TMI Blog2013 (5) TMI 374X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of such contracts. Tax neutrality in respect of interest income received on funds placed with its Head Office / Overseas branches - Held that:- As decided in ABN Amro Bank NV v. ADIT [2005 (8) TMI 294 - ITAT CALCUTTA-E] there cannot be transactions with self and as such branch of the assessee bank cannot be treated as a separate entity insofar as the transactions between the Head Office and the Indian branch resulting into interest income or interest expenditure are concerned. As decided in Sumitomo Mitsui Banking Corporation case [2012 (10) TMI 443 - ITAT MUMBAI] there can be neither any income in respect of interest earned by the assessee branch from its HO/ overseas branches nor there can be any deduction for interest paid by the Indian branch to the HO / other overseas branches on the basis of principle of mutuality. Thus following the principle of mutuality arising from the above special bench orders, overturn the impugned order on this issue and direct that neither the interest income should be charged to tax nor the interest expenditure be allowed as deduction. Broken period interest paid on securities - treatment to the securities as stock-in-trade or investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edule VI to the Companies Act. The assessee being a foreign bank in that case, was held to be not governed by the provisions of section 115JB. The instant assessee is also a foreign bank thus also not required to draw its Profit and loss account as per the Companies Act. In the absence of any contrary view brought to notice by the DR, case of Krung Thai Bank PCL (supra) is applicable. As this issue has been raised for the first time and neither taken up nor considered by the authorities below, it will be in the fitness of things if the AO is directed to decide this aspect of the matter as per law Rectification of mistake - Adjustment of bad debts - whether against the opening balance under section 36(1)(viia) as per CIT(A) OR against the closing balance as done by AO - Held that:- CIT(A) has simply held that for allowing deduction in respect of bad debt u/s 36(1)(vii), only opening balance of the provision for bad and doubtful debts will have to be considered. He directed the A.O. to work out the amount of allowable bad debts accordingly. DR as well as AR failed to point out the correct controversy involved in this appeal from the order of the AO. Even the application filed u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. However, the AO is directed to verify and ensure that the preceding year s notional loss from revaluation of foreign exchange forward contracts not allowed by him but eventually allowed at the appellate level, is properly considered at the time of settlement of such contracts so that there is no corresponding reduction of income once again at the time of settlement of such contracts. As this issue is there in subsequent years also, the AO should also verify that each year s loss is suitably considered in the subsequent year at the time of final settlement of forward exchange contracts. In so far as the present ground is concerned, the same is allowed. 4. Ground no.2 is against the tax neutrality in respect of interest income of Rs. 5,48,15,653 received by the assessee on funds placed with its Head Office / Overseas branches and interest of Rs. 1,43,929 paid by the assessee in respect of funds placed by it with its Head Office / Overseas Branches. 5. After considering the rival submissions and perusing the relevant material on record, we find that the Special Bench of the Tribunal in the case of ABN Amro Bank NV v. ADIT [(2005) 97 ITD 89 (Kol) (SB)] has held that there canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of tax / revenue for the Department. The reliance of the learned Departmental Representative on the contrary judgment of the Hon ble Rajasthan High Court in the case of CIT v. Bank of Rajasthan Limited [(2009) 316 ITR 391 (Raj.)] holding that the amount paid by the bank towards broken period interest on securities purchased by it is not an allowable deduction, cannot be applied due to the availability of the direct judgment of the Hon ble jurisdictional High Court on the point in the case of American Express International Banking Corporation (supra). The ld. DR was fair enough to concede that the albeit the judgment of the Hon ble Rajasthan High Court is in favour of the Revenue, but the judgment of the Hon ble jurisdictional High Court in assessee s favour is also direct on the point. There is hardly any need to emphasize that the judgment of the Hon ble jurisdictional High Court is binding on the tribunal. As it is not denied that the securities are stock in trade of the bank, the assessee is entitled to deduction for such broken period interest. We, however direct the AO to verify and ensure that the preceding year s broken period interest not allowed by him but finally all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Bank of Bahrain and Kuwait (supra). 13. Ground no.4 of the Revenue s appeal is against deletion of disallowance of Rs. 58,26,804 made on account of interest expenditure incurred for earning interest on tax free bonds on the ground that no nexus has been proved between the tax free bonds and the interest bearing funds. Briefly stated the facts apropos this issue are that the assessee earned interest on tax free securities amounting to Rs. 73,39,468 which was claimed as exempt u/s 10(15)(iv)(h) on gross basis. The Assessing Officer, after discussing the issue in detail, held in para 10.8 of the assessment order that the gross interest from tax free securities was not eligible for exemption u/s 10. He computed the amount of net interest by applying rate of 20.61% after taking into account the income after reducing interest cost but before indirect expenses. This led to restricting the exemption u/s 10(15) to Rs. 15,12,664. The learned CIT(A) went through the details tabulated by the assessee showing its net capital and reserves at Rs. 34.68 crore (Capital and reserve at Rs. 85.81 crore minus fixed assets at Rs. 51.12 crore). This available amount was seen against the investment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned CIT(A) held that such interest is chargeable to tax. 18. We have heard the rival submissions and perused the relevant material on record. Both the sides are unanimous in submitting that the issue in this appeal is similar to ground no.2 of the assessee s appeal for assessment year 1998-99, which has been disposed off above. Following the view taken hereinabove, we direct that the interest income received by the assessee from its head office / overseas branches is not chargeable to tax and interest paid to the head office / other overseas branches is not deductible on the principle of mutuality. This ground is accordingly allowed. 19. Ground no.1 of the Revenue s appeal is against the deletion of addition of broken period interest of Rs. 2,55,86,944. Both the sides are in agreement that the facts and circumstances of this ground are similar to those of ground no.1 for assessment year 1998-99. Following the view taken hereinabove, we uphold the impugned order on this issue and dismiss this ground of appeal. The AO is directed to verify that the current/preceding year s broken period interest not allowed by him but finally allowed at the appellate level, is not taken as a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of net interest. This ground is, therefore, allowed by holding that the net interest income cannot be charged to tax. 24. Ground no.2 is against the sustenance of disallowance of net loss of Rs. 1,63,05,317 on revaluation of foreign exchange contracts outstanding on March 31, 2000. The facts and circumstances of this case are admittedly similar to ground no.1 for the assessment year 1998-99. The Assessing Officer is directed to decide this issue in accordance with our directions given above. 25. Ground no.3 is against the sustenance of disallowance of net interest of Rs. 6,14,45,309 earned from head office / other overseas branches in computing the book profit for the purpose of section 115JA. The facts apropos this ground are that the Assessing Officer held the amount of interest earned from head office / other overseas branches as includible in the computation of total income under the regular provisions as well as u/s 115JA. The learned CIT(A), apart from sustaining the taxability of interest under the regular provisions of the Act, also held that the similar amount be also added in the total income for computing the book profit for the purpose of section 115JA. While dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the clauses i.e. (i) to (ix) of the Explanation to section 115JA, the same cannot be reduced. As section 115JA is a special deeming provision relating to certain companies, it is impermissible to go beyond the mandate specifically set out in it. We, therefore, uphold the action of the learned CIT(A) in including the amount of net interest earned by the assessee from placement of funds with the head office / other overseas branches amounting to Rs. 6,14,45,309 in computing the Rs. book profit for the purposes of section 115JA of the Act. This ground taken by the assessee is not allowed. 26. The learned Counsel for the assessee placed on record a copy of the order passed by the Mumbai Bench of the Tribunal in the case of Krung Thai Bank PCL v. JCIT (IT) in ITA No.3390/Mum/2009. In the light of this order, it was prayed that the very applicability of section 115JA should be cancelled as the assessee is foreign bank not subject to the provisions of the Companies Act, 1956. The learned Departmental Representative requested that since this issue has not been dealt with by the authorities below, the matter may be remitted to the A.O. 27. After considering the rival submissions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter allowing deduction u/s 36(1)(vii) for the current year), was not correct, against which the Revenue has come up in appeal before us. 30. After considering the rival submissions and perusing the relevant material on record, we find that in the order dated 30.09.2003 passed by the Assessing Officer u/s 154, the said issue has been discussed in para 3 by which it has been observed that the assessee created a provision for doubtful debts of Rs. 7.07 crore for assessment year 2000-2001 u/s 36(1)(viia) of the Act. The assessee had claimed bad debts of Rs. 40.83 crore, Rs. 34.46 crore on actual write off and Rs. 6.36 crore on account of specific provision created. In the assessment order only Rs. 34.46 crore was allowed u/s 36(1)(vii). The A.O. further observed that The total assessed income of the assessee is Rs. 31,41,70,520. The deduction u/s 36(1)(viia) of the Act works out to Rs. 1,57,08,526/- [@ 5% of the total income] and the same is allowed to the assessee. However, in view of the proviso to sec.36(1)(vii), the deduction in the said section will stand reduced to Rs. 32,89,70,464/- from Rs. 34,46,78,990/- (as allowed in the order for A.Y. 2000-01). Therefore, this will not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und no.1 above, we have held that principle of mutuality is applicable and accordingly the amount of interest received by the assessee from its head office / overseas branches cannot be subjected to tax. In this ground the position is about the deduction of interest paid to HO/overseas branches. When mutuality is applicable on transactions with HO/Overseas branches, it effectively means that these are transactions with self. Neither there can be any income nor expenditure from the transactions with the HO/overseas braches. The natural consequence is that there can be no case for allowing deduction to the assessee on account of interest paid to the HO/Overseas branches. We, therefore, sustain the disallowance on the first principle of such amount being not deductible because of transaction with self. These grounds are not allowed. 36. Ground no.4 is against computation of book profit u/s 115JB by including net interest earned of Rs. 3.96 crore from head office / overseas branches, the write back of the provision for doubtful debts amounting to Rs. 1.29 crore, write back of interest tax provision amounting to Rs. 2.33 crore and interest on income-tax refund, in the book profit. 37. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inistrative and other expenses. 43. Ground no.4 is against deletion of disallowance of Rs. 6,08,58,444 made by the AO in respect of expenses incurred by the assessee for earning the exempt interest income from the HO/overseas branches. As noted above the assessee received interest from head office / overseas branches and credited the said amount of Rs. 3.97 crore to its profit and loss account. While disposing off ground no.1 of the assessee s appeal, we have held that such interest is exempt on the principle of mutuality. Similar view has been taken in other years involved before us. The present ground is against disallowance of expenses u/s 14A in respect of such interest income of Rs. 3.97 crore which was claimed by the assessee to be exempt on the principle of mutuality. Apart from rejecting the assessee s claim in not exempting the said amount of Rs. 3.97 crore on the principle of mutuality, the Assessing Officer also requested the assessee to furnish the details of costs attributable to earning the interest from head office / overseas branches. The assessee submitted its reply vide letter dated 08.03.2004 by stating that the assessee s placements with the head office / ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad office / overseas branches is exempt from tax on the principle of mutuality. Similar view has been consistently taken for the earlier years as well. Once interest income is exempt from tax, it is but natural that the expenses incurred in relation to such exempt income cannot be allowed as deduction u/s 14A. Sub-section (1) of section 14A unambiguously provides that 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. When we hold that the interest earned by the assessee from placement of funds with its head office / other overseas branches is exempt from taxation, the natural and logical conclusion which therefore has to follow is that no deduction should be allowed towards expenses incurred in relation to such exempt income. We, therefore, hold in principle that the provisions of section 14A are attracted on the interest earned by the assessee from placement of funds with its head office / overseas branches which has been claimed and allowed as exempt on the principle of mutuality. The learned AR unsuccessfully tried to argue that the funds for such placement with head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l is as under:- On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in holding that no income arises to the Head Office of the Bank, on account of the interest paid by the Indian Branch to it without appreciating that the P.E. in India has to be treated as a separate entity for the purpose of taxation. 48. Briefly stated the facts of the case are that the assessee paid interest of Rs. 12,24,093 to the head office / other overseas branches. The Assessing Officer taxed this amount as income of the head office and levied tax at the rate of 25%. The learned CIT(A), following the Special Bench order in the case of ABN Amro Bank held that no income can be said to have arisen to the head office. He, therefore, deleted the said addition of Rs. 12,24,093. 49. After considering the rival submissions and perusing the relevant material on record, we find that there is no infirmity in the order passed by the learned CIT(A) on this issue. It has been held by the Special Bench of the Tribunal in the case of ABN Amro Bank NV v. ADIT [(2005) 97 ITD 89 (Kol) (SB)] and Sumitomo Mitsui Banking Corporation v. DDIT [(147 TTJ 649 (Mum.)] that insofar as the principle ..... X X X X Extracts X X X X X X X X Extracts X X X X
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