2010 (8) TMI 578 - AT - Income Tax

Addition - Forward contract - the assessee evaluates the unmatured forward contracts on the last day of the accounting period on the basis of rate of foreign exchange prevailing on that date and books the loss or profit - income arising from securities and on debenture to the assessee is liable to be taxed on due basis or on the basis of day to day - Supreme Court in the case of another bank, namely United Commercial Bank, [1999 -TMI - 5764 - SUPREME Court] - Held that: the issue has been decided in favour of the view that the interest accrues only on the specified coupon dates and not on day to day basis - Accordingly the appeal is decided in the favour of the assessee

Regarding disallowance on account of broken period interest paid by the assessee - securities had been classified as investments in Schedule -8 to the balance sheet - Merely the classification of the securities as investment in balance sheet is of no consequence and the real income is to be determined as per the return filed by the assessee - Accordingly the ground is dismissed

Regarding addition on account of deferred guarantee commission - The fundamental principle of taxing the income under the mercantile system of accounting is time of its accrual - If the guarantee commission was refundable then it cannot be said that absolute right to the commission had accrued in favour of the assessee at the time of execution of contract for furnishing guarantee by it but if the guarantee commission was not depended upon the period of guarantee and, thus, had accrued in favour of the assessee on the date of execution of contract for furnishing guaratnee then the same has to be taxed in the year in which the guarantee was furnished irrespective of the period to which guarantee remained alive - Appeal is allowed by way of remand

Regarding interest attributable to investment, dividends from which is exempt from tax - At the time of hearing, it was brought to the notice of both the parties that the issue is pending before the Hon’ble Bombay High Court in regard to 14A issue and, therefore, the appeal may be adjourned sine die till the disposal of the same by the Hon’ble High Court - Appeal is allowed by way of remand

Regarding forward contract - The loss claimed by the assessee is in accordance with a recognized method of accounting - The moot point for consideration is whether keeping in view the nature of contract, can it be said that a liability accrued on 31st March in respect of unmatured forward foreign exchange contract on account of fluctuation in rate of foreign currency or not - the issues relating to accrual of income cannot be decided on the same footing and considerations on which the issues relating to loss/expense is to be decided - Accounting Standard - 11, mandates that in a situation like in the present case, since the transaction is not settled in the same accounting period, the effect of exchange difference has to be recorded on 31st March - when profits are being taxed by the department in respect of such unmatured forward foreign exchange contracts then there was no reason to disallow the loss as claimed by assessee in respect of same contracts on the same footing - Accordingly decided in the favour of the assessee