The spectre of Harshad Mehta has returned to haunt the Indian arm of Standard Chartered Bank, with a tribunal ruling that the interest it paid to its headquarters on an amount borrowed to make payments to NHB, in the aftermath of the infamous stock scam of 1992, is taxable.
The case concerns UK-based Standard Chartered Bank, which had paid an interest of about Rs 32 crore to its head office on the sum borrowed from its headquarters to pay to the National Housing Bank (NHB) in the assessment year 1996-97.
Standard Chartered had been asked by the Reserve Bank at the time of the notorious Harshad Mehta stock scam to pay about Rs 506.54 crore to NHB, which it borrowed from its head office and also paid an interest of Rs 32 crore on the borrowed sum.
The Delhi bench of Income Tax Appellate Tribunal (ITAT) giving a ruling in case of the bank said, “It (interest paid to Standard Chartered bank’s head office) is not an expense in the hands of non-resident assessee and hence cannot be allowed.”
The bank had shown the amount as an expense for itself.
An amount shown as an expense by an entity is eventually deducted from the income of the company, thus not being taxed.
The tribunal sided with the argument of the tax department, which said that the interest paid by an Indian branch of the foreign bank to its head office is not to a different entity but only to the head office and hence, just an inter-branch transfer.
Besides, if this payment is treated as expense, the same shall become income in the hands of the head office, which has earned from India and hence is also taxable here, the order said.