Section 14A does not apply to non-income receipts governed by the doctrine of mutuality.

ORDER

Smt. Beena Pillai, Judicial Member. – A division bench on 12/07/2016 had sought for constitution of Special Bench to the Hon’ble President in terms of section 255(3) of the Act to decide the following question:-

Whether an income which is not subject to tax on the doctrine of mutuality can be construed to be an “income which does not form part of the total income under this Act”, as understood for the purposes of section 14A of the Act?”

2. Hon’ble President vide order dated 20/02/2025 reconstituted the Special Bench and has accordingly placed the above issue before the present bench comprising of Three Members.

3. The assessee is a foreign bank, permitted by the RBI to undertake banking business in India, receives, as a part of its banking business, deposits in designated foreign currencies under various schemes stipulated by the RBI for example FCNR(B) Scheme. The RBI under the scheme permit to lend amounts so received in the overseas overnight call money market in which institutions like banks participate. It is submitted that the Indian Branch office is permitted to temporarily lend the amounts in the overseas overnight call Money Market.

3.1 During the Financial Year relevant to assessment year 1998-99, the Indian branch office of the assessee earned Rs.2,70,56,575/- as interest on the surplus funds deposited with the overseas branches/ Head office. In the P&L account Rs.2,70,56,575/- was credited as interest received in India on short term lending to overseas Branches/Head office. The assessee was of the opinion that the aforesaid amount represents a charge from one branch to another of the same taxable entity, and it is not in the nature of income and hence is not subjected to tax in India. In the return of income filed by the assessee in India, the said interest was not treated as taxable by applying “principle of mutuality”, on the basis that the said interest was receipt from self and therefore cannot be construed as income.

3.2 It is also noted that the assessee vide letter dated 06/11/2000 intimated the Ld.AO that though the assessee is a tax resident of US,and is eligible to claim benefit if any as per India US Double Taxation Avoidance Agreement, it has filed the return of income as per the provisions of the Income Tax Act and has chosen to be governed by the provisions of the Act and not to be governed by the provisions of the treaty.

3.3 Based on the above facts, the submission of the assessee before the Ld.AO are summarised as under:

3.4 The Ld.AO after considering above submissions disallowed the claim on the following key grounds:

4. On an appeal before the Ld.CIT(A), the observations of the Ld.AO was upheld and the addition made was confirmed.

4.1 Aggrieved by the order of the Ld.CIT(A), the assessee preferred appeal before this Tribunal.

5. One of the grounds raised in assessee’s appeal is regarding taxability of interest received by the Indian branch of assessee from the overseas HO or other overseas branches.

5.1 As a consequence, the Revenue filed Cross Objection, claiming that, if in view of the decision by Hon’ble Mumbai Special Bench, in case of Sumitomo Mitsui Banking Corpn. v. Deputy DIT (IT) 136 ITD 66 (Mumbai), the interest received by Indian branch office is held not chargeable to tax, then expenditure in relation to such tax free income should be held as disallowable u/s 14A.

5.2 Before the division bench, the Ld.Sr.Counsel on behalf of the assessee argued that, interest received is not in the nature of income in hands of Indian Branch Office (hereinafter referred to as BO) in view of the Hon’ble Mumbai Special Bench decision in Sumitomo Mitsui Banking Corpn (supra) wherein, the payment from BO to Head Office (hereinafter referred to as HO)was held to be payment in nature of self to self which is governed by ‘principle of mutuality’, as BO and HO are not independent entities under domestic law. It was argued that for invoking section 14A, there has to be an income chargeable to tax under section 4 of the act at the first place, which gets exempted under the Act. He submitted that once there is no income arising under section 4 due to principle of mutuality, there is no question of income being exempt, and as such, section14A cannot be invoked.

5.3 Alternatively, it was also argued by the Ld.Sr.Counsel on behalf of the assessee that, since interest expenditure was incurred by HO for purposes of its business, it is an allowable expenditure u/s 36(1)(iii) under domestic law.

5.4 Per contra, the Revenue relied on the decision of coordinate bench of this Tribunal in case of Oman International Bank SAOG v. Jt. DIT (International. Taxation) (2013) 35 CCH 207 wherein, it was held that, provisions of 14A are applicable for disallowance of interest, if the interest received by BO from HO/other overseas branch or vice-a-versa is held as not taxable in view of Sumitomo Mitsui Banking corporation (supra).

5.5 Considering the view taken by the Special Bench in case of decision of Sumitomo Mitsui Banking corporation (supra) and decision of coordinate bench of this Tribunal in case of Oman Intl Bank SAOG (supra), recommendation was made by the Ld. Division Bench on 12/07/2016 to the Hon’ble President to constitute a special bench in terms of section 255(3) of the Act to decide the following question:-

Whether an income which is not subject to tax on the doctrine of mutuality can be construed to be an “income which does not form part of the total income under this Act”, as understood for the purposes of section 14A of the Act?”

6. It emerges from the reference that, the very foundation of the Revenue’s cross-objection is rooted from the ratio decidendi laid down by Hon’ble Special Bench in the aforesaid case.

The question referred by the Ld.Division Bench is therefore being examined on first principles, based on the submissions of both sides.

7. The submission on behalf of the Revenue, advanced by the Ld.Standing Counsel, proceeds on the footing that, where the impugned interest income does not form part of the total income, the mandate of section 14A of the Act stands attracted so as to disallow the expenditure incurred in relation to the earning of such income. In aid of her submission, reliance has been sought to be placed on the observations of the Coordinate Bench of the Tribunal in Oman International Bank SAOG (supra).

“5. We have considered the rival submissions as well as the relevant material on record. Having held that the Interest Income received from the HO is not taxable in view of principle of mutuality, the question arises whether such Income which has to be excluded from the total Income, shall be the gross receipts or net Income after deduction of the expenditure incurred in relation to earning of such income. The aspect of total income under the scheme of Income Tax is understood as the earning of the assessee from all the sources as classified under different heads of Income reduced by the expenditure directly and Indirectly incurred in relation to the earning of the income and further deducting all the allowable claims and the exemption/deduction while computing the total Income. Thus, the total income chargeable to tax means the net income computed from the gross receipts after the deduction of the allowable expenditure and other deductions. As per the scheme of the Income Tax, the income which is chargeable to tax Is computed after the deduction of the expenditure which has been Incurred for earning such taxable Income. Therefore, the expenditure Incurred for other than the Income chargeable to tax, is not permitted to be reduced from the Income for computation of the total income. This aspect of allowing the expenditure incurred in relation to the taxable Income is embedded in the provisions of section 14A to ensure that the expenditure Incurred in relation to the income which is not chargeable to tax shall not be allowed as deduction against the income which is chargeable to tax. In other words, the income, which is chargeable to tax is taken as net income after deduction of the allowable expenditure and similarly the Income which is not chargeable to tax is also taken net and the expenditure incurred in relation to such Income is reduced from it. Thus, the Income, which does not form part of the total Income, shall also be the net Income after considering the expenditure directly or indirectly incurred in relation to earning the said income.

5.1 The term “Income Itself under the provisions of the IT Act de notes the net Income and not gross receipt. Therefore, whether it is the Income chargeable to tax or an exempt income, the expression of income remains the same as net after deduction of the allowable expenditure and claims.

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8. The next objection raised by the id AR of the assessee is that the provisions of section 14A cannot be applied in respect of Interest received from the HO, which is not an income; therefore, there is no question of exclusion of the same from the total Income.

8.1 The Id AR has contended that the Tribunal and the Hon’ble High Court have held that the interest received is not taxable because one cannot earn Income from oneself for the purpose of income tax. This issue has been considered by the Tribunal in the case as relied upon by the id DR and it has been held that the provisions of sec 14A are applicable in respect of Interest Income received from HO. Therefore, we do not agree with the contention of the Id AR that the provisions of sec. 14A are not applicable because there is no income which is contrary to the fact that the assessee itself has shown the interest received from the HO as Income in the P&L. account; but has not offered the same for taxation.

8.2 In the case of M/s Societe Generale, the Tribunal has upheld the applicability of section 14A in respect of the interest which was held to be exempt on principle of mutuality. The Tribunal has given the finding in para 44 of the order as under:

Therefore, there is no ambiguity on the issue that section 14A is applicable in respect of interest received from HO/overseas branches which is held as exempt on the principle of mutuality.

7.1 The written submissions filed on behalf of the Revenue, vide submission dated 07.08.2025, form part of the record and stand reproduced herein for ready reference

8. Per contra, the Ld. Sr. Counsel for the assessee reiterated, even at the cost of repetition, that the interest received is not in the nature of ‘income’ in the hands of the BO, in view of the decision of the Hon’ble Special Bench, Mumbai, in the case of Sumitomo (supra), wherein the payment from the BO to the HO was held to be in the nature of ‘self-to-self’, governed by the principle of mutuality, as the BO and the HO are not independent entities under domestic law. It was further emphasised that, where no income arises under section 4 owing to the principle of mutuality, the question of treating such receipt as exempt does not arise, and consequently the provisions of section 14A cannot be invoked. It was also submitted that, since the interest expenditure was incurred by the HO for the purposes of its business, the same is otherwise allowable as a deduction under section 36(1)(iii) of the Act under domestic law

8.1 The Ld.Sr.Counsel for the assessee submitted that the issue raised by the Revenue pertains to interest received by the Indian BO from its overseas HO or other overseas branches, which proceeds on the erroneous assumption that the HO and the Indian BO are two distinct entities. It was vehemently contended that the decision of the Coordinate Bench in the case of Oman International Bank SAOG (supra), relied upon by the Revenue, does not lay down the correct law, for the reason that the invocation of section 14A of the Act is contingent upon the satisfaction of the following two conditions:

8.2 The Ld.Sr.Counsel for the assessee submitted that the aforesaid conditions stand unfulfilled in the present case, as they presuppose the existence of a receipt which is in the nature of income but not chargeable to tax by virtue of specific provisions of the Act. According to the Ld.Sr.Counsel, the impugned receipt by way of interest from the overseas HO does not partake the character of ‘income’ at all. In other words, section 14A of the Act has no application in a situation where the receipt itself is not in the nature of ‘income’. It was further emphasised that the Tribunal, in the case of Oman International Bank SAOG (supra), failed to appreciate the fundamental principle that no person can earn income from itself. Consequently, he submitted that, mere credit of interest in the books of the Indian Branch Office cannot confer upon it the character of ‘income’. It was thus urged that, the Tribunal in Oman International Bank SAOG (supra) proceeded on an erroneous footing in holding that, the receipt of interest constituted income, which was required to be excluded from the total income on a net basis.

8.3 The Ld.Sr.Counsel further emphasised that, once a receipt does not partake the character of income and is not in the nature of income chargeable to tax, the question of making a disallowance under section 14A of the Act does not arise. It was submitted that the provisions of section 14A are attracted only in respect of income which does not form part of the total income under Chapter III of the Act, and not in respect of receipts which are excluded at the very threshold for want of chargeability under section 4 of the Act. In support of this proposition, reliance was placed on the observations of the Hon’ble Special Bench in the case of Sumitomo (supra)

55. The first and foremost aspect which is relevant in the context of the issue involved in question No.2 is whether interest payable by the Indian PE is chargeable to tax in India in the hands of GE of which the PE is a part. In our opinion, this issue first of all has to be considered and examined from the point of view of relevant provisions contained in the Income-tax Act, 1961 so as to ascertain whether interest payable by the Indian branch of the assessee bank to its overseas HO is chargeable to tax in India as per the domestic law or not. Only when it is found that the said income is chargeable to tax in India as per the domestic law, one can refer to the relevant treaties to look for any benefits available to the assessee vis-a-vis the Income-tax Act since as per the specific provisions contained in section 90(2), provisions of DTAA override the provisions of the Act in so far they are more beneficial to the assessee. It is also to be taken into consideration that the provisions contained in tax treaties are not the charging provisions inasmuch as they do not bring to tax income which otherwise is not taxable as per the domestic law. This position is clear from the decision of Hon’ble Supreme Court in the case of AzadiBachaoAndolan (supra) wherein it was held that no provision of double taxation agreement can possibly fasten a tax liability where the liability is not imposed by the Act. It was held that if a tax liability is imposed by the Act, the agreement may be resorted to for negativing or reducing it.

56. In so far as the taxability of interest payable by PE in India in the hands of GE under the domestic law is concerned, it is relevant to note that the PE in India and the GE abroad of which the said PE is part are not independent persons under the domestic law i.e. Indian Income-tax Act and they are not assessed to tax separately in India. The taxable entity is only one i.e. the overseas GE which is the assessee bank in the present case who is a non resident in India and the PE in India is part of that entity which is a taxable entity in India even in respect of income attributable to the PE in India. There is thus only one person assessable to tax i.e. GE and PE is not an independent person who is assessed to tax separately in India. It is a part of the GE and its income is chargeable to tax in the hands of GE which alone is the person assessable to tax in India.

57. In the case of Sir Kikabhai Premchand (supra) it was held by the Hon’ble Supreme Court that under the Income-tax Act, all that the State can tax is income, profits and gains in the relevant accounting year. It was held that it is well recognized that in revenue cases regard must be had to the substance of the transaction rather than to its mere form. In the case before the Hon’ble Supreme Court, the business was owned and run by the assessee himself and it was held in these facts and circumstances by the Hon’ble Supreme Court that it was wholly unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of fictional sale introduce a fictional profit which in truth and in fact was non-existent. It was held that cut away this fiction and one easily reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the fact of it is not only absurd but against all cannons of Mercantile and Income-tax Law.

58. A somewhat similar situation arose before the Hon’ble Calcutta High Court in the case of Betts Hartley Huett & Co. Ltd. (supra) wherein the assessee was non resident company with its head office in London. Its business in Calcutta was mainly that of purchasing Tea for its constituents abroad. In the relevant assessment year, the assessee had charged from its constituents in respect of Tea purchased actual cost, commission or brokerage and also a sum of Rs. 10 paise per pound of Tea on account of shipping, sampling and other miscellaneous charges. In respect of dispatch to the head office, the assessee did not charge any commission but charged all other items of expenses. The AO, however, held that the amount of commission which was not charged on sale to the head office as income accrued to the assessee’s head office in London and estimated the profit attributable to purchase operations of the assessee’s London office in India through the assessee at 1.5% of the value of Tea to compute such income assessable to tax in India u/s 9(1). On appeal, the AAC accepted the contention of the assessee that the sales to its head office having been effected on a principal to principal basis, there was no profit assessable u/s 9(1) of the Income-tax Act, 1961. Accordingly he directed the deletion of the addition made by the AO on this issue to the income of the assessee. The Tribunal, however, held that the London Office did not earn more because of its business connection through the assessee in India and by not paying commission, this earning accrued or arose to the assessee because of its business connection in India. The Tribunal accordingly set aside the order of the AAC on this issue and restored the addition made by the AO as profit in respect of purchase operation carried on in India on behalf of the London office. On reference, the question raised before the Hon’ble Calcutta High Court was whether on the facts and circumstances of the case, the Tribunal was right in holding that the amount in question was includible in the computation of assessee’s income as profit in respect of sales made to its head office in London within the meaning of section 9(1) of the Income-tax Act, 1961. Their lordships answered the said question in the negative and in favour of the assessee holding that when the transaction between the London head office of the assessee and its unit in India was a transaction as between principal and principal, it cannot be held that any income arose in favour of the assessee either directly or indirectly since the gain in London office was offset by the loss incurred in the Indian branch. It was held that in law there cannot be a valid transaction of sale between the branch office of the assessee in India and its head office in London. It was held that it is a elementary proposition that no person can enter into a contract with oneself and debiting or crediting one’s account cannot alter this legal position. It was held that if one unit of a business does not debit any commission to another unit of the same business then it is difficult to follow how any saving has been effected by the business.

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74. In the assessment order, the AO has relied on the provisions of section 9(1)(v)(c) of the Income-tax Act to hold that interest payable by PE in India being income deemed to accrue or arise in India is chargeable to tax in India. In our opinion, such interest payable by the PE to GE being payment to self does not give rise to any income that is chargeable to tax in India as held, inter alia, by the Hon’ble Supreme Court in the case of Sir Kikabhai Premchand (supra) and the question of bringing the said income to tax by relying on the provisions of section 9(1)(v)(c) therefore, does not arise.

8.4 The Ld.Sr.Counsel submitted that, the Revenue seeks to place reliance on the third word employed in the question referred to the Special Bench, wherein the interest received has been described as ‘income’. It was contended that such interest received by the Indian BO does not form part of the total income under the Act, so as to warrant invocation of section 14A. The Ld.Sr.Counsel emphasised that, the question referred to the Special Bench must be construed in the light of the relevant facts and circumstances. It was urged that a proper understanding of the real purport of the question, and the context in which the Division Bench chose to differ from the earlier view taken by the Coordinate Bench in the case of Oman International Bank SAOG (supra), becomes essential.

8.5 Adverting to the provisions of section 14A(1), the Ld.Sr.Counsel submitted that the said provision, though couched in the form of a non obstante clause, cannot be construed as dispensing with the foundational requirement that there must first be a receipt having the character of ‘income’ within the meaning of section 2(24) of the Act and falling within the ambit of total income as defined under section 4 of the Act. Accordingly, section 14A cannot operate in isolation, divorced from the charging provisions of the Act, and its application necessarily presupposes the existence of an income which, though otherwise chargeable, is excluded from the total income by virtue of specific provisions contained in Chapter III of the Act.

8.6 The Ld. Sr. Counsel further submitted that the decision of the Hon’ble Bombay High Court in the case of DIT v. Societe Generale [IT Appeal No. 1314 of 2013, dated 15.04.2015], relied upon by the Revenue, is clearly distinguishable on facts. It was pointed out that in the said case, the Hon’ble High Court was dealing with a claim of exemption under section 10(15)(iv) of the Act, and in that context held that the provisions of section 14A were applicable. He submitted that, in contradistinction, in the present case, the interest received by the Indian BO does not assume the character of ‘income’ under section 4 of the Act at the very threshold. Ld. Sr. Counsel thus submitted that, the question of exemption does not arise at all, and the ratio of the aforesaid decision can have no application to the facts at hand. Accordingly, the reliance placed by the Revenue on the said judgment is wholly misplaced.

8.7 The Ld.Sr.Counsel thus submitted that the mere credit of interest in the books of the Indian BO cannot confer upon it the character of ‘income’. It was contended that the Tribunal, in the case of Oman International Bank SAOG (supra), proceeded on an erroneous foundation in treating the aforesaid receipt of interest as income which was required to be excluded from the total income on a net basis. For all the aforesaid reasons, it was urged that the decision of the Tribunal in Oman International Bank SAOG (supra) does not lay down the correct law.

8.8 The Ld.Sr.Counsel placed reliance on the decision of the Hon’ble Supreme Court in the case of Bangalore Club v. CIT [2013]  350 ITR 509 (SC). It was pointed out that in the said case the Hon’ble Supreme Court was dealing with a club which claimed exemption from payment of income-tax on the interest earned on fixed deposits placed with certain banks, who were also corporate members of the assessee-club, by invoking the ‘doctrine of mutuality’. Hon’ble Supreme Court, however, disagreed with the stand of the assessee therein for the reasons recorded in the judgment. The Ld.Sr.Counsel emphasised that what is material for the present controversy is the exposition of the doctrine of mutuality by the Hon’ble Court. Hon’ble Supreme Courtrecognised the principle that ‘a person cannot make profit out of himself’, and proceeded to hold that such receipts would not fall within the ambit of ‘income’ as defined under section 2(24) of the Act. It was observed that only such receipts which bear the character of income within the meaning of section 2(24) are chargeable to tax. The Ld.Sr.Counsel thus contended that receipts entitled to the benefit of the doctrine of mutuality stand excluded from the very definition of ‘income’ under section 2(24) of the Act. In this context, attention was invited to the following observations of the Hon’ble Supreme Court in Bangalore Club (supra):

7. Before we evaluate the rival stands, it would be necessary to appreciate the general understanding of doctrine of mutuality. The principle relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore not subject to tax, only the income which comes within the definition of Section 2(24) of the Act is subject to tax (income from business Involving the doctrine of mutuality is denied exemption only in special cases covered under clause (vii) of Section 2(24) of the Act). The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable. Over time, groups which have been considered to have mutual income have included corporate bodies, clubs, friendly societies, credit unions, automobile associations, insurance companies and finance organizations. Mutuality is not a form of organization, even if the participants are often called members. Any organization can have mutual activities. A common feature of mutual organizations in general and of licensed clubs in particular, is that participants usually do not have property rights to their share in the common fund, nor can they sell their share. And when they cease to be members, they lose their right to participate without receiving a financial benefit from the surrender of their membership. A further feature of licensed clubs is that there are both membership fees and, where prices charged for club services are greater than their cost, additional contributions. It is these kinds of prices and/or additional contributions which constitute mutual income.

8.9 Relying on the aforesaid exposition of the ‘doctrine of mutuality’ by the Hon’ble Supreme Court, the Ld. Sr. Counsel submitted that, the same principle squarely applies to the relationship between a HO and its BO. In this regard, reliance was placed on the decision of the Special Bench in Sumitomo (supra), wherein it was held that a payment from the BO to its HO partakes the nature of ‘self-to-self’ and, being governed by the ‘doctrine of mutuality’, does not give rise to income chargeable to tax under section 4 of the Act and therefore is out of the ambit of section 14A.

We have perused the submissions advanced by both sides in the light of records placed before us.

9. The income of an assessee carrying on business in India is to be taxed as per the provisions of Chapter IV-D consisting of sections 28 to 43 and 44BA. A bank, a corporate body, and carrying on banking business in India is liable to be taxed in India in respect of the profit earned in India by virtue of section 5(2), read with sections 28 to 44BA. Since it carried on the business through a branch in India which was a PE, it is to be assessed only in respect of that profit which was relatable to the activities and attributable to the PE both by virtue of section 5 as well as section 9. Further in view of the existence of DTAA, the taxability is to be judged with reference to the provisions under the DTAA as well.

10. Be that as it may, it is noted that the present case involves a reverse transaction of the issue considered by the Hon’ble Special Bench in Sumitomo (supra). However, the moot question that has been placed before this Bench is to examine whether section 14A would be applicable if a receipt, falls within the ambit of “doctrine of mutuality” which arises with reference to the cross objection of the Department. In other words the issue before this special bench is not to determine as to whether, “doctrine of mutuality” applies in the instant case. The said issue is for the division bench to decide while considering assessee’s appeal.

10.1 Before we advert to analyse the above issue under consideration, it is necessary to consider section 14A, that reads as under:

Section 14A – Expenditure incurred in relation to income not includible in total income.

(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

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10.2 The above section was first introduced by Finance Act 2001. It is also relevant to understand the intention of the legislature to bring in the provision to the statue with retrospective effect from 01/04/1962. The extract of the memorandum is reproduced as under:

Certain incomes are not includable while computing the total income as these are exempt under various provisions of the act’s there have been cases where deductions have been claimed in respect of such exempt income this in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.

It is proposed to insert a new section 14A so as to clarify the intention of the legislature since the inception of the income tax act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the income tax act.

The proposed amendment will take effect retrospectively from 01/04/1962 and will accordingly, apply in relation to the assessment year 1962-1963 and subsequent assessment years.

10.3 The above memorandum makes it abundantly clear that the legislative intent behind section 14A is to apply its provisions to incomes which are exempt under various provisions of the Act and, therefore, are not includable in the total income for the purpose of computing tax in the hands of the assessee. By way of illustration, if a company engaged in business through industrial undertakings also derives agricultural income, such agricultural income would not be includable in the computation of total income under the Act, being exempt under section 10 thereof. It is to such exempt incomes that the provisions of section 14A are intended to apply.

10.4 The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On this analogy the exemption is also in respect of the net income. Further the expenses can be allowed only in respect of earning of taxable income. Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads.

10.5 In section 14A, the 1^st phrase is “For the purposes of computing the total income under this Chapter”, which makes it clear that various heads of income as prescribed under chapter VI would fall within section 14A. The next phrase, “in relation to income that does not form part of total income under the act” means that, if an income does not form part of the total income by virtue of provisions under the act, then the related expenditure falls within the ambit of applicability of section 14A. Therefore, for attracting the provisions of section 14A, there has to be proximate cause for disallowance, which is its relationship with the tax exempt income.

10.6 The provisions of the act are clear on the aspect of the receipts that partake the character of income, however not includable in computing the total income in the hands of an assessee by virtue of various provisions contained in the act. Chapter III of the income tax act deals with such receipts that partake the character of income and are exempt. Thus disallowance under section 14A of the act would apply only to such category of income that is exempt from tax by virtue of the provisions of the act. The language of section 14A are therefore similarly worded with that of the provisions under section 10 in chapter III. For the purposes of highlighting the difference between the provisions that are dealing with exemptions and the provisions that deal with deduction the Ld.Sr.Counsel on behalf of the assessee referred to the decision of Hon’ble Karnataka High Court in case of Second ITO v. Stumpp, Schuele and Somappa Private Ltd. [1977] 106 ITR 399 (Karnataka). He also relied on the decision of Hon’ble Bombay High Court in case of CIT v. Century Spg. and Mfg. Co. Ltd. [1978] 111 ITR 6 (Bombay), approved by Hon’ble Supreme Court Second ITO v. Stumpp Schuele and Somappa (P.) Ltd. [1991] 187 ITR 108 (SC).

10.7 The issue that was considered by Hon’ble High Courts referred to herein above was in the context of levy of surtax. Hon’ble Court observed that according to the provisions of this Act charged profits, i.e., the total income of an assessee computed under the Act after making adjustments in accordance with the 1^st schedule thereof was liable to surtax. And a statutory deduction was allowed being amount equal to 10% of the capital of the company in accordance with the provisions of the 2^nd schedule. Hon’ble Court observed that rule 4 of the 2^nd schedule provided as under:

“Where a part of the income, profits and gains of a company is not includable in its total income as computed under the income tax act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains”

10.8 Hon’ble Court held that, “The provisions of rule 4 will be attracted only if a part of the income, profits and gains of a company’s includable in its total income”. The court further emphasised that, “Normally, the provisions of rule 4, as stated above, will be applicable only to the items of the income which are included in chapter 3 which do not form part of the total income.”

10.9 From the above it is clear that a distinction has to be drawn between cases where the receipt is not bearing the character of ‘income’ and cases where the receipt is in the nature of ‘income’,but is ‘exempt’ by virtue of various provisions under the act. Thus section 14A would apply only to cases where the receipt is in the nature of income, but is exempt from the tax by virtue of various provisions under the act.

10.10 The “doctrine of mutuality” relates to a notion that a person cannot make profit from himself. An amount received from oneself is not regarded as “income” and is therefore cannot be subjected to tax. Only such income that comes within the definition of sec. 2(24) of the Act is subject to tax. Based on the above discussion, in the present case, if the division bench takes the view that the interest received by the Indian Branch Office is covered by the “doctrine of mutuality”,then by its very nature, such income will not fall within the scope of ‘income’ as defined in sections 2(24) and 4 of the Act, based on various Judicial precedents that consistently recognised this position.

10.11 Now coming to the applicability of section 14A, it is noted that section 14A, as explained in the legislative memorandum, was introduced only to deal with incomes which are exempt under specific provisions of the Act but are otherwise includable in total income as observed by Hon’ble Supreme Court in case of CIT v. Walfort Share & Stock Brokers (P.) Ltd. 326 ITR 1 (SC) vide paragraphs 12, 13& 14. Similar observation has been well founded by Hon’ble Delhi High Court in case of Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi) vide paragraphs 15, 16, 17, 24 & 25.

10.12 Receipts under the principle of mutuality are of a different character. They are not exempt income but are simply not income at all. It thus naturally follows that section 14A has no application to such receipts.

Thus the issue referred before this Special Bench is answered in negative.

11. The Revenue’s submission on issue framing by the Division Bench and constitution of the Special Bench hold no relevance now, as it has already been addressed by the larger Bench vide order dated 09/04/2024.

12. During the course of hearing, the Ld. Sr.Counsel for the assessee raised the issue of inordinate delay in filing of the cross-appeal by the Revenue. However, having regard to the limited mandate of the Special Bench, which is confined only to answering the specific issue referred by the Hon’ble President, the question of condonation or otherwise of such delay does not fall within its purview. Accordingly, the issue is left open for consideration by the Division Bench, which is ultimately competent to adjudicate both the appeal and the cross-objection on their own merits. We, therefore, make it clear that the Special Bench expresses no opinion on any matter other than the issue specifically referred.