INCOME TAX ACT, 1961

Section 14A

Disallowance under section 14A - Expenditure against exempt income - Assessee bank pleaded for disallowance of only net interest expenditure -

Assessee bank claimed that during financial year 2006-07, assessee has earned interest income of Rs. 16,33,86,000 and incurred interest expenditure of Rs. 12,79,38,000. Since there was net interest income earned by Bank for the year under consideration, no disallowance of interest expenditure was to be made under section 14A out of the total interest income credited to profit & loss account, interest income of Rs. 14,35,542 pertained to interest received from Head Office/overseas branches which had been held as not taxable in India. Out of total interest expenditure debited to profit & loss account, interest of Rs. 164,68,864 was paid to Head office/overseas branches and was not claimed as deduction while computing total income and therefore, only net interest expenditure was to be considered for disallowance under section 14A. Held: In concerned assessment year, there was net interest income but it might not be same situation in all the assessment years. Transaction with Head Office and Branch, which was dealing with themselves had to be considered like Mutual Concerns and all the transactions with them were to be eliminated for taxation purpose, not just the income but also the expenditure. When whole transaction was eliminated with Head Office, it was important to note that it was the main business of assessee, i.e., Banking all the relevant expenditure for carrying out these transactions also to be eliminated. Therefore, assessee's contention that only exempt income which was not part of total income alone was to be considered for disallowance under section 14A, was beyond acceptance. Therefore, issue was remanded back to AO to quantify disallowance under section 14A by eliminating expenditure relevant for earning above said income, it might not the interest expendture alone, it would include administrative and other expenditure.

REFERRED :

FAVOUR : Matter remanded

A.Y. : 2007-08

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