESTABLISHMENT HAS TO BE ALLOWED IN FULL. IF, HOWEV ER, THERE IS A RESTRICTIVE CLAUSE IN THE TREATY, THEN THE OTHERWIS E FULL DEDUCTIBILITY GETS REDUCED IN ACCORDANCE WITH THE PROVISION OF TH E ACT. 4.14. IT IS PERTINENT TO NOTE THAT WE ARE DE ALING WITH THE INDO- MAURITIUS DTA. AS CAN BE SEEN FROM THE PHRASEOLOGY OF PARA 3 OF ARTICLE 7 OF THE DTA, REPRODUCED ABOVE, THAT THERE IS NO RESTRICTIVE CLAUSE THEREIN. IT INDICATES THAT BOTH THE COUNTRIE S HAVE DECIDED TO ALLOW EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS OF THE PERMANENT ESTABLISHMENT IN FULL, WITHOUT ANY LIMIT AS MAY BE SET OUT IN SECTIONS OF THE ACT. SO LONG AS AN EXPENSE IS INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE PERMANENT ESTABLISHMENT, THE SAME H AS TO BE ALLOWED AS DEDUCTION IN FULL AS PER THE PRESCRIPTION OF ART ICLE 7(3). THE ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 12 ABSENCE OF THE RESTRICTIVE CLAUSE IN PARA 3 OF ARTI CLE 7 MAKES IT ABUNDANTLY CLEAR THAT ANY EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS OF THE PERMANENT ESTABLISHMENT DESERVES TO BE ALLOWED AS DEDUCTION IN ENTIRETY. AS WE ARE PRESENTLY COMPUTI NG THE BUSINESS PROFITS OF THE ASSESSEE FROM THE OPERATIONS CARRIED OUT IN INDIA THROUGH ITS PERMANENT ESTABLISHMENT, ALL THE EXPENS ES SO INCURRED INCLUDING THE BONUS QUALIFY FOR DEDUCTION IN ENTIRE TY. IT IS NOTICED THAT BUT FOR SECTION 43B, THE ENTIRE AMOUNT OF BONUS WOU LD HAVE BEEN ALLOWED AS DEDUCTION. SECTION 43B HAS PLACED A LIM IT ON THE OTHERWISE FULL DEDUCTIBILITY OF BONUS EXPENDITURE T O THE AMOUNT ACTUALLY PAID ON OR BEFORE THE DUE DATE OF FILING T HE RETURN. PRIOR TO THE INSERTION OF SECTION 43B, THE ENTIRE AMOUNT OF BONUS WAS ALLOWED AS DEDUCTION UNDER THE MERCANTILE SYSTEM OF ACCOUNT ING ON THE PRINCIPLE OF INCURRING LIABILITY IN RESPECT OF SUCH BONUS IRRESPECTIVE OF ITS PAYMENT. IT IS NOT THE CASE OF THE DEPARTMENT T HAT THE ASSESSEE DID NOT INCUR LIABILITY IN RESPECT OF SUCH BONUS EXPEND ITURE. THE ASSESSEE HAS INCURRED THIS EXPENDITURE AND IT IS ONLY THE PA YMENT PART WHICH IS DELAYED FOR THE TIME BEING. THE OTHERWISE INCURRING OF SUCH EXPENDITURE AND THE CONSEQUENT ALLOWABILITY OF DED UCTION IS NOT IN DISPUTE. AS WE ARE DEALING WITH THE INDO-MAURITIUS DTA, WHICH DOES NOT EXPRESSLY CONTAIN ANY RESTRICTIVE CLAUSE I N THIS REGARD, CONTRARY TO THE PRESENCE OF SUCH CLAUSE IN CERTAIN CONVENTIONS INCLUDING INDO-US DTAA, IT BECOMES PERCEPTIBLE THAT EX FACIE RESTRICTIVE PROVISIONS OF THE ACT INCLUDING SECTION 43B CANNOT BE READ INTO ARTICLE 7. ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 13 4.15. NOW WE WILL ESPOUSE THE CONTENTION OF THE LE ARNED DR THAT THE PRESENCE OF SECTION 43B OF THE ACT SHOULD BE INFERRED BY VIRTUE OF THE ARTICLE 3(2) AND ARTICLE 23(1) OF THE DTA. IT IS OBSERVED THAT ARTICLE 3 IS A DEFINITION ARTICLE WHI CH INCORPORATES DEFINITIONS OF VARIOUS TERMS USED IN THE DTA. PARA 1 OF ARTICLE 3 DEALS WITH CERTAIN SPECIFIC TERMS WHICH HAVE BEEN E XPRESSLY DEFINED FOR THE PURPOSE OF DTA. PARA 2 OF ARTICLE 3 PROVIDE S THAT : IN THE APPLICATION OF THE PROVISIONS OF THIS CONVENTION BY THE CONTRACTING STATE, ANY TERM NOT DEFINED THEREIN SHALL, UNLESS T HE CONTEXT OTHERWISE REQUIRES, HAVE THE MEANING WHICH IT HAS UNDER THE L AWS IN FORCE OF THAT CONTRACTING STATE RELATING TO THE AREAS WHICH ARE THE SUBJECT OF THIS CONVENTION . A CURSORY LOOK AT PARA 2 OF ARTICLE 3 IN JUXTAPOSITION TO PARA 1 OF THE SAME ARTICLE DIVULGE S THAT THE TERMS WHICH HAVE BEEN DEFINED IN PARA 1 OF ARTICLE 3 OF T HE DTA SHALL HAVE THE MEANING WHICH HAS BEEN SPECIFICALLY GIVEN AND A NY OTHER TERM, WHICH HAS NOT BEEN SPECIFICALLY DEFINED IN PARA 1 S HALL, UNLESS THE CONTEXT OTHERWISE REFERS, WILL HAVE THE SAME MEANIN G AS IS THERE UNDER THE DOMESTIC LAW. IT IS TRITE THAT A DEFINITI ON PROVISION IS ORDINARILY DIFFERENT FROM A SUBSTANTIVE OR MACHINER Y PROVISION. WHEREAS, ARTICLE 3 IS ONLY A DEFINITION CLAUSE, PARA 1 OF ARTICLE 7 IS A SUBSTANTIVE CLAUSE AND PARA 3 OF ARTICLE 7 IS A MAC HINERY CLAUSE. WE ARE UNABLE TO APPRECIATE AS TO HOW ARTICLE 3(2) HEL PS THE REVENUE IN IMPORTING THE MANDATE OF SECTION 43B IN ARTICLE 7(3 ). SECTION 43B IS A SECTION PROVIDING THAT THE DEDUCTION IN RESPECT O F EXPENSES, ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 14 MENTIONED IN CLAUSES (A) TO (F), SHALL BE ALLOWED O NLY IN COMPUTING THE INCOME REFERRED TO SECTION 28 OF THE PREVIOUS Y EAR IN WHICH SUCH SUM IS ACTUALLY PAID OR IS PAID BEFORE THE DUE DATE OF FILING RETURN AS PER SECTION 139(1) OF THE ACT. IT IS PALPABLE THAT THIS SECTION DOES NOT DEFINE ANY TERM, THE MEANING OF WHICH, IN THE ABSEN CE OF ANY SPECIFIC PROVISION IN PARA 1 OF ARTICLE 3, CAN BE LIFTED IN THE DTA THROUGH ARTICLE 3(2). CLEARLY THE DISALLOWANCE OF BONUS AS PER SECTION 43B, CANNOT BE CHARACTERIZED AS ANY TERM NOT DEFINED A S PER ARTICLE 3(2). IN OUR CONSIDERED OPINION THE CONTENTION RAISED ON BEHALF OF THE REVENUE THAT SECTION 43B SHOULD BE READ INTO ARTICL E 7 BY MEANS OF ARTICLE 3(2), DESERVES THE FATE OF REJECTION. 4.16. THE LEARNED DEPARTMENTAL REPRESENTATIVE THEN FOCUSED HIS ATTENTION ON PARA 1 OF ARTICLE 23 TO BOLSTER HIS SU BMISSION THAT THE RESTRICTION U/S 43B SHOULD BE READ IN TO ARTICLE 7( 3). PARA 1 OF ARTICLE 23 PROVIDES THAT : THE LAWS IN FORCE IN EITHER OF THE CONTRACTING STATES SHALL CONTINUE TO GOVERN THE TAXATION OF INC OME IN THE RESPECTIVE CONTRACTING STATES EXCEPT WHERE PROVISIO NS TO THE CONTRARY ARE MADE IN THIS CONVENTION . THE FIRST PART OF PARA 1 OF ARTICLE 23 MAKES OUT A GENERAL RULE THAT IF INCOME OF THE PERM ANENT ESTABLISHMENT IS TO BE COMPUTED IN INDIA, THEN THE PROVISIONS OF THE ACT SHALL GOVERN THE TAXATION OF INCOME IN INDIA. H OWEVER, THE SECOND PART OF PARA 1 OF ARTICLE 23 CONTAINS A RI DER, WHICH MAKES THE OPERATION OF THE FIRST PART OF PARA 1 OF ARTICLE 23 SUBJECT TO THE FULFILLMENT OF SUCH STIPULATION. THE WORD EXCEPT IS THE DIVIDING ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 15 POINT BETWEEN THE MAIN PROVISION AND THE QUALIFICAT ION PART. THE PORTION STARTING THEREAFTER ENUMERATES THE QUALIFIC ATION, WHICH IS : `WHERE PROVISIONS TO THE CONTRARY ARE MADE IN THIS CONVENTION. WHEN WE READ FULL TEXT OF PARA 1 OF ARTICLE 23, IT I S AMPLY BORNE OUT THAT IF THERE IS SOME PROVISION IN THE DTA CONTRARY TO THE DOMESTIC LAW, THEN IT IS THE PROVISION OF THE DTA WHICH SHAL L PREVAIL. THUS THE GENERAL RULE CONTAINED IN THE FIRST PART OF PARA 1 OF ARTICLE 23, BEING THE APPLICABILITY OF THE DOMESTIC LAW, HAS BEEN ECL IPSED BY ANY PROVISION TO THE CONTRARY IN THE DTA. IN CASE THERE IS NO CONTRARY PROVISION IN THE TREATY, THEN IT IS THE DOMESTIC LA W WHICH SHALL APPLY. IF HOWEVER, THERE IS SOME PROVISION IN THE DTA CONT RARY TO THE DOMESTIC LAW THEN IT IS SUCH CONTRARY PROVISION OF THE DTA WHICH SHALL OVERRIDE THE PROVISION IN THE DOMESTIC LAW IN THE COMPUTATION OF INCOME AS PER THE DTA. 4.17. WITH THIS UNDERSTANDING WE WILL PROCEED TO VE T THE CONTENTION RAISED BY THE LEARNED DEPARTMENTAL REPRE SENTATIVE THAT SINCE THERE IS A PRECISE PROVISION OF SECTION 43B U NDER THE ACT, WHICH LIMITS THE DEDUCTIBILITY OF THE SPECIFIED EXPENSES, THIS PROVISION WILL APPLY BECAUSE THERE IS NO SUCH CONTRARY PROVISION I N THE DTA. 4.18. IN ORDER TO APPRECIATE THIS CONTENTI ON OF THE LD. DR IN RIGHT PERSPECTIVE, IT IS OF PARAMOUNT IMPORTANCE TO NOTE THE SCHEME OF ARTICLE 7. FIRST PARA, IN SO FAR AS WE ARE CONCERNE D, PROVIDES FOR TAXING THE INCOME OF THE PE OF A FOREIGN BANK HAVIN G BRANCH IN INDIA, ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 16 WHICH CONSTITUTES ITS PE. SECOND PARA MANDATES THE ATTRIBUTION OF PROFITS TO THE INDIAN PE BY CONSIDERING SUCH INDIAN BRANCH AS INDEPENDENT OF ITS GENERAL ENTERPRISE. IT MEANS TH AT FOR THE PURPOSES OF DETERMINING THE PROFIT ATTRIBUTABLE TO PE, ALL I TS TRANSACTIONS EVEN WITH THE HEAD OFFICE OR ITS OTHER BRANCHES ARE TO B E CONSIDERED AS DONE WITH OUTSIDERS UNLESS OTHERWISE EXPRESSLY PROV IDED. PARA 3 OF ARTICLE 7 PROVIDES FOR THE DEDUCTIBILITY OF EXPENSE S INCURRED FOR THE PURPOSE OF BUSINESS OF PERMANENT ESTABLISHMENT. TH US THE MANDATE OF ARTICLE 7(3) IS TO ALLOW DEDUCTION FOR EXPENSES. IT DOES NOT EXCLUSIVELY DEAL WITH NON-DEDUCTIBILITY OF EXPENSES INDEPENDENT OF ANY SEPARATE PROVISION DEALING WITH THE ALLOWABILIT Y OF EXPENSES. CONSEQUENTLY IT FOLLOWS THAT PARA 3 OF ARTICLE 7 IS BASICALLY AN ENABLING PROVISION FOR GRANTING DEDUCTION OF EXPENS ES AND NOT A DISABLING PROVISION FOR RESTRICTING THE OTHERWISE A LLOWABLE DEDUCTIONS. THUS PARA 3 OF ARTICLE 7 IS A SPECIFIC PROVISION GO VERNING THE DEDUCTIBILITY OF EXPENSES AS PER THE DTA. 4.19. SECTION 29 OF THE ACT PROVIDES THAT TH E INCOME REFERRED TO IN SECTION 28 SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTIONS 30 TO 43D. THERE ARE VARIOUS SECTIONS UNDER CHAPTER IV-D WHICH GRANT DEDUCTIONS FOR EXPENSES AN D ALLOWANCES, SUCH AS SECTIONS 30, 31, 32 AND 36. IN THE LIKE MA NNER, THERE ARE CERTAIN SECTIONS, WHICH RESTRICT THE OTHERWISE ALLO WABILITY OF DEDUCTIONS, SUCH AS SECTIONS 40, 43B, 44C. THUS, W HILE COMPUTING ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 17 INCOME UNDER THE HEAD `PROFITS AND GAINS OF BUSINES S OR PROFESSION, WHAT IS REQUIRED TO BE DONE IS TO ALLOW DEDUCTION F OR EXPENSES UNDER THE RELEVANT SECTIONS ONLY TO THE EXTENT IT IS NOT BARRED BY THE OPERATION OF THE LATER SECTIONS SUCH AS 30, 43B AND 44C. RESULTANTLY, SECTION 43B NEEDS TO BE READ IN CONJUNCTION WITH TH E OTHER RELEVANT SECTIONS PROVIDING FOR THE DEDUCTION OF EXPENSES AS ENUMERATED IN CLAUSES (A) TO (F) OF SECTION 43B. FOR EXAMPLE, SE CTION 36(1)(III) PROVIDES DEDUCTION OF INTEREST ON CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS. SECTION 43B(D) PROVIDES A RESTRICTION ON THE OTHERWISE DEDUCTIBILITY OF INTEREST U/S 36(1)(III), IF SUCH INTEREST IS ON ANY LOAN OR BORROWING MADE FROM THE PUBLIC FINANCIAL INSTITU TIONS ETC. AND SUCH INTEREST IS NOT PAID BEFORE THE DUE DATE APPLICABLE FOR FILING THE RETURN OF INCOME U/S 139(1). WHEN WE READ BOTH THESE PROVIS IONS IN UNISON WHAT FOLLOWS IS THAT IT IS THE QUESTION OF ALLOWING DEDUCTION FOR INTEREST ON BORROWINGS BUT TO THE EXTENT IT IS PAID BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME. REVERTING TO OUR IS SUE, IT IS FOUND THAT THE DEDUCTIONS OF EXPENSES ARE TO BE REGULATED AS P ER THE RESTRICTIONS CONTAINED IN RELEVANT SECTIONS. THUS, IF ONE HAS T O VIEW THESE SECTIONS ON A WHOLESOME BASIS AT MACRO LEVEL, WHAT EMERGES I S THAT THESE ARE MEANT FOR GRANTING DEDUCTION FOR EXPENSES TO THE PE RMISSIBLE EXTENT. 4.20. THE NATURAL COROLLARY WHICH FOLLOWS FROM THE ABOVE DISCUSSION IS THAT THE ACT ENVISAGES DEDUCTIONS FOR EXPENSES WITH SOME RESTRICTIONS. ON THE OTHER HAND, PARA 3 OF ART ICLE 7 THE DTA IS A ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 18 SPECIFIC PROVISION GOVERNING THE DEDUCTIBILITY OF E XPENSES WITHOUT ANY RESTRICTION. IN BOTH THE CASES, THAT IS, UND ER THE ACT AS WELL AS THE DTA, THE SUBJECT MATTER UNDER CONSIDERATION IS SAME, BEING, THE GRANTING OF DEDUCTIONS IN THE COMPUTATION OF BUSINE SS PROFITS OF THE PERMANENT ESTABLISHMENT OF A FOREIGN ENTERPRISE. WH EN THERE IS A SPECIFIC PROVISION AS PER ARTICLE 7(3) OF THE DTA P ROVIDING FOR THE DEDUCTIBILITY OF ALL EXPENSES INCURRED FOR THE PURP OSE OF PERMANENT ESTABLISHMENT, WE FAIL TO COMPREHEND AS TO HOW ART ICLE 23(1) CAN BE APPLIED TO INVOKE DISALLOWANCE U/S 43B. THIS CONTEN TION OF THE LD. DR, BEING DEVOID OF ANY MERIT, IS THUS JETTISONED. 4.21. WE CAN SUPPORT OUR ABOVE CONCLUSION FROM ONE MORE ANGLE. IF, FOR A MOMENT, WE ACCEPT THE CONTENTION O F THE LD. DR THAT ARTICLE 23(1) IS AN AUTHORITY FOR IMPORTING THE PRO VISIONS CONTAINING DISALLOWANCES UNDER THE ACT, IN THE DTA, THEN ABSUR D RESULTS WILL FOLLOW. WE HAVE NOTICED SUPRA THAT MANY TREATIES INCLUDING INDO-US DTAA CONTAIN A RESTRICTIVE CLAUSE IN PARA 3 OF ART ICLE 7 TO LIMIT THE DEDUCTIBILITY OF EXPENSES IN ACCORDANCE WITH AND SU BJECT TO THE PROVISIONS OF TAX LAWS OF THAT STATE. IT IS ONLY IN SUCH CASES THAT THE RESTRICTIONS PROVIDED ON THE DEDUCTIBILITY OF EXP ENSES AS PER THE PROVISIONS OF THE DOMESTIC LAW, APPLY EVEN WHILE COMPUTING THE BUSINESS PROFITS AS PER THE DTA. IN THE OTHERWISE SITUATION, THAT IS, IN THE CASE OF A TREATY NOT CONTAINING SUCH RESTRICTI VE CLAUSE, THE DEDUCTIBILITY OF EXPENSES IS GOVERNED BY THE FIRST PART OF PARA 3 OF ARTICLE 7, WHICH SANCTIONS THE GRANT OF DEDUCTION O F EXPENSES TO THE ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 19 FULL EXTENT IN SO FAR AS THESE ARE INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PE. THE ACCEPTANCE OF THIS CONTENTI ON OF THE LD. DR WILL OBLITERATE THE DIFFERENCE IN THE LANGUAGE OF T REATIES CONTAINING AND NOT CONTAINING SUCH RESTRICTIVE CLAUSE, THEREBY RENDERING THE RESTRICTIVE CLAUSE IN PARA 3 OF ARTICLE 7 IN SOME O F THE TREATIES, AS REDUNDANT. OBVIOUSLY, IT CAN NOT BE THE CASE. AS S UCH, WE TURN DOWN THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESEN TATIVE THAT PARA 1 OF ARTICLE 23 IMPLIEDLY SANCTIONS THE INVOKING OF S ECTION 43B, AS IN OUR CONSIDERED OPINION THERE IS AN EXPRESS CONTRAR Y PROVISION IN ARTICLE 7(3) PROVIDING FOR DEDUCTION OF ALL EXPENS ES INCURRED FOR THE PURPOSE OF BUSINESS OF PERMANENT ESTABLISHMENT. BE FORE DISASSOCIATING WITH THIS ISSUE, WE CONSIDER IT OUR DUTY TO RECORD THAT BOTH THE SIDES HAVE RELIED ON TRIBUNAL ORDERS SUPPO RTING THEIR RESPECTIVE STANDS. IN FACT, THESE ORDERS, DO FORTIF Y THE VIEWPOINT OF THE RIVAL PARTIES. WE HAVE DESISTED FROM DEALING WITH S UCH CONTRADICTORY ORDERS BUT DECIDED THE EXTANT ISSUE ON WHAT WE PERC EIVE AS THE SIMPLE AND PLAIN INTERPRETATION OF THE RELEVANT ARTICLES. 4.22. IN VIEW OF THE FOREGOING DISCUSSION, WE HOL D THAT NO DISALLOWANCE U/S 43B CAN BE MADE IN RESPECT OF THE BONUS UNPAID BEFORE THE DUE DATE OF FILING OF RETURN U/S 139(1) BECAUSE ARTICLE 7(3) EXPRESSLY PROVIDES FOR THE DEDUCTION OF ALL EXPENSE S INCURRED FOR THE PURPOSE OF THE BUSINESS OF PERMANENT ESTABLISHMENT. FURTHER ARTICLE 3(2) AND ARTICLE 23(1) DO NOT IMPLIEDLY SANCTION TH E INVOKING OF ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 20 SECTION 43B IN ARTICLE 7(3) OF THE DTA. EX CONSEQUENTI , THE GROUND RAISED BY THE ASSESSEE IN THIS REGARD IS ALLOWED. 5.1. THE ONLY GROUND IN THE REVENUES APPEAL IS AGA INST THE DELETION OF DISALLOWANCE U/S 14A. FACTUAL MATRIX OF THIS GRO UND IS THAT THE ASSESSEE INVESTED `10 CRORE IN TAX FREE BONDS AND C LAIMED EXEMPTION IN RESPECT OF INTEREST FROM THE SAME. FROM THE COPY OF BANK ACCOUNT WITH THE RESERVE BANK OF INDIA, IT WAS OBSERVED BY THE AO THAT THE ASSESSEE BORROWED FUNDS TO THE TUNE OF ` 15 CRORE ON 12.11.1998 AND MADE INVESTMENT IN TAX FREE BONDS FROM SUCH BORROWE D AMOUNT. AS THE ASSESSEE HAD NOT OFFERED ANY DISALLOWANCE IN RE SPECT OF SUCH EXEMPT INCOME, THE AO CALLED UPON IT TO EXPLAIN AS TO WHY DISALLOWANCE U/S 14A BE NOT MADE TOWARDS PROPORTION ATE INTEREST EXPENDITURE. THE ASSESSEE REPLIED THAT THERE WERE D AILY BORROWINGS/DEPOSITS FROM/TO OTHER BANKS TO MAINTAI N THE NECESSARY CASH RESERVES WITH THE RBI AND HENCE THE PAYMENT FO R INVESTMENT IN TAX FREE BONDS WAS NOT LIABLE BE CO-RELATED WITH T HE BORROWINGS FROM THE RBI. IT WAS ALSO STATED THAT THE FUNDS BORROWED ON 12.11.1998 WERE UTILIZED FOR MAKING INVESTMENT IN TAX FREE BON DS ON THE SAME DATE BUT WERE REPAID ON THE NEXT DAY I.E. 13.11.199 8. WITHOUT PREJUDICE TO ITS MAIN CLAIM OF NO DISALLOWANCE U/S 14A, THE ASSESSEE STATED THAT IF ANY INTEREST WAS TO BE DISALLOWED, T HE SAME SHOULD BE RESTRICTED TO ONE DAY ALONE. NOT CONVINCED WITH THE ASSESSEES SUBMISSIONS, THE ASSESSING OFFICER MADE DISALLOWAN CE U/S 14A TO THE TUNE OF ` 34,76,712 BY APPLYING RATE OF 9% AS INTEREST ON TH E ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 21 BORROWED FUNDS TO THE EXTENT OF INVESTMENT IN TAX F REE BONDS. THE ASSESSEE FILED BEFORE THE LEARNED CIT(A), ITS FUNDS FLOW STATEMENT AS AT THE YEAR END, TO DEMONSTRATE THAT IT HAD SUFFIC IENT INTEREST FREE FUNDS AVAILABLE WITH IT AND HENCE NO DISALLOWANCE O F INTEREST WAS CALLED FOR. THE LD. CIT(A) CONCURRED WITH THE SUBMI SSIONS ADVANCED ON BEHALF OF THE ASSESSEE AND DELETED THE DISALLOWA NCE MADE BY THE A.O. U/S 14A. 5.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. IT IS NOT DISPUTED THA T THE ASSESSEE INVESTED ` 10 CRORE IN TAX FREE BONDS FROM THE BORROWING MADE BY IT FROM THE RBI ON 12.11.1998. IT IS EQUALLY NOT DISPU TED THAT THE ASSESSEE HAS PAID INTEREST ON SUCH BORROWINGS MADE FROM THE RBI. IN SUCH CIRCUMSTANCES, THE QUESTION ARISES AS TO WHET HER ANY DISALLOWANCE OF INTEREST CAN BE MADE WHEN THERE IS A DIRECT NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENT IN TAX FR EE BONDS. 5.3. THE LEARNED AR VEHEMENTLY ARGUED THAT THE D ECISION OF THE LEARNED CIT(A) IN DELETING THE DISALLOWANCE U/S 14A SHOULD BE UPHELD FOR THE REASON THAT ARTICLE 7(3) DOES NOT PR OVIDE FOR LIMITING THE DEDUCTIBILITY OF EXPENSES AS PER THE PROVISIONS OF THE ACT. IN THAT VIEW OF THE MATTER, IT WAS CONTENDED THAT THE PROVI SIONS OF SECTION 14A ALSO LIMITING THE DEDUCTIBILITY OF EXPENSES, C ANNOT BE APPLIED. ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 22 5.4. IT IS CLEAR FROM THE LANGUAGE OF SECTION 14 A THAT IT PROVIDES FOR DISALLOWANCE OF EXPENSES INCURRED BY T HE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. OBVIOUSLY, IF INVESTMENT IS MADE IN TAX FR EE SECURITIES, INTEREST THEREON WILL BE EXEMPT FROM TAX. THE PROVI SIONS OF SECTION 14A WILL SQUARELY APPLY TO MAKE DISALLOWANCE IN RES PECT OF EXPENSES INCURRED IN RELATION TO SUCH EXEMPT INCOME AS HAS B EEN HELD BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT [(2010) 328 ITR 81 (BOM)] . THIS IS THE POSITION UNDER THE ACT. 5.5. THE LEARNED AR HAS MADE OUT A CASE FOR NO DISALLOWANCE U/S 14A IN THE LIGHT OF THE ARICLE 7(3) OF THE DTA. WE HAVE NOTICED ABOVE THAT SECTION 90(2) OF THE ACT PROVIDES THAT W HERE A DTA HAS BEEN SIGNED FOR GRANTING RELIEF OF TAX THEN IN RELATION TO THE ASSESSEE TO WHOM SUCH AGREEMENT APPLIES, THE PROVISIONS OF T HIS ACT SHALL APPLY TO THE EXTENT THEY ARE MORE BENEFICIAL TO THA T ASSESSEE . IN OTHER WORDS, IF THE ACT CHARGES A PARTICULAR ITEM O F INCOME TO TAX AND THE DTAA PROVIDES EXEMPTION TO SUCH ITEM OF INCOME, IT IS THE DTAA WHICH SHALL PREVAIL. TO PUT IT IN SIMPLE WORDS , THE DTAA CAN PROVIDE RELIEF ONLY IF THE ACT FAVOURS TAXABILITY O F AN ITEM OF INCOME OR DISFAVOURS THE DEDUCTIBILITY OF ANY EXPENDITURE. UNLESS AN ITEM OF INCOME IS TAXABLE UNDER THE ACT, THERE CAN BE NO QU ESTION OF PRESSING INTO SERVICE THE PROVISIONS OF THE DTAA BECAUSE THE DTAA CAN INTERVENE ONLY FOR PROVIDING RELIEF. IT CANNOT BE T HE OTHER WAY. IF AN ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 23 ITEM OF INCOME IS EXEMPT UNDER THE PROVISIONS OF TH E ACT, THE DTAA CANNOT EXPOSE IT TO TAX. OPERATION OF THE DTAA CEA SES IF AN ITEM OF INCOME IS OTHERWISE EXEMPT UNDER THE PROVISIONS OF THE ACT. IT IS SELF EVIDENT THAT WHEN AN ITEM OF INCOME IS NOT CHARGEAB LE UNDER THE ACT THAT CANNOT BECOME THE SUBJECT MATTER OF CONSIDERAT ION UNDER THE DTAA AS WELL. ONLY SUCH ITEMS OF INCOME CAN COME W ITHIN THE PURVIEW OF THE DTAA WHICH ARE OTHERWISE CHARGEABLE TO TAX AS PER THE ACT. 5.6. IT IS AXIOMATIC THAT IF AN ITEM OF INC OME IS EXEMPT AND GETS EXCLUDED AT THE VERY OUTSET FROM ENTERING INTO COMP UTATION OF TOTAL INCOME, ANY EXPENDITURE INCURRED IN RELATION TO SU CH INCOME SHALL ALSO MEET WITH THE SAME FATE. SUCH EXPENSE WILL ALS O NOT COME WITHIN THE AMBIT OF CONSIDERATION ZONE AS TO ITS DEDUCTIBI LITY OR OTHERWISE. BUSINESS EXPENSES GO HAND IN HAND WITH THE BUSINESS INCOME AS LEGAL SPOUSE. BOTH ARE TO BE VIEWED TOGETHER AND NOT DIV ORCED FROM EACH OTHER. BUSINESS INCOME CAN BE DETERMINED AFTER DED UCTING BUSINESS EXPENSES. IF WE COMPARTMENTALIZE BUSINESS INCOME A ND EXPENSES INTO TAXABLE AND EXEMPT PARTS, IT IS BUT NATURAL T HAT ONLY THAT MUCH OF THE BUSINESS EXPENDITURE CAN BE ALLOWED AS DEDUCTIO N FROM THE TAXABLE INCOME AS HAS BEEN INCURRED IN RELATION TO SUCH TAXABLE INCOME. BUSINESS EXPENDITURE INCURRED FOR EARNING T HE EXEMPT BUSINESS INCOME SHALL CALL FOR DEDUCTION ONLY AGAIN ST THE EXEMPT BUSINESS INCOME. IT IS QUITE ELEMENTARY THAT, UNLES S EXPRESSLY PROVIDED OTHERWISE, EXEMPTION IS ALWAYS IN RESPECT OF INCOME AND ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 24 NOT THE GROSS RECEIPT. IT IS THE EXCESS OF GROSS R ECEIPT OVER THE EXPENDITURE FOR EARNING SUCH INCOME, WHICH QUALIFIE S FOR EXEMPTION. THE CRUX IS THAT IF ANY BUSINESS INCOME IS EXEMPT F ROM TAXATION UNDER THE ACT, THE EXPENDITURE INCURRED IN RELATION TO SU CH INCOME SHALL ALSO STAND QUALIFY FOR REDUCTION AGAINST THE EXEMPT INCO ME AND NOT ANY TAXABLE INCOME. NEITHER SUCH EXEMPT INCOME NOR ANY EXPENDITURE INCURRED IN RELATION TO SUCH EXEMPT INCOME SHALL EN TER INTO THE COMPUTATION OF TAXABLE INCOME. 5.7. WE HAVE NOTICED ABOVE THAT A DTAA CAN ON LY CURE THE RIGOR OF THE ACT AND NOT CONVERT AN EXEMPT INCOME UNDER T HE ACT INTO A TAXABLE ONE. IF A PARTICULAR AMOUNT OF INCOME IS EXEMPT UNDER THE ACT, IT WILL CEASE TO FORM PART OF `BUSINESS PROFI TS OF THE ENTERPRISE UNDER ARTICLE 7. ONCE A PARTICULAR ITEM OF INCOME D OES NOT ITSELF CONSTITUTE BUSINESS PROFIT AS PER ARTICLE 7 BECAUS E OF ITS EXEMPTION UNDER THE ACT, THERE CAN BE NO QUESTION OF ALLOWING ANY DEDUCTION FOR AN EXPENDITURE INCURRED IN RELATION TO SUCH INCOME AGAINST THE OTHER TAXABLE BUSINESS INCOME. TO PUT IT IN SIMPLE WORDS , WHEN THE EXEMPT INCOME DOES NOT ENTER INTO THE PROCESS OF DE TERMINATION OF `BUSINESS PROFITS OF THE PERMANENT ESTABLISHMENT, THE EXPENSES INCURRED FOR EARNING SUCH INCOME ALSO DO NOT EQUALL Y QUALIFY FOR DEDUCTION. IF SUCH EXPENSES HAVE BEEN INCLUDED IN T HE TOTAL BUSINESS EXPENSES CLAIMED AS DEDUCTION UNDER ARTICLE 7(3), T HEN THESE ARE REQUIRED TO BE REDUCED ACCORDINGLY, AS INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE `BUSINESS PR OFITS. ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 2 5 5.8. THE LD. AR PROJECTED HIS STAND POINT BY CONTENDING THAT IT IS BECAUSE OF THE LANGUAGE OF ARTICLE 7(3) OF THE DTA NOT CONTAINING ANY RESTRICTIVE CLAUSE, THAT NO DISALLOWANCE CAN B E MADE U/S 14A AS IS THE CASE IN RESPECT OF DISALLOWANCES UNDER SECTI ONS 43B AND 44C OF THE ACT. IN A WAY, HE TRIED TO DRIVE HOME ANALOGY FROM SECTION 43B FOR PUTTING SECTION 14A ON THE SAME PLATFORM. 5.9. IT IS IMPORTANT TO HIGHLIGHT THE FUNDAMEN TAL DISTINCTION BETWEEN DISALLOWANCE UNDER SECTION 14A ON ONE HAND AND OTHER SECTIONS PROVIDING FOR DISALLOWANCES, SUCH AS SECTI ON 37, 40, 43B AND 44C ON THE OTHER. CERTAIN SUB-SECTIONS OF SECTION 37, PRIOR TO THEIR OMISSION, PROVIDED FOR DISALLOWANCE OF EXPENSES TO SOME EXTENT. FOR EXAMPLE, THE LIMIT ON THE ALLOWABILITY OF ENTERTA INMENT EXPENSES WAS PROVIDED IN SUB-SECTION (2) OF SECTION 37. SEC TION 40(A)(I)PROVIDES FOR DISALLOWANCE OF ANY EXPENDITUR E ON WHICH TAX IS DEDUCTIBLE BUT THE ASSESSEE FAILED TO DEDUCT OR DEP OSIT SUCH TAX AFTER DEDUCTION. SECTION 43B PROVIDES FOR DISALLOWANCE OF CERTAIN EXPENSES WHICH ARE DEDUCTIBLE ON PAYMENT BASIS ONLY. SECTIO N 44C REFERS TO RESTRICTING THE DEDUCTION OF HEAD OFFICE EXPENSES T O 5% OF THE ADJUSTED TOTAL INCOME. THERE ARE CERTAIN DISALLOWAN CES SET OUT IN SECTION 40, LIKE PAYMENT OF INCOME TAX ETC., WHIC H BY THEIR VERY NATURE, ARE NOT EXPENSE. THUS IT CAN BE NOTICED TH AT A COMMON THREAD PERMEATING THROUGH ALL SUCH SECTIONS IS THAT DISALL OWANCE HAS BEEN PROVIDED IN RESPECT OF EXPENSES WHICH ARE OTHERWISE DEDUCTIBLE. IT IS ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 26 BECAUSE OF SUCH LIMIT OR BREACH OF STIPULATION THAT THE OTHERWISE DEDUCTIBLE EXPENSE BECOMES NON-DEDUCTIBLE OR DEDUCT IBLE AT A LOWER LEVEL. WE FIND THAT POSITION IS QUITE DIFFERENT IN S O FAR AS SECTION 14A IS CONCERNED. THIS SECTION CONTAINS A FUNDAMENTAL PRINCIPLE THAT ANY EXPENDITURE INCURRED IN RELATION TO AN INCOME NOT I NCLUDIBLE IN TOTAL INCOME, SHALL NOT BE ALLOWED AS DEDUCTION. THIS SEC TION, AT THE VERY THRESHOLD ITSELF, SNATCHES AWAY THE DEDUCTIBILITY OF EXPENSES INCURRED IN RELATION TO AN EXEMPT INCOME. IT IS NOT A CASE THAT THE EXPENSES ARE OTHERWISE DEDUCTIBLE BUT HAVE BECOME NON-DEDUCTIBLE DUE TO THE OPERATION OF SECTION 14A. RATHER, THE EXPENSES DO N OT QUALIFY FOR DEDUCTION AT THE VERY FIRST INSTANCE. THIS POSITI ON U/S 14A IS IN SHARP CONTRAST TO OTHER SECTIONS AS DISCUSSED ABOVE , SUCH AS 37, 40, 43, AND 44C. WHEREAS THESE LATER SECTIONS APPLY TO T AKE AWAY THE DEDUCTION OF EXPENSES, WHICH ARE OTHERWISE ALLOWABL E AND HAVE ENTERED INTO THE BASKET OF DEDUCTIBLE EXPENSES , S ECTION 14A RESTRICTS THE ENTRY OF CERTAIN EXPENSES INTO THE BASKET OF DE DUCTIBLE EXPENSES. THIS IS THE UNDERLYING DISTINCTION BETWEEN SECTION 14A AND THE OTHER SET OF SECTIONS PROVIDING FOR DISALLOWANCE. FURTHE R, IT IS RELEVANT TO NOTE THE PLACE OF RESIDENCE OF SECTION 14A. UNLI KE THE SECTIONS PROVIDING FOR DISALLOWANCES AS DISCUSSED ABOVE FALL ING IN CHAPTER IV- D DEALING WITH THE INCOME FROM BUSINESS OR PROFESSI ON, SECTION 14A HAS BEEN PLACED IN CHAPTER IV ITSELF, NEXT TO SECTI ON 14, WHICH CLASSIFIES INCOME UNDER DIFFERENT HEADS OF INCOME. BECAUSE OF THIS BASIC PRINCIPLE OF NOT ALLOWING DEDUCTION OF ANY E XPENSE INCURRED IN RELATION TO AN EXEMPT INCOME ENSHRINED IN SECTION 1 4A, THE ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 27 DISTINCTION BETWEEN DISALLOWANCE UNDER THIS SECTION AND OTHER SPECIFIC SECTIONS AS DISCUSSED ABOVE, ASSUMES SIGNIFICANCE. IT IS THUS PATENT THAT THE SET OF SPECIFIC SECTIONS OF DISALLOWANCES STAND ON A DIFFERENT PEDESTAL FROM SECTION 14A. 5.10. AT THIS STAGE, IT MAY BE RELEVANT TO NO TE PARA 4 OF ARTICLE 7 AS PER WHICH : `NO PROFITS SHALL BE ATTRIBUTED TO A PERMANENT ESTABLISHMENT BY REASON OF THE MERE PURCHASE BY THA T PERMANENT ESTABLISHMENT OF GOODS OR MERCHANDISE FOR THE ENTER PRISE. AS PER THIS PARA, NO PROFITS CAN BE ATTRIBUTED TO A PE IN RESP ECT OF PURCHASE OF GOODS FOR THE GENERAL ENTERPRISE. THE PERTINENT QUE STION WHICH ARISES IS THAT WHEN NO PROFITS CAN BE ATTRIBUTED TO THE P E IN RESPECT OF SUCH PURCHASES, IS IT PERMISSIBLE TO INCLUDE EXPENSES I N RELATION TO SUCH PURCHASE IN THE TOTAL EXPENSES OF THE PE FOR CLAIMI NG DEDUCTION IN DETERMINATION OF ITS BUSINESS PROFITS? THE ANSWER IS OBVIOUSLY IN NEGATIVE. THE REASON FOR SUCH NEGATIVE ANSWER IS TH AT WHEN NO INCOME IN RESPECT OF SUCH PURCHASES CAN BE INCLUDED IN THE `BUSINESS PROFITS OF THE PE, THEN NATURALLY, NO EXPENSES IN RELATION TO SUCH PURCHASES CAN BE ALLOWED AS DEDUCTION IN COMPUTING THE BUSINESS PROFITS OF THE PE. THE SAME LOGIC APPLIES FOR NOT A LLOWING DEDUCTION FOR ANY EXPENSES IN RELATION TO AN INCOME, WHICH DO ES NOT CONSTITUTE PART OF THE `BUSINESS PROFITS. 5.11. IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF THE CONSIDERED OPINION THAT THE CONTENTION OF THE LEARNED AR ABOUT NO DISALLOWANCE ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 28 OF EXPENSES IN RELATION TO EXEMPT INCOME IS LIABLE TO BE REJECTED BECAUSE WHEN THE EXEMPT INCOME ITSELF DOES NOT FORM PART OF THE `BUSINESS PROFITS OF THE ASSESSEE, THERE CAN BE NO SCOPE FOR ALLOWING DEDUCTION OF EXPENSES INCURRED IN RELATION TO SUCH INCOME. WE ORDER ACCORDINGLY. AS THE INTEREST INCOME FROM TAX FREE B ONDS PER SE IS NOT INCLUDIBLE IN THE `BUSINESS PROFITS OF THE PERMANE NT ESTABLISHMENT AND FURTHER THE ASSESSEE HAS ALSO CLAIMED EXEMPTION IN THAT REGARD WHICH HAS BEEN RIGHTLY GRANTED AS WELL, THE EXPENS ES INCURRED IN RELATION TO SUCH INTEREST INCOME CANNOT EQUALLY BE ALLOWED AS DEDUCTION. 5.12. THE NEXT POINT URGED BY THE LEARNED AR WAS T HAT TAX FREE SECURITIES WERE HELD BY THE ASSESSEE AS STOCK-IN-TR ADE AND HENCE THE PROVISIONS OF SECTION 14A CANNOT APPLY TO DISALLOW ANY EXPENDITURE NOTWITHSTANDING THE FACT THAT THE INTEREST INCOME I S EXEMPT. WE FIND THAT SIMILAR CONTENTION WAS RAISED BEFORE THE MUMBA I BENCH OF THE TRIBUNAL IN THE CASE OF JCIT V. AMERICAN EXPRESS BANK LIMITED IN ITA NO. 5904/MUM/2000 FOR THE A.Y. 1997-98. IN THAT CASE THE ASSESSEE RELIED ON THE JUDGMENT OF THE HONBLE KER ALA HIGH COURT IN THE CASE OF CIT V. SMT.LEENA RAMACHANDRAN [(2011) 339 ITR 296 (KER.)] FOR RAISING A PROPOSITION THAT NO DISALLOWANCE CA N BE MADE U/S 14A BECAUSE THE SECURITIES WERE HELD AS INVESTM ENT. THE MUMBAI BENCH CONSIDERED THIS ISSUE AT LENGTH IN THE LIGHT OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE O F GODREJ & BOYCE MFG. CO. LTD. VS. DCIT [(2010) 328 ITR 81 (BOM)] . VIDE ITS ORDER ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 29 DATED AUGUST, 2012, THE TRIBUNAL HAS HELD IN THAT C ASE THAT DISALLOWANCE U/S 14A IS WARRANTED AS THE OPERATION OF SECTION 14A DOES NOT CEASES WHERE THE DIVIDEND INCOME IS ONLY I NCIDENTAL TO THE SHARES HELD AS STOCK IN TRADE. RESPECTFULLY FOLLOW ING THE RATIO DECIDENDI OF THIS PRECEDENT DE HORS SPECIFIC REFERENCE TO SECTION 14A, WE HOLD THAT THE EXPENSES INCURRED IN RELATI ON TO THE INCOME WHICH DOES NOT FORM PART OF `BUSINESS PROFITS CAN NOT BE ALLOWED AS DEDUCTION. THIS CONTENTION OF THE LEARNED AR IS ALS O REJECTED. 5.13. IT IS WORTHWHILE TO NOTE THAT THE AO MA DE A REFERENCE TO SECTION 14A FOR THE PURPOSES OF MAKING DISALLOWANCE OF INTEREST IN RELATION TO THE EXEMPT INTEREST INCOME FROM TAX FRE E SECURITIES. REFERENCE TO SUCH SECTION, WHILE CONSIDERING THE D ISALLOWANCE UNDER THE ACT IS FINE, BUT IN CONSIDERING THE COMPUTATION OF INCOME UNDER THE DTA, THE EPITOME OF SUCH REFERENCE IS TO BE CON SIDERED IN THE LIGHT OF DISCUSSION MADE IN PRECEDING PARAS, AS NOT ALLOWING ANY DEDUCTION FOR EXPENSES IN RELATION TO EXEMPT INCOME . SIMILAR WAS THE CONTENTION OF THE LD. DR IN SUPPORT TO THE GROUND C HALLENGING THE DELETION OF DISALLOWANCE OF EXPENSES IN RELATION TO EXEMPT INCOME ALBEIT IT HAS BEEN SYMBOLICALLY NARRATED WITH REFERENCE T O THE SAME PROVISION. BE THAT AS IT MAY IT IS A TRITE LAW THA T THERE CAN BE NO FETTERS ON THE POWER OF THE TRIBUNAL TO ALLOW OR DI SALLOW A CLAIM ON DIFFERENT PLEA. THE HONBLE SUPREME COURT IN CIT VS. MAHALAKSHMI TEXTILES MILLS LTD. (1967) 66 ITR 710 (SC) HAS HELD SO. THE HONBLE CALCUTTA HIGH COURT IN STEEL CONTAINERS LTD. VS. CIT (1978) 112 ITR ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 30 995 (CAL) HAS HELD THAT THE DISALLOWANCE OF EXPENSES BY TH E REVENUE UNDER ONE SECTION CAN BE UPHELD BY THE TRIB UNAL UNDER ANOTHER SECTION, IF IT IS SUSTAINABLE UNDER SUCH OT HER PROVISIONS. SIMILAR VIEW HAS BEEN EXPRESSED BY THE HONBLE DEL HI HIGH COURT IN CIT VS. JINDAL EQUIPMENTS (2010) 325 ITR 87 (DEL). IN VIEW OF THE FOREGOING DISCUSSION IT IS CLEAR THAT NO INFIRMITY CAN BE TRACED IN THE GROUND OF APPEAL OR THE ORDERS OF THE AUTHORITIES B ELOW IN SO FAR AS REFERENCE HAS BEEN MADE TO SECTION 14A IN THE CONTE XT OF THE DTA. IT IS SO FOR THE REASON THAT THE SPIRIT OF THE DISALLO WANCE IS ON ACCOUNT OF NOT ALLOWING ANY DEDUCTION FOR EXPENSES INCURRED I N RELATION TO EXEMPT INCOME, WHICH COINCIDES WITH THE INTENT AND THE LANGUAGE OF SECTION 14A. 5.14. LASTLY IT WAS ARGUED ON BEHALF OF THE ASSESS EE THAT IF AT ALL ANY DISALLOWANCE OF INTEREST WAS TO BE MADE, THAT S HOULD BE RESTRICTED TO INTEREST FOR ONE DAY ALONE AS THE AMOUNT BORROWE D FROM RESERVE BANK OF INDIA ON 12.11.1998 FOR PURCHASING TAX FREE BONDS WAS REPAID ON THE NEXT DAY I.E. 13.11.1998. SIMILAR CO NTENTION RAISED BEFORE THE ASSESSING OFFICER, WHO HAD THE BENEFIT O F THE STATEMENT OF BANK ACCOUNT FOR THE RELEVANT PERIOD, REMAINED UNCO NTROVERTED. IT IS FURTHER SEEN THAT THE AO HAS RESTRICTED DISALLOWANC E ONLY TO THE INTEREST EXPENDITURE AND NOT TO ANY OTHER ADMINISTR ATIVE OR MANAGEMENT EXPENSES INCURRED IN RELATION TO THE INC OME NOT CHARGEABLE TO TAX. IT IS BORNE OUT FROM THE IMPUGN ED ORDER THAT THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS AT ITS DISPOSAL APART FROM ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 31 SUFFICIENT NET PROFIT FROM BUSINESS OPERATIONS FOR THE YEAR. NO MATERIAL HAS BEEN BROUGHT OUT ON RECORD BY THE LD. DR TO SHOW THAT FINDING OF THE LD. CIT(A) IS INCORRECT. THIS FACTUA L SCENARIO BRINGS US TO A STAGE WHERE THE ASSESSEE DID BORROW INTEREST BEARING FUNDS FOR MAKING INVESTMENT IN TAX FREE BONDS AND REPAID SUCH LOAN OUT OF ITS OWN INTEREST FREE FUNDS ON THE NEXT DAY. THERE IS O BVIOUSLY A DIRECT NEXUS BETWEEN THE BORROWING OF INTEREST BEARING FUN DS AND MAKING OF INVESTMENT IN TAX FREE BONDS. THERE CAN BE NO DIS PUTE ON THE FACT THAT ONLY SUCH PART OF INTEREST CAN BE DISALLOWED W HICH HAS BEEN INCURRED IN RELATION TO THE INCOME NOT FORMING PART OF THE `BUSINESS PROFITS OF THE ASSESSEE AS PER ARTICLE 7 OF THE DT A. IN SUCH A CASE, THE DISALLOWANCE OF INTEREST IS DEFINITELY CALLED FOR BUT IT CANNOT EXCEED THE ACTUAL AMOUNT OF INTEREST PAID IN RESPEC T OF BORROWED FUNDS USED FOR THE PURPOSES OF MAKING INVESTMENT IN TAX FREE BONDS, WHICH IN THE PRESENT CASE IS ONLY ONE DAY. THE ASSE SSING OFFICER IS DIRECTED TO CALCULATE DISALLOWANCE ON ` 10 CRORE FOR ONE DAY AT THE RATE WHICH WAS CHARGED BY THE RBI ON THE LOAN ADVANCED T O THE ASSESSEE ON 12.11.1998. THIS WILL BE THE AMOUNT OF INTEREST PAID BY THE ASSESSEE IN RELATION TO TAX FREE INTEREST INCOME WH ICH IS NOT INCLUDED IN THE BUSINESS PROFITS AS PER ARTICLE 7 OF THE DTA , WARRANTING DISALLOWANCE IN THE COMPUTATION OF `BUSINESS PROFIT S. THE IMPUGNED ORDER IS MODIFIED ON THIS SCORE IN ABOVE TERMS. TH E GROUND TAKEN BY THE REVENUE IS PARTLY ALLOWED PRO TANTO . ITA NO.2254 & 3005/MUM/2005 M/S.STATE BANK OF MAURITIUS LTD. 32 6. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED AND THAT OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPO SES. ORDER PRONOUNCED ON THIS 03 RD DAY OF OCTOBER, 2012. !$ / 12* 3!)4 2 / 5 SD/- SD/- (AMIT SHUKLA) (R.S.SYAL) & ! & ! & ! & ! / JUDICIAL MEMBER ! ! ! ! / ACCOUNTANT MEMBER MUMBAI ; 3!) DATED : 03 RD OCTOBER, 2012. DEVDAS* !$ / -&#'6 76*# !$ / -&#'6 76*# !$ / -&#'6 76*# !$ / -&#'6 76*#/ COPY OF THE ORDER FORWARDED TO : 1. +, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. 8 () / THE CIT(A)-XXXI, MUMBAI. 4. 8 / CIT 5. 6;5 -&#&) , , / DR, ITAT, MUMBAI 6. 5< = / GUARD FILE. !$) !$) !$) !$) / BY ORDER, .6# -&# //TRUE COPY// > > > >/ // /? @ ? @ ? @ ? @ ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI