State Bank of Mauritius Limited vs. DDIT (ITAT Mumbai)

DATE: (Date of pronouncement)
DATE: October 4, 2012 (Date of publication)

Click here to download the judgement (state_bank_mauritius_43B_14A_disallowance.pdf)

Whether s. 43B & s. 14A disallowance can be made under Article 7(3) of the India-Mauritius DTAA

The Tribunal had to consider two issues: Whether in view of Article 7(3) of the India-Mauritius DTAA, a disallowance u/s 43B and s. 14A was permissible while computing the assessee’s income. HELD by the Tribunal:

(i) Article 7(3) of the India-Mauritius DTAA provides that “in determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere“. This is in contrast to the other DTAAs (e.g. India-USA DTAA) which provide that the deduction shall be “in accordance with the provisions of and subject to the limitations of the taxation laws of that State“. As there is no limitation, the result is that all expenses incurred for the purpose of business of the permanent establishment have to be allowed as deduction and no disallowance u/s 43B can be made. Neither Article 3(2) nor Article 23(1) make any difference to this interpretation;

(ii) However, the position with regard to s. 14A is different because unlike other disallowance provisions which disallow deductible expenditure, s. 14A contains a fundamental principle that any expenditure incurred in relation to an income not includible in total income, shall not be allowed as deduction. S. 14A, at the very threshold itself, snatches away the deductibility of expenses incurred in relation to an exempt income. It is not a case that the expenses are otherwise deductible but have become non-deductible due to the operation of s. 14A. Rather, the expenses do not qualify for deduction at the very first instance in accordance with the principle that if an item of income is not chargeable under the Act, the related expenditure has to be ignored.

For more on s. 14A/ Rule 8D see Champion Commercial Co Ltd (ITAT Kolkata)

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