Income Tax Appellate Tribunal - Chennai
Bharat Overseas Bank Ltd., Chennai vs Department Of Income Tax on 4 October, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' Bench Chennai
Before Dr. O. K. Narayanan, Vice President
and Shri V. Durga Rao, Judicial Member
-------
ITA Nos. 213, 214 & 215/Mds/2010
Assessment years : 1993-94, 2004-05 & 2006-07
The Dy. Commissioner of v. M/s. Bharat Overseas
Income Tax, Company Bank Ltd.,
Circle-I(2), "Habeeb Towers", 763
Chennai. Anna Salai,
Chennai-600 002.
(PAN :AAACB1374M)
(Appellant) (Respondent)
Appellant by : Shri Shaji P. Jacob,
Addl. CIT
Respondent by : Shri C. Naresh, CA
Date of Hearing : 04.10.2012
Date of Pronouncement : 30.10.2012
ORDER
PER V. DURGA RAO, JUDICIAL MEMBER:
These appeals by the Revenue are directed against the orders of the CIT(Appeals)-III, Chennai dated 30-11-2009 for the assessment years 1993-94, 2004-05 and 200-607. The Revenue has raised the following grounds :
2ITA Nos.213-215 /Mds/2010 ITA No. 213/Mds/2010: "1. The order of the learned Commissioner of Income Tax(Appeals) is contrary to the Law and facts of the case.
2. The learned CIT(A) has erred in directing the assessing officer to allow Double Income-tax relief in full of ` 1,86,74,470/- instead of ` 1,08,25,780/- allowed by the assessing officer.
3. The learned CIT(A) has failed to note that the fact that as per the article 23(3) of the DTAA between India and Thailand which clearly states that the quantum of credit to be allowed is that "any amount which would have been payable as Thai tax for any year". Hence only the eligible DITR of ` 1,08,25,780/- was allowed and not the entire claim of ` 2,86,74,470/-.
4. The learned CIT(Appeals) has erred in directing the assessing officer to allow interest on any amount including interest u/s 244A.
5. It is submitted that in the decision of the Hon'ble Supreme Court in the case of Sandvik Asia Ltd. Vs. CIT(280 ITR 643) relied on by the CIT(A) , the Court has allowed only compensation at 9% on the amount due to the assessee. The learned CIT(Appeals) has failed to note that the word "refund"
means an amount previously paid by an assessee and does not relate to an amount payable by the Revenue by way of interest on such sums. There is no provision in the Income- tax Act to allow compensation as suggested by the learned CIT(Appeals) based on the decision of the Hon'ble Supreme Court.
6. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (appeals) be set aside and that of the Assessing Officer."
ITA No. 214/Mds/2010:"1. The order of the learned Commissioner of Income Tax(Appeals) is contrary to the Law and facts of the case.3
ITA Nos.213-215 /Mds/2010
2. The learned CIT(Appeals) has erred in directing the Assessing Officer to allow the interest on any amount including interest u/s 244(1A).
3. It is submitted that in the decision of the Hon'ble Supreme Court in the case of Sandvik Asia Ltd. Vs. CIT(280 ITR 643) relied on by the CIT(A) , the Court has allowed only compensation at 9% on the amount due to the assessee and not the interest u/s 244(1A).
4. The learned CIT(A) ought to have noted that the word "refund" means an amount previously paid by an assessee and does not relate to an amount payable by the Revenue byway of interest on such sums. There is no provision in the Income-tax Act to allow compensation as suggested by the learned CIT(A) based on the decision of the Hon'ble Supreme Court.
5. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (appeals) be set aside and that of the Assessing Officer."ITA No. 215/Mds/2010:
"1. The order of the learned Commissioner of Income Tax(Appeals) is contrary to the Law and facts of the case.
2. The learned CIT(A) has erred in directing the assessing officer to allow the entire bad debt relating to non- rural advances.
3. The learned CIT(A) has erred in directing the assessing officer to work out the credit balance pertaining to provision for bad and doubtful debts relating to rural advances and allow bad debt if it exceeds the credit balance in the provisions u/s 36(1)(viia).
4. It is submitted that this disallowance has been made from year to year and the CIT(A)'s findings have been contested before ITAT.4
ITA Nos.213-215 /Mds/2010
5. The learned CIT(A) has erred in directing the assessing officer to allow loss on revaluation of assets of ` 27,76,08,025/-.
6. The learned CIT(A) has failed to note that the assessee has kept their portion of their investments as "Held to Maturity" which is relatively a long term investment which may not be considered as "stock in trade". Hence claim of assessee's investment in securities as stock in trade cannot be accepted.
7. The learned CIT(A) has erred in directing the assessing officer to allow DITR in full as claimed by the assessee without any restriction.
8. The learned CIT(A) has failed to note the fact that where the profits or income has been subjected to tax both in India and in Thailand, there shall be allowed as a credit in the form of "DITR Relief" against the Indian tax payable in respect of such profits or income earned in Thailand. It is amply made clear vide article 23(3) of DTAA that the quantum of credit to be allowed is that "any amount which would have been payable as Thai tax for any year".
9. For these and other grounds that may be adduced at the time of hearing, it is prayed that the Order of the learned Commissioner of Income Tax (appeals) be set aside and that of the Assessing Officer."
2. Ground No.1 in all the appeals is common and needs no adjudication.
3. ITA No. 213/Mds/2010:
Grounds 2 and 3 relate to Double Taxation Relief in respect of the income from Bangkok branch. The assessee is a banking company and has claimed DITR in respect of foreign income taxed 5 ITA Nos.213-215 /Mds/2010 in India at the rate of tax in India. During the course of the original assessment proceedings the Assessing Officer observed that the assessee bank had claimed DITR in respect of foreign income taxed in India at Indian tax rate. However, for the reasons stated in the earlier years' orders the Assessing Officer held that the DITR will be allowed only at the lower rate the Bangkok income taxed in India or taxed at Bangkok. According to the Assessing Officer it is amply made clear vide Article 23(3) of DTAA that the quantum of credit to be allowed is that "any amount which would have been payable as Thai tax for any year". In this case the assessee's Bangkok income suffering tax in India was ` 3,60,85,934/-. Thai tax on that about at 30% works out to ` 1,08,25,780/-. This is the credit available to the assessee against the Indian tax payable in respect of Thai income. Accordingly, the Assessing Officer has allowed ` 1,08,25,780/- as DITR Relief.
4. On being aggrieved, the assessee carried the matter before the CIT(Appeals). The learned CIT(Appeals) allowed the claim of the assessee at ` 1,86,74,470/-.
5. Aggrieved, the Revenue carried the matter before the Tribunal. The Tribunal vide order dated 30-11-2004 in ITA Nos.
299, 300, 301 & 605/Mds/2001 for the assessment years 1995-96, 6 ITA Nos.213-215 /Mds/2010 1996-97, 1997-98 and 1993-94 directed the Assessing Officer to enquire into the existence of Double Taxation Avoidance Agreement ('DTAA' for short) between Indian and Bangkok.
6. In accordance with the directions given by the Tribunal, the Assessing Officer has completed the assessment by observing as under :
"Accordingly, the DTAA issued vide notification No. GSR 915(E) dated 27.6.1986 was examined. Article 23(2) of the DTAA read as under:
"That the amount of Thailand tax payable under the laws of Thailand and in accordance with the provisions of the convention whether directly or by deduction, by a resident of India, in respect of profits or income arising in Thailand, which has been subjected to tax both in India and in Thailand shall be allowed as a credit against the Indian tax payable in respect of such profits or income provided that such credit shall not exceed the Indian tax (as computed before allowing any such credit) which is appropriate to the profits or income arising in Thailand.
According to Article 23(3) of the DTAA, "For the purposes of the credit referred to in paragraph (2), the term "Thai tax Payable" shall be deemed to include any amount which would have been payable as Thai tax for any year...7
ITA Nos.213-215 /Mds/2010 It is clear from the above that where the profits or income has been subjected to tax both in India and in Thailand, there shall be allowed as a credit in the form of "DITR Relief" against the Indian tax payable in respect of such profits or income earned in Thailand. It is amply clear made clear vide article 23(3) of DTAA that the quantum of credit to be allowed is that "any amount which would have been payable as Thai tax for any year". In this case, the assessee's Bangkok income suffering tax in India was ` 3,60,85,934/-. Thai Tax on ` 3,60,85,934/- at 30% works outto ` 1,08,25,780/-. This is the credit available to the assessee against the Indian Tax payable in respect of Thai income."
Accordingly, the Assessing Officer allowed a sum of Rs1,08,25,780/-
as DITR relief.
7. On being aggrieved, the assessee carried the matter before the CIT(Appeals). It was submitted before the learned CIT(Appeals) that the order of the Tribunal dated 30-11-2004 in ITA Nos. 299, 300, 301 & 605/Mds/2001, supra, directed the Assessing Officer to enquire into the existence of DTAA between India and Bangkok.
The Assessing Officer was only to enquire whether there is a DTAA between India and Bangkok and relief has to be granted. The Assessing Officer instead of making enquiry came to the conclusion 8 ITA Nos.213-215 /Mds/2010 that there is a DTAA agreement existed between India and Bangkok and interpreted it and it is not in accordance with the directions of the Tribunal. The learned CIT(Appeals) by considering the submissions of the assessee has observed that the Tribunal had allowed the claim of the assessee by upholding the order of the learned CIT(Appeals) and the Assessing Officer was only required to enquire into the existence of DTA agreement between India and Bangkok. Once the agreement exists, the AO has to allow the relief as claimed by the assessee. The question of again going into the various articles of DTAA did not arise. Therefore once the AO had concluded that the DTA agreement existed, the relief as directed by the CIT(A) and confirmed by ITAT ought to have been granted.
Even otherwise, the business profit of Bangkok branch are governed by Article 7 of DTAA between India and Thailand according to which the income Bangkok branch can be taxed only in that country. The AO was therefore directed to grant the relief as claimed by the assessee and directed by the ITAT. The learned CIT(Appeals) allowed the ground raised by the assessee.
8. On being aggrieved, the Revenue has come up in appeal before the Tribunal. The learned DR has submitted that the only dispute between the assessee and the Revenue is that according to 9 ITA Nos.213-215 /Mds/2010 the assessee the DITR relief has to be allowed at ` 1,86,74,470/- as per the tax rate payable in India. According to the Assessing Officer the DITR relief can be allowed at the lower of the Bangkok income taxed in India or taxed at Bangkok. The learned DR relied on the departmental circular No. 91/2008 dated 28-08-2008 and submitted that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax, or as the case may be, avoidance of double taxation, provides that any income of a resident of India "may be taxed" in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement. It was further submitted that whatever the assessee paid in Thailand credit was given in India. Therefore, the assessee has no grievance. He relied on the decision of the Tribunal in the case of ITO v. M/s. Data Software Research Co. P. Ltd. in ITA No. 2072/Mds/2006 dated 27- 11-2007, wherein it was held that "as per the Treaty between India and USA, the tax which the assessee did pay in the USA be deducted from the income computed on global basis. The Tribunal 10 ITA Nos.213-215 /Mds/2010 held that as such the Assessing Officer had rightly followed the tax credit method for elimination of double taxation. The Tribunal therefore decided the issue in favour of the Revenue and against the assessee. Relying on the above order of the Tribunal it was submitted by the learned DR that in the present case the tax credit method for elimination of double taxation adopted by the Assessing Officer is correct and justified. So far as the merits of the case is concerned, he submitted that the issue involved in this appeal is squarely covered by the decision of the Delhi Bench of the Tribunal in the case of M/s. Telecommunications Consultants India Ltd. v.
Addl. CIT in ITA Nos. 1293 & 1294/Del/2009 dated 29-03-2012.
9. On the other hand, the learned counsel for the assessee has submitted that the Tribunal had remitted the matter back to the Assessing Officer in ITA Nos. 299, 300, 301 & 605/Mds/2001 dt. 30- 11-2004 only to enquire whether there is an agreement between India and Bangkok. If there is an agreement, the Assessing Officer has no jurisdiction to go beyond that and enquire into the issue and to pass a fresh order. Therefore the order passed by the Assessing Officer is not correct and contrary to the directions given by the Tribunal. Secondly, on merits the learned counsel for the assessee submitted that as per the DTAA it is well known that there are two 11 ITA Nos.213-215 /Mds/2010 types of elimination of double taxation, one by "exemption method"
and the other by "tax credit method". As per Article 7 of the DTAA the income earned by the assessee in Bangkok branch will be taxed only in Bangkok and not in India. Further he has relied on the decisions in the cases of P.V.A.L. Kulandagan Chettiar (267 ITR
654) (SC) and CIT v. VR.SR.M. Firm and Others (208 ITR 400) (Mad).
10. We have heard both the sides, perused the records and gone through the orders of the authorities below. In this case the assessee is a banking company and also having a branch office at Bangkok. The Assessing Officer in the original assessment order gave tax credit to the assessee on the tax paid at Bangkok at ` 1,08,25,780/-. According to the assessee he is entitled for the tax rate payable in India and claimed at ` 1,86,74,470/-. The matter went to the CIT(A). The learned CIT(Appeals) allowed the claim of the assessee. The Revenue carried the matter before the Tribunal.
The Tribunal vide order dated 30-11-2004 directed the Assessing Officer to enquire whether there is a DTAA between India and Bangkok. The Assessing Officer in accordance with the directions given by the ITAT enquired all the provisions of the DTAA between India and Thailand and as per Article 23(3) by following the tax 12 ITA Nos.213-215 /Mds/2010 credit method whatever tax was paid by the assessee in Thailand was given credit to the assessee. Aggrieved, the assessee carried the matter before the learned CIT(Appeals). The learned CIT(Appeals) hyper technically held that the only job of the Assessing Officer was to see whether there is a DTAA between India and Thailand. We are unable to understand the above conclusion made by the learned CIT(Appeals) that the job of the Assessing Officer is just to see whether there is a DTAA between India and Thailand. If there is a DTAA, the Assessing Officer has to allow the relief claimed by the assessee. That being so, in our opinion, the Tribunal need not refer it to the Assessing Officer as well just to see and pass an order. The Tribunal clearly directed the Assessing Officer to enquire into the existence of a DTAA between India and Bangkok. "Enquiry" means to investigate and apply the same. In our opinion, the Assessing Officer has rightly investigated and applied the same and decided the issue. We therefore hold that the finding given by the learned CIT(Appeals) is not correct.
Accordingly, we reverse the order passed by the learned CIT(Appeals) on this count and uphold the order of the Assessing Officer.
13ITA Nos.213-215 /Mds/2010
11. Insofar as other aspect is concerned, the assessee having accepted the tax credit method only, the assessee's grievance that the tax rate payable in India is to be allowed, we are unable to understand on what basis the assessee is making this claim.
Therefore, we hold that the Assessing Officer has rightly decided the issue as per Article 23(3) of the DTAA between India and Thailand. Even as per the departmental circular No. 91/2008 dated 28-08-2008, supra, the Assessing Officer has correctly applied the tax credit method and his view has been supported even by the Tribunal in ITA No.2072(Mds)/2006 dated 27-11-2007, supra. In that case the DTAA is between India and USA. Therefore, the Assessing Officer has rightly followed the tax credit method.
12. So far as the merits of the case is concerned, whether the 'tax credit method' has to be followed or 'exempt method' has to be followed, this has been discussed in detail by the Delhi Bench of the Tribunal in the case of M/s. Telecommunications Consultants India Ltd. in ITA Nos. 1293 & 1294/Del/2009 (supra), considering various case laws. Similar issue was the issue before the Delhi Bench of the Tribunal and the Tribunal has elaborately examined the DTAA between India and other countries and held as under :
14ITA Nos.213-215 /Mds/2010
21. We have heard both the sides in detail. We have also perused the case laws relied upon. The assessee is a public sector company incorporated in India and assessed to tax in India as tax resident.
The assessee is having domestic operations as well as overseas operations and derives income from both kinds of operation. Since the assessee company is incorporated in India, the provisions of Income-tax Act, being a domestic law, is applicable to the assessee. Accordingly, all the incomes of the assessee company including the global income are liable to be taxed in India. Section 4 of the Income-tax Act is a charging section of Income-tax which provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at the rate or those rates shall be charged for that year in accordance with, and [subject to the provisions (including provisions for the levy of additional income-tax) of, this Act] in respect of the total income of the previous year of every person. The provisions of this section also provide that where by virtue of any provision of this Act income-tax is to be charged in respect of income of a period other than the previous year, notwithstanding shall be charged accordingly. Section 5 of the Income-tax Act defines the scope of the total income which read as under :-
"5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which--
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or
(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or
(c) accrues or arises to him outside India during such year :
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which--
(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or 15 ITA Nos.213-215 /Mds/2010
(b) accrues or arises or is deemed to accrue or arise to him in India during such year."
Thus, the sub-clause (c) of clause (1) to section 5 provides that the total income of any previous year of a person who is a resident includes all income from whatever source derived which accrues or arises to him outside India during such year. As per the provisions of Income-tax Act, the assessee is a resident of India. Due to State of residency, India has inherent right to tax the global income of the assessee as per provisions of Section 5 of Income-tax Act, 1961. The assessee has permanent establishment in the foreign countries from where the project income have been derived and with whom India has entered into Double Taxation Avoidance Agreement. The assessee has opted for application of DTAA under section 90(2) of the Income-tax Act. The character of the income earned by the assessee is "income from business". Article 7 of relevant DTAA's which are applicable in the assessee's case are similarly worded. In these DTAAs, it have been provided that the profit of an enterprise of contracting state shall be taxable only in that state unless the enterprise carries on business in other contracting state through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprises may be taxed in the other Contracting State but only so much of them as is attributable directly or indirectly to that permanent establishment. This Article 7 of the all relevant DTAA is consisting of two parts, i.e., one is that the profit of an enterprise of a contracting state shall be taxable only in that state; and, the second part is that when the enterprise carries on business in the other contracting state through a permanent establishment. In that situation, the profits of enterprise may be taxed in the other contracting state but only so much of them as is attributable to that permanent establishment. Thus, the first part of the Article gives exclusive right to the taxation of business income to the state of residency as the phrase used as "shall be taxable only". The second part of this article 7 of the relevant DTAA provides right to taxation of the state of residency as well as to the other contracting state wherein the permanent establishment situated. Thus, the Article 7 provides that in such a situation, the state of the residents does not have exclusive right to tax but it has inherent right to tax such income. The article also provides that the state of the source has also right to tax the business income. It is a non-exclusive right in case there exist a permanent establishment. The phrase used "may be taxed". Therefore, the combined reading of the sentences of Article 7 of relevant DTAA means that the state of source has non-exclusive right to tax of business income attributable to permanent establishment. In view of this, such income may be taxed as per the domestic laws. This non-exclusive right of state of 16 ITA Nos.213-215 /Mds/2010 source does not extinguish the inherent right of state of residency to tax global income of its residents. In the circumstances, where the state of the residents of the taxpayer had given up its inherent right to tax the global income, in such situation, the phrase used in Article 7 of the DTAA is "shall be taxable only". Since all the DTAA applicable in the case of assessee the phrase used "may be taxed", therefore, inherent right of taxation of global business income in India is not lost.
21.1 Case laws relied upon by assessee are basically based on the decision of Hon'ble Supreme Court in the case of CIT vs. P.V.A.L. Kulandagan Chettiar, cited supra. In the case, Hon'ble Apex Court had stated general principles governing taxation of global income. In this case, Hon'ble Apex Court had upheld the decision of Hon'ble High Court where High Court took a view that Indian Tax authorities could not tax the income of the applicant on the test of close personal and economic relations. Hon'ble Supreme Court clarified that it affirmed the judgment of Hon'ble High Court for different reasons. Hon'ble Supreme Court observed as under :-
" Here, in these appeals, we are concerned with income arising from immovable property. We will proceed on the basis that fiscal connection arises in relation to taxation either by reason of residence of the assessee or by reason of the location of the immovable property which is the source of income. In the clauses which we have set out above, fiscal domicile is set out in art. IV which states that in a case where the person is a resident in both the Contracting States, fiscal domicile will have to be determined with reference to the fact that if the Contracting State with which his personal and economic relations are closer, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode. This implies that tax liability arises in respect of a person residing in both the Contracting States has to be determined with reference to his close personal and economic relations with one or the other. The immovable property in question is situate in Malaysia and income is derived from that property. Further, it has also been held as a matter of fact that there is no permanent establishment in India in regard to carrying on the business of rubber plantations in Malaysia out of which income is derived and that finding of fact has been recorded by all the authorities and affirmed by the High Court. We, therefore, do not propose to re- examine the question whether the finding is correct or not. Proceeding on that basis, we hold that business income out of rubber plantations cannot be taxed in India because of closer economic relations between the assessee and Malaysia in which the property is located and where the permanent establishment has been set up will determine the fiscal domicile. On the first issue, the 17 ITA Nos.213-215 /Mds/2010 view taken by the High Court is correct. We need not enter into an exercise in semantics as to whether the expression "may be" will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Reading the Treaty in question as a whole when it is intended that even though it is possible for a resident in India to be taxed in terms of ss. 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant. The Treaty will have to be interpreted as such and prevails over ss. 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court. The contention put forth by the learned Attorney General that capital gains is not income and, therefore, is not covered by the Treaty cannot be accepted at all because for purposes of the Act capital gains is always treated as income arising out of immovable property though subject to different kind of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the Treaty cannot be accepted because in the terms of Treaty wherever any expression is not defined, the expression defined in the IT Act would be attracted. The definition of 'income' would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and, therefore, art. 6 would be attracted."
Hon'ble Supreme Court's conclusions rest on the fact that the personal and economic relations of the assessee in relation to capital asset were far closer in the State of Malaysia than in India. In view of these facts, the residency of India was held to be irrelevant.
21.2 The fiscal domicile of the assessee had to be decided in view of the provisions of Treaty. In the case of CIT vs. P.V.A.L. Kulandagan Chettiar, there was dual residency and in that view of matter, issue was so decided. Assessee's contention that its foreign income is taxable income in foreign countries and it cannot be taxed in India is an untenable contention. It is a fallacious view taken by the assessee by wrong interpretation of Article 7 of relevant DTAA.
21.3 We would also like to mention that in the sphere of international taxation, there are two fundamental systems of taxation, one is based on residency of the taxpayer and the other is based on the source of the income. In the international arena, most of the countries follow the residency based taxation system. According to this system, a country can tax its residents on the 18 ITA Nos.213-215 /Mds/2010 global income of the taxpayer while the non-residents are taxed only on the income sourced inside the country. The provisions of section 5 of Income-tax Act, 1961 as enumerated above give a scope of a total income of the assessee who is resident of India. As per these provisions, the income of the resident taxable in India includes all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person or accrues or arises or is deemed to accrue or arise in India during such year or accrues or arises to him outside India during such year. Thus, the scope of the total income in the case of a resident also extended to the income accrues or arises to him outside India during such year. Under the source based system, a country can tax a person whether resident or non-resident, only on income sourced inside the country. Had all the countries in the world following source based taxation system then the problem of double taxation would not have arisen. However, under the resident based system, there arises a situation of double taxation because countries where the taxpayer is a resident then it will have to pay tax on its global income. To avoid the double taxation, two rules are devised in the DTAA's, i.e., one is by way of providing Distributive Rules under which taxing rights allocated between contracting state with respect to various kinds of income; and the second rule is to put state of residence under an obligation to give either credit for taxes paid in the source state or to exempt the income which is taxed in source state. These two rules have also been explained in para 19 of OECD Commentary which reads as under :-
"19. For the purpose of eliminating double taxation, the Convention establishes two categories of rules. First, Articles 6 to 21 determine, with regard to different classes of Income, the respective rights to tax of the State of source or situs and of the State of residence, and Article 22 does the same with regard to capital. In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the Contracting States. The other Contracting State is thereby prevented from taxing those items and double taxation is avoided. As a rule, this exclusive right to tax is conferred on the State of residence. In the case of other items of income and capital, the right to tax is not an exclusive one. As regards two classes of income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief so as to avoid double taxation; this is the purpose of Articles 23 A and 23 B. The Convention 19 ITA Nos.213-215 /Mds/2010 leaves it to the Contracting States to choose between two methods of relief, i.e. the exemption method and the credit method."
The taxation law in India follows the credit method for relieving the burden of double taxation. Under the Distributive Rules, the taxing rights are distributed between the contracting states. Exclusive rights to taxation in respect of certain incomes are given to one state and thus other state is precluded from taxing those incomes and therefore the double taxation is avoided. As a rule, such exclusive rights are given to state of residence. In respect of the other types of income, the right to tax is not exclusive one. The other state may also tax that income and depending upon taxing rights of the source state, income are classified into three categories and such classification are provided in para 20 to 23 of the OECD Commentary which read as under:-
20. Income and capital may be classified into three classes, depending on the treatment applicable to each class in the State of source or situs: - income and capital that may be taxed without any limitation in the State of source or situs,
- income that may be subjected to limited taxation in the State of source, and
- income and capital that may not be taxed in the State of source or situs.
21. The following are the classes of income and capital that may be taxed without any limitation in the State of source or situs:
- income from immovable property situated in that State (including income from agriculture or forestry), gains from the alienation of such property, and capital representing it (Article 6 and paragraph 1 of Articles 13 and 22);
- profits of a permanent establishment situated in that State, gains from the alienation of such a permanent establishment, and capital representing movable property forming part of the business property of such a permanent establishment (Article 7 and paragraph 2 of Articles 13 and 22); an exception is made, however, if the permanent establishment is maintained for the purposes of international shipping, inland waterways transport, and international air transport (cf. paragraph 23 below);20
ITA Nos.213-215 /Mds/2010
- income from the activities of artistes and sportsmen exercised in that State, irrespective of whether such income accrues to the artiste or sportsman himself or to another person (Article 17) ;
- directors' fees paid by a company that is a resident of that State (Article 16);
- remuneration in respect of an employment in the private sector, exercised in that State, unless the employee is present therein for a period not exceeding 183 days in any twelve month period commencing or ending in the fiscal year concerned and certain conditions are met; and remuneration in respect of an employment exercised aboard a ship or aircraft operated internationally or aboard a boat, if the place of effective management of the enterprise is situated in that State (Article 15);
- subject to certain conditions, remuneration and pensions paid in respect of government service (Article 19).
22. The following are the classes of income that may be subjected to limited taxation in the State of source:
- dividends: provided the holding in respect of which the dividends are paid is not effectively connected with a permanent establishment in the State of source, that State must limit its tax to 5 per cent of the gross amount of the dividends, where the beneficial owner is a company that holds directly at least 25 per cent of the capital of the company paying the dividends, and to 15 per cent of their gross amount in other cases (Article 10);
- interest: subject to the same proviso as in the case of dividends, the State of source must limit its tax to 10 per cent of the gross amount of the interest, except for any interest in excess of a normal amount (Article
11).
23. Other items of income or capital may not be taxed in the State of source or situs; as a rule they are taxable only in the State of residence of the taxpayer. This applies, for example, to royalties (Article 12), gains from the alienation of shares or securities (paragraph 5 of Article B), private sector 21 ITA Nos.213-215 /Mds/2010 pensions (Article 18), payments received by a student for the purposes of his education or training (Article 20), and capital represented by shares or securities (paragraph 4 of Article 22). Profits from the operation of ships or aircraft in international traffic or of boats engaged in inland waterways transport, gains from the alienation of such ships, boats, or aircraft, and capital represented by them, are taxable only in the State in which the place of effective management of the enterprise is situated (Article 8 and paragraph 3 of Articles 13 and 22). Business profits that are not attributable to a permanent establishment in the State of source are taxable only in the State of residence (paragraph 1 of Article 7).
The Distributive Rules uses the word "shall be taxed only", "may be taxed" and "may also be taxed". Thus, if a contracting state is to give exclusive right to tax a particular kind of an income, then relevant article of convention uses the phrase "shall be taxed only". As a rule, such exclusive right is given to state of residence, though there are a few articles where exclusive right to tax is given to state of source. The phrase "shall be taxed only" precludes other contracting state from taxing that income. In the cases, where distribution of right to tax is not exclusive, the convention uses the phrase "may be taxed". In such Model of Convention, the use of the phrase "may be taxed" does not give exclusive right of taxation to state of residence. As per these Model of Convention, the word "may be taxed" and "may also be taxed" gives simultaneous taxing rights to state of source. If, in the DTAA, an item of income is "may be taxed" in state of source and nothing is mentioned about taxing right of state of residence in convention itself, then state of residence is not precluded from taxing such income and can tax such income using inherent right of state of residence to tax such global income of its resident. Only in the case of phrase "shall be taxed only" used, then only the state of residence is precluded from taxing it. In such cases, where the phrase "may be taxed" used, the state of residence has been given its inherent right to tax. In the assessee's case, the claim of the assessee is for income taxable in foreign countries and it should not be taxed in India, cannot be accepted as the phrase used is "may be taxed" and in such cases, the state of residence has inherent power to tax such income which has been clearly provided in the DTAA itself. Domestic law also provides for taxing such income. Therefore, there is no contradiction between the provisions of DTAA and the domestic tax laws. As we have already stated above, India has not waived all the rights to tax under Article 7 of the relevant DTAA which provides that India shall give credit to the taxes paid in the country of source. The following case laws relied upon by assessee are based on the decision of Hon'ble Supreme 22 ITA Nos.213-215 /Mds/2010 Court in the case of CIT vs. P.V.A.L. Kulandagan Chettiar, cited supra :-
(i) CIT v Torqouise Investment and Finance Ltd. 300 ITR 1 (SC)
(ii) DCIT v Mideast India Ltd. 28 SOT 395 (De)
(iii) Ms Pooja Bhatt v DCIT 26 SOT 574 (Mum)
(iv) CIT v Essar Oil (ITA. No. 135 of2008) Born.
The facts of assessee's case are completely different set of facts than the decision of Hon'ble Supreme Court in the case of CIT vs. P.V.A.L. Kulandagan Chettiar, cited supra. The facts of that case are not relevant to the assessee's case. In that case, assessee sought a relief under the DTAA between the India and Malaysia. In that case, the Hon'ble Supreme Court held that it was a case of dual residency. The Hon'ble Supreme Court's conclusion rests on the fact that personal and economic relations of the assessee in relation to capital asset were far closer in the State of Malaysia than in India and in these facts, the residence of India became irrelevant. The assessee was not having permanent establishment in India in respect of that source of income. On the aspect and scope of the expression "may be taxed", Hon'ble Supreme Court had not expressed any opinion. Therefore, the incomes derived from rubber plantations of Malaysia were held to be not assessable in India. Similarly, the capital gain arising on the sale of immovable property in Malaysia was held to be not assessable income in India and business income for not having permanent establishment in India. The income derived from business in Malaysia not assessable in India. Thus, the facts of that case are completely at variance to the facts of assessee's case.
21.3 In the case of CIT vs. S.R.M. Firm & Others - 208 ITR 400, the subject matter was taxability and computation of income depending upon the agreement entered into between the Government of India and Government of Malaysia for avoidance of double taxation. Income from Rubber Estate in Malaysia and there was no separate establishment maintained in India in respect of the rubber estate in Malaysia. Thus, facts of that case are also at variance to the facts of assessee's case.
21.4 In the case of L.G. Cable vs. DDIT(International Taxation) reported in 314 ITR (AT) 301 (Delhi), the facts are different. In that case, the assessee was a non-resident company of Korea. The assessee (non-resident) entered into two contracts with Power Grid Corporation of India, one for onshore excavation of fibre optics project and second for offshore supply of equipment. The income for onshore was offered for tax. The contract for offshore supply of equipment was carried out in Korea. The bill of lading was issued 23 ITA Nos.213-215 /Mds/2010 in Korea in favour of Power Grid Corporation of India. The payments were remitted directly to Korea through an irrecoverable letter of credit. In that situation, it was held that no part of income arising from supply of offshore equipment was assessable in India. Thus, facts of the case are completely at variance to the facts of assessee's case.
21.5 In the case of Manpreet Singh Gambhir vs. DCIT - 119 TTJ 615, the issues and facts are completely different in comparison to assessee's case. In that case, issue was of salary earned in USA and also in India and issue as tax credit which was decided as under :-
"We are therefore of the opinion that the assessee can get only proportionate tax credit which was rightly computed by the Assessing Officer. As regards contention of the learned DR that the learned CIT(A) was not justified in granting credit of tax also for State Income-tax, we are in agreement with his submission. Though the appeal is not filed by the revenue, a respondent can support the order appealed against on any of the ground decided against him in terms of rule 27 of the Incometax Appellate Tribunal) Rules, 1963. Referring to Article 2, the taxes covered under the OT M are in respect of taxes paid in United States only for Federal Income-tax imposed by internal revenue code and not the State Income-tax. To this extent the finding of the learned CIT(A) is not in accordance with the treaty provision. We, therefore, restore the order of the Assessing Officer in this regard."
Thus, there is no comparison of facts and issue involved of assessee's case. In our considered view, we find no merits in the assessee's appeal on this issue.
22. In the result, this ground of appeal involved in all the three appeals stands dismissed. All these three appeals stand dismissed."
13. Insofar as the case laws relied on by the learned counsel for the assessee, the Delhi Bench of the Tribunal has already considered all the case laws in this connection. Respectfully following the above decision, we reverse the order passed by 24 ITA Nos.213-215 /Mds/2010 the learned CIT(Appeals) and uphold the order passed by the Assessing Officer. Therefore, this ground of appeal raised by the Revenue is allowed.
14. The next ground of appeal relates to the taxability of income under section 244A of the Act. This issue was not discussed by the Assessing Officer in his order. However, it was submitted by the assessee before the CIT(Appeals) that the Assessing Officer has not granted interest on interest due and consequently interest has been granted at ` 68,73,774/-
as against ` 94,99,482/-. On the basis of the submissions made by the assessee the learned CIT(Appeals) directed the Assessing Officer to allow the interest on interest.
15. Against that the Revenue has come up in appeal before us. The learned DR has relied on the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Wheels India Ltd. in Tax Case (Appeal) Nos. 76 & 77 of 2008 dated 27-04- 2011.
16. On the other hand, the learned counsel for the assessee has submitted that the Assessing Officer is adopting two different methods while calculating the tax, i.e interest on tax rate for the assessee adopting a different method and so far 25 ITA Nos.213-215 /Mds/2010 as refund is concerned the Assessing Officer is adopting another method. The learned counsel for the assessee relied on the decision of the Hon'ble Supreme Court in the case of Sandvik Asia Limited v. CIT (280 ITR 643).
17. We have heard both the sides, perused the records and gone through the orders of the authorities below. There is nothing on record to verify how the Assessing Officer and the learned CIT(Appeals) calculated the interest. Relevant material facts are not available on record to decide this issue.
We therefore direct the Assessing Officer to examine the entire facts and decide the issue afresh keeping in view the decisions relied on by both the sides, after providing reasonable opportunity to the assessee of being heard.
18. In the circumstances, ITA No. 213/Mds/2010 filed by the Revenue is partly allowed for statistical purposes.
19. ITA No. 214/Mds/2010: In this appeal the only issue involved relates to section 244A. This issue has already been remitted back to the Assessing Officer in the appeal in ITA No. 213/Mds/2010, above. For the reasons discussed therein, we direct the Assessing Officer to decide this issue on the same lines.
26ITA Nos.213-215 /Mds/2010
20. In the circumstances, the appeal filed by the Revenue is therefore allowed for statistical purposes.
21. ITA No. 215/Mds/2010: Grounds 2, 3 and 4 relate to provision of bad and doubtful debts. During the course of the assessment proceedings the Assessing Officer observed that from the computation of the statement that the assessee had added back a sum of ` 4,28,73,068/- being the provision for bad and doubtful debts to the Profit & Loss account.
However, in the said computation the assessee has claimed a sum of ` 7,59,24,503/- being bad debts written off in excess of credit balance in provision for bad and doubtful debts made under section 36(1)(viia) of the Act. The Assessing Officer after calling for the explanation of the assessee disallowed the same.
22. On being aggrieved, the assessee carried the matter before the CIT(Appeals). Before the learned CIT(Appeals) the assessee has relied on various case laws, viz.
i) South Indian Bank Ltd. v. CIT (262 ITR 579) (Ker)
ii)Dhanalakshmi Bank Ltd. v. CIT [(131 Taxman 774 (Ker)].
iii) DCIT v. Catholic Syrian Bank Ltd. (88 ITD SB Coch)
iv) Assessee's own case for the assessment year 2003-04 in ITA No. 93/Mds/2007 dt. 14.12.2007.27
ITA Nos.213-215 /Mds/2010 The learned CIT(Appeals) after considering the submissions of the assessee allowed the grounds of appeal raised by the assessee by observing as under :
"2.3 I have carefully considered various submissions of the learned AR and perused the facts pertaining to this issue. The issue of arriving at the credit balance in the provision account has been explained in the order of learned CIT(A) for the assessment year 2003- 04, wherein it has been held as under:
"I am of the considered view that the AO had chosen to allow claim of deduction for bad debt based on the decision of jurisdictional ITAT in case of Karur Vysys Bank (supra) and based on which the appellant was granted deduction in earlier years. On ther same facts, the Chennai Tribunal has decided the issuein favour of the appellant for assessment year 1999-2000 in ITA No. 421/Mds/2003 vide order dated 30-0-2006. There being no change of facts, the ratio of the said decision is required to be applied in the current year also. The decision of the Special Bench, Cochin in the case of Catholic Syrian Bank (supra) also support the contentions of the appellant. Therefore, as contended by the appellant, the deduction under section 36(1)(vii) is required to be worked out by first 28 ITA Nos.213-215 /Mds/2010 arriving at the balance in the provision for bad and doubtful debt consisting solely of rural branches. Bad debt written off relating to rural branches have to be allowed to the extent it exceeded the credit balance. As far as non rural bad debts are concerned, the same have to be allowed in full."
2.4 This decision was followed by my learned predecessor for the assessment years 2004-05 and 2005-06. As held by my learned predecessors, the credit balance has to be worked out by considering the balance in the provision for bad and doubtful debt account consisting solely of rural branches. In respect of bad debts written off relating to non rural branches the jurisdictional ITAT in appellant's own case cited above had held that "debts actually written off which do not arise out of rural advances are not affected by the proviso to section 36(1)(vii)A". Respectfully following the said decision, I hold that the bad debts written off relating to non rural advances has to be allowed in full. Accordingly, the AO is directed to allow bad debts written off in respect of non rural branches separately. With regard to write off relating to rural branches, the AO is directed to work out the credit balance pertaining to provision for bad and 29 ITA Nos.213-215 /Mds/2010 doubtful debts relating to rural branches. The deduction under section 36(1)(vii) in respect of rural branches will be allowed if it exceeds the credit balance in the provision account under section 36(1)(viia) computed in the manner detailed earlier. The appellant succeeds partly on this ground."
23. On being aggrieved, the Revenue has carried the matter before the Tribunal. The learned DR supported the order passed by the Assessing Officer. On the other hand, the learned counsel for the assessee supported the order passed by the learned CIT(Appeals).
24. We have heard both the sides, perused the records and gone through the orders of the authorities below.
The learned CIT(Appeals) has only followed the order of the Tribunal in the assessee's own case for the assessment year 2003-04 in ITA No. 93/Mds/2007 dated 14-12-2007. We find no infirmity in the order passed by the learned CIT(Appeals).
Therefore, this ground of appeal raised by the Revenue is dismissed.
25. The next ground of appeal (ground Nos. 5 & 6) relates to loss of revaluation of assets. During the course of the 30 ITA Nos.213-215 /Mds/2010 assessment proceedings the Assessing Officer observed as under :
"5. The assessee had reduced ` 27,76,08,025/- from the Net profit as per P&L a/c claiming as Loss on revaluation of investments being stock in trade as per annexure. In the annexure they produced the particulars of securities and they classified all these securities under the head investments. The assessee was asked to explain why this loss on revaluation of investments should not be added to the total income of the assessee for the reasons mentioned in the Assessment order for the Assessment year 1996-97 which is further confirmed by the honourable CIT(A) in his order dated 15/11/2000 referring the Decision in Indian Bank case in ITA No. 71/00-01 of 19/9/2000 for the assessment year 1993-94. The assessee vide its reply relied on various judicial pronouncements of honourable courts. Further in ITAT also decided in favour of the assessee. But this year the assessee bank had kept their portion of their investments as "Held to Maturity"
which is relatively long term investment which may not be considered as stock in trade.
Notwithstanding with the above, and by giving due respect of the above decisions, I propose to 31 ITA Nos.213-215 /Mds/2010 disallow the loss on revaluation of investment since it is learnt that the issue has been taken by the department in the Honourable Madras High Court and the issue is not yet decided. Therefore ` 27,76,08,025/- is disallowed and added to the total income of the assessee."
26. The assessee carried the matter before the CIT(Appeals). Before the learned CIT(Appeals) the assessee has relied on the decisions in the cases of UCO Bank v. CIT (240 ITR 355) (SC) and CIT v. City Union Bank Ltd. (292=1 ITR 144) (Mad). The assessee also relied on the decision in the assessee's own case in ITA No. 239/Mds/2001 dated 7-1- 2005 for the assessment year 1994-95. The learned CIT(Appeals) after considering all the decisions observed as under :
"5.2 I have carefully considered the facts pertaining to the case on the various submissions made by the learned AR. I find that this issue has been elaborately discussed by my learned predecessor in the assessment year 2005-06, where after considering the various judicial precedents and the facts of the case the issue had been decided in favour of the appellant. The facts being identical, following the various judicial precedents, I am of the opinion that the appellant is entitled to 32 ITA Nos.213-215 /Mds/2010 depreciation on investments amounting to ` 27,76,08,025/-. The AO is directed to allow this claim of the appellant. The appellant succeeds on this ground."
27. Being aggrieved, the Revenue has carried the matter before the Tribunal. The learned DR strongly supported the order passed by the Assessing Officer. He relied on the decision of the Karnataka High Court in the case of CIT v. ING Vysya Bank Ltd. (2012) 208 Taxman 511.
29. On the other hand, the learned counsel for the assessee placed relied on the decision in the case of the assessee's own case in ITA Nos. 231 to 237 and 239 to 242/Mds/2001 and 907/Mds/98 dated 30-06-2011. It was argued that the assessee has been consistently following the method and cannot be disturbed.
28. We have heard both the sides, perused the records and gone through the orders of the authorities below. The Tribunal in the assessee's own case has considered the issue and following the decision of the Hon'ble Supreme Court in the case of UCO Bank v. CIT (supra) allowed the claim of the assessee. The relevant portion of the order of the Tribunal is extracted hereunder :
33ITA Nos.213-215 /Mds/2010
11. We have perused the orders and heard the rival contentions. In so far as investments held as "current", there is no dispute among both parties that it has to be valued at lower of cost or market price. The question in dispute is, therefore, regarding valuation of investment held under "permanent"
category. As per learned D.R., such "permanent" category was to maintain SLR requirements and it had to be valued at cost only. Though in the case of UCO Bank (supra), Hon'ble Apex Court was dealing with assessment year 1982- 83, when the RBI Circular regarding bifurcation of investments into "permanent" and "current" was not there, we find that in subsequent decisions of various High Courts, including that of Kerala High Court in the case of Nedungadi Bank Ltd. (supra) and that of Hon'ble Karnataka High Court in the case of CIT v. Karnataka State Co- operative Apex Bank (251 ITR 194), no such bifurcation was attempted between "permanent" and "current" category for valuation. The Courts have consistently held that investment held by bank had to be valued at lower of cost or market price. A bank by virtue of Banking Regulation Act, has to maintain its accounts as per Section 29 and 30 thereof and Schedule III mentioned thereunder, gives the assessee an option to give the value of investment at cost or market price. Hence, in our opinion, differentiation attempted by ld. CIT(Appeals) between "permanent" and "current" categories of investments was not warranted. In taking this view, we are fortified by the decision of co-ordinate Bench of this Tribunal in the case of Bharat Overseas Bank Ltd. (supra). On the same issue, after considering arguments of both parties, the Tribunal at para 11 held as under:-
"11. After considering the rival submissions and relevant material on record, we find force in the contentions of the learned authorized representative of the assessee. The Hon'ble Supreme Court in the case of United Commercial Bank v. CIT supra, had clearly held that even if the securities are valued at cost in the Balance Sheet in accordance with the statutory provision, this action would not disentitle the assessee by submitting the income-tax returns on the real taxable income in 34 ITA Nos.213-215 /Mds/2010 accordance with the method of accounting adopted by the assessee consistently and regularly. The Court further approved that if securities were valued on cost or market value whichever is lower, the same should be accepted by the Assessing authorities if the same method has been consistently followed. Before us the Revenue has not disputed that the assessee has not adopted the same method of accounting consistently. We find that even the RBI had allowed discretion to the banks to value even the permanent category of securities on the cost or market value. Respectfully following the decision of the Hon'ble Supreme Court, we decide this issue in favour of the assessee, set aside the order of the learned CIT(Appeals) and direct the Assessing Officer to allow depreciation on securities which has been claimed on the basis of market value of the securities."
We are, therefore, of the opinion that assessee has to succeed in this ground. Its investments can be valued at cost or market value whichever is lower and depreciation arising can be deducted from its profit before arriving at its total income. Similarly, if such valuation results in appreciation, the profits would also go to increase its total income. The issue regarding depreciation on securities is decided in favour of assessee."
Respectfully following the decision of the Tribunal in the assessee's own case, this ground of appeal raised by the Revenue is therefore dismissed.
29. Ground Nos. 7 & 8 relate to DITR relief. This issue has already been dealt with elaborately in ITA No. 213/Mds/2010 above. For the reasons stated therein, these grounds raised by the Revenue are allowed.
35ITA Nos.213-215 /Mds/2010
30. In the result, the Revenue's appeals in ITA Nos. 213 & 215/Mds/2010 are partly allowed for statistical purposes and the appeal in ITA No. 214/Mds/2010 is allowed for statistical purposes Order pronounced on Tuesday, the 30th of October, 2012, at Chennai.
Sd/- Sd/-
(Dr. O. K. Narayanan) ( V.Durga Rao )
VICE PRESIDENT JUDICIAL MEMBER
Chennai,
Dated the 30th October, 2012
H.
Copy to: Assessee/AO/CIT (A)/CIT/D.R./Guard file