DDIT(I.T) 1(2), MUMBAI V. M/s. CREDIT AGRICOLE INDOSUEZ, MUMBAI

ITA 4965/MUM/2005

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 70665 (ITAT-MUMBAI)
• Duration Of Justice: 8 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 25-02-2013
• Assessment Year: 2001-2002
• Appeal Filed On: 11-07-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJAY SRI VASTAVA
• Assessee Lawyers: MADHUR AGARWAL
• Keywords: Business income; Depreciation; Double taxation relief; Opportunity of being heard; Earning of tax free income; Retrospective amendment; Permanent establishment; Question of law; Bad and doubtful debts
• Section: 90; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI . . , ! , ' # BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER . : 4295 / / 2005 A.Y. 2001-02 ITA NO. : 4295/MUM/2005 (ASSESSMENT YEAR: 2001-02) M/S CREDIT AGRICOLE INDOSUEZ ( NOW CALYON BANK ), 11 TH FLOOR, HOECHST HOUSE, NARIMAN POINT, MUMBAI .: PAN: AAACB 3537 A VS DDIT(IT)-1(2), R. NO. 117, 1 ST FLOOR, SCINDIA HOUSE, NARIMAN POINT, MUMBAI-400 021 (APPELLANT) (RESPONDENT) . : 4965 / / 2005 A.Y. 2001-02 ITA NO. : 4965/MUM/2005 (ASSESSMENT YEAR: 2001-02) DDIT(IT)-1(2), R. NO. 117, 1 ST FLOOR, SCINDIA HOUSE, BALLARD ESTATE, NARIMAN POINT, MUMBAI-400 021 VS M/S CREDIT AGRICOLE INDOSUEZ ( NOW CALYON BANK ), 11 TH FLOOR, HOECHST HOUSE, NARIMAN POINT, MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI MADHUR AGARWAL REVENUE BY : SHRI AJAY SRIVASTAVA ! /DATE OF HEARING : 18-07-2013 '# ! / DATE OF PRONOUNCEMENT : 07-08-2013 ' O R D E R ! , : PER VIVEK VARMA, JM: CROSS APPEALS HAVE BEEN FILED BY THE ASSESSEE AND THE DEPARTMENT AGAINST THE ORDER OF CIT(A) 31, MUMBAI, DATED 04.03 .2005. SINCE THE ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 2 APPEALS, AS FILED EMERGE FROM THE SAME ORDER OF THE CIT(A), WE ARE PASSING A CONSOLIDATED ORDER FOR THE SAKE OF CONVEN IENCE AND BREVITY. ITA NO. 4295/MUM/2005 : APPEAL BY THE ASSESSEE : 2. THE FOLLOWING GROUNDS OF APPEAL HAVE BEEN RAISED : 1. THE COMMISSIONER OF INCOME-TAX (APPEALS)-XXXI, MU MBAI (HEREINAFTER REFERRED TO AS CIT(A)) ERRED IN HOLDING THAT THE ASS ESSING OFFICER (HEREINAFTER REFERRED TO AS AO) WAS JUSTIFIED IN RES ERVING HIS RIGHT TO MAKE ALTERNATE COMPUTATION OF INCOME IN THE EVENT THE DI SALLOWANCES MADE IN THE ASSESSMENT ORDER ARE DELETED BY THE APPELLATE A UTHORITIES. YOUR APPELLANTS SUBMIT THAT THE CIT(A) OUGHT TO HAV E HELD THAT THE ORDER ISSUED BY THE AO IS BEYOND THE SCOPE AND POWERS CONF ERRED ON THE AO BY THE PROVISIONS OF THE INCOME-TAX ACT, 1961 (HEREINAF TER REFERRED TO AS THE ACT) AND IS THEREFORE BAD IN LAW. YOUR APPELLANTS PRAY THAT THE IMPUGNED ORDER PASSED BY THE AO BE QUASHED. IN ANY EVENT, THE RELEVANT OBSERVATIONS OF THE AO BE DELETED. 2. THE CIT(A) ERRED IN HOLDING THAT THE AO WAS JUSTI FIED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND THEREBY DISA LLOWING THE WHOLE OF INTEREST AMOUNTING TO RS. 4,21,73,860, PAID ON FCNR(B ) DEPOSITS. YOUR APPELLANTS SUBMIT THAT ON THE FACTS AND CIRCUM STANCES OF THE CASE, THE CIT(A) OUGHT TO HAVE HELD THAT PROVISIONS OF SE CTION 14A HAVE NO APPLICATION TO THE FACTS OF THEIR CASE. YOUR APPELLANTS PRAY THAT THE AO BE DIRECTED TO DELE TE THE ADDITION OF RS. 4,21,73,860 MADE TO THEIR TOTAL INCOME. 3. THE CIT(A) ERRED IN HOLDING THAT THE AO WAS JUST IFIED IN HOLDING THAT THE WHOLE OF INTEREST PAID AMOUNTING TO RS.4,21,73,860 O N FCNR(B) DEPOSITS IS RELATABLE TO INCOME TO WHICH THE PROVISIONS OF SECT ION 14A ARE APPLICABLE. YOUR APPELLANTS SUBMIT THAT ON A PROPER APPRECIATIO N OF THE FACTS, THE CIT(A) SHOULD HAVE HELD THAT ONLY A PART OF THE INT EREST, IF AT ALL, IS ATTRIBUTABLE TO INCOME TO WHICH THE PROVISIONS OF S ECTION 14A ARE APPLICABLE. YOUR APPELLANTS SUBMIT THAT IN ANY EVENT, THE CIT(A ) OUGHT TO HAVE MADE A FAIR ESTIMATE IN THE MATTER. YOUR APPELLANTS PRAY THAT THE AO BE DIRECTED ACCORDI NGLY. 4. THE CIT(A) ERRED IN HOLDING THAT THE AO WAS JUST IFIED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND THEREBY ALLO CATING AN AMOUNT OF RS. 36,64,040 OUT OF THE GENERAL ADMINISTRATION EXPE NSES ON THE GROUND THAT THE EXPENDITURE IS RELATABLE TO INCOME TO WHIC H THE PROVISIONS OF SECTION 14A ARE APPLICABLE. YOUR APPELLANTS SUBMIT THAT ON A PROPER APPRECIATIO N OF THE FACTS, THE CIT(A) SHOULD HAVE HELD THAT ONLY A PART OF THE EXP ENSES, IF AT ALL, IS ATTRIBUTABLE TO INCOME TO WHICH THE PROVISIONS OF S ECTION 14A ARE APPLICABLE. YOUR APPELLANTS SUBMIT THAT IN ANY EVENT, THE CIT(A ) OUGHT TO HAVE MADE A FAIR ESTIMATE IN THE MATTER. YOUR APPELLANTS PRAY THAT THE AO BE DIRECTED ACCORDI NGLY. 5. THE CIT(A) ERRED IN HOLDING THAT THE AO WAS JUS TIFIED IN TAXING INTEREST / COMMISSION RECEIVED FROM HO/BRANCHES AND ALSO JUSTI FIED IN CONSIDERING ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 3 INTEREST / COMMISSION PAID TO HO / BRANCHES IN COMP UTING INCOME OF YOUR APPELLANTS. YOUR APPELLANTS SUBMIT THAT INTEREST I COMMISSION R ECEIVED FROM HO/BRANCHES AND INTEREST / COMMISSION PAID TO HO / BRANCHES REPRESENTS RECEIPT FROM / PAYMENT TO SELF AND SHOULD THEREFORE BE IGNORED IN COMPUTING BUSINESS INCOME. YOUR APPELLANTS PRAY THAT THE AO BE DIRECTED ACCORDI NGLY. 6. THE CIT(A) OUGHT TO HAVE HELD THAT INTEREST AMO UNTING TO RS.6,08,00,028 RECEIVED FROM BRANCHES ON PLACEMENT OF OVERSEAS DEP OSITS WITH THEM REPRESENTS RECEIPT FROM SELF AND SHOULD HAVE ACCORD INGLY DIRECTED THE AO NOT TO INCLUDE INTEREST OF RS. 6,08,00,028 IN COMPUT ING THEIR BUSINESS INCOME. YOUR APPELLANTS PRAY THAT THE AO BE DIRECTED ACCORDI NGLY. 7. THE CIT(A) ERRED IN HOLDING THAT THE AO WAS JUST IFIED IN NOT GRANTING A DEDUCTION OF RS. 33,55,026, BEING INTEREST PAID TO H EAD OFFICE (HO) AND BRANCHES AND COMMISSION PAID TO BRANCHES AND CORRES PONDENT, IN VIEW OF THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. YOUR APPELLANTS SUBMIT THAT THE PROVISIONS OF SECTI ON 40(A)(I) OF THE ACT HAVE NO APPLICATION IN THEIR CASE AND THE CIT(A) OU GHT TO HAVE DIRECTED THE AO TO GRANT YOUR APPELLANTS A DEDUCTION OF RS. 33 ,55 ,026. YOUR APPELLANTS PRAY THAT THE AO BE DIRECTED ACCORDI NGLY. 8. THE CIT(A) ERRED IN HOLDING THAT THE AO WAS JUSTIFIE D IN DISALLOWING DATA PROCESSING CHARGES AMOUNTING TO RS. 91,03,072 ON THE GROUND THAT PROVISIONS OF SECTION 40(A)(I) HAVE NOT BEEN COMPLI ED WITH. YOUR APPELLANTS SUBMIT THAT THE PROVISIONS OF SECTI ON 40(A)(I) OF THE ACT HAVE NO APPLICATION IN THEIR CASE AND THE CIT(A) OU GHT TO HAVE DIRECTED THE AO TO GRANT YOUR APPELLANTS A DEDUCTION OF RS. 9 1,03 ,072. YOUR APPELLANTS PRAY THAT THE AO BE DIRECTED ACCORDI NGLY. 9. THE CIT(A) ERRED IN UPHOLDING THAT YOUR APPELLA NTS INCOME IS TAXABLE AT THE RATE OF 48% AS APPLICABLE TO NON-RESIDENT COMPA NY. YOUR APPELLANTS SUBMIT THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) OUGHT TO HAVE HELD THAT IN ACCORDA NCE WITH THE PROVISIONS OF ARTICLE 26 OF THE AGREEMENT FOR AVOIDANCE OF DOUBL E TAXATION BETWEEN INDIA AND FRANCE (AADT), TAX ON BUSINESS INCOME SHOU LD HAVE BEEN LEVIED AT THE RATE APPLICABLE TO DOMESTIC COMPANY. YOUR APPELLANTS PRAY THAT THE AO BE DIRECTED TO REC OMPUTE THEIR TAX LIABILITY IN ACCORDANCE WITH THE PROVISIONS OF ARTIC LE 26 OF THE AADT. YOUR APPELLANTS CRAVE TO LEAVE TO ADD TO, AMEND, AL TER, VARY, OMIT OR SUBSTITUTE THE AFORESAID GROUNDS OF APPEAL OR ADD A NEW GROUND OR GROUNDS OF APPEAL AT ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL AS THEY MAY BE ADVISED. 3. GROUND NO. 1 IS GENERAL. 4. GROUND NO. 2 TO 4 PERTAIN TO DISALLOWANCE OF RS. 4,21,73,860/- AND RS. 36,64,040/- UNDER SECTION 14A WITH REGARD TO EX PENDITURE INCURRED IN RELATION TO INTEREST INCOME ON NOSTRO BALANCES W ITH BANKERS TRUST COMPANY(BTC) AND GENERAL ADMINISTRATION EXPENSES ON NOSTRO BALANCES WITH BTC. ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 4 5. BEFORE THE REVENUE AUTHORITIES, IT WAS EXPLAINED THAT THE ASSESSEE HAS ITS HEAD OFFICE AT PARIS AND THE ENTIRE BRANCH NET WORK, MAINTAINED NOSTRO ACCOUNT WITH BTC IN USD, WHICH REMAINED AS A FLOATING ACCOUNT AVAILABLE WITH THE ASSESSEE TO BE DRAWN, WH ENEVER REQUIRED. INDIAN BRANCH ALSO MAINTAINED ITS ACCOUNT IN FCNR-B DEPOSIT IN FOREIGN CURRENCY. DUE TO HIGH COSTS ON FORWARD DEALINGS, IN DIAN BRANCH DID NOT CONVERT ITS FUNDS INTO INR TILL SUCH TIME, IT WAS E CONOMICALLY FEASIBLE, TO CONVERT THE SAME FOR ITS BUSINESS OF LENDING. BTC P AID INTEREST ON THE CREDIT BALANCES @ 2% LESS THEN FED FUND RATES. IN T HIS MODUS, THE ASSESSEE EARNED INTEREST OF RS. 1,13,37,503/- ON NO STRO ACCOUNT, MAINTAINED WITH BTC, WHICH HAS BEEN AS CLAIMED AS E XEMPT. 6. THE ISSUE IN QUESTION HAS BEEN IN DISPUTE FOR A FAIRLY LONG TIME AND THE CIT(A), FOLLOWING HIS OWN ORDER IN ASSESSMENT Y EAR 1998-99, AND IN SUBSEQUENT YEARS 1999-2000 & 2000-01, SUSTAINED THE DISALLOWANCE MADE BY THE AO. LIKE WISE, THE ASSESSEE IS IN APPEA L BEFORE THE ITAT, AS IT WAS IN THE PRECEDING YEARS. 7. THESES APPEALS, WITH THE INSTANT ISSUE HAS BEEN DECIDED BY THE COORDINATE BENCH IN ITA NOS. 6615/MUM/2003, CO NO. 283/MUM/2003 AND ITA NO. 6400/MUM/2003, WHEREIN IT WAS HELD, 4. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD, IT IS OBSERVED THAT THE DEPARTMENTAL STAND IS THAT THE INTEREST ON NOSTRO ACCOUNT AMOUNTING TO RS. 13.66 CRORE BE CHARGE D TO TAX IN THE CURRENT YEAR, WHICH HAS NOT BEEN OPPOSED BY THE LEA RNED AR. SIMULTANEOUSLY THE LEARNED COUNSEL FOR THE ASSESSEE , ON ORAL INSTRUCTIONS CONVEYED THE UNDERTAKING OF THE ASSESSEE NOT TO OPP OSE THE DEPARTMENTAL APPEAL ABOUT THE CHARGEABILITY OF INTEREST ON NOSTRO ACCOUNT BEFORE THE HONBLE BOMBAY HIGH COURT FOR ASSESSMENT YEAR 1996- 97, IN RESPECT OF WHICH SUBSTANTIAL QUESTION OF LAW HAS BEEN ADMITTED . IN VIEW OF THESE RIVAL BUT COMMON SUBMISSIONS WE ARE OF THE CONSIDERED OPI NION THAT THE ASSESSMENT ORDER ON THIS COUNT NEEDS TO BE APPROVED IN PREFERENCE OVER THE VIEW TAKEN BY THE LEARNED CIT(A). THIS GROUND T AKEN BY THE REVENUE ABOUT THE CHARGEABILITY OF INTEREST ON NOSTRO ACCOUN T AMOUNTING TO RS. RS. 13.66 CRORE IS, THEREFORE, ALLOWED. 5. IT IS OBSERVED THAT THE LD. CIT(A) MADE ENHANCE MENT OF INCOME TO THE TUNE OF RS. 32.79 CRORE BY COMPUTING DISALLOWANCE UNDER S ECTION 14A IN RESPECT OF SUCH INTEREST INCOME ON NOSTRO ACCOUNT, WHICH WAS HELD BY HIM TO BE ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 5 NOT CHARGEABLE TO TAX AS AGAINST THE AOS DECISION AS TO THE CHARGEABILITY OF THIS AMOUNT. WHEN THE VIEW OF THE LD. CIT(A) ON THIS ISSUE IS OVERTURNED AND THAT OF THE AO IS RESTORED, INTEREST ON NOSTRO AC COUNT BECOMES TAXABLE. ONCE THE INCOME ITSELF IS CHARGEABLE TO TA X, THERE CAN BE NO QUESTION OF COMPUTING ANY DISALLOWANCE UNDER SECTIO N 14A, THE MANDATE OF WHICH OPERATES TO DISALLOW DEDUCTION FOR EXPENSE S INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. ACCORDINGLY, GROUNDS RAISED BY THE ASSESSEE AGAINST THE ENHANCEMENT DONE BY THE LEARNED CIT(A) FOR RS. 32.79 CRORE BY IN VOKING THE PROVISIONS OF SECTION 14A ARE ALSO CONSEQUENTLY ALLOWED. 8. IN THE INSTANT YEAR, THE FACTS ARE IDENTICAL, AN D THE ASSESSEE, HAS AGREED TO HAVE THE INTEREST INCOME CHARGEABLE TO TA X, THE ISSUE OF COMPUTING THE DISALLOWANCE UNDER SECTION 14A COMES TO A NAUGHT. 9. CONSEQUENTIALLY, THE DISALLOWANCE OF RS. 4,21,73 ,860/- AND RS. 36,64,040/- BECOME INFRUCTUOUS, HENCE, ARE DIRECTED TO BE DELETED. 10. GROUNDS NO. 2 TO 4 ARE, THEREFORE, ALLOWED. 11. GROUNDS NO. 5 & 6 PERTAIN TO INTEREST/COMMISSIO N OF RS. 10,74,965/- AND RS. 6,08,00,028/- RECEIVED FROM HO AND OTHER OVERSEAS BRANCHES. 12. THE ISSUE ALSO HAS BEEN IN DISPUTE EARLIER AND IT IS NOW SETTLED IN ITA NO. 6615/MUM/2003, BY THE COORDINATE BENCH IN M UMBAI IN ASSESSEES OWN CASE. 13. THE AR CONTENDED THAT THOUGH SIMILAR GROUNDS IN T HE PRECEDING YEAR HAVE BEEN DECIDED IN FAVOUR OF THE ASSESSEE, B UT FOR THIS YEAR THE SAID GROUNDS WERE NOT BEING PRESSED, THEREBY ALLOWI NG THE ORDER OF THE CIT(A) BE UPHELD. IN VIEW OF THIS CONCESSION, WE UP HOLD THE IMPUGNED ORDER ON THIS ISSUE AND DECIDE THESE GROUNDS IN FAV OUR OF THE REVENUE. FURTHER, SINCE THE IMPUGNED ORDER HAS BEEN UPHELD A ND THE TAXABILITY OF THE INTEREST INCOME HAS BEEN CONFIRMED, THERE CAN B E NO QUESTION OF ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 6 MAKING ANY DISALLOWANCE UNDER SECTION 14A ON ACCOUN T OF SUCH INTEREST INCOME. 14. GROUND NO. 7 PERTAINS TO DISALLOWANCE OF RS. 33 ,55,026/- UNDER SECTION 40(A)(I). 15. IN VIEW OF OUR DECISION ON GROUNDS NO. 5 AND 6, ABOVE, TAXING THE INTEREST INCOME RECEIVED FROM HO/OVERSEAS BRANCHES, THE NATURAL CONSEQUENCE IS THAT THE INTEREST PAID BY THE ASSESS EE TO ITS HO/OVERSEAS BRANCHES WOULD BECOME DEDUCTIBLE. HOWEVER, WE FIND THAT THE AMOUNT OF INTEREST DISALLOWED HAS BEEN WRONGLY TAKEN IN THIS GROUND. ON THE PERUSAL OF THE ASSESSMENT ORDER, IT WAS NOTICED THA T THE AMOUNT ACTUALLY DISALLOWED BY THE AO IS RS. 21,51,539/- AND NOT RS. 33,55,026/-. THE AO IS THEREFORE, DIRECTED TO GRANT DEDUCTION FOR TH E CORRECT AMOUNT OF RS. 21,51,539/-. 16. GROUND NO. 8 PERTAINS TO DISALLOWANCE OF RS. 91 ,03,072/- UNDER SECTION 40(A)(I). 17. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT T HE ASSESSEE CLAIMED DEDUCTION FOR RS. 91,03,072/-, BEING THE DATA PROC ESSING COSTS PAID TO THE HEAD OFFICE. THE AO TREATED THIS AMOUNT IN THE NATURE OF ROYALTY. IN THE ABSENCE OF THE ASSESSEE HAVING DEDUCTED TAX AT SOURCE, THE AO MADE DISALLOWANCE UNDER SECTION 40(A)(I) OF THE ACT. THE CIT(A) UPHELD THE ASSESSMENT ORDER ON THIS POINT. 18. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ACTION OF THE REVENUE AUTHORITIES ON TREATING THE AMOUNT BEING IN THE NATURE OF ROYALTY AND HENCE NOT ALLOWABLE UNDER SECTION 40(A)(I) CANNOT BE ALLOWED. THE OBVIOUS REASON IS THAT THE ASSESSEE MADE THE PAYMENT ON ACCOUNT OF DA TA PROCESSING COSTS ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 7 TO ITS HEAD OFFICE. BY NO STANDARD THIS AMOUNT CAN BE CONSIDERED AS ROYALTY AS A CONSIDERATION FOR THE USE OF THE ASSET S SPECIFIED UNDER EXPLANATION 2 TO SECTION 9(1)(VI). THIS AMOUNT IS I N THE NATURE OF HEAD OFFICE EXPENSES. THE ASSESSEE DID NOT INCLUDE THIS AMOUNT IN THE AMBIT OF HEAD OFFICE EXPENSES TO BE CONSIDERED ON THE TOUCHSTONE OF SECTION 44C OF THE ACT. SINCE AO MADE DISALLOWANCE BY TREATING IT AS ROYALTY, HE HAD NO OCCASION TO CONSIDER THE DEDUCTIBILITY OR OTHERWISE OF THE AMOUNT AS PER THE PRESCRIPTION OF SECTION 44A. UNDER SUCH CIRCUMS TANCES, WE ARE OF THE CONSIDERED OPINION THAT IT WOULD BE IN THE INTEREST OF JUSTICE IF THE IMPUGNED ORDER ON THIS ISSUE IS SET ASIDE AND THE M ATTER IS RESTORED TO THE FILE OF THE AO. WE ORDER ACCORDINGLY AND DIRECT THE AO TO CONSIDER THE DEDUCTIBILITY OR OTHERWISE OF SUCH AMOUNT BY TREATI NG IT AS HEAD OFFICE EXPENSES. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALL OWED A REASONABLE OPPORTUNITY OF BEING HEARD IN SUCH FRESH PROCEEDING S. 19. THE GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 20. GROUND NO. 9 PERTAINS TO THE CLAIM OF THE ASSES SEE THAT TAX TO IMPOSED AS PER RATE OF TAX APPLICABLE TO INDIAN BAN KS. 21. THE ISSUE HAS BEEN DECIDED BY THE CIT(A), WHERE IN THE CIT(A) HAS HELD, 12. AT THE OUTSET, IT NEEDS TO BE EMPHASIZED THAT THE INDIAN INCOME TAX ACT DOES NOT IN ANY WAY CONFLICT WITH THE PROVISIONS OF ARTICLE 26 OF THE D.T.A.A. WITH FRANCE, WHICH IS ONE OF THE UNIFORM CLA USES IN MOST OF THE TAX TREATIES. THE ASSESSEE BANK IS ALLOWED THE SAME DED UCTIONS AS OTHER INDIAN BANKS AND THE PROFITS OF THE BANK ARE ALSO C OMPUTED AND ASSESSED BY ADOPTING THE SAME METHODS AND PROCEDURES. CERTAI N PROVISIONS, SUCH AS PROVISIONS FOR BAD DEBT AT A CERTAIN PERCENTAGE OF A TOTAL INCOME, IRRESPECTIVE OF THE ACTUAL AMOUNT OF BAD DEBTS, ARE ALLOWED TO THE ASSESSEE BANK AS TO ALL OTHER BANKS. THE UNDERLYING INTENTIO N OF ARTICLE 26, WHICH CORRESPONDS TO ARTICLE 24 OF THE UN MODEL CONVENTIO N, IS TO PREVENT DISCRIMINATION ON THE GROUNDS OF NATIONALITY. ARTIC LE 26 IS REGARDING NON- DISCRIMINATION WITH OTHER LOCAL ENTERPRISES CARRYIN G ON THE SAME ACTIVITIES IN THE SAME CIRCUMSTANCES AND UNDER THE SAME CONDIT IONS. IT IS IMPORTANT TO NOTE THAT WORD USED IS SAME AND NOT SIMILAR. 12.3 THE INCOME TAX ACT LAYS DOWN SEPARATE RATES OF TAXES, ONE APPLICABLE TO DOMESTIC COMPANIES AND THE OTHER TO NON-RESIDENT CO MPANIES. IN ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 8 CONFORMITY WITH THE REGIME OF ADVANCING TOWARDS LOW ER TAX RATES, BOTH THE RATES HAVE BEEN LOWERED OVER THE LAST 3 YEARS. WHIL E THE TAX RATES FOR DOMESTIC COMPANIES HAVE GONE DOWN FROM 46% TO 35%, THE TAX RATES FOR NON-RESIDENTS HAVE BEEN LOWERED FROM 55% TO 48%. AL THOUGH TAXED AT A HIGHER RATE, THE NON-RESIDENT COMPANIES ALSO ENJOY CERTAIN CONCESSION WHICH ARE NOT AVAILABLE TO DOMESTIC COMPANIES. THE NON-RESIDENT COMPANIES HAVE TO PAY A LOWER RATE OF TAX OF 20% ON DIVIDEND INCOME UNDER SECTION 1 15A OF THE INCOME TAX ACT, 1961. SIMI LARLY, WITH EFFECT FROM 1.6.97, AS PER SECTION 1150, DOMESTIC COMPANY IS CHARGED TO ADDITIONAL INCOME TAX AT THE RATE OF 10% ON THE AMO UNT OF DIVIDEND DISTRIBUTED, WHETHER OUT OF CURRENT OR ACCUMULATED PROFITS. THE DIVIDEND TAX IS NOT PAYABLE BY NON-RESIDENT COMPANIES, AS TH EIR PROFITS ARE NOT DISTRIBUIED IN INDIA. 12.4 THE ASSESSEE BANK IS A BRANCH OF A FOREIGN BA NK, WHICH CARRIES ON LIMITED BANKING ACTIVITIES IN A METROPOLITAN CITY. THE INDI AN BANKS ARE SPREAD OVER THE COUNTRY AND HAVE TO OPERATE IN RURAL AREAS. THE RBI HAS LAID DOWN GUIDELINES WHICH THE BANKS HAVE TO FOLLOW. THESE GU IDELINES ENJOIN THAT CERTAIN PERCENTAGE OF THE BANKS RESOURCES HAVE TO BE UTILISED IN RURAL ADVANCES, WHICH CARRY MORE RISK THAN CORPORATE LOAN S ETC. THE BANKS ALSO HAVE TO INVEST THEIR RESOURCES IN A CERTAIN MANNER AS PER THE GUIDELINES LAID DOWN BY RBI. THE GUIDELINES ARE NOT IDENTICAL I N CASE OF FOREIGN BANKS. THE FOLLOWING CHART SHOWS THE UNEQUAL TREATMENT GIV EN TO THE FOREIGN BANKS, AS COMPARED TO THEIR INDIAN COUNTERPARTS; DOMESTIC NON-RESIDENT PRIORITY SECTOR ADVANCES 40% 32% ADVANCES TO AGRICULTURE 18% NIL ADVANCES TO WEAKER SECTIONS 10% NIL THE ABOVE ADVANCES HAVE A LOWER RATE OF RETURN AND CARRY A GREATER RISK. THE INDIAN BANKS AS ILLUSTRATED EARLIER, CARRY A HE AVIER BURDEN OF SOCIAL RESPONSIBILITY, WHICH ALSO HAS A DAMPENING EFFECT O N THEIR PROFITS. CONSIDERING THE TOTALITY OF THE TAX STRUCTURE, THE NON-RESIDENT COMPANIES ENJOY CERTAIN CONCESSIONS OVER THEIR INDIAN COUNTER PARTS AND SO THE HIGHER RATE OF TAX CANNOT BE SAID TO BE A DISCRIMINATION. AS ILLUSTRATED ABOVE, THE CONDITIONS UNDER WHICH THEY OPERATE CANNOT BE SAID TO BE THE SAME. THUS, THE CLAIM FOR EQUAL TREATMENT IS NOT JUSTIFIED. THE PROVISIONS OF THE DTAA ARE ALSO NOT CONTRAVENED EITHER. IN THIS CONTEXT IT NEEDS TO BE HIGHLIGHTED HERE, ONCE AGAIN, AT THE RISK OF REPETITION, THAT S TRICTLY SPEAKING THERE IS NO ASSESSEE IN INDIA WHICH IS ENGAGED IN SAME BUSINE SS AS THE ASSESSEE. 12.5 THE COMMENTARY ON ARTICLE 24(4) OF THE OECD M ODEL CONVENTION, REGARDING THE INSERTION OF THE QUALIFYING CLAUSE SAME CONDIT IONS, STATES AS FOLLOWS: THE SECOND SENTENCE OF PARAGRAPH 4 SPECIFIES THE CONDITIONS UNDER WHICH THE PRINCIPLE OF EQUAL TREATMENT SET FORTH IN THE FIRST SENTENCE SHOULD BE APPLIED TO INDIVIDUALS WHO ARE RESIDENTS OF A CO NTRACTING STATE AND HAVE A PERMANENT ESTABLISHMENT IN THE OTHER STATE. IT IS DESIGNED MAINLY TO ENSURE THAT SUCH PERSONS DO NOT OBTAIN GREATER ADVA NTAGES THAN RESIDENTS, THROUGH ENTITLEMENT TO PERSONAL ALLOWANCES AND RELI EFS FOR FAMILY RESPONSIBILITIES, BOTH IN THE STATE OF WHICH THEY A RE RESIDENTS, BY THE APPLICATION OF ITS DOMESTIC LAWS, AND IN THE OTHER STATE BY VIRTUE OF THE PRINCIPLE OF EQUAL TREATMENT. CONSEQUENTLY, IT LEAV ES IT OPEN TO THE STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED WHETH ER OR NOT TO GIVE PERSONAL ALLOWANCES AND RELIEFS TO THE PERSONS CONC ERNED IN THE PROPORTION ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 9 WHICH THE AMOUNT OF THE PERMANENT ESTABLISHMENTS P ROFITS BEARS TO THE WORD INCOME TAXABLE IN THE OTHER STATE. MOREOVER, THE SITUATION OF A PERMANENT ESTABLISHMEN T IS DIFFERENT FROM THAT OF A DOMESTIC ENTERPRISE, WHICH CONSTITUTES A SINGL E ENTITY, WHOSE ALL ACTIVITIES, WITH THEIR FISCAL IMPLICATIONS CAN BE F ULLY BROUGHT WITHIN THE PURVIEW OF THE STATE WHERE IT HAS IT S HEAD OFFICE . ON THE OTHER HAND, THE PERMANENT ESTABLISHMENT, IS A PART OF AN ENTERPRISE , THAT HAS ITS HEAD OFFICE IN ANOTHER STATE. THE COMMENTARY ON PARA 4 O F THE OECD CONVENTION MENTIONS, THAT, WITH REGARD TO THE BASIS OF ASSESSM ENT OF TAX, THE PRINCIPLE OF EQUAL TREATMENT NORMALLY HAS THE FOLLOWING IMPLI CATIONS. PERMANENT ESTABLISHMENT MUST BE ACCORDED THE SAME R IGHT AS RESIDENT ENTERPRISES TO DEDUCT TRADING EXPENSES. PERMANENT ESTABLISHMENT MUST BE ACCORDED THE SAME F ACILITIES WITH REGARD TO DEPRECIATION AND RESERVES. PERMANENT ESTABLISHMENT SHOULD ALSO HAVE OPTION OF CARRYING FORWARD OR BACKWARD A LOSS. PERMANENT ESTABLISHMENT SHOULD FURTHER HAVE THE SAM E RULES APPLIED TO RESIDENT ENTERPRISES, WITH REGARD TO TAXATION OF CA PITAL GAINS. ALL THE ABOVE FACILITIES ARE AVAILABLE TO THE ASSESS EE BANK. THE RATE OF TAX IS JUST ONE OF THE THREADS IN THE TOTAL FABRIC OF T AXATION. THE COMMENTARY, ON STRUCTURE AND RATE OF TAX, ON PARA 4 OF ARTICLE 2 4 OF THE UN MODEL CONVENTION IS VERY RELEVANT, IN THIS CONTEXT: IT SHOULD BE POINTED OUT AS BEING A FACT CENTRAL TO THE ISSUE HERE THAT MOST OECD MEMBER COUNTRIES WHICH HAVE ADOPTED THIS SYSTE M DO NOT CONSIDER THEMSELVES TO BE BOUND BY THE PROVISIONS OF PARAGRA PH 4 TO EXTEND IT TO PERMANENT ESTABLISHMENTS OF NON-RESIDENT COMPANIES. THIS ATTITUDE IS BASED, IN PARTICULAR, ON THE VIEW THAT THE SPLIT RA TE IS ONLY ONE ELEMENT AMONGST OTHERS (IN PARTICULAR A WITHHOLDING TAX ON DISTRIBUTED INCOME) IN A SYSTEM OF TAXING PROFITS AND DIVIDENDS OF COMPANIES , WHICH MUST BE CONSIDERED AS A WHOLE AND IS, THEREFORE, BOTH FOR L EGAL AND TECHNICAL REASONS, OF DOMESTIC APPLICATION ONLY. THE STATE WH ERE THE PERMANENT ESTABLISHMENT IS SITUATED COULD CLAIM THE RIGHT NOT TO TAX SUCH PROFITS AT THE REDUCED RATE, AS GENERALLY IT DOES NOT TAX THE DIVI DENDS DISTRIBUTED BY THE COMPANY TO WHICH THE PERMANENT ESTABLISHMENT BELONG S. MOREOVER, A STATE WHICH HAS ADOPTED A SPLIT RATE SYSTEM USUALLY HAS O THER ECONOMIC POLICY OBJECTIVES, SUCH AS THE PROMOTION OF THE CAPITAL MA RKET, BY ENCOURAGING RESIDENT COMPANIES TO DISTRIBUTE DIVIDENDS. THE EXT ENSION OF THE REDUCED RATE TO THE PROFITS OF THE PERMANENT ESTABLISHMENT WOULD NOT SERVE SUCH A PURPOSE AT ALL, AS THE COMPANY DISTRIBUTING THE DIV IDENDS IS NOT A RESIDENT OF THE STATE CONCERNED. 12.6 THE ISSUE RAISED BY THE ASSESSEE WAS ALSO THE SUBJECT MATTER OF AN APPEAL BY THE BANK OF TOKYO MITSUBISHI LTD. BEFORE THE LD. ITAT, CALCUTTA WHICH WAS DECIDED ON 31/3/1997. THE APPLICANT HAD QUESTIO NED THE TAX RATES FOR NON-RESIDENTS, VIS A VIS THE PROVISIONS OF ARTIC LE 24(1) OF THE TREATY WITH JAPAN REGARDING NON-DISCRIMINATION, WHICH IS IDENTI CAL TO THE PROVISIONS OF ARTICLE 26 OF THE INDO-FRANCE TREATY. THE TRIBUNAL I N A DETAILED ORDER REJECTED THE APPEAL OF THE ASSESSEE HOLDING THAT TH ERE IS NO DISCRIMINATION AS PER ARTICLE 24(1) OF THE TREATY. SOME OF THE OBS ERVATIONS OF THE LD. TRIBUNAL, ARE AS BELOW: - ARTICLE 23(1) OF THE DTAA PROVIDES THAT THE LAWS IN F ORCE IN EITHER OF THE STATES SHALL CONTINUE TO GOVERN INTO RESPECTIVE STA TES EXCEPT WHERE EXPRESS PROVISIONS TO THE CONTRARY ARE MADE IN THE CONVENTI ON. THE DIFFERENTIAL TAX RATES WERE IN EXISTENCE AT THE TIME OF SIGNING OF T HE TREATY AND THEREFORE, THE SAME SHALL CONTINUE TO GOVERN THE TAXATION OF I NCOME IN INDIA EXCEPT ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 10 WHERE EXPRESS PROVISIONS TO THE CONTRARY HAVE BEEN MADE IN THE DTAA ITSELF THE PROVISIONS OF ARTICLE 24(2) CANNOT BE PRE SSED INTO SERVICE IN RELATION TO SUCH PROVISION OF THE I. T. ACT, WHICH E XISTED AT THE TIME OF SIGNING OF THE CONVENTION. IN THIS VIEW OF THE MATT ER THE PROVISIONS OF ARTICLE 24(2) WOULD APPEAR TO BE INTENDED TO SAFEGUARD AGAI NST THE LAWS OF EITHER CONTRACTING STATE BEING SUBSEQUENTLY AMENDED TO THE DETRIMENT OF THE ENTERPRISES OR THE OTHER CONTRACTING STATES. 12.7 CBDT CIRCULAR NO. 333 DATED 2/4/82, PARA 2, A LSO AFFIRMS THE ABOVE INTERPRETATION. FURTHER CBDT CIRCULAR NO. 621, DATE D 19/12/1991, ALSO STATES AS FOLLOWS: - TAXATION OF FOREIGN COMPANIES AND OTHER NON-RESIDE NT TAXPAYERS-43. TAX TREATIES GENERALLY CONTAIN A PROVISION OF THE EFFEC T THAT THE LAWS OF THE TWO CONTRACTING STATES WILL GOVERN THE TAXATION OF INCO ME ON THE RESPECTIVE STATE EXCEPT WHEN EXPRESS PROVISION TO THE CONTRARY IS MADE IN THE TREATY. IT MAY SO HAPPEN THAT THE TAX TREATY WITH A FOREIGN COMPANY MAY CONTAIN A PROVISION GIVING CONCESSIONAL TREATMENT TO ANY INCO ME AS COMPARED TO THE POSITION UNDER THE INDIAN LAW EXISTING AT THAT POIN T OF TIME. HOWEVER, THE INDIAN LAW EXISTING AT THAT POINT OF TIME. HOWEVER, THE INDIAN LAW MAY SUBSEQUENTLY BE AMENDED REDUCING THE INCIDENCE OF T AX TO A LEVEL LOWER THAN WHAT HAS BEEN PROVIDED IN THE TAX TREATY. SINCE THE TAX TREATIES ARE INTENDED TO GRANT TAX RE LIEF AND NOT PUT RESIDENTS OF CONTRACTING COUNTRY AT A DISADVANTAGE VIS--VIS OTHER TAX PAYERS, SECTION 90 OF THE INCOME-TAX ACT HAS BEEN AMENDED TO CLARIFY THAT ANY BENEFICIAL PROVISIONS IN THE LAW WILL NOT BE DENIED TO A RESID ENT OF A CONTRACTING COUNTRY MERELY BECAUSE THE CORRESPONDING PROVISION IN THE TAX TREATY IS LESS BENEFICIAL. WHETHER AN ASSESSEE HAS BEEN LESS FAVOURABLY TREATED OR NOT, CANNOT BE DECIDED ON THE BASIS OF SINGLE ITEM OF TAX RATE ALONE AND A COMPREHENSIVE VIEW AFTER TAKING INTO CONSIDERATION ALL OTHER ASPECTS HAS TO BE TAKEN. ARTICLE 24 OF THE INDO-JAPANESE TREATY IS SIMILAR TO ARTICLE 26 OF THE INDO FRANCE TREATY. THEREFORE, THE OBSERVATIONS AT THE TRIBUNAL ARE DIRECTLY APPLICABLE TO THE CASE OF THE APPLICANT. 12.8 THIS CONTEXT, IT IS FURTHER NECESSARY TO HIGH LIGHT HERE THAT FINANCE ACT, 2001 HAS INSERTED AN EXPLANATION TO SEC.90(2) OF TH E INCOME TAX ACT, 1961 WITH RETROSPECTIVE EFFECT FROM 01-04-1962. THIS EXP LANATION IS REPRODUCED BELOW, FOR READY REFERENCE: EXPLANATION: - FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT THE CHARGE OF TAX IN RESPECT OF A FOREIGN COMPANY AT A RATE HIGHER THAN THE RATE AT WHICH A DOMESTIC COMPANY IS CHARGEABLE, SHALL NO T BE REGARDED AS LESS FAVOURABLE CHARGE OR LEVY OF TAX IN RESPECT OF SUCH FOREIGN COMPANY, WHERE SUCH FOREIGN COMPANY HAS NOT MADE THE PRESCRIBED AR RANGEMENT FOR DECLARATION AND PAYMENT WITHIN INDIA, OF THE DIVIDE NDS (INCLUDING DIVIDENDS ON PREFERENCE SHARES) PAYABLE OUT OF ITS INCOME IN INDIA. OUR ASSESSEE IS A PERMANENT ESTABLISHMENT IN INDIA OF ITS HEAD OFFICE. THIS FE DOES NOT DECLARE, AND PAY DIVIDENDS, WITHIN INDIA, OUT OF THE INCOME ARISING TO IT FROM ITS OPERATIONS IN INDIA. IN FACT, THE SURPLUS ARISING TO THE FE FROM ITS ACTIVITIES IN INDIA IS SUPPOSED TO BE REMITTED TO ITS HEAD OFFICE. ACCORDINGLY, AS PER THE PROVISIONS OF THIS E XPLANATION CHARGING OF TAX AT THE RATE APPLICABLE TO A FOREIGN COMPANY CAN NOT BE SAID TO BE LESS FAVOURABLE TO THE ASSESSEE. 12.9 IN CONCLUSION, IT MAY BE STATED THAT, CONSIDE RING THE SYSTEM OF TAXATION AS A WHOLE, THERE CANNOT BE SAID TO BE ANY DISCRIMINAT ION AGAINST THE ASSESSEE BANK, IN CHARGING A DIFFERENT RATE OF TAX. THE ASSESSEES CLAIM IS ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 11 THEREFORE REJECTED AND IT IS BEING CHARGED TO TAX O N ITS TOTAL INCOME, AT THE RATES LAID DOWN FOR NON-RESIDENT COMPANIES. 22. THE AR BEFORE US, ADMITTED THAT THE ISSUE IS AG AINST THE ASSESSEE. ON GOING THROUGH THE ORDER OF THE CIT(A), WE FIND T HAT THE CIT(A) HAS SUSTAINED THE ORDER OF THE AO BY APPLYING RATE OF T AX @ 48%, INSTEAD OF 35% AS ASKED FOR BY THE ASSESSEE. NOW THAT THE ASSE SSEE HAS ACCEPTED THAT THE COORDINATE BENCH OF KOLKATA HAS DEALT WITH THE ISSUE AND FOR THE REASONS MENTIONED THEREIN, THE AR ACCEPTS THE RATE AS APPLIED BY THE AO. WE ALSO FIND THAT THERE IS NO INFIRMITY IN THE ORDE R OF THE REVENUE AUTHORITIES, WHICH WE SUSTAIN. 23. THE GROUND, AS RAISED BY THE ASSESSEE IS REJECT ED. 24. THE ASSESSEE HAS ALSO RAISED AN ADDITIONAL GROU ND, WHEREIN IT HAS CHALLENGED THE TAXABILITY OF RS. 33,55,026/-, BEING AMOUNT RECEIVED FROM HO AND BRANCHES. THE AO HAS HELD, IN THE COMPUTATION OF INCOME OF THE BRANCH AS PER THE DOMESTIC LAWS, THE INTEREST HAS BEEN ALLOWED AS DEDUCTION FROM COMPUTATION OF I NCOME BUT THE SAME IS NOT ALLOWABLE UNDER SECTION 40(A)(I) OF THE I.T. ACT, 19 61 BECAUSE IT FAILED TO DEDUCT TAX ON PAYMENT OF INTEREST TO OVERSEAS BRANCH /H.O. AS DISCUSSED IN PARA 6 TO 6.4. THE INCOME OF THE OVERSEAS BRANCH/H.O. WOULD BE TAX ABLE UNDER ARTICLE 12 OF THE TREATY WITH FRANCE @ 10%. I, THEREFORE ADDED THE AM OUNT OF RS. 33,55,026/- TO THE TOTAL INCOME OF THE ASSESSEE AS INTEREST INCOME OF THE OVERSEAS BRANCH/H.O. 25. THE AR SUBMITTED THAT PATENTLY, THE AMOUNT HAS BEEN BROUGHT TO TAX TWICE, WHICH IS INCLUDED IN INTEREST & COMMISSI ON PAID TO OVERSEAS BRANCHES AND HO, THE ISSUE IS CLEARLY COVERED BY TH E DECISION OF THE SPECIAL BENCH OF THE ITAT IN THE CASE OF SUMITOMO M ITSUI BANKING CORP. VS. DDIT, REPORTED IN 136 ITD 66, WHEREIN THE SB HE LD, THAT THE INTEREST PAID BY THE INDIAN BRANCH OF THE ASSESSEE BANK TO ITS HO AND OTHER BRANCHES IS NOT CHARGEABLE TO TAX IN INDIA. S ECTION 195 WOULD NOT BE ATTRACTED. 26. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD, IT IS SEEN THAT THE AMOUNT IN Q UESTION HAS BEEN TAXED ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 12 IN THE ASSESSMENT OF THE ASSESSEE FIRSTLY AS THE IN COME OF THE HEAD OFFICE AND THEN AS THE INCOME OF THE PE. THE SPECIAL BENCH OF THE ITAT, IN THE CASE OF SUMITOMO (SUPRA) HAS HELD THAT THE TAXATION OF THE SAME AMOUNT TWICE IS NOT POSSIBLE. RESPECTFULLY FOLLOWING THE P RECEDENT, WE DELETE THE TAXABILITY OF THIS AMOUNT AS THE INCOME OF THE HEAD OFFICE. 27. THIS ADDITIONAL GROUND IS ALLOWED. THE APPEAL, FILED BY THE ASSESSEE IS, THUS, PARTLY ALLOWED. ITA NO. 4965/MUM/2005 : DEPARTMENT APPEAL : 28. GROUND NO. 1 PERTAINS TO ALLOWANCE OF EXEMPT ION OF GROSS INTEREST U/S 10(15) AND 10(33). 29. THE DR ARGUED THAT THE ISSUE IS COVERED BY THE ASSESSEES OWN CASE IN 1997-98 BY THE COORDINATE BENCH, BUT AT THAT TIM E, PROVISIONS RELATING TO SECTION 14A WAS NOT THERE, HENCE, DISALLOWANCE H AS TO BE MADE ON EQUITABLE BASIS. 30. THE AR ON THE OTHER HAND SUBMITTED THAT IN ASS ESSMENT YEAR 2001- 02, IN THE CASE OF CREDIT LYONANIS 2% DISALLOWANCE HAS BEEN MADE, WHICH, THE AR SUBMITTED WOULD BE ACCEPTABLE. 31. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PE RUSING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE QUESTION OF ALL OWING EXEMPTION UNDER SECTION 10(15) AND (33) ON GROSS BASIS IS NO MORE RES INTEGRA IN VIEW OF THE ORDER PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR EARLIER YEARS. AS REGARDS THE CONTENTION OF THE DR FOR MAKING DISA LLOWANCE UNDER SECTION 14A, WE FIND THAT THE SAME IS ALSO A SETTLE D ISSUE. IN PRINCIPLE, IT IS HELD THAT DISALLOWANCE UNDER SECTION 14A IS CALL ED FOR. HOWEVER, THE AMOUNT DISALLOWABLE UNDER SECTION 14A HAS BEEN ADJU DICATED IN EARLIER ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 13 YEARS. AFTER NOTICING THAT THE FUNDS FOR INVESTMENT IN SECURITIES FETCHING EXEMPT INCOME WERE OUT OF OWN FUNDS, IT HAS BEEN HE LD THAT NO DISALLOWANCE UNDER SECTION 14A ON ACCOUNT OF INTERE ST IS CALLED FOR. AS REGARDS THE AMOUNT OF OTHER EXPENSES DISALLOWABLE, WE FIND THAT THE TRIBUNAL HAS UPHELD DISALLOWANCE @ 2% OF EXEMPT INC OME IN THE ABOVE REFERRED CASE. FOLLOWING THE PRECEDENT, WE DIRECT A CCORDINGLY. 32. GROUND NO. 2 PERTAINS TO ALLOWANCE OF BROKEN PE RIOD INTEREST AS EXPENSE. THE ISSUE HAS BEEN DEALT WITH BY THE COORD INATE BENCH IN ITS OWN CASE, WHEREIN, IT HAS BEEN HELD, 6. GROUND NO.2 OF THE REVENUES APPEAL IS AGAINST T HE DIRECTION OF THE LEARNED CIT(A) TO ALLOW BROKEN PERIOD INTEREST AS E XPENDITURE. THE LEARNED DEPARTMENTAL REPRESENTATIVE WAS FAIR ENOUGH TO CONCEDE THAT SIMILAR ISSUE WAS THERE IN THE APPEAL FOR THE IMMEDIATELY PRECEDING YEAR AND THE TRIBUNAL, FOLLOWING ITS DECI SION FOR ASSESSMENT YEAR 1991-92, HAS DECIDED THIS ISSUE AGA INST THE REVENUE. IN VIEW OF THE FACT THAT THE FACTS AND CIRC UMSTANCES FOR THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER CONSIDERATION ARE SIMILAR AND NO DISTINGUISHING FEA TURE HAS BEEN BROUGHT TO OUR NOTICE BY THE LEARNED DEPARTMENTAL RE PRESENTATIVE, RESPECTFULLY FOLLOWING THE PRECEDENT, WE UPHOLD THE IMPUGNED ORDER ON THIS ISSUE BY DIRECTING THAT THE INTEREST PAID I N RESPECT OF THE BROKEN PERIOD BE SET OFF AGAINST THE INTEREST RECEI VED IN RESPECT OF THE BROKEN PERIOD. THIS GROUND IS DISPOSED OFF ACCO RDINGLY. 33. RESPECTFULLY FOLLOWING THE ORDER, WE HOLD THAT THE ISSUE IS AGAINST THE REVENUE AND THUS WE UPHOLD THE ORDER OF THE CIT (A). GROUND NO. 2, THEREFORE, IS REJECTED. 34. GROUND NO. 3 PERTAINS TO DISALLOWANCE OF RS. 1, 16,62,285/- INCURRED BY THE HO ON CREDIT RISK ASSISTANCE. 35. THE ISSUE HAS BEEN DEALT WITH BY THE COORDINATE BENCH, WHEREIN THEY RELIED UPON THE DECISION OF JCIT VS AMERICAN E XPRESS BANK LTD., REPORTED IN 24 TAXMAN.COM50. AND HELD, 12. LAST GROUND OF THE REVENUES APPEAL IS AGAINST THE DIRECTION GIVEN BY THE LEARNED CIT(A) TO ALLOW DEDUCTION OF ` 48,60,08 ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 14 INDEPENDENT OF THE PROVISIONS OF SECTION 44C OF THE ACT. ON THIS ISSUE AS WELL, THE LEARNED DEPARTMENTAL REPRESENTATI VE WAS FAIR ENOUGH TO CONCEDE THAT IT WAS COVERED AGAINST THE RE VENUE. WE FIND THAT THE MUMBAI BENCH OF THE TRIBUNAL IN THE C ASE OF AMERICAN EXPRESS BANK LTD.(SUPRA) HAS ALSO TAKEN SIMILAR VIE W ON THIS ISSUE IN FAVOUR OF THE ASSESSEE. IN VIEW OF THESE FACTS W E UPHOLD THE IMPUGNED ORDER ON THIS ISSUE. THIS GROUND IS NOT AL LOWED. 36. RESPECTFULLY FOLLOWING THE ORDER IN THE ASSESSE ES OWN CASE, WE SUSTAIN THE ORDER OF THE CIT(A). 37. THE GROUND, THEREFORE, REJECTED. 38. GROUND NO. 4 PERTAINS TO THE ALLOWABILITY OF RS . 5,76,81,812/-, BEING THE AMOUNT REINCORPORATED IN THE BOOKS. 39. BEFORE THE REVENUE AUTHORITIES IT WAS SUBMITTED THAT THE CLAIM OF RS. 5,76,81,812/- WRITTEN OFF AS BAD DEBTS HAVE BEE N WRITTEN BACK AS PROVISIONS INCORPORATED, WHICH WAS REJECTED BY THE AO. 40. THE CIT(A), ON CONSIDERATION OF THE ARGUMENTS, HELD, 10.2 THE LEARNED A.R. SUBMITTED THAT THE APPELLANT HAS ADDED BACK THE PROVISION FOR DOUBTFUL DEBTS MADE IN THE ACCOUNTS F ROM YEAR TO YEAR. DURING THE YEAR UNDER APPEAL THE APPELLANT HAS WRIT TEN BACK PROVISION FOR DOUBTFUL DEBTS AMOUNTING TO RS. 5,76,81,812/- UNDER THE HEAD PROVISIONS REINCORPORATED. IN THE RETURN OF INCOME IT WAS CLAI MED THAT WRITE BACK OF PROVISION IS NOT ASSESSABLE AS INCOME CONSIDERING T HE FACT THAT PROVISION WHEN MADE WAS ADDED BACK TO THE INCOME OF RESPECTIV E YEAR. HOWEVER, THE AO IN HIS ASSESSMENT ORDER HAS HELD THAT THE APP ELLANT HAS NOT ESTABLISHED HOW THE AMOUNTS ARE NOT CHARGEABLE TO T AX. 10.3 FURTHER, THE APPELLANT FURNISHED THE DETAILS OF PROVISIONS REVERSED DURING THE YEAR AS UNDER: ASST. YEAR DATE OF PROVISION DATE OF REVERSAL CUSTOMER NAME AMOUNT (RS) 1998-99 JUNE 1997 31.03.31 INDOKEM LTD. 1,18,82,486.09 1998-99 SEPTEMBER 1997 31.03.01 JAIN IRRIGATION. 81,52,234.63 1998-99 DECEMBER 1997 31.12.00 DSQ LTD. 1,25,18,584.16 1998-99 DECEMBER 1997 30.09.00 DSQ LTD. 1,10,06,640 .00 1998-99 SEPTEMBER 1997 30.09.00 EXPRESS INDUSTRIES 11,764.25 1998-99 SEPTEMBER 1997 30.09.00 JAIN IRRIGATION 24,70,000.00 1998-99 DECEMBER 1997 30.06.00 DSQ LTD. 82,22,645.8 3 2000-01 JUNE 1999 30.09.00 DEWAN TYRES 5,72,736.75 2000-01 JUNE 1999 30.06.00 CHEMWOOD CORP. 18,44,449.80 RAJESH ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 15 MENSION 10,00,000.00 TOTAL 5,76,81,811.51 10.4 WHEN IN THE COURSE OF APPELLATE PROCEEDINGS T HE APPELLANT WAS ASKED TO GET ITS CONTENTION VERIFIED THAT ALL THE ABOVE PROV ISIONS WERE OFFERED FOR TAX THE RESPECTIVE YEAR OF PROVISION, THE APPELLANT FIL ED FOLLOWING SUBMISSION NECESSARY DETAILS: AS SUBMITTED IN THE COURSE OF THE APPELLATE PROCEEDI NGS PROVISION FOR DOUBTFUL DEBTS IS OFFERED TO TAX IN THE RESPECT IVE YEAR OF PROVISION. WE NOW ENCLOSE AT ANNEXURE 2 A COPY OF COMPUTATION O F TOTAL INCOME FOR ASSESSMENT YEAR 1998-99. YOU WILL NOTE THEREFROM THAT PROVISION FOR DOUBTFUL DEBTS AMOUNTING TO RS. 17,93,96,844 WAS ADDED BACK IN COMPUTING BUSI NESS INCOME FOR THAT ASSESSMENT YEAR. FURTHER, WE ENCLOSE AT ANNEXURE 3 A COPY OF COMPUTA TION OF TOTAL INCOME FOR ASSESSMENT YEAR 2000-01. IT WILL BE NOTED THEREFROM THAT, PROVISION FOR DOUB TFUL DEBTS WAS ADDED BACK AT RS. 62,84,82,300. WE ALSO ENCLOSE AT A NNEXURE 4 PARTY-WISE DETAILS OF PROVISION FOR DOUBTFUL DEBTS DISCLOSING YEAR WISE CHARGE TO THE PROFIT AND LOSS ACCOUNT AND THE A MOUNTS WRITTEN BACK OUT OF SUCH PROVISION DURING THE YEAR UNDER APPEAL. 41. THE CIT(A), ON CONSIDERATION OF THE ABOVE SUBM ISSIONS, HELD, 10.5 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE APPELLANT ON THIS ISSUE. ON VERIFICATION, I FIN D THE CONTENTION OF THE APPELLANT THAT ALL THE ABOVE PROVISIONS WERE OFFERE D FOR TAX IN THE RESPECTIVE YEAR OF PROVISION AS ACCEPTABLE. THEREFO RE, WHEN THE PROVISIONS FOR DOUBTFUL DEBTS WERE ADDED BACK IN THE COMPUTATI ON OF INCOME IN THE RESPECTIVE YEARS, THERE IS NO QUESTION OF TAXING TH EM AGAIN IN THE YEAR WHEN THEY ARE WRITTEN BACK. THE A.O. IS DIRECTED TO DELETE THE ADDITION OF RS. 5,76,81,812/- IN RESPECT OF PROVISIONS REINCORPO RATED IN THE ACCOUNTS. 42. THE CIT(A), THEREFORE, DELETED THE ADDITION MAD E. 43. AGGRIEVED, THE REVENUE AUTHORITIES IS IN APPEAL BEFORE ITAT. 44. THE DR RELIED ON THE ORDER OF THE AO, WHEREAS, THE AR RELIED ON THE ORDER OF THE CIT(A). 45. AFTER CONSIDERING THE ORDER OF THE CIT(A), WE F IND THAT THE ASSESSEE PROVIDED COMPLETE DETAILS AND REASONS, AS TO WHY TH E PROVISIONS IS BEING REINCORPORATED, AND THAT THE REASONING GIVEN BY THE CIT(A), DESERVES TO BE SUSTAINED. ITA NO. 4295/MUM/2005 ITA NO. 4965/MUM/2005 M/S. CREDIT AGRICOLE INDOSUEZ (NOW CALYON BANK) 16 46. WE, THEREFORE, SUSTAIN THE ORDER OF THE CIT(A) AND REJECT THE GROUND OF APPEAL FILED BY THE DEPARTMENT. 47. IN THE RESULT, THE APPEAL, AS FILED BY THE DEPA RTMENT IS PARTLY ALLOWED. TO SUM UP: APPEALS FILED BY THE ASSESSEE AND THE DEPARTMENT AR E PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH AUGUST, 2013. SD/- SD/- ( . . ) ( ! ) (R.S. SYAL) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 7 TH AUGUST, 2013 / COPY TO:- 1) / THE APPELLANT. 2) / THE RESPONDENT. 3) THE CIT (A)-XXXI, MUMBAI. 4) ' '( / THE DIT( IT )/ , CIT CONCERNED , MUMBAI / THE DIT(IT)/CIT, CONCERNED.., MUMBAI. 5) ,-. / , ' ! / , 01 / THE D.R. L BENCH, MUMBAI. 6) .2 3 COPY TO GUARD FILE. '45 / BY ORDER / / TRUE COPY / / 6 / 7 8 ' ! / , 01 DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI *:;7 , . . * CHAVAN, SR. PS