Income Tax Appellate Tribunal - Mumbai
Bank Of Credit And Commerce ... vs Income-Tax Officer on 5 November, 1990
Equivalent citations: [1991]37ITD293(MUM)
ORDER
M.A. Ajinkya, Accountant Member
1. This is an appeal by the assessee against the order of the CIT (Appeals) for the assessment year 1984-85.
2. The appellant herein is a non-resident banking company. The appellant has substantially raised three grounds in the present appeal which are dealt with seriatim.
3. The first ground is that the CIT (Appeals) erred in rejecting the appellant's claim under Section 20 of the Act for deduction of proportionate expenses reasonably expended to earn interest on securities while computing income chargeable under the head "interest on securities" and thereby enhancing the disallowances under Sections 37 and 40A(5) of the Act. The CIT(Appeals) has dealt with this issue in para-2 of his order. It was the case of the appellant before the CIT (Appeals) that the ITO should have apportioned the gross expenditure between its two sources of income assessable under the head "interest on securities" and the head "profits and gains from business" and thereafter made disallowance under Section 40A(5) with reference to the expenditure apportioned to the profits and gains of business. The CIT (Appeals) first referred to Section 20 of the Act which lays down a rule for apportionment of deduction of common expenditure from income from interest on securities in the case of a banking company. He thereafter relied on a decision of the Madras High Court in the case of Addl. CIT v. Indian Overseas Bank [1980] 123 ITR 790 and observed that there was no merit in the contention of the appellant that the provisions of Section 40A(5) are outside the purview of proportionate expenses allocable to interest on securities.
3.1 The counsel for the appellant pointed out that this issue has been decided by C-Bench of the Tribunal in another case of a non-resident banking company in ITA No. 1894(Bom)/81 dated 18-2-1983 in favour of the appellant and against the revenue. The Tribunal have dealt with this issue in paragraphs 7 and 8 of this order. The Tribunal accepted the stand of the CIT (Appeals) that the ceiling mentioned in Section 40A(5) should be considered only in respect of the balance of the expenditure which has to be considered under the head 'business'. It may be pointed out here that the Tribunal considered the decision of the Madras High Court in the case of Indian Overseas Bank (supra) therein which has been relied upon by the CIT (Appeals) in the present case and distinguished it. The Tribunal pointed out that the Madras High Court was considering expenditure on 'entertainment' which has to be considered under Section 37 of the Act. Section 20(1) refers to expenditure under Section 37 and, therefore, the limitations under Section 37(2) have to be considered under Section 20(1), whereas Section 40A(5) is not a part of Section 37. The limitations prescribed under that section have to be considered independently and that section mainly provides that the provisions of that section shall have effect in the computation of income under the head 'profits and gains of business or profession'. Therefore, as rightly held by the earlier Bench of the Tribunal, Section 40A(5) can be invoked only while computing the income from business. Section 20(2) clearly states that the amount considered for the purpose of deduction under the head' interest on securities' shall not form part of the deductions admissible under Sections 30 to 37 for the purpose of computing income under the head 'business'. Therefore, for the purpose of considering disallowance under Section 40A(5), the ratio of the decision of the Madras High Court in the case of Indian Overseas Bank (supra) relied upon by the CIT (Appeals) will not be applicable. We would, therefore, reverse the order of the CIT (Appeals) in this regard and allow the first ground of the appellant.
4. The second ground raises a more interesting issue. The substance of the appellant's case as raised in its second ground of appeal is that Section 44C is not applicable in the case of the assessee. The appellant, as we have stated earlier, is a non-resident banking company. While computing its total income for the assessment year 1984-85, the ITO allowed only Rs. 18,553 as head office expenses being 5% of the adjusted total income. The ITO probably applied Clause (a) of Section 44C for allowing such deduction. It was the case of the appellant before the CIT(A) that Section 44C is not applicable in its case since one of the clauses mentioned therein could not conceivably be invoked inasmuch as it was not possible to work out an average of the head office expenses allowed during a base period of 3 years from the assessment years 1974-75 to 1976-77 in the appellant's case because this was the first year of the appellant's business in India and that, therefore, it was not possible to work out an average of head office expenses in terms of Clause (b), and since the head office expenses in terms of this clause could not conceivably be worked out, the provisions of Section 44C would not be applicable in the appellant's case. The CIT (Appeals), after making extensive reference to the memorandum explaining the provisions of the Finance Bill (102 ITR 187 Statutes) disposed of the arguments of the appellant in the following words :-
7. In order to carry out effectively the object of the new provision it is only necessary to make such construction as will express the mischief and advance the remedy and to suppress all evasions for the continuance of the mischief (Maxwell's Interpretation of Statues -1985 Edition, p. 137). What Section 44C contemplated is that the least of the three amounts as contemplated in Clauses (a), (b) and (c) should be allowed as deduction. If one of the clauses is not applicable [as in the instance case Clause (b) is not applicable] that does not necessarily render the remaining two clauses nugatory. The appellant's contention that because Clause (b) is not applicable, the whole section should be thrown overboard runs counter to the canon of construction of statute to prevent evasion or abuse as indicated earlier, i.e., mischief rule.
The CIT(A) also negatived the stand of the appellant's counsel that the decision of the Spl. Bench of the Tribunal in the case of IAC v. Goodricke Group Ltd. [1985] 12 ITD 1 (Cal.) was applicable in that present case. He distinguished the facts of that case from the facts in the present case in para 8 of his order. It is against this finding of the CIT(A) that ground No. 2 is directed.
5. Before us, Shri Dastur, the learned counsel for the appellant, more or less reiterated the same arguments that were advanced before the CIT(Appeals). He first of all referred to the provisions of Section 44C and, in particular, the provisions of Clause (iii) of Explanation to Section 44C which have laid down how average head office expenses is to be worked out. He pointed out that in terms of this clause where any expenditure in the nature of head office expenditure has been allowed as a deduction in computing the income of the assessee chargeable under the head "profits and gains of business or profession" in respect of each of the three previous years relevant to the assessment years commencing on the 1st day of April, 1974, the 1st day of April, 1975,and the Ist day of April, 1976, one-third of the aggregate amount of the expenditure was to be allowed. If the expenditure has been allowed in respect of two of the three previous years, one-half of the aggregate amount of expenditure was to be allowed, and in a case where such expenditure has been so allowed only in respect of one of the aforesaid three previous years, the amount of expenditure so allowed was to be allowed as average head office expenses. Since the appellant company was not operating in India during the previous three years, it was not conceivable that any amount would be allowable in any of the three years. Therefore, in the appellant's case, it was not possible to work out the figure of average head office expenses as contemplated by Clause (b) of Section 44C. Since Clause (b) could not be operated in the present case and since Section 44C provided for adopting the least of the three different types of expenditure, if one of the three figures not available, it was not possible to give effect to the provisions of Section 44C and, that therefore, Section 44C was not at all applicable in the present case. In support of this argument, Shri Dastur first referred to a decision of the Spl. Bench of the Tribunal in Goodricke Group Ltd.' s case (supra). In that case, the Spl. Bench held, applying the rationale of the decision of the Supreme Court in CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294, that where there is a case to which computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. In view of this observation, it was clear that if any one or more of the computations under Clause (a), (b) or (c) of Section 44C is not conceivable in a particular case, it would have to be held that the non obstante provisions contemplating disallowance of head office expenditure under Section 44C does not apply. Shri Dastur also relied on the aforementioned decision of the Supreme Court in B.C. Srinivasa Setty's case (supra). Shri Dastur relied on yet another decision of the Supreme Court in the case of CIT v. Official Liquidator, Pallai Central Bank Ltd. [1984] 150 ITR 539. Shri Dastur argued that since Section 44 AC was not applicable in the present case for the reasons stated by him, the actual head office expenses should have been allowed as a deduction in the computation of income.
6. The learned Departmental Representative, relying on the order of the CIT (Appeals), pointed out that the decision of the Spl. Bench was relevant only to the facts of that case and could not be generally applied in all cases of non-resident companies. He also argued that the interpretation of Section 44C in the manner suggested by the counsel for the appellant would defeat the purpose of the section and, therefore, such interpretation should be avoided. For this purpose, he relied on a decision of the Madras High Court in the case of J. K. K. Angappan & Bros. v. CIT [1973] 91 ITR 513.
7. We have considered the submissions made on both the sides and have gone through the authorities cited. In our opinion, the interpretation sought to be placed on Section 44C by Shri Dastur is far-fetched and would make the operation of that section unworkable in all cases of non-resident assessees who were never assessed to tax in the assessment years 1974-75, 1975-76 and 1976-77. This could never have been the intention of the legislature when it inserted Section 44C by the Finance Act 1976 with effect from 1-6-1976. Prior to insertion of Section 44C,head office expenses of non-residents were being allowed in accordance with the provisions of Sections 28 to 43 A. The scope of the effect of the new Section 44C has been elaborated in the departmental Circular No. 242 dated 5-7-1976. A portion of this circular, which is relevant for our purpose, reads as under :-
25.1 Non-residents carrying on any business or profession in India through their branches are entitled to a deduction, in computing the taxable profits, in respect of general administrative expenses incurred by the foreign head offices insofar as such expenses can be related to their business or profession in India. It is extremely difficult to scrutinise and verify claims in respect of such expenses, particularly in the absence of account books of the head office which are kept outside India. Foreign companies operating through branches in India sometimes try to reduce the incidence of tax in India by inflating their claims in respect of head office expenses. With a view to getting over these difficulties, the Finance Act, 1976 has inserted a new Section 44C in the Income-tax Act laying down certain ceiling limits for the deduction of head office expenses in computing the taxable profits in the case of non-resident taxpayers. Under this provision, the deduction in respect of head office expenses will be limited to -
(i) an amount equal to 5 per cent of the adjusted total income of the taxpayer for the relevant year; or
(ii) the annual average of the head office expenditure allowed during a base period of three previous years, namely, the previous years relevant to the assessment years 1974-75 to 1976-77; or
(iii) the actual amount of head office expenditure attributable to the business in India, whichever is the least.
In cases where the adjusted total income of the resident for the current year is a loss, the rate of 5 per cent, referred to at (i) above will be applied with reference to the average adjusted total income of the non-resident for the three previous years immediately preceding the relevant assessment year.
It would be seen that the principle of ceiling down deduction available to nonresident assessees has also been given effect to in other provisions like Sections 44D, 57 and 58(3). For example, under Section 44D, which was also inserted with effect from 1-6-1976 by Finance Act, 1976, special provisions have been laid down for computing income by way of royalty and fees received by foreign companies from Indian concerns. Where such income is received under agreements before 1-4-1976, the deduction in respect of expenses incurred for earning such income is subjected to a ceiling of 20% of the gross amount. Similarly, in Section 57, a proviso was introduced by Finance Act, 1976, with effect from 1-6-1976 which excluded the operation of Clauses (i) and (ii) of Section 57 under which deductions are provided from income chargeable under the head "Income from other sources". Likewise, Sub-section (3) was added to Section 58 by the same Finance Act, 1976, with effect from 1-6-1976 which provided that the provisions of Section 44D shall, so far as may be, apply in computing the income chargeable under the head "income from other sources". This would mean that the Finance Act, 1976 has amended Section 58 of the Act to secure that the ceiling prescribed under Section 44D will be applicable even in cases where income by way of royalties or technical service fees received under the approved agreements is charged to tax in the hands of a foreign company under the head "Income from other sources". It is necessary to mention all these amendments to point out that Sections 44C, 44D and 58(3) were inserted in the Act with effect from 1-6-1976 by the same Finance Act to govern and regulate the assessment of non-resident assessees/foreign companies. AU these are procedural sections which have been introduced with a specific purpose and which have the intention of regulating the admissibility of deductions of various expenses that may be claimed by such assessees against different heads of income. Once this is understood, it would not be correct for us to interpret one of these sections namely, Section 44C, in such a way as to render it a nullity. What the section, in effect, provides is that any claim for deduction of head office expenses would be regulated by finding out the least of the three possible figures which can be found out by reference to Clauses (a), (b) and (c) of that section. Clause (a) speaks of 5% of the adjusted total income and the expression "adjusted total income" is explained in Clause (i) of the Explanation. Clause (b) of the section speaks of amount equal to the average head office expenditure and the expression "average head office expenditure" is explained in Clause (iii) of the Explanation to that section and Clause (c) speaks of the amount in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the "assessee in India, whichever is the least. The expression "whichever is the least" is used because three different types of expenses were considered possible at the point of time when this section was first introduced, i.e., by Finance Act, 1976 with effect from 1-6-1976. One such possibility which is spelt out in Clause (b) is the average of head office expenses allowed in the years 1974-75,1975-76 and 1976-77 in computing the income of the assessee chargeable under the head "Profits and gains of business". Now, in cases like that of the present appellant, who were not assessed to tax in those years, it is just not possible that this figure can ever be worked out. Therefore, in such cases, there is no question of working out average head office expenditure; but this fact by itself does not render the entire section a nullity and we are not prepared to accept Shri Dastur's argument that the decision of the Special Bench of the Tribunal in Goodricke Group Ltd.'s case (supra) helps his case because, in Goodricke Group Ltd.'s case (supra), the facts were slightly different. In that case, the Tribunal, as a matter of fact, found that the entire head office expenses were for the purpose of business in India, and where the books of the head office could be produced, the claim for expenses in the nature of head office expenditure could be considered under Section 37(1) itself without any difficulty. This factor weighed with the Tribunal. Further, the major portion of the so-called head office expenditure in that case governed the expenditure for supervising the sales which was included in the commission paid to its Secretaries. The expression "so much of the expenditure as is attributable to the business in India" contained in the non obstante clause contemplates that at least a part of the expenditure is referable to business outside India. However, in Goodricke Group Ltd.'s case (supra), the entire expenditure was wholly and necessarily incurred for the business in India as the assessee had no business outside India at all. The ratio of the decision in Goodricke Group Ltd.'s case (supra) has to be considered in the context of these facts which distinguish the case from the case of the appellant before us and, therefore, in our opinion, the finding of the Special Bench in that case has to be considered as given in the context of the facts obtaining in that case and cannot be applied in general in all cases of non-resident assessees.
7.1 Similarly the reliance by Shri Dastur on the two decisions of the Supreme Court, in our opinion, is misplaced and does not advance the case of the appellant. In both these cases, the Supreme Court was concerned with interpreting a charging section and not procedural section. In B.C. Srinivasa Setty's case (supra), the main principal laid down by the Supreme Court was that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provision cannot apply at all, it is evident that such a case was not intended to fall within the charging section. The Supreme Court in that case was concerned with determining whether the transfer of goodwill gives rise to capital gains for the purpose of income-tax. What is contemplated by Section 48(ii) is an asset, in the acquisition of which it is possible to envisage a cost. It must be an asset which possesses inherent qualities of being available on the expenditure of money to a person seeking to acquire it. The Supreme Court observed that none of the provisions pertaining to the head 'Capital expenses' suggests that they include an asset, in the acquisition of which no cost at all can be considered. Therefore, they held that when goodwill in a new business is sold, what is charged is capital value of asset and not any profit or gain. This reasoning went to the very basis of charge and laid down the fundamental principle that when a self-generating asset is sold, capital gains cannot be computed, because the cost of such asset cannot be determined. This decision of the Supreme Court lays down a principle concerning the charge to capital gains tax of certain assets, the cost of which it is not possible to ascertain or determine. Similarly, another decision of the Supreme Court also concerned the chargeability to super-tax of companies in liquidation. It laid down the principle that where standard deduction contemplated by Section 2(9) of the Super Profits Tax Act is incapable of ascertainment in respect of a company in liquidation for a period falling subsequent to the date of winding up, the charge of super profits tax under Section 4 is not attracted to such a case. Both these decisions, it will be seen, were concerned with the charge of tax in certain circumstances. In the present case, we are only concerned with a procedural section and a section, which has been introduced as has been discussed earlier, with a view to regulate the admissibility of expenses claimed in certain circumstances by non-resident assessees or foreign companies. If one of the alternatives envisaged in Section 44C is not available, this situation does not ipso facto render the section unworkable. If an average of head office expenses could not be calculated under Clause (b), Clause (a) or Clause (c) could still be applied to work out the lesser of the two figures of head office expenditure which could be calculated under these clauses. This is exactly what the ITO has done and, in our opinion, the CIT(A) was fully justified in confirming the action of the ITO in this regard. This ground of appeal is, therefore, rejected.
8. The third ground of appeal is that the CIT(A) erred in sustaining the ITO's decision on the strength of the appellate order for the assessment year 1981-82 in not allowing expenses incurred by the appellant as a representative office functioning in India. The CIT(A) has dealt with this issue in para 10 of his order. It would appear that the appellant had claimed deduction of expenses of Rs. 4,85,345 as representative office expenses. These expenses were disallowed by the CIT(A) for the reasons as were stated by him while disposing of the appeal for the assessment year 1981-82. Although copy of the order of the CIT(A) for the assessment year 1981-82 has not been filed before us, a copy of the order of the Tribunal in an appeal filed by the appellant against that order has been filed (pages 5 to 12 of the compilation). The Tribunal, in their consolidated order in ITA No. 3979 (Bom) 86 and 443 to 445 (Bom) 87, have, inter alia, dealt with this issue and decided it against the appellant. The issue about admissibility of such expenses has been considered by the Tribunal in paragraphs 3 to 5 of their order. Since the decision of the CIT(A) for the assessment year 1981-82 on this issue has been confirmed in the appellant's own case by the Tribunal, we would, for the reasons stated by the Tribunal in the aforementioned paragraphs of their order dated 3-1-1990, confirm the disallowance of representative office expenses for the assessment year 1984-85 and would, therefore, dismiss the third ground of appeal.
9. Before we part with this order, we have to deal with an additional ground which was sought to be raised by the appellant in their letter dated 19-12-1989. The additional ground raised reads as under: -
In the event of the expenses not being computed for carry forward and set off then entire expenses incurred during the assessment years 1980-81 to 1983-84 be allowed as expenses related to the previous year relevant to this assessment year.
While arguing that the additional ground should be admitted, Shri Dastur, the learned counsel for the assessee, relied on the decision of the Delhi High Court in the case of Shriram Refrigeration Industries Ltd. v. CIT[ 1981] 127 ITR 746, the decision of Andhra Pradesh High Court in the case of Coromandel Fertilizers Ltd. v. CIT [1984] 148 ITR 546 and the decision of Punjab & Haryana High Court in the case of Atlas Cycle Industries Ltd. v. CIT [1982] 133 ITR 231, Shri Raju strongly objected to the admission of the additional ground on the ground that the issue did not arise out of the orders of the revenue authorities for the year concerned. Shri Raju relied on a decision of the Bombay High Court in the case of Ugar Sugar Works Ltd. v. CIT [1983] 141 ITR 326 and the decision of the Delhi High Court in CIT v. Bhagat Swamp Chranjit Singh & Co. [1982] 133 ITR 13.
10. We have considered the submissions made in this behalf and, in our opinion, the additional ground as framed by the appellant above cannot be admitted. We would proceed to state out reasons as follows. The appellant is, in effect, claiming that the expenses relating to the assessment years 1980-81 to 1983-84 be allowed as expenses relating to the previous year relevant to the assessment year under appeal. It is not disputed that this issue was never raised either before the assessing officer or before the first appellate authority. The issue was considered at length by the CIT(A) for the assessment year 1981-82 and decided against the appellant by the Tribunal in their order dated 3-1-1990, to which we have made reference herein-above. The merits of the claim were considered by the Tribunal which also dealt with the various authorities cited on behalf of the appellant. Therefore, the admissibility of such expenses has been considered and the issue concluded against the appellant in an appeal filed by it before the Tribunal. The appellant clearly cannot re-agitate the same issue in a different way once again for the assessment year 1984-85 particularly when the appellant had not raised this claim before the assessing officer or appellate authority in the manner in which it is now seeking to raise it before the Tribunal.
11. We have considered the various authorities cited by Shri Dastur in support of his stand that the additional ground of appeal be admitted. In our opinion, none of these authorities advances the case of the appellant. In Shriram Refrigeration Industries Ltd.'s case (supra), the brief issue was whether a particular item of expenditure was allowable for the assessment year 1966-67. The relevance of this decision would be considered only if and when we admit the additional ground and consider the issue on merits. Since, in our opinion, the additional ground cannot be admitted and has to be dismissed in limine on preliminary ground itself, we do not consider it necessary to pronounce on the applicability of this decision to the facts of the present case. Similarly, in Coromandel Fertilizers Ltd.'s case (supra), the Andhra Pradesh High Court had laid down tests for deciding whether the expenditure incurred for acquiring technical know-how could be allowed as revenue expenditure or whether it could be considered as capital expenditure. Here, again, the judgment deals with the merits of the issue which could be considered after the ground is admitted. So far as Atlas Cycle Industries Ltd.'s case (supra) is concerned, it would appear that the issue about the Tribunal's power to allow additional evidence came up for consideration before the Punjab & Haryana High Court in that case. The Court observed that the power of the Tribunal in appeal to allow an additional plea and, consequently, for additional evidence being taken, has been given to do substantial justice between the parties. The Tribunal has to allow or disallow the additional plea and additional evidence for applying its judicial mind. In that case, the assessee had claimed certain expenses under what was called "monsoon gift scheme" during the accounting year 1968-69 relevant to the assessment year 1969-70. The expenditure was not claimed at the time of assessment but it was claimed in the subsequent assessment year, i.e. 1970-71.The A AC disallowed the claim on the ground that the amount should have been claimed in the assessment year 1969-70. The second appeal filed by the assessee before the Tribunal for the assessment year 1969-70 was still pending before the Tribunal when the AAC allowed the expenditure in this regard during the assessment year 1970-71 and disallowed the same sum as the expenditure pertaining to the assessment year 1969-70. The assessee contended that the necessity of raising the ground arose after the AAC's order and that the omission to raise the ground was neither wilful nor intentional. The facts in the present case are entirely different and distinguishable. The issue before the revenue authorities and before the Tribunal for earlier year was not whether the expenses claimed were allowable for one year or the other. The issue was whether this type of representative office expenses was at all allowable and the Tribunal in their aforementioned order for the earlier years specifically held after a proper consideration of all the arguments and case law against the assessee on merits. The appellant is now trying to raise the same issue by trying to claim it as expenses relating to the previous year relevant to the assessment year under appeal. We cannot permit the appellant to keep on raising an issue, the merits of which have been considered and decided by the Tribunal in the assessee's own case for an earlier year. There must be some finality to proceedings in this regard which cannot be allowed to go on aimlessly. The Bombay High Court in Ugar Sugar Works Ltd.'s case (supra) has clearly stated that the Tribunal's jurisdiction under Section 254 in an appeal before it is restricted only to passing of orders on the subject-matter of the appeal. If initially the Tribunal did not have jurisdiction to adjudicate on a finding of the ITO, as it was not the subject matter of an appeal before it, then it would not get that jurisdiction merely because such a contention was taken in the memorandum of appeal or sought to be taken in an additional ground of appeal with its leave or otherwise argued before it. Similarly, the Delhi High Court in CIT v. Anand Prasad [1981] 128 ITR 388 observed that when the point has not been taken before the AAC and is not mentioned in the order of the AAC, then the Commissioner cannot object nor can the assessee object. Both these decisions would appear to support the objection of the learned Departmental Representative. We would, therefore, decline to admit the additional ground raised which is, therefore, dismissed in limine.
12. There is one more reason why the additional ground cannot be allowed to be taken at the present stage. The form in which the question is framed implies that the entire expenses for earlier years which are not allowed are to be treated as loss to be carried forward and set off. Whether, such expenses not allowed for the earlier years are to be treated as losses of those years is a question of fact on which no pronouncement has been made by the revenue authorities for those years. Therefore, the question raised is not a pure question of law and cannot be decided without adjudicating on facts. There is no finding of the assessing authority or the appellate authority about whether such expenses can be treated or have been determined as unabsorbed losses and are to be carried forward and set off as such for the subsequent years. In the absence of any such finding, It is not possible for us at this stage to decide the issue as is raised in the additional ground. For this reason also, we would decline to admit the additional ground.
13. In the result, the appeal by the assessee is partly allowed.