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TMI Blog2013 (5) TMI 374X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the view taken by him for assessment year 1997- 98. The learned Counsel for the assessee submitted that the order passed by the learned CIT(A) for the said earlier year came to be overturned by the Tribunal. It was, therefore, prayed that the loss in respect of such foreign exchange forward contracts which is a revenue liability, be allowed. The learned Departmental Representative could not controvert the submissions of the ld. AR on this issue but chose to rely on the impugned order. 3. After considering the rival submissions and perusing the relevant material on record, we find that this issue is settled by the Special Bench order passed by the Tribunal in the case of DCIT (International Taxation) v. Bank of Bahrain and Kuwait [(2010) 132 TTJ (Mum.) (SB) 505] in which it has been held that where forward contract is entered into by the assessee to buy or sell the foreign currency at an agreed price at a future date falling beyond the last date of the accounting period, the loss incurred by the assessee on account of revaluation of contract on the last date of the relevant accounting period is an allowable deduction. In view of this Special Bench decision, it is clear that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t neither the interest income should be charged to tax nor the interest expenditure be allowed as deduction. This ground is accordingly allowed. 6. Last ground about the disallowance of professional fees of Rs. 30,67,903 of the assessee's appeal was not pressed by the learned AR. The same is, therefore, dismissed as not pressed. 7. First ground of the Revenue's appeal is against the deletion of addition towards broken period interest of Rs. 3,28,07,147 paid on securities purchased by the assessee treating the securities purchased as stock-in-trade and not investment of the assessee. 8. After considering the rival submissions and perusing the relevant material on record, we find that this issue is covered, as stated by the ld. AR, by the judgment of the Hon'ble jurisdictional High Court in the case of American Express International Banking Corporation v. CIT [(2002) 258 ITR 601 (Bom.)] in which it has been held that once the broken period interest received by the assessee bank on Government securities was charged to tax as business income u/s 28, deduction for payment made for broken period interest at the time of purchase of these securities could not be denied when the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been upheld by the Tribunal for the preceding year. This ground of the Revenue is, therefore, allowed. 11. Ground no.3 of the Departmental appeal is against the deletion of addition made on account of guarantee commission of Rs. 9,47,373. 12. After considering the rival submissions and perusing the relevant material on record, we find that this issue has been decided by the Special Bench of the Tribunal in the case of Bank of Bahrain and Kuwait (supra). It has been held in this case that if the guarantee commission is refundable on the revocation of guarantee, then it cannot be said that the absolute right to the commission has accrued to the assessee at the time of execution of the contract for furnishing the guarantee, and the commission is to be spread over the period for which the guarantee is given. In all other cases, it has been held by the Special Bench that the amount is to be taxed in the year in which the guarantee has actually been given irrespective of the period of guarantee. In view of the afore-noted Special Bench decision, we set aside the impugned order on this issue and remit the matter to the file of A.O. for deciding it afresh in accordance with the ratio l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A. Adverting to the facts of the instant case, it is seen that the learned CIT(A) has recorded a categorical finding that the interest free funds available with the assessee in the shape of capital and reserves are far in excess of the amount invested in bonds. In that view of the matter there can be no disallowance of any interest u/s 14A. However, the administrative and other expenses etc. are required to be disallowed u/s 14A on some reasonable basis. The Assessing Officer is directed to compute such disallowance. This ground is, therefore, partly allowed. 15. In the result, both the appeals are partly allowed. Assessment Year 1999-2000 16. The only effective ground raised in the assessee's appeal is as under:- "In disregarding the tax neutrality claimed in respect of interest of Rs. 5,47,04,967 received by the Appellant on funds placed with its head office / overseas branches and the interest of Rs. 54,887 paid by the Appellant in respect of funds placed with it by its head office / overseas branches." 17. Briefly stated the facts of the case are that the assessee received interest of Rs. 5,47,04,967 from its Head office / overseas branches, which was not offered for taxat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, in the light of the tabulated financial position showing investment in bonds at much lower level than the amount of capital and reserves, no disallowance of interest is called for u/s 14A. The A.O. is directed to compute disallowance u/s 14A in respect of other administrative and other expenses on some reasonable basis. This ground is partly allowed. 22. In the result, the assessee's appeal is allowed and that of the Revenue is partly allowed. Assessment Year 2000-2001 23. First ground of the assessee's appeal is against the sustenance of disallowance of tax neutrality claimed in respect of interest of Rs. 6,14,45,309 received by the assessee on funds placed with its head office / overseas branches. Both the sides are in agreement that the facts and circumstances of this ground are similar to ground no.2 for assessment year 1998-99. Following the view taken hereinabove, we hold, on the basis of principle of mutuality, that neither any interest income earned from the head office / other overseas branches can be charged to tax nor any deduction is permissible in respect of interest paid to HO/Overseas branches. The case of the assessee is that the amount given in the ground at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 115JA as well. Explanation to section 115JA provides that for the purposes of this section, "book profit" means net profit as shown in the profit and loss account for the relevant previous year prepared under subsection (2) as increased by the amount in clauses (a) to (g) which are debited to the profit and loss account and as reduced by the amounts referred to clause (i) to (ix) which are credited to the Profit and loss account. Obviously, the amount of interest earned by the assessee from its head office / overseas branches is part and parcel of the credit side of the profit and loss account of the assessee. This amount is not covered by any of the clauses from (i) to (ix) of the Explanation. As the Assessing Officer has no authority to go beyond the Profit and loss account prepared by the assessee and tinker with the figure of profit so disclosed, the same is equally true for the assessee as well. What is immune from alteration is the amount of net profit as per Profit and loss account irrespective of the fact whether the alteration is ventured by the AO or the assessee. Once an amount as shown to the credit side of the profit and loss account of the assessee and the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) against the order passed by the A.O. u/s 154 reads as under:- "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in holding that the bad debts should be adjusted against the opening balance under section 36(1)(viia) of the Income-tax Act and not against the closing balance as done by the Assessing Officer." 29. Briefly stated the facts of the case are that the assessee filed rectification application u/s 154 dated 29.04.2003. One of the issues taken in this rectification application was about the amount of deduction u/s 36(1)(viia). The Assessing Officer did not find any merit in the rectification application on this issue. However when the matter came up before the learned CIT(A), he held that section 36(1)(vii) allows deduction in respect of bad debt to the assessee and proviso to section 36(1)(vii) providing for deduction for bad debt in the case of bank shall be limited to the amount by which such debt exceeds the credit balance in the provision for bad and doubtful debts made u/s.36(1)(viia). The learned CIT(A) further held that the Assessing Officer's action in holding that the closing balance in the provision for bad and do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed for statistical purposes. Assessment Year 2001-2002 33. First ground of the assessee's appeal is against the sustenance of disallowance of tax neutrality claimed in respect of interest of Rs. 3,97,86,208 received by the assessee on the funds placed with its head office / overseas branches. 34. After considering the rival submissions and perusing the relevant material on record, we find that the issue raised in this ground is similar to ground no.2 for assessment year 1998-99. We have held in the appeal for assessment year 1998-99 and subsequent years that the amount of interest received by the assessee from its head office / overseas branches cannot be subjected to tax on the principle of mutuality. Following the view consistently taken hereinabove, we decide this issue in assessee's favour by holding that the interest of Rs. 3.97 crore received by the assessee from its HO/overseas branches cannot be subjected to tax. 35. Ground nos.2 and 3 are against confirmation of disallowance of interest amounting to Rs. 91,959 paid by the assessee to its head office / overseas branches u/s 40(a)(i) because of the failure of the assessee to deduct tax at source from the same. While dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is no double deduction as discussed above. 41. Ground no.2 is against deletion of addition on account of guarantee commission of Rs. 2,24,501. Here also both the sides are agreeable that the facts and circumstances of this ground are mutatis mutandis similar to those of ground no.3 for assessment year 1998- 99. Following our decision for the said year, we set aside the impugned order on this issue and remit the matter to the file of A.O. for deciding it in consonance with the direction given above for the assessment year 1998-99. 42. Ground no.3 is against the deletion of disallowance of Rs. 34,90,860 by granting exemption u/s 10(15) on gross basis. Here also both the sides are in agreement that the facts and circumstances of this ground are similar to ground no.4 for assessment year 1998- 99. Following the view taken hereinabove, we hold that the exemption be granted u/s 10(15) on gross basis. However disallowance u/s 14A is sustainable. No disallowance can be made u/s 14A in respect of interest expenditure because of the interest free funds exceeding the amount invested in the tax free bonds. However the A.O. is directed to compute the disallowance u/s 14A in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He observed that these workings were based on certain assumptions and therefore, were not capable of acceptance. He estimated the average rate of interest at 8% on FCNR(B) deposits and accordingly worked out the costs incurred for interest income from head office / overseas branches assuming that the entire funding to the head office / overseas branches was made from FNCR(B) deposits. As the assessee had submitted that the funds were placed with head office / overseas branches at 5.23%, the Assessing Officer took this rate for receiving interest income of Rs. 3.97 crore and thereafter computed the amount invested by the assessee with its head office / overseas branches. By applying 8% rate, the A.O. computed disallowance u/s 14A at Rs. 6,08,58,444. When the matter came up before the learned CIT(A), he held that interest income of Rs. 3.96 crore received by the assessee from head office/overseas branches was taxable and in that view of the matter there could be no disallowance u/s 14A. 44. We have considered the rival submissions and perused the relevant material on record. We have held above that the amount of interest at Rs. 3.97 crore received by the assessee on funds placed w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AR and hence the same has not been considered. Thus it is held in principle that the provisions of section 14A are applicable on the exempt interest income earned from the head office/overseas branches. 45. Coming to the merits of the issue it is observed that the Assessing Officer computed disallowance u/s 14A at Rs. 6.08 crore by applying 8% rate of interest paid on FCNR(B) deposits as against the assessee's claim of 1.27% at 6.29% on EEFC and FCNR deposits. No reason has been given as to why the assessee's contention of such interest cost is not acceptable. We, therefore, direct the Assessing Officer to compute the amount of disallowance u/s 14A afresh on the basis of the rate of interest on EEFC deposits and FCNR deposits given by the assessee, unless it is found to be incorrect. Needless to say the assessee will be allowed a reasonable opportunity of being heard in the fresh proceedings. This ground of the Revenue's appeal is partly allowed for statistical purposes. 46. In the result, the appeal of the assessee is partly allowed and that of the Revenue is partly allowed for statistical purposes. Assessment Year 2003-2004 47. The only ground raised by the Revenue in its ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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