STATE BANK OF MAURITIUS LTD., MUMBAI V. DEPUTY DIRECTOR OF INCOME TAX (I.T.) RG.2(1), MUMBAI

ITA 5778/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9178 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 04-12-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 12-08-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Double taxation relief; Earning of tax free income; Permanent establishment
• Section: 43B; 143(3); 14A; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI L BENCH MUMBAI BENCHES, MUMBAI BEFORE SHRI B RAMAKOTAIAH, AM & SHRI VIJAY PAL RAO , JM ITA NO. 5778/MUM/2011 (ASST YEAR2008-09 ) STATE BANK OF MAURITIUS LTD 101 REHEJA CENTRE, FREE PRESS JOURNAL ROAD NARIMAN POINT MUMBAI 21 VS THE DY DIRECTOR OF INCOME TAX(I.T) RANGE 2(1), MUMBAI (APPELLANT) (RESPONDENT) PAN NO. AABCS4465K ASSESSEE BY SH NISHANT THAKKAR REVENUE BY SH MAHESH KUMAR DT.OF HEARING 4 TH DEC 2012 DT OF PRONOUNCEMENT 7 TH , DEC 2012 ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ASSESSMENT ORDER DATED 15.6.2011 PASSED U/S 144C (13) R.W.S 143(3) OF THE I T ACT IN PURSUANT TO THE DIRECTIONS OF THE DISPUTE RESOLUTION PANEL (DRP) DT 13.5.2011 PASSED U/S 144C(5) OF THE IT ACT FOR THE ASSESSMENT YEAR 2008-09. 2 THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE G ROUNDS IN THIS APPEAL: 1. THE ASSESSING OFFICER/DISPUTE RESOLUTION PANEL H AS ERRED IN MAKING AN ADDITIONAL DISALLOWANCE OF ` 15,61,625/- U/S 14A OF THE I T ACT BY APPLYING THE PROVISIONS OF ?RULE 8D OF THE I T RULES 1962 WITHOUT CONSIDERING THE APPELLANTS ARGUMENTS AND THE DETAILS FILED. 2 THE ASSESSING OFFICER HAS ERRED IN APPLYING THE PRO VISIONS OF SEC 44C OF THE IT ACT 1861 IN COMPUTING THE DEDUCTION IN RESPECT OF HE AD OFFICE EXPENDITURE WITHOUT CONSIDERING THE APPELLANTS ARGUMENTS AND TH E DETAILS FILED. 3 GROUND NO.1 IS REGARDING DISALLOWANCE U/S 14A OF THE I T ACT. ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 2 3.1 THE ASSESSEE RECEIVED INTEREST OF ` 24,93,562/- ON TAX FEE BONDS AND DIVIDEND OF ` 90,070/- ON SHARES OF QUOTED COMPANIES, AGGREGAT ING TO TAX FREE INCOME OF ` 25,83,632/-. THE ASSESSING OFFICER PROPOSED TO DI SALLOW THE EXPENDITURE RELATING TO EARNING OF TAX FREE INCOME U/S 14A. 3.2 THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFF ICER THAT THE INVESTMENTS WERE MADE IN THE EARLIER YEAR OUT OF BANKS OWN FUNDS. THE ASSESSING OFFICER REJECTED THE CONTENTION OF THE ASSESSEE AND APPLIED RULE 8D WHIL E DISALLOWING THE EXPENDITURE U/S 14A ON ACCOUNT OF TAX FREE INCOME. THE ASSESS ING OFFICER HAS GIVEN THE REASONING FOR REJECTING THE ASSESSEES CONTENTION T HAT IT IS IMPOSSIBLE TO IDENTIFY THE EXPENDITURE ATTRIBUTABLE TO THE EXEMPT INCOME IN CO MPOSITE BUSINESS ACTIVITIES WHERE THERE ARE MULTIPLE STREAMS OF HEADS OF INCOME . SECONDLY, THE FUNDS ARE FUNGIBLE AND IT CANNOT BE ARGUED WITH ANY CERTAINTY THAT WHAT TYPE OF FUNDS, INTEREST FREE OR INTEREST BEARINGS, WAS UTILIZED IN A PARTIC ULAR INVESTMENT. 4 BEFORE US, THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THE ASSESSEE HAS USED INTEREST FREE FUNDS FOR TAX FREE BONDS AND SHARES; THEREFORE, THERE IS NO QUESTION OF DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A WHEN N O SUCH EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR EARNING TAX FREE INCOM E. THE LD AR HAS FURTHER SUBMITTED THAT BEFORE THE ASSESSING OFFICER THE ASS ESSEE HAS RELIED THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) FOR THE ASSESSM ENT YEAR 2003-04 TO ESTABLISH THAT THE INVESTMENT HAS BEEN MADE IN THE EARLIER YE AR OUT OF ASSESSEES OWN FUNDS. 4.1 THOUGH, FOR THE ASSESSMENT YEAR 2003-04, THIS I SSUE HAS BEEN REMANDED TO THE RECORD OF THE ASSESSING OFFICER BY FOLLOWING THE OR DER FOR THE ASSESSMENT YEAR 2001-02; HOWEVER, WHEN THE ASSESSEE IS SHOWING THE BONDS AND SHARES AS STOCK IN ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 3 TRADE, THEN IN VIEW OF THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD VS JCIT REPORTED IN 250 CTR 291, NO DISA LLOWANCE CAN BE MADE U/S 14A IN RESPECT OF DIVIDEND/INTEREST INCOME RECEIVED FROM SHARES AND BONDS HELD BY THE ASSESSEE AS TRADE-IN-STOCK. THE LD AR HAS ALSO REL IED UPON THE ORDER DATED 14.9.2001 OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS INDIA ADVANTAGE IN ITA 6771/MUM/2011 WHEREIN THE TRIBUNAL HAS CONSIDERED A ND DECIDED THIS ISSUE AFTER CONSIDERING THE DECISION OF THE TRIBUNAL IN THE CA SE OF AMERICAN EXPRESS BANK LTD IN ITA NO.5904/MUM/2000 AS WELL AS THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD(SUPRA). 4.2 THE LD AR HAS SUBMITTED THAT WHILE DECIDING THE ISSUE FOR THE ASSESSMENT YEAR 2003-04 THE DECISION FOR THE ASSESSMENT YEAR 2001-0 2 HAS BEEN FOLLOWED BY THE TRIBUNAL IN ASSESSEES OWN CASE BECAUSE THE DECISI ON IN THE CASE OF CCI LTD (SUPRA) OF HONBLE KARNATAKA HIGH COURT WAS NOT AVAILABLE W ITH THE TRIBUNAL. THEREFORE, THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE EARLIER YEAR CANNOT BE TAKEN AS BINDING PRECEDENT WHEN THERE IS A DIRECT DECISIO N ON THE POINT OF HONBLE KARNATAKA HIGH COURT (SUPRA). 4.3 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THAT THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2001-02 HAS CONSIDERED ALL THE CONTENTIONS AND THE RELEVANT FACTS REGARDING T HE ISSUE AND AFTER A DETAILED DISCUSSION HAS DECIDED THAT SECTION 14A WOULD APPLY WHETHER THE SHARE AND SECURITIES ARE HELD AS INVESTMENT OR STOCK IN TRADE . HE HAS FURTHER SUBMITTED THAT THE COORDINATE BENCH OF THE TRIBUNAL WHILE DEALING WITH THE ISSUE FOR THE ASSESSMENT YEAR 1999-00 HAS OBSERVED THAT THE DECISION OF THE SPECI AL BENCH OF THE TRIBUNAL IN THE ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 4 CASE OF DAGA CAPITAL MANAGEMENT PVT LTD ON THE POIN T OF DISALLOWANCE OF EXPENDITURE U/S 14A IN RESPECT OF TAX FREE DIVIDEND INCOME ON SHARES HELD AS STOCK IN TRADE HAS IMPLIEDLY BEEN APPROVED BY THE HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE OF GODREJ BOYCE MFG CO LTD VS ACIT REPORTED IN 328 ITR 81. THUS, WHEN THE ISSUE HAS BEEN DECIDED BY THE COORDINATE BENCH IN A SSESSES OWN CASE, THE SAME IS COVERED AGAINST THE ASSESSEE. THE LD DR HAS FURT HER CONTENDED THAT WHEN THE COORDINATE BENCH HAS TAKEN A VIEW BY FOLLOWING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ BOY CE MFG PVT LTD (SUPRA), THEN THE TRIBUNAL IS BOUND BY THE DECISION OF THE HONBLE JU RISDICTIONAL HIGH COURT AND NOT BY THE DECISION OF THE NON JURISDICTIONAL HIGH COURT A S RELIED UPON BY THE ASSESSEE. 5 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RELE VANT MATERIAL ON RECORD. AS REGARDS THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES U/S 14A IS CONCERNED FOR THE ASSESSMENT YEAR 2001-01, THIS ISSUE WAS CONSIDERED BY THE TRIBUNAL AND HELD THAT THE DISALLOWANCE RESTRICTED AT 2% OF THE EXEMPT INCOME FOR MANAGEMENT AND ADMINISTRATIVE EXPENSES BY THE COMMISSIONER OF INCO ME TAX(APPEALS), IS IN ORDER AND THE SAME WAS CONFIRMED. EVEN, THE ASSESSEE DI D NOT PRESS THE SAID GROUND OF DISALLOWANCE OF 2% OF EXEMPT INCOME ON ACCOUNT OF M ANAGEMENT AND ADMINISTRATIVE INCOME U/S 14A. 5.1 BEFORE US, THE LD AR HAS ALSO NOT DISPUTED THE ADMITTED POSITION AS REGARDS THE DISALLOWANCE FOR MANAGEMENT AND ADMINISTRATIVE EXPENSES RESTRICTED TO 2% OF THE EXEMPT INCOME U/S 14A. SINCE IN THE EARLIER YE AR, RULE 8D WAS NOT APPLICABLE AND THEREFORE, 2% OF EXEMPT INCOME ON ACCOUNT OF MA NAGEMENT AND ADMINISTRATIVE EXPENSES WAS CONSIDERED AS REASONABL E FOR DISALLOWANCE U/S 14A; ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 5 WHEREAS FOR THE ASSESSMENT YEAR UNDER CONSIDERATION , RULE 8D IS APPLICABLE;. THEREFORE, THE DISALLOWANCE ON ACCOUNT OF MANAGEMEN T AND ADMINISTRATIVE EXPENSES HAS TO BE WORKED OUT BY APPLYING RULE 8D. 5.2 SO FAR AS THE DISALLOWANCE U/S 14A ON ACCOUNT O F INTEREST EXPENDITURE, THOUGH THE ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN AS SESSEES OWN CASE FOR THE ASSESSMENT YEAR 1999-00. HOWEVER, WHEN A DIRECT DE CISION OF THE HONBLE KARNATAKA HIGH COURT AS WELL AS THIS TRIBUNAL IS ON THE POINT THEN THIS ISSUE HAS TO BE CONSIDERED AND EXAMINED IN THE LIGHT OF THE SAID DE CISION. FOR THE ASSESSMENT YEAR 1999-00, THE TRIBUNAL HAS CONSIDERED THIS ISSUE INP ARA5.12 AS UNDER: 5.12. THE NEXT POINT URGED BY THE LEARNED AR WAS T HAT TAX FREE SECURITIES WERE HELD BY THE ASSESSEE AS STOCK-IN-TRADE AND HENCE THE PROVISIONS OF SECTION 14A CANNOT APPLY TO DISALLOW ANY EXPENDITURE NOTWITHSTANDING THE FACT THAT THE INTEREST INCOME IS EXEMPT. WE FIND TH AT SIMILAR CONTENTION WAS RAISED BEFORE THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF JCIT V. AMERICAN EXPRESS BANK LIMITED IN ITA NO. 5904/MUM/2 000 FOR THE A.Y. 1997- 98. IN THAT CASE THE ASSESSEE RELIED ON THE JUDGMEN T OF THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT V. SMT.LEENA RAMACHAN DRAN [(2011) 339 ITR 296 (KER.)] FOR RAISING A PROPOSITION THAT NO DISALLOWAN CE CAN BE MADE U/S 14A BECAUSE THE SECURITIES WERE HELD AS INVESTMENT. THE M UMBAI BENCH CONSIDERED THIS ISSUE AT LENGTH IN THE LIGHT OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOY CE MFG. CO. LTD. VS. DCIT [(2010) 328 ITR 81 (BOM)]. VIDE ITS ORDER DATED AUGUST, 2012, THE TRIBUNAL HAS HELD IN THAT CASE THAT DISALLOWANCE U/S 14A IS WARR ANTED AS THE OPERATION OF SECTION 14A DOES NOT CEASES WHERE THE DIVIDEND INCOM E IS ONLY INCIDENTAL TO THE SHARES HELD AS STOCK IN TRADE. RESPECTFULLY FOLL OWING THE RATIO DECIDENDI OF THIS PRECEDENT DE HORS SPECIFIC REFERENCE TO SEC TION 14A, WE HOLD THAT THE EXPENSES INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF `BUSINESS PROFITS CANNOT BE ALLOWED AS DEDUCTION. T HIS CONTENTION OF THE LEARNED AR IS ALSO REJECTED. 5.3 SINCE THE DISPUTE RAISED BEFORE US IS ONLY FOR DISALLOWANCE OF INTEREST EXPENDITURE ON THE GROUND THAT THE ASSESSEE HAS NO T UTILISED ANY INTEREST BEARING FUNDS FOR THESE BONDS AND SHARES RESULTING TO TAX F REE INCOME AND SECONDLY THAT THE ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 6 ASSESSEE IS SHOWING THESE BONDS AND SHARES AS STOCK IN TRADE AND THEREFORE, IN VIEW OF THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD (SUPRA) AND THE DECISION OF THE COORDINATE BENCH OF THE TRI BUNAL IN THE CASE OF INDIA ADVANTAGE (SUPRA), THE OBSERVATIONS AND THE FINDIN GS OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1999-00 IN PARA 5.12 (SUPRA) IS NOT BINDING ON THIS POINT. 5.4 IT IS CLEAR FROM THE EARLIER ORDER THAT THE TRI BUNAL HAS FOLLOWED THE DECISION IN THE CASE OF CIT VS AMERICAN EXPRESS BANK LTD WHILE COMING TO THE CONCLUSION THAT THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE BUSINESS PROFIT CANNOT BE ALLOWED AS DEDUCTION. IT IS EVIDENT THAT THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD (SUPRA) WAS NEITHER CITED NOR CONSIDERED BY THE TRIBUNAL WHILE PASSING THE OR DER FOR THE ASSESSMENT YEAR 1999-00 AND SUBSEQUENT YEARS. 5.5 IN THE CASE OF INDIA ADVANTAGE (SUPRA), THE TRI BUNAL AFTER CONSIDERING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL I N THE CASE OF AMERICAN EXPRESS BANK LTD (SUPRA) HAS TAKEN A VIEW BY FOLLOWING THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CCI LTD (SUPRA) THAT IF THE SHARES WERE HELD AS STOCK IN TRADE, THEN THE INTEREST PAID ON BORROWED FUNDS FOR ACQUIRING THE SHARES WOULD BE ALLOWABLE AS DEDUCTION U/S 36(1)(III) AND THEREFORE, NO DISALLOWANCE CAN BE MADE U/S 14A ON ACCOUNT OF INTEREST EXPENDITURE ON DIVIDEND INCOME EARNED ON THE SHARES HELD AS STOCK IN TRADE. THE RELEVANT OB SERVATIONS AND THE FINDINGS OF THE TRIBUNAL IN PARAS 5 & 6 ARE AS UNDER: 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIV AL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING THE DISALLOWANCE OF EXPENSES U/S.14A IN RELATION TO THE EXEMPT DIVIDEND INCOME RECEIVED FROM SHARES HELD ON TRADING ACCOUNT. THE A.O. DISALLOWED THE EXPENSES HOLDING THAT THE PROVISIONS OF ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 7 SECTION 14A WERE APPLICABLE EVEN IN RELATION TO THE D IVIDEND RECEIVED FROM THE TRADING SHARES. THE LD.CIT(A) HAS HOWEVER HELD THAT THE PROVISIONS OF SECTION 14A WILL NOT APPLY TO THE SHARES HELD ON TRAD ING ACCOUNT. THE REVENUE HAS PLACED RELIANCE ON THE DECISION OF MUM BAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. AMERICAN EXPRESS BANK LI MITED (SUPRA) IN WHICH THE TRIBUNAL HAS HELD THAT THE EXPENDITURE U/S.14A HAS TO BE DISALLOWED EVEN IN RESPECT OF DIVIDEND INCOME RECEIVED FROM TRADING SHARES. THE TRIBUNAL FOLLOWED THE DECISION OF THE SPECIAL BENCH OF THE T RIBUNAL IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (SUPRA). THE ASSESSEE IN THAT CASE HAD RELIED ON THE JUDGMENT OF HONBLE HIGH COURT OF KERALA IN THE CASE OF CIT VS. SMT. LEENA RAMACHANDRAN (339 ITR 296) TO ARGUE T HAT THE DISALLOWANCE COULD NOT BE MADE IN RELATION TO THE DIVIDEND RECEIVE D FROM TRADING SHARES. THE TRIBUNAL HAD HOWEVER, DISTINGUISHED THE SAID JUD GMENT OF HONBLE HIGH COURT OF KERALA ON THE GROUND THAT IN THAT CASE THE A CQUISITION OF SHARES WITH THE BORROWED FUNDS WAS FOR THE PURPOSE OF CONTROLLING THE COMPANY. THEREFORE, EVEN THOUGH THE PURPOSE FOR ACQUIRING THE SHA RES WAS BUSINESS, THE HIGH COURT HAD UPHELD THE DISALLOWANCE U/S.14A OF TH E I.T. ACT. THE TRIBUNAL ALSO NOTED THAT THE HIGH COURT IN THAT CASE HAD ONLY OBSERVED THAT THE INTEREST PAID ON BORROWED FUNDS UTILISED FOR ACQUIRIN G SHARES COULD BE ALLOWED AS DEDUCTION U/S.36(1)(III) ONLY IF SHARES WERE HELD AS STOCK-IN-TRADE. THESE OBSERVATIONS WERE ONLY OBITER DICTA AND NOT THE RATIO DECIDENDI OF THE JUDGMENT. THE RATIO DECIDENDI OF THE JUDGMENT WAS D ISALLOWANCE OF INTEREST U/S.14A WHICH HAD BEEN UPHELD BY THE TRIBUNAL. THE TRIBUNAL, THEREFORE, DID NOT ACCEPT THE ARGUMENTS BASED ON THE JUDGMENT OF HO NBLE HIGH COURT OF KERALA IN THE CASE OF SMT. LEENA RAMACHANDRAN (SUPRA ) WHICH WAS NOT DIRECTLY ON THE ISSUE OF DISALLOWANCE OF EXPENSES I N RELATION TO THE DIVIDEND INCOME RECEIVED FROM TRADING IN SHARES. 6. HOWEVER, THE HONBLE HIGH COURT OF KARNATAKA HAVE RECENTLY CONSIDERED THE DISALLOWANCE OF EXPENSES INCURRED ON BORROWINGS MADE FOR PURCHASE OF TRADING SHARES U/S.14A OF THE I.T. ACT IN CASE OF CCL LTD. VS. JCIT (SUPRA). THE ASSESSEE IN THAT CASE WAS DISTRIBUTOR OF STATE LOTTERIES AND A DEALER IN SHARES AND SECURITIES. THE ASSESSEE HAD TAKEN LOAN S FOR THE PURCHASE OF CERTAIN SHARES AND IT HAD INCURRED EXPENDITURE FOR BROKING THE LOANS WHICH HAD BEEN DISALLOWED UNDER RULE 8D BY THE A.O. AND CONFIRMED BY THE LD.CIT(A). THE TRIBUNAL AGREED WITH THE AUTHORITIES BELOW THAT THE EXPENDITURE RELATABLE TO EARNING OF DIVIDEND INCOME THOUGH INCIDENTAL TO THE TRADING IN SHARES WA S ALSO TO BE DISALLOWED U/S.14A OF THE I.T. ACT. THE TRIBUNAL HOWEVER, HAD OBSERVED THAT THE ENTIRE BROKING COMMISSION WAS NOT RELATABLE TO EARNING OF D IVIDEND INCOME AS THE LOAN HAD BEEN UTILISED FOR THE PURCHASE OF SHARES AN D THE PROFIT SHOWN FROM THE SALE OF SHARES HAD BEEN OFFERED AS BUSINESS INCO ME. THE TRIBUNAL, THEREFORE, DIRECTED THE A.O. TO BIFURCATE THE EXPENDI TURE PROPORTIONATELY. THE ORDER OF THE TRIBUNAL WAS HOWEVER, NOT UPHELD BY THE TRIBUNAL. THE HIGH COURT NOTED THAT 63% OF SHARES WHICH WERE PURCHASED WERE SOL D AND INCOME DERIVED WAS OFFERED TO TAX AS BUSINESS INCOME. THE REMAINING 30% OF SHARES WHICH REMAINED UNSOLD HAD REVERTED TO DIVIDEND INCOM E FOR WHICH THE ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 8 ASSESSEE HAD NOT INCURRED ANY EXPENDITURE AT ALL. THE HIGH COURT ALSO OBSERVED THAT THE ASSESSEE HAD NOT RETAINED THE SHARE S WITH THE INTENTION OF EARNING DIVIDEND INCOME WHICH WAS INCIDENTAL DUE TO HIS SALE OF SHARES WHICH REMAINED UNSOLD BY THE ASSESSEE. THE HIGH COURT, THE REFORE, DID NOT UPHOLD THE ORDER OF THE TRIBUNAL DISALLOWING THE EXPENDITURE IN RELATION TO THE DIVIDEND FROM SHARES. THUS THERE BEING A DIRECT JUD GMENT OF A HONBLE HIGH COURT ON THIS ISSUE, THE SAME HAS TO BE FOLLOWED IN PREFERENCE TO THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT P. LTD. (SUPRA). INFACT, WE NOTE THAT T HE TRIBUNAL IN THE CASE OF GANJAM TREADING CO. LTD. (SUPRA) HAS ALREADY CONSIDERE D THIS SITUATION AND HELD THAT IN VIEW OF THE JUDGMENT OF HONBLE HIGH C OURT OF KARNATAKA IN THE CASE OF CCL LTD. VS. JCIT (SUPRA) THE DISALLOWANCE O F INTEREST IN RELATION TO THE DIVIDEND RECEIVED FROM TRADING SHARES CANNOT BE MADE. WE, THEREFORE, SEE NO INFIRMITY IN THE ORDER OF THE LD. CIT(A) IN DELETI NG THE DISALLOWANCE U/S.14A COMPUTED BY THE A.O. IN RELATION TO THE STOCK-IN-TR ADE. THE ORDER OF THE LD.CIT(A) IS ACCORDINGLY UPHELD. 5.7 IT IS CLEAR FROM THE ORDER OF THE TRIBUNAL IN T HE CASE OF INDIA ADVANTAGE (SUPRA) THAT THE DECISION IN THE CASE OF AMERICAN EXPRESS B ANK LTD (SUPRA) HAS BEEN CONSIDERED AND DISTINGUISHED BECAUSE A DIRECT DECIS ION ON THE POINT OF THE HONBLE KARNATAKA HIGH COURT IS AVAILABLE ON THE POINT. 5.8 WE HAVE CONSIDERED THE DECISION RELIED UPON BY EITHER OF THE PARTIES AS WELL AS GIVEN OUR DEEP THOUGHT ON THIS ISSUE AND AGREED /CONCURRED WITH THE VIEW OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF IND IA ADVANTAGE (SUPRA). THEREFORE, ON PRINCIPLE WE HOLD THAT NO DISALLOWANCE CAN BE MA DE ON ACCOUNT OF SECTION 14A FOR INTEREST EXPENDITURE ON ACCOUNT OF TAX FREE INC OME EARNED ON THE SECURITIES HELD AS STOCK IN TRADE. HOWEVER, SINCE THIS ISSUE OF ST OCK IN TRADE HAS BEEN RAISED FIRST TIME BEFORE US AND THEREFORE, THE ASSESSING OFFICER HAS NOT DEALT WITH THE SAME IN THE IMPUGNED ORDER. IT IS ALSO NOT CLEAR FROM THE RECO RDS AS NO SPECIFIC FINDING HAS BEEN GIVEN BY THE ASSESSING OFFICER ON THE FACT WHETHER THE ASSESSEE HAS USED BORROWED FUNDS FOR ACQUIRING THE BONDS AND SHARES IN QUESTIO N. FURTHER, THE ASSESSING OFFICER ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 9 HAS ALSO NOT EXAMINED THESE FACTS WHETHER THE BONDS AND SHARES IN QUESTION ARE HELD AS STOCK IN TRADE OR INVESTMENT BY THE ASSESSE E AND FURTHER WHETHER THESE BONDS AND SHARES ARE THE SAME AS HELD BY THE ASSESS EE FOR THE ASSESSMENT YEAR 2003-04. 5.9 WE NOTE THAT THE ASSESSING OFFICER HAS NOT GIVE N A CONCLUSIVE FINDING ABOUT THE USE OF BORROWED FUNDS BY THE ASSESSEE; BUT HAS EXPRESSED THE DIFFICULTIES IN ACCEPTING THE CONTENTION OF THE ASSESSEE ON THIS PO INT. THEREFORE, ALL THESE ASPECTS REQUIRE A PROPER VERIFICATION AND EXAMINATION OF TH E FACTS. ACCORDINGLY, THIS ISSUE IS REMITTED TO THE RECORD OF THE ASSESSING OFFICER TO EXAMINE AND VERIFY THE NECESSARY RELEVANT RECORDS TO ASCERTAIN THE REAL NATURE OF TH E TRANSACTIONS WHETHER THESE SECURITIES ARE ACQUIRED BY THE ASSESSEE AS INVESTME NT OR STOCK IN TRADE AND SECONDLY WHETHER THE ASSESSEE HAS USED INTEREST BEARING FUND S FOR ACQUIRING THESE BONDS AND SHARES. IN ORDER TO FIND THE REAL NATURE OF THE TR ANSACTION, IT IS NECESSARY TO CONSIDER THE FACT WHETHER THE ASSESSEE HAS OFFERED THE INCOM E ARISING FROM SALE/TRANSFER OF THESE SECURITIES AS BUSINESS INCOME OR CAPITAL GAIN AND WHETHER THE SAME WAS ACCEPTED BY THE ASSESSING OFFICER OR ANY OTHER TREA TMENT WAS GIVEN TO THE SAME. THE ASSESSING OFFICER IS DIRECTED TO CARRY OUT THE NECESSARY ENQUIRIES AND VERIFICATION AND THEN DECIDE THE ISSUE AS PER LAW. 6 GROUND NO.2 IS REGARDING DEDUCTION U/S 44C REGARD ING HO EXPENSES ATTRIBUTABLE TO INDIAN OPERATIONS. 7 WE HAVE HEARD THE LD AR OF THE ASSESSEE AS WELL A S THE LD DR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE LD AR HAS SUB MITTED THAT THIS ISSUE HAS BEEN ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 10 CONSIDERED AND DECIDED BY THE TRIBUNAL IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 1999-00 AND FOR THE ASSESSMENT YEARS 2000-01 TO 2004-05. 7.1 ON THE OTHER HAND, THE LD DR HAS SUBMITTED THAT THOUGH THE TRIBUNAL HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE FOR TH E ASSESSMENT YEAR 1999-00 WHICH HAS BEEN FOLLOWED FOR THE SUBSEQUENT YEARS; HOWEVER , WHILE CONSIDERING THE PROVISIONS OF THE TREATY, ARTICLE 23(1) SHOULD BE T AKEN AS OVERRIDING EFFECT TO THE ARTICLE 7(3) OF THE TREATY. HE HAS REFERRED ARTICL E 23(1) OF THE INDO MAURITIUS TREATY. IN SUPPORT OF HIS CONTENTION AND RELIED ON THE DECISIO N OF THE TRIBUNAL IN THE CASE OF MASHREQBANK PSC VS DY DIRECTOR OF INCOME TAX REPORT ED IN 14 SOT 01 (MUM) 8 AFTER CONSIDERING THE RIVAL SUBMISSIONS AND CAREF ULLY PERUSAL OF THE ORDER OF THE TRIBUNAL FOR THE ASSESSMENT YEAR 1999-00, WE NOTE T HAT ALL THESE OBJECTIONS RAISED BY THE LD DR HAVE BEEN DEALT WITH BY THE COORDINATE BE NCH OF THE TRIBUNAL. AFTER TAKING NOTE OF THE DIFFERENCE IN THE LANGUAGE OF TH E TREATY, THE TRIBUNAL HAS HELD THAT THE INDO MAURITIUS TREATY DOES NOT CONTAIN ANY RESTRICTION CLAUSE UNDER ARTICLE 7(3) WHICH RESTRICTS THE EXPENSE IN SO FAR AS THES E ARE INCURRED FOR THE PURPOSE OF PE. THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN PARAS 4.7 TO 4.21 ARE AS UNDER: 4.7. A BARE PERUSAL OF PARA 1 OF ARTICLE 7 REVEALS TH AT WHEN THE ENTERPRISE OF ONE CONTRACTING STATE (SAY, MAURITIUS) CARRIES ON BUSINESS IN THE OTHER CONTRACTING STATE (SAY, INDIA), THE PROFITS OF THE EN TERPRISE MAY BE TAXED IN INDIA BUT ONLY SO MUCH OF THEM AS ARE ATTRIBUTABLE TO THE PERMANENT ESTABLISHMENT (HEREINAFTER ALSO CALLED `THE PE), TH ROUGH WHICH THE MAURITIUS ENTERPRISE CARRIES ON BUSINESS IN INDIA. PARA 2 OF ARTI CLE 7 TALKS OF ATTRIBUTION OF PROFITS TO SUCH PE BY CONSIDERING IT AS DISTINCT AN D SEPARATE ENTERPRISE DE HORS THE GENERAL ENTERPRISE FOR THE LIMITED PURPOSE OF THE COMPUTATION 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 PROFITS OF THE PERMANENT ESTABLISHMENT , DEDUCTION IS ALLOWED FOR ALL EXPENSES WHICH ARE INCURRED FOR THE PU RPOSE OF THE BUSINESS OF THE PERMANENT ESTABLISHMENT INCLUDING EXECUTIVE AND GENERAL ADMINISTRATIVE ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 11 EXPENSES WHICH ARE INCURRED IN THE STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED OR ELSEWHERE. THE CRUX OF P ARA 3 OF ARTICLE 7 OF THE DTA IS THAT FOR THE PURPOSES OF DETERMINING THE PROFI TS OF THE PERMANENT ESTABLISHMENT IN INDIA, ALL THE EXPENSES INCURRED FO R THE PURPOSE OF BUSINESS OF THE PERMANENT ESTABLISHMENT ARE TO BE ALLOWED AS DEDU CTION. IN OTHER WORDS, THE DEDUCTIBILITY OF ALL THE EXPENSES FOR THE PURPOSE OF COMPUTING THE `BUSINESS PROFITS OF THE PERMANENT ESTABLISHMENT, H AS BEEN SANCTIONED BY PARA 3 OF ARTICLE 7. 4.8. IT WAS CONTENDED BY THE LD. AR THAT SINC E THERE IS NO REFERENCE TO ANY DISALLOWANCE AS PER SECTION 43B IN PARA 3 OF ARTIC LE 7 OF THE DTA, THERE CAN BE NO QUESTION OF MAKING ANY DISALLOWANCE BY CONSID ERING SECTION 43B. ON THE OTHER HAND, THE LD. DR ARGUED THAT THE APPLICATI ON OF SECTION 43B IS IMPLICIT IN PARA 3 OF ARTICLE 7 DIRECTLY AND ALSO B Y VIRTUE OF THE PROVISIONS OF ARTICLE 3(2) AND ARTICLE 23(1) OF THE DTA. 4.9. FROM PARA 3 OF ARTICLE 7 AS EXTRACTED ABO VE, IT IS APPARENT THAT THE BUSINESS PROFITS IMBIBE THE QUESTION OF GRANT OF DEDU CTION OF ALL EXPENSES WHICH ARE INCURRED FOR THE PURPOSE OF BUSINESS OF THE PERMANENT ESTABLISHMENT. THERE IS NO RESTRICTION ON THE ALLOWA BILITY 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 DED UCTIBILITY OF EXPENSES AS PER THE DOMESTIC LAW ARE NOT ENSHRINED IN THIS PART OF THE DTA. 4.10. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE T HAT THERE ARE SEVERAL TREATIES CONTAINING THE RESTRICTIVE CLAUSE IN SO FAR AS THE DE DUCTIBILITY OF EXPENSES IS CONCERNED. FOR EXAMPLE, ARTICLE 7(3) OF INDO-US DT AA PROVIDES THAT THE DEDUCTION OF EXPENSES IS TO BE ALLOWED IN ACCORDANCE WITH THE PROVISIONS OF AND SUBJECT TO THE LIMITATIONS OF THE TAXATION LAWS OF THAT STATE. WE CAN USEFULLY REFER TO PARA 3 OF ARTICLE 7 OF INDO-US DTA A, AS UNDER :- IN THE DETERMINATION OF THE PROFITS OF A PERMANENT ESTABLISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE BUSINESS O F THE PERMANENT ESTABLISHMENT, INCLUDING A REASONABLE ALLO CATION OF EXECUTIVE AND GENERAL ADMINISTRATIVE EXPENSES, RE SEARCH AND DEVELOPMENT EXPENSES, INTEREST, AND OTHER EXPENSE S INCURRED FOR THE PURPOSES OF THE ENTERPRISE AS A WHOLE (OR THE PART THEREOF WHICH INCLUDES THE PERMANENT ESTABLISHM ENT), WHETHER INCURRED IN THE STATE IN WHICH THE PERMANENT ESTABLISHMENT IS SITUATED OR ELSEWHERE, IN ACCORDANCE WITH THE PROVISIONS OF AND SUBJECT TO THE LIMITATIONS OF THE TAXATION LAWS OF THAT STATE. (EMPHASIS SUPPLIED BY US) 4.11. PARA 3 OF ARTICLE 7 OF INDO-US DTAA CAN BE SP LIT INTO TWO PARTS, VIZ, THE FIRST PART GRANTING DEDUCTION FOR THE EXPENSES INCURRED FOR THE PURPOSES OF THE ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 12 BUSINESS OF THE PERMANENT ESTABLISHMENT AND THE SECO ND PART, TOWARDS THE END OF THE PARA, RESTRICTING SUCH DEDUCTION `IN ACCORDA NCE WITH THE PROVISIONS OF AND SUBJECT TO THE LIMITATIONS OF THE TAXATION LAWS (HEREINAFTER REFERRED TO AS `THE RESTRICTIVE CLAUSE) OF THE STATE . ON A CAREFUL READING OF PARA 3 OF ARTICLE 7 IN ENTIRETY, IT EMERGES THAT THE D EDUCTIBILITY OF ANY EXPENDITURE HAS TO NECESSARILY PASS THE RESTRICTIVE CLA USE, IF ANY, CONTAINED IN THE ACT. SUPPOSE THERE IS ANY PROVISION RESTRICTING TH E DEDUCTIBILITY OF ANY EXPENDITURE OR SUCH DEDUCTION HAS BEEN MADE DEPENDEN T ON THE SATISFACTION OF ANY CONDITION, THEN UNLESS SUCH CON DITION IS FULFILLED, THE DEDUCTION CANNOT BE ALLOWED AND THAT TOO, TO THE EX TENT AS PROVIDED IN SUCH PROVISION. 4.12. THIS POSITION CAN BE VIEWED FROM THE S TAND POINT OF SECTION 44C OF THE ACT. THIS SECTION PUTS A CEILING ON DEDUCTION O F HEAD OFFICE EXPENDITURE, AS DEFINED IN CLAUSE (IV) OF EXPLANATION, IN THE CA SE OF NON-RESIDENTS. IF ANY EXPENDITURE IN THE NATURE OF HEAD OFFICE EXPENDITURE IS INCURRED AND SUPPOSE THERE IS A PROVISION IN THE TREATY THAT THE D EDUCTIBILITY OF EXPENSES AS PER ARTICLE 7(3) IS SUBJECT TO `THE RESTRICTIVE CLA USE 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 PRESUM ED AS BODILY INCORPORATED IN THE TREATY ALSO. IN SUCH A CASE, IT WILL BE UNDERSTOOD AS IF SECTION 44C IS INBUILT IN THE TREATY ALSO FOR THE PU RPOSES OF LIMITING THE DEDUCTIBILITY OF HEAD OFFICE EXPENDITURE. 4.13. IT IS MANIFEST THAT DIFFERENCE BETWEEN THE FULL OR PARTIAL DEDUCTIBILITY OF ANY EXPENDITURE IS DUE TO THE ABSENCE OR PRESENCE OF THE RESTRICTIVE CLAUSE IN THE TREATY. BUT FOR SUCH RESTRICTIVE CLAUSE, ANY EXP ENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOSES OF THE BUSINESS OF THE PERMA NENT ESTABLISHMENT BECOMES DEDUCTIBLE IN FULL AS PER THE FIRST PART OF PARA 3 OF ARTICLE 7. IT IS ONLY DUE TO THE OCCURRENCE OF SUCH RESTRICTIVE CLAUSE TH AT THE OTHERWISE FULL ALLOWABILITY OF DEDUCTION AS PER EARLIER PART OF TH E PARA 3 OF ARTICLE 7, GETS RESTRICTED TO THE EXTENT OF DEDUCTIBILITY AS PER THE PROVISIONS OF THE ACT. THE NUTSHELL IS THAT IF THERE IS NO RESTRICTIVE CLAUSE I N THE TREATY, THEN THE EXPENDITURE INCURRED FOR THE PURPOSES OF THE BUSINESS OF PERMANENT ESTABLISHMENT HAS TO BE ALLOWED IN FULL. IF, HOWEV ER, THERE IS A RESTRICTIVE CLAUSE IN THE TREATY, THEN THE OTHERWISE FULL DEDUCT IBILITY GETS REDUCED IN ACCORDANCE WITH THE PROVISION OF THE ACT. 4.14. IT IS PERTINENT TO NOTE THAT WE ARE DEAL ING 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 TH EREIN. IT INDICATES THAT BOTH THE COUNTRIES HAVE DECIDED TO ALLOW EXPENSES IN CURRED 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 EXP ENSE IS INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE PERMANENT ESTABLISHMEN T, THE SAME HAS TO BE ALLOWED AS DEDUCTION IN FULL AS PER THE PRESCRIPTION OF ARTICLE 7(3). THE ABSENCE OF THE RESTRICTIVE CLAUSE IN PARA 3 OF ARTICLE 7 MAKES IT ABUNDANTLY CLEAR THAT ANY EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS OF THE PERMANENT ESTABLISHMENT DESERVES TO BE ALLOWED AS DE DUCTION IN ENTIRETY. AS WE ARE PRESENTLY COMPUTING THE BUSINESS PROFITS O F THE ASSESSEE FROM THE ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 13 OPERATIONS CARRIED OUT IN INDIA THROUGH ITS PERMANEN T ESTABLISHMENT, ALL THE EXPENSES SO INCURRED INCLUDING THE BONUS QUALIFY FO R DEDUCTION IN ENTIRETY. IT IS NOTICED THAT BUT FOR SECTION 43B, THE ENTIRE AMOUNT O F BONUS WOULD HAVE BEEN ALLOWED AS DEDUCTION. SECTION 43B HAS PLACED A LIMIT ON THE OTHERWISE FULL DEDUCTIBILITY OF BONUS EXPENDITURE TO THE AMOUN T ACTUALLY PAID ON OR BEFORE THE DUE DATE OF FILING THE RETURN. PRIOR TO TH E INSERTION OF SECTION 43B, THE ENTIRE AMOUNT OF BONUS WAS ALLOWED AS DEDUCTION UNDER THE MERCANTILE SYSTEM OF ACCOUNTING ON THE PRINCIPLE OF INCURRING LI ABILITY IN RESPECT OF SUCH BONUS IRRESPECTIVE OF ITS PAYMENT. IT IS NOT THE CAS E OF THE DEPARTMENT THAT THE ASSESSEE DID NOT INCUR LIABILITY IN RESPECT OF SU CH BONUS EXPENDITURE. THE ASSESSEE HAS INCURRED THIS EXPENDITURE AND IT IS ONLY THE PAYMENT PART WHICH IS DELAYED FOR THE TIME BEING. THE OTHERWISE INCURRING OF SUCH EXPENDITURE AND THE CONSEQUENT ALLOWABILITY OF DEDUCTION IS NOT IN DISPUTE. AS WE ARE DEALING WITH THE INDO-MAURITIUS DTA, WHICH DOES NOT EXPRESS LY CONTAIN ANY RESTRICTIVE CLAUSE IN THIS REGARD, CONTRARY TO THE PRESENCE OF SU CH CLAUSE IN CERTAIN CONVENTIONS INCLUDING INDO-US DTAA, IT BECOMES PERCE PTIBLE THAT EX FACIE RESTRICTIVE PROVISIONS OF THE ACT INCLUDING SECTION 43 B CANNOT BE READ INTO ARTICLE 7. 4.15. NOW WE WILL ESPOUSE THE CONTENTION OF THE LE ARNED DR THAT THE PRESENCE OF SECTION 43B OF THE ACT SHOULD BE INFERRE D BY VIRTUE OF THE ARTICLE 3(2) AND ARTICLE 23(1) OF THE DTA. IT IS OBSERVED T HAT ARTICLE 3 IS A DEFINITION ARTICLE WHICH INCORPORATES DEFINITIONS OF VARIOUS TERM S USED IN THE DTA. PARA 1 OF ARTICLE 3 DEALS WITH CERTAIN SPECIFIC TERMS WHICH H AVE BEEN EXPRESSLY DEFINED FOR THE PURPOSE OF DTA. PARA 2 OF ARTICLE 3 P ROVIDES THAT : IN THE APPLICATION OF THE PROVISIONS OF THIS CONVENTION BY THE CONTRACTING STATE, ANY TERM NOT DEFINED THEREIN SHALL, UNLESS THE CONTEXT O THERWISE REQUIRES, HAVE THE MEANING WHICH IT HAS UNDER THE LAWS IN FORCE OF THAT CONTRACTING STATE RELATING TO THE AREAS WHICH ARE THE SUBJECT OF THIS C ONVENTION. A CURSORY LOOK AT PARA 2 OF ARTICLE 3 IN JUXTAPOSITION TO PARA 1 OF THE SAME ARTICLE DIVULGES THAT THE TERMS WHICH HAVE BEEN DEFINED IN PARA 1 OF ARTICLE 3 OF THE DTA SHALL HAVE THE MEANING WHICH HAS BEEN SPECIFICALLY GIVEN AND ANY OTHER TERM, WHICH HAS NOT BEEN SPECIFICALLY DEFINED IN PARA 1 S HALL, UNLESS THE CONTEXT OTHERWISE REFERS, WILL HAVE THE SAME MEANING AS IS T HERE UNDER THE DOMESTIC LAW. IT IS TRITE THAT A DEFINITION PROVISION IS ORDI NARILY DIFFERENT FROM A SUBSTANTIVE OR MACHINERY PROVISION. WHEREAS, ARTICLE 3 IS ONLY A DEFINITION CLAUSE, PARA 1 OF ARTICLE 7 IS A SUBSTANTIVE CLAUSE AND PARA 3 OF ARTI CLE 7 IS A MACHINERY CLAUSE. WE ARE UNABLE TO APPRECIATE AS TO HOW ARTICLE 3(2) HELPS THE REVENUE IN IMPORTING THE MANDATE OF SECTION 43B IN ARTICLE 7(3) . SECTION 43B IS A SECTION PROVIDING THAT THE DEDUCTION IN RESPECT OF EXPENSES , MENTIONED IN CLAUSES (A) TO (F), SHALL BE ALLOWED ONLY IN COMPUTING THE INCO ME REFERRED TO SECTION 28 OF THE PREVIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAI D 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 WH ICH, IN THE ABSENCE 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 P ER SECTION 43B, CANNOT BE CHARACTERIZED AS ANY TERM NOT DEFINED AS PER ARTICLE 3(2). IN OUR CONSIDERED OPINION THE CONTENTION RAISED ON BEHALF OF THE REVEN UE THAT SECTION 43B ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 14 SHOULD BE READ INTO ARTICLE 7 BY MEANS OF ARTICLE 3( 2), DESERVES THE FATE OF REJECTION. 4.16. THE LEARNED DEPARTMENTAL REPRESENTATIVE THEN F OCUSED HIS ATTENTION ON PARA 1 OF ARTICLE 23 TO BOLSTER HIS SUBMISSION THA T 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 C ONTINUE TO GOVERN THE TAXATION OF INCOME IN THE RESPECTIVE CONTRACTING STA TES EXCEPT WHERE PROVISIONS TO THE CONTRARY ARE MADE IN THIS CONVENTIO N. THE FIRST PART OF PARA 1 OF ARTICLE 23 MAKES OUT A GENERAL RULE THAT IF INCOM E OF THE PERMANENT ESTABLISHMENT IS TO BE COMPUTED IN INDIA, THEN THE PROVISIONS OF THE ACT SHALL GOVERN THE TAXATION OF INCOME IN INDIA. HOWEVER, THE SECOND PART OF PARA 1 OF ARTICLE 23 CONTAINS A RIDER, WHICH MAKES THE OP ERATION OF THE FIRST PART OF PARA 1 OF ARTICLE 23 SUBJECT TO THE FULFILLMENT OF S UCH STIPULATION. THE WORD EXCEPT IS THE DIVIDING POINT BETWEEN THE MAIN PROV ISION AND THE QUALIFICATION PART. THE PORTION STARTING THEREAFTER E NUMERATES THE QUALIFICATION, WHICH IS : `WHERE PROVISIONS TO THE C ONTRARY ARE MADE IN THIS CONVENTION. WHEN WE READ FULL TEXT OF PARA 1 OF ARTI CLE 23, IT IS AMPLY BORNE OUT THAT IF THERE IS SOME PROVISION IN THE DTA CONTRA RY TO THE DOMESTIC LAW, THEN IT IS THE PROVISION OF THE DTA WHICH SHALL PRE VAIL. THUS THE GENERAL RULE CONTAINED IN THE FIRST PART OF PARA 1 OF ARTICLE 23, B EING THE APPLICABILITY OF THE DOMESTIC LAW, HAS BEEN ECLIPSED BY ANY PROVISION TO THE CONTRARY IN THE DTA. IN CASE THERE IS NO CONTRARY PROVISION IN THE TREATY, T HEN IT IS THE DOMESTIC LAW WHICH SHALL APPLY. IF HOWEVER, THERE IS SOME PROVI SION IN THE DTA CONTRARY TO THE DOMESTIC LAW THEN IT IS SUCH CONTRARY PROVISION OF THE DTA WHICH SHALL OVERRIDE THE PROVISION IN THE DOMESTIC LAW IN THE C OMPUTATION OF INCOME AS PER THE DTA. 4.17. WITH THIS UNDERSTANDING WE WILL PROCEED TO VE T THE CONTENTION RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT SINC E THERE IS A PRECISE PROVISION OF SECTION 43B UNDER THE ACT, WHICH LIMITS THE DEDUCTIBILITY OF THE SPECIFIED EXPENSES, THIS PROVISION WILL APPLY BECAU SE THERE IS NO SUCH CONTRARY PROVISION IN THE DTA. 4.18. IN ORDER TO APPRECIATE THIS CONTENTION OF THE LD. DR IN RIGHT PERSPECTIVE, IT IS OF PARAMOUNT IMPORTANCE TO NOTE TH E SCHEME OF ARTICLE 7. FIRST PARA, IN SO FAR AS WE ARE CONCERNED, PROVIDES F OR TAXING THE INCOME OF THE PE OF A FOREIGN BANK HAVING BRANCH IN INDIA, WHIC H 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 THAT FOR THE PURPOSES OF DETERMINING THE PROFI T ATTRIBUTABLE TO PE, ALL ITS TRANSACTIONS EVEN WITH THE HEAD OFFICE OR ITS OTHER B RANCHES ARE TO BE CONSIDERED AS DONE WITH OUTSIDERS UNLESS OTHERWISE EX PRESSLY PROVIDED. PARA 3 OF ARTICLE 7 PROVIDES FOR THE DEDUCTIBILITY OF EXPENS ES INCURRED FOR THE PURPOSE OF BUSINESS OF PERMANENT ESTABLISHMENT. THUS THE M ANDATE OF ARTICLE 7(3) IS TO ALLOW DEDUCTION FOR EXPENSES. IT DOES NOT EXCLUSIV ELY DEAL WITH NON- DEDUCTIBILITY OF EXPENSES INDEPENDENT OF ANY SEPARA TE PROVISION DEALING WITH THE ALLOWABILITY OF EXPENSES. CONSEQUENTLY IT FOLLO WS THAT PARA 3 OF ARTICLE 7 IS BASICALLY AN ENABLING PROVISION FOR GRANTING DEDUCTI ON OF EXPENSES AND NOT A DISABLING PROVISION FOR RESTRICTING THE OTHERWISE ALLO WABLE DEDUCTIONS. THUS ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 15 PARA 3 OF ARTICLE 7 IS A SPECIFIC PROVISION GOVERNING T HE DEDUCTIBILITY OF EXPENSES AS PER THE DTA. 4.19. SECTION 29 OF THE ACT PROVIDES THAT THE INCOME REFERRED TO IN SECTION 28 SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIO NS CONTAINED IN SECTIONS 30 TO 43D. THERE ARE VARIOUS SECTIONS UND ER CHAPTER IV-D WHICH GRANT DEDUCTIONS FOR EXPENSES AND ALLOWANCES, SUCH AS SECT IONS 30, 31, 32 AND 36. IN THE LIKE MANNER, THERE ARE CERTAIN SECTIONS, WHICH RESTRICT THE OTHERWISE ALLOWABILITY OF DEDUCTIONS, SUCH AS SECTIONS 40, 43 B, 44C. THUS, WHILE COMPUTING INCOME UNDER THE HEAD `PROFITS AND GAINS OF BUSINESS OR PROFESSION, WHAT IS REQUIRED TO BE DONE IS TO ALLO W DEDUCTION FOR 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. RES ULTANTLY, SECTION 43B NEEDS TO BE READ IN CONJUNCTION WITH THE OTHER RELEVANT SE CTIONS PROVIDING FOR THE DEDUCTION OF EXPENSES AS ENUMERATED IN CLAUSES (A) TO (F) OF SECTION 43B. FOR EXAMPLE, SECTION 36(1)(III) PROVIDES DEDUCTION OF I NTEREST 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 INSTITUTION S ETC. AND SUCH INTEREST IS NOT PAID BEFORE THE DUE DATE APPLICABLE FOR FILING T HE RETURN OF INCOME U/S 139(1). WHEN WE READ BOTH THESE PROVISIONS IN UNISON WHAT FOLLOWS IS THAT IT IS THE QUESTION OF ALLOWING DEDUCTION FOR INTEREST ON BO RROWINGS BUT TO THE EXTENT IT IS PAID BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME. REVERTING TO OUR ISSUE, IT IS FOUND THAT THE DEDUCTIONS OF EXPENSES ARE TO BE REGULATED AS PER THE RESTRICTIONS CONTAINED IN RELEVANT SECTIONS. THU S, IF ONE HAS TO VIEW THESE SECTIONS ON A WHOLESOME BASIS AT MACRO LEVEL, WHAT E MERGES IS THAT THESE ARE MEANT FOR GRANTING DEDUCTION FOR EXPENSES TO THE PERMI SSIBLE 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 ARTICLE 7 THE DTA IS A SPECIF IC PROVISION GOVERNING THE DEDUCTIBILITY OF EXPENSES WITHOUT ANY RESTRICTION. IN BOTH THE CASES, THAT IS, UNDER THE ACT AS WELL AS THE DTA, THE SUBJECT MATTE R UNDER CONSIDERATION IS SAME, BEING, THE GRANTING OF DEDUCTIONS IN THE COMP UTATION OF BUSINESS PROFITS OF THE PERMANENT ESTABLISHMENT OF A FOREIGN ENTERPR ISE. WHEN THERE IS A SPECIFIC PROVISION AS PER ARTICLE 7(3) OF THE DTA P ROVIDING FOR THE DEDUCTIBILITY OF ALL EXPENSES INCURRED FOR THE PURPOSE OF PERMANE NT ESTABLISHMENT, WE FAIL TO COMPREHEND AS TO HOW ARTICLE 23(1) CAN BE APPLIE D TO INVOKE DISALLOWANCE U/S 43B. THIS CONTENTION OF THE LD. DR , BEING DEVOID OF ANY MERIT, IS THUS JETTISONED. 4.21. WE CAN SUPPORT OUR ABOVE CONCLUSION FROM ONE M ORE ANGLE. IF, FOR A MOMENT, WE ACCEPT THE CONTENTION OF THE LD. DR THAT ARTICLE 23(1) IS AN AUTHORITY FOR IMPORTING THE PROVISIONS CONTAINING DIS ALLOWANCES UNDER THE ACT, IN THE DTA, THEN ABSURD RESULTS WILL FOLLOW. WE HAV E NOTICED SUPRA THAT MANY TREATIES INCLUDING INDO-US DTAA CONTAIN A RESTRICTI VE CLAUSE IN PARA 3 OF ARTICLE 7 TO LIMIT THE DEDUCTIBILITY OF EXPENSES I N ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF TAX LAWS OF THAT STATE. IT IS ONLY IN SUCH CASES THAT THE RESTRICTIONS PROVIDED ON THE DEDUCTIBILITY OF EX PENSES AS PER THE ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 16 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 RESTRICTIVE CLAUSE, THE DEDUC TIBILITY OF EXPENSES IS GOVERNED BY THE FIRST PART OF PARA 3 OF ARTICLE 7, WH ICH SANCTIONS THE GRANT OF DEDUCTION OF EXPENSES TO THE FULL EXTENT IN SO FAR AS THESE ARE INCURRED FOR THE PURPOSES OF THE BUSINESS OF THE PE. THE ACCEPTANCE O F THIS CONTENTION OF THE LD. DR WILL OBLITERATE THE DIFFERENCE IN THE LANGUAGE OF TREATIES CONTAINING AND NOT CONTAINING SUCH RESTRICTIVE CLAUSE, THEREBY REN DERING THE RESTRICTIVE CLAUSE IN PARA 3 OF ARTICLE 7 IN SOME OF THE TREATIE S, AS REDUNDANT. OBVIOUSLY, IT CAN NOT BE THE CASE. AS SUCH, WE TURN DOWN THE CON TENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT PARA 1 OF ARTICLE 2 3 IMPLIEDLY SANCTIONS THE INVOKING OF SECTION 43B, AS IN OUR CONSIDERED OPINI ON THERE IS AN EXPRESS CONTRARY PROVISION IN ARTICLE 7(3) PROVIDING FOR DEDUCT ION OF ALL EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS OF PERMANENT EST ABLISHMENT. BEFORE DISASSOCIATING WITH THIS ISSUE, WE CONSIDER IT OUR D UTY TO RECORD THAT BOTH THE SIDES HAVE RELIED ON TRIBUNAL ORDERS SUPPORTING THEIR RES PECTIVE STANDS. IN FACT, THESE ORDERS, DO FORTIFY THE VIEWPOINT OF THE RIVAL PARTIES. WE HAVE DESISTED FROM DEALING WITH SUCH CONTRADICTORY ORDERS BUT DECID ED THE EXTANT ISSUE ON WHAT WE PERCEIVE AS THE SIMPLE AND PLAIN INTERPRETAT ION OF THE RELEVANT ARTICLES. 8.1 IT IS CLEAR FROM THE FINDING OF THE TRIBUNAL FO R THE ASSESSMENT YEAR 1999-00 THAT BECAUSE OF THE LANGUAGE EMPLOYED IN ARTICLE 7(3), D EDUCTION OF EXPENSES INCURRED FOR THE PURPOSE OF BUSINESS OF THE PE ARE ALLOWABLE AND THEREFORE, THE PROVISIONS OF SEC 44B ARE NOT APPLICABLE. 8.2 AS OBSERVED BY THE TRIBUNAL IN PARA 4.12, RESTR ICTION PROVIDED ON THE DEDUCTION OF HO EXPENDITURE U/S 44C IS ALSO SUBJECT ED TO THE DEDUCTIBILITY OF THE EXPENDITURE AS PER ARTICLE 7(3) OF THE TREATY. THUS , WHEN THERE IS NO RESTRICTION CLAUSE IN THE TREATY THEN THE EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS OF THE PE HAS TO BE ALLOWED IN FULL. 8.3 FOLLOWING THE EARLIER ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST TH E REVENUE. ITA NO. 5778/M/2011 STATE BANK OF MAURITIUS LTD . 17 9 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE I S PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 7 TH DAY OF DEC 2012 SD/- SD/- ( B RAMAKOTAIAH ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 7 TH , DEC 2012 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI