The Income Tax Appellate Tribunal (ITAT), Mumbai Bench while remitting the matter back to the AO held that the disallowance cannot be more than the income earned by the assessee.
The assessee, Oman International Bank is engaged in the business of banking including foreign exchange transactions. It has two branches in India and its head office is based in Muscat.
During assessment proceedings, the assessing officer observed that the assessee has credited an amount of Rs. 14,35,542 as interest received from the head office in its profit and loss account but in the computation of income filed along with the return of income, it has reduced the interest income from the taxable income statement that the same is not taxable as it is received from head office.
The AO observed that the assessee has paid transaction charges of Rs.4,07,474 on Nostro Accounts. The assessee was asked to give the details of the amount of TDS under section 195 of the Act on these expenses as it is paid outside India.
In response, the assessee submitted that such charges are in the nature of bank charges and are recovered directly by way of debit to the account with the banks. The transaction charges represent the business income of this bank which accrue/arise outside India.
It is submitted that the transaction charges are for services rendered by the bank in the course of carrying on banking activities outside India and is therefore earned outside India and would not be chargeable to tax in India. Therefore, no tax is required to be deducted at the source on the remittance made for transaction charges.
The AO rejected the contention of the assessee and he observed that as per the provisions of Section 195 of the Act, tax is to be deducted on any sum payable outside India, which is the income of a non-resident. In this case, the amount charged even the income of the overseas branch and an expenditure of the assessee branch. Further, he observed that section 40(a)(i) of the Act restricts such expenditure if no tax is deducted on the amount paid to a non-resident. Therefore, he made the addition of Rs.4,07,470 under section 40(a)(i) of the Act.
The assessee preferred an appeal before CIT(A) which decided the issues in favor of the assessee.
The two-member bench of Judicial Member, Vikas Awasthy and Accountant Member, S. Rifaur Rahman noted that since the interest income earned by assessee dealing with Head Office i.e., self, the coordinate benches has already adjudicated that this income cannot be part of total income earned by the branch in India. Since the interest income is not part of total income, any related expenses for earning this income has to be identified and disallowed.
“We are also inclined to remit this issue back to AO to quantify the disallowance u/s 14A by eliminating the expenditure relevant for earning the above said income, it may not be the interest expenditure alone, it will include the administrative and other expenditure,” the ITAT said.
The Tribunal urged the AO that the disallowance cannot be more than the income earned by the assessee as it is judicial precedent that the disallowance cannot be more than the income earned by the assessee.
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