Director Of Income Tax (It) – I v. M/S American Express Bank Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1507 OF 2013 Director of Income Tax (IT) – I Vs. M/s American Express Bank Ltd. ..Appellant ..Respondent .... Mr. Tejveer Singh, Advocate for Appellant.Mr. Percy Pardiwalla, Senior Advocate a/w Megha Sharma,Advocate i/b PDS Legal for Respondent. .... CORAM : M.S. SANKLECHA & N.M. JAMDAR, JJ.DATED : 17 AUGUST 2015 P.C.: This appeal by revenue challenges the order dated 10August 2012 passed by the Income Tax Appellate Tribunal (the'Tribunal'). The appeal relates to Assessment Year 1998-99. 2.Following questions of law have been urged for ourconsideration: (A)Whether, on the facts and in thecircumstances of the case and in law, the Tribunalwas right in holding that the expenses incurred at S.S.DESHPANDE 1 / 12 Head Office on behalf of the Indian Branch of theassessee are deductible u/s.37(1) of the Act withoutany restrictions contained in Section 44C? (B)Whether, on the facts and in thecircumstances of the case and in law, the Tribunalwas right in deleting the disallowance made by AORs.75,03,911/- keeping in view provisions ofSection 14A? (C)Whether, on the facts and in thecircumstances of the case and in law, the Tribunalwas right in holding that the interest income earnedon funds by HO, in Indian Branch be termed asinterest to self? (D)Whether, on the facts and in thecircumstances of the case and in law, the Tribunalwas right in holding that the interest on bad anddoubtful debts is not chargeable to tax for this yearu/s. 43D when assessee had not credited suchinterest to it's P&L Account of this year?” 3. Regarding Question A: Mr. Tejveer Singh, the learned Counsel for the revenue fairly states that the same is concluded against theappellant/revenue by order of this Court in an appeal filed by S.S.DESHPANDE revenue in respect of the same respondent relating to AssessmentYear 1997-98 being Income Tax Appeal No. 1294/2013 dated 1April 2015. In view of the above, Question (A) does not give rise toany substantial question of law. 4.Regarding Question B: (a)Mr. Tejveer Singh, the learned Counsel for the revenuestates that although the impugned order of the Tribunal has placedreliance upon its order in respect of the same respondent reltatingto Assessment Year 1997-98 and the appeal of revenue therefrombeing Income Tax Appeal No. 1294/2013 decided on 1 April 2015was also dismissed, the same should not be relied upon for thesubject assessment year. This for the reason that in it's appeal tothis Court in respect of Assessment Year 1997-98, the question didnot arise out of the order of the Assessment Officer and CIT(A) thusit was not entertained by this Court in Income Tax Appeal No.1294/2013. However in this year, the issue arising in the impugnedorder of the Tribunal is an issue that arose in the order of theAssessing Officer and CIT(A). We find merit in the submission of Mr.Singh. The order of the Tribunal for the Assessment Year 1997-98 on which reliance has been placed in the impugned order,specifically records that the issue which has been urged by therevenue did not arise from the order either of Assessing Officer orCIT(A). Therefore the order passed by the Tribunal for theAssessment Year 1997-98 on 17 June 2005 would not per se applythe subject assessment year. However we find that the order of theTribunal for the Assessment Year 1997-98 after holding as above,proceeds to consider on merits and holds that the claim of therespondent-assessee is sustainable even on merits. Mr.Singh. The order of the Tribunal for the Assessment Year 1997-98 on which reliance has been placed in the impugned order,specifically records that the issue which has been urged by therevenue did not arise from the order either of Assessing Officer orCIT(A). Therefore the order passed by the Tribunal for theAssessment Year 1997-98 on 17 June 2005 would not per se applythe subject assessment year. However we find that the order of theTribunal for the Assessment Year 1997-98 after holding as above,proceeds to consider on merits and holds that the claim of therespondent-assessee is sustainable even on merits. (b)The grievance of the revenue is that the dividend incomeand interest income are liable for tax under Section 115A(1) of theAct at a special rate which is lower than normal rate of tax. In theabove view, it is contended by Mr. Tejveer Singh that theproportionate expenditure for earning the dividend and interestincome chargeable to tax under Section 115(A) of the Act could nothave been allowed as deduction against the other incomechargeable to tax at normal rates of tax. The proportionateexpenditure reduced from the income chargeable to tax underS.S.DESHPANDE4 / 12 Section 115A of the Act. In support of the same, reliance is placedupon Section 14A of the Act. (c)We find that the impugned order of the Tribunal hasplaced reliance upon the decision of Supreme Court in RajasthanState Warehousing Corporation Vs. CIT[1] wherein the contention ofthe revenue that if part of the income which arise is exempt fromtax and the business is one and indivisible, then no part ofexpenditure incurred to earn exempt income can be disallowed. TheParliament thereafter amended the statute and introduced Section14A into the Act. This Section 14A of the Act specifically providesthat expenditure incurred in relation to income which does not formpart of total income under the Act shall not be allowed asdeduction. Thus it excludes the allowing of deduction ofexpenditure incurred to earn the exempt income. It does notdisturb the finding of Supreme Court in Rajasthan StateWarehousing in respect of cases wherein the expenditure is incurredon earning income which is not exempt. In this case, incomeearned is not exempt but chargeable to tax albeit at a lower 1 (2000) 242 ITR 450 S.S.DESHPANDE5 / 12 rate. In the present facts it is not disputed that income earned oninterest and dividends is chargeable to tax at a special rate underSection 115A of the Act. Consequently, there could be no occasionto invoke Section 14A of the Act to disallow expenditure which hasadmittedly been incurred in respect of income which is taxable. (d)Accordingly, in view of the clear position of law, questionof law as raised does not give rise to any substantial question of law.Thus not entertained. 5.Regarding Question C: (a)The learned Counsel for the revenue fairly states that thesame is concluded against the revenue by virtue of decision of thisCourt in Income Tax Appeal No. 1430/2013 (Director of IncomeTax Vs. M/sCredit Agricole Indosuez) dated 17 June 2015. In theabove case, an identical question as raised herein was raised thereinand was not admitted. This on the ground that it is a settledposition in law that one cannot make profit out of oneself. Question(C) does not give rise to any substantial question of law and notentertained. 6 / 12 (d)Accordingly, in view of the clear position of law, questionof law as raised does not give rise to any substantial question of law.Thus not entertained. 5.Regarding Question C: (a)The learned Counsel for the revenue fairly states that thesame is concluded against the revenue by virtue of decision of thisCourt in Income Tax Appeal No. 1430/2013 (Director of IncomeTax Vs. M/sCredit Agricole Indosuez) dated 17 June 2015. In theabove case, an identical question as raised herein was raised thereinand was not admitted. This on the ground that it is a settledposition in law that one cannot make profit out of oneself. Question(C) does not give rise to any substantial question of law and notentertained. 6 / 12 (b)At this stage, Mr. Tejveer Singh, the learned Counsel forthe revenue interjects in the midst of dictation after we heard theparties on all the questions to withdraw his earlier submission andnow states that decision in M/s Credit Agricole Indosuez, will notapply to the present facts. We do not appreciate this. Be that as itmay, we stopped out dictation and heard him in support of hisabove proposition. According to Mr. Tejveer Singh, the decision inM/s Credit Agricole Indosuez will not apply for the reason that therespondent-assessee had in its return of income originally filed on30 November 1998 had claimed the benefit of DTAA entered intobetween the United States and India. Mr. Tejveer Singh submitsthat in view of the decision of Special Bench in Sumitomo MutsuiBanking Corporation Vs. Deputy Director of Income Tax[2], theTribunal ought to have followed the same. Moreover, the issuearising in Sumitomo Mutsui Banking Corporation has been admittedby this Court at the instance of the assessee and is awaitingconsideration. In the above view, it is submitted that this questionrequires admission. 2 (2012) 19 Taxmann 364 (c)We find that in the original return of income, therespondent-assessee had claimed the benefit of DTAA. However on29 March 2000, the respondent-assessee had filed revised return ofincome wherein it has specifically pleaded that the interest receivedfrom branches outside India cannot be considered as taxable incomeas one cannot earn income out of itself. The Assessing Officer bythe impugned order held that the respondent-assessee's interestincome is taxable under the normal provisions of the Act as well asDTAA. On further appeal, the Commissioner of Income Tax(Appeals) (the 'CIT(A)') by the order in appeal holds that theinterest income is chargeable to tax under normal provision of theAct i.e. Section 9(1)(v)(c) of the Act. On further appeal, theTribunal held that no occasion to tax such interest income receivedfrom its Head Office can arise nor deduction is to be allowed in caseof interest paid by the respondent-assessee to its Head Office. (d)We find that no specific ground as urged before us by Mr.Tejveer Singh has been taken in memo of appeal filed in this Court.Be that as it may, we find that respondent-assessee had claimedbenefit under the DTAA in its return of income but the same wasS.S.DESHPANDE8 / 12 (d)We find that no specific ground as urged before us by Mr.Tejveer Singh has been taken in memo of appeal filed in this Court.Be that as it may, we find that respondent-assessee had claimedbenefit under the DTAA in its return of income but the same wasS.S.DESHPANDE8 / 12 effectively withdrawn by virtue of filing a revised return of incomeon 29 March 2000. Although the Assessing Officer held that therespondent-assessee is liable to pay tax in respect of interest earnedfrom its Head Office both under the normal provision of Act as wellas DTAA, both CIT(A) as well as the Tribunal have proceeded on thebasis of the claim of the respondent-assessee being under thenormal provisions of the Act. We find that in case of SumitomoMutsui Banking Corporation, the assessee therein was seekingdeduction of the interest payable to the head office. It was in thatcontext, that the claim of the assessee for deduction was beingclaimed by invoking the provision of DTAA wherein this deductionwas specifically provided for. In the present facts, the issue arisingfor consideration is not the deduction on account of interest paid tothe Head Office but the non exigibility to tax on account of interestreceived from its Head Office on the ground that no person canmake profit out of itself as held by the Apex Court in the case of SirKikabhai Premchand Vs. Commissioner of Income Tax (Central),Bombay[3]. In any view of the matter, Section 90(2) of the Act itselfprovides that the assessee has an option to either invoke DTAA or3 24 ITR 506S.S.DESHPANDE9 / 12 normal provisions of tax to the extent which of the two is morebeneficial to it. In this case, by filing the revised return of incomethe claim to be subjected tot ax under the DTAA stood withdrawn.In the above view, we see no substantial question of law arising forour consideration. Accordingly, Question (C) as formulated by therevenue, does not give rise to any substantial question of law. 6.Regarding Question D: (a)The respondent-assessee had in the subject assessmentyear, in terms of Reserve Bank of India guidelines, had declaredinterest on loans remaining unpaid for more than 90 days then suchloans are declared as non-accrual loans. The interest on such non-accrual loans is credited to Reserve for Doubtful Interest (RFDI)Account. The interest accounts are only credited to RFDI and not toProfit and Loss Account of the respondent-assessee. Only on receiptof interest is the same credited to the Profit and Loss Account.However the Assessing Officer held that such non-accrual of intereston being credited to the RFDI Account would be chargeable to taxunder Section 43D of the Act. In appeal, the CIT(A) upheld the finding of the Assessing Officer. On further appeal, by theimpugned order, the Tribunal holds that Section 43D of the Act willnot apply to interest which is credited to RFDI Account only. Theimpugned order holds that Section 43D of the Act will apply onlywhen the amounts of interest has been credited to Profit and LossAccount which is admittedly not the case in the present facts. (b)The grievance of the revenue is that as the crediting ofinterest to the RDFI account would by itself be sufficient to bringthe amounts to tax under Section 43D of the Act. (c)We find that Section 43D of the Act clearly provides thatonly such interest on bad and doubtful debts which are received oris credited to the Profit and Loss Account for the year underconsideration, would the same be taxable. In the present facts, theamount of interest attributable to bad and doubtful debts has notbeen received. Further the interest has not been credited to Profitand Loss Account but to a reserve amount called RDFI accountmaintained in terms of Reserve Bank of India's guidelines. Besides, (b)The grievance of the revenue is that as the crediting ofinterest to the RDFI account would by itself be sufficient to bringthe amounts to tax under Section 43D of the Act. (c)We find that Section 43D of the Act clearly provides thatonly such interest on bad and doubtful debts which are received oris credited to the Profit and Loss Account for the year underconsideration, would the same be taxable. In the present facts, theamount of interest attributable to bad and doubtful debts has notbeen received. Further the interest has not been credited to Profitand Loss Account but to a reserve amount called RDFI accountmaintained in terms of Reserve Bank of India's guidelines. Besides, this Court in CIT Vs. Citi Bank[4] had recorded the practice of banksto effectively control it's problem loans and it's recoveries bykeeping/maintaining a memorandum record of interest due on suchaccounts. This is an usual banking practice to keep a tab/check onthe problem loans and interest thereon. The provision underSection 43D of the Act are very clear and unequivocal that theinterest receivable on bad and doubtful debts are chargeable to taxonly when it is credited to the Profit and Loss Account and/or whenthey are actually received. Clearly, in the present case, the interestaccrued on the bad and doubtful loans has not been credited toProfit and Loss Account nor has the amounts of such interest beenreceived by the respondent. Therefore in view of the self evidentposition as noticed in Section 43D of the Act, no substantialquestion of law arises. Accordingly, Question (D) as formulated isalso not entertained. 7.Hence appeal is dismissed. No order as to costs. [N.M. JAMDAR, J] [M.S. SANKLECHA, J.] 4 208 ITR 930