TMI Blog2013 (11) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... uch date to whom interest can be said to have accrued – Following the above observation by the Hon’ble High Court, in any event interest did not accrue to the respondent on 31st March, 2001, as admittedly interest was not payable on that date as per the terms of the said securities – Addition on account of interest deleted – Decided in favor of Assessee. Addition of interest amount received from the foreign Head Office – Held that:- Relying upon the Special Bench judgment in the case of Sumitomo Mitsui Banking Corpn [2012 (4) TMI 80 - ITAT MUMBAI], it has been held that interest, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law – Decided in favor of Assessee. Addition of Provision of Bad Debt for computing ‘book profit' under section 115JA of the Act – Held that:- In view of the retrospective amendment made by the Finance (No. 2) Act , 2009 w.r.e.f. 1-4-1998, the A.O. was justified in making the addition of the said provision of bad debts while computing the book profit/s 115JA of the Act – Decided against the Assessee. No portion of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the appeal. 3. Being aggrieved by the order of the ld. CIT(A), the assessee and the Revenue both are in appeal before us. ITA 2962/Mum/2004 (By assessee for A.Y. 1999-00) 4. Ground No. 1 reads as under:- "The CIT(A) erred in holding that interest accrued but not due as at 31 March 1999 of Rs. 31,836,688 as the 'income' of your Appellant." 5. Briefly stated facts of the above issue are that the A.O. noted that in the books of accounts the assessee bank recognised income from interest on securities on day to day accrual basis. However, in the return filed it is claimed that interest which has not become due for payment during the previous year should not be treated as income. The assessee bank accordingly had claimed deduction in the return of income in respect of interest of Rs. 3,18,36,688/- on account of interest on securities accrued but not due during the previous year under consideration, which had been credited in the books of account. The A.O. was of the view that the assessee bank follows the mercantile system of accounting under which all interest which was accrued during the previous year should be included as income. According to the A.O. in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the A.O. He, therefore, submits that following the said decision, the addition made by the A.O. and sustained by the ld. CIT(A) be deleted. 7. On the other hand, the ld. D.R. while relying on the order of the A.O. and the ld. CIT(A) submits that in the earlier years, such interest has been taxed on accrual basis which has been accepted by the assessee and has not filed any appeal, therefore, following the principle of consistency, the addition made by the A.O. be sustained. He further submits that since the assessee has claimed payment of interest on accrual basis, following the same principle, the interest accrued but not due on the securities should be taxed in the year under consideration and for this proposition, the reliance was also placed on the decision in American Express International Banking Corpn. v. CIT CIT (2002) 258ITR 601(Bom.) wherein it has been held that the amount paid by the assessee towards interest is deductible as business expenditure. He further submits that if the interest component for the purchase price of securities is allowed as deduction towards broken period interest, then, correspondingly, the interest accrued but not due on securities held b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lder of the security on such date to whom interest can be said to have accrued. In any event interest did not accrue to the respondent on 31st March, 2001, as admittedly interest was not payable on that date as per the terms of the said securities. 20. The appellate authorities, therefore, rightly deleted the addition of Rs.1,21,57,517/- by the Assessing Officer as interest income". Respectfully following the above decision which is binding on us, we delete the addition of interest accrued but not due Rs. 3,18,36,688/- and accordingly we while reversing the order passed by the ld. CIT(A) on this account allow the ground taken by the assessee. 9. Ground No. 2 reads as under:- "The CIT(A) erred in holding that the interest receivable by the Indian branch of your Appellant from its Head Office/Overseas Branches is the 'income' of your Appellant taxable as such." 10. Brief facts of the issue are that the A.O. noted that during the previous year the assessee bank had credited an amount of Rs. 6,48,87,337/- to the P L account on account of interest and commission from head office and branches. The above amount however was reduced by the assessee bank from the taxabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/Mum/2003 ITA No. 6400/Mum/2003 dtd. 12-9-2012; and 3. Oman International Bank S.A.O.G. v. Asstt. CIT and vice versa in ITA No. 1981/Mum/2001 for A.Y. 1996-97, ITA No. 1982/Mum/2001 for A.Y. 1997-98, ITA No. 1449/Mum/2005 for ITA No. 1450/Mum/2005 dtd. 29-6-2012. 12. On the other hand, the ld. D.R. while relying on the order of the A.O. and the ld. CIT(A) submits that if following the decision cited by the ld. Counsel for the assessee, the interest received from H.O. is not taxable, then provisions of section 14A of the Act would be applicable to disallow the interest and for that proposition the reliance was also placed in Credit Agricole Indosuez (supra) wherein the Tribunal has held as under (para 2 to 5) :- "2. First ground of the Revenue's appeal is against the direction of the learned CIT(A) for not charging interest on NOSTRO account amounting to Rs. 13,66,37,677. Briefly stated the facts of this ground are that the assessee earned interest on NOSTRO account amounting to Rs. 13.66 crore which was credited to the Profit and loss account. However, while computing the total income, the said amount was reduced. On being called upon to explain as to why this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r sometime to seek instruction from the assessee. After few minutes the learned AR stated that his instructions from the assessee are that it undertakes to accept the chargeability of interest of Rs. 5.74 crore for assessment year 1996-1997 before the Hon'ble Bombay High Court and will not oppose the taxability of such amount provided the Departmental ground for this year is accepted and the consequently the assessee's grounds for disallowance u/s 14A are also allowed. 4. Having heard the rival submissions and perused the relevant material on record, it is observed that the departmental stand is that the interest on NOSTRO account amounting to Rs. 13.66 crore be charged to tax in the current year, which has not been opposed by the learned AR. Simultaneously the learned Counsel for the assessee, on oral instructions conveyed the undertaking of the assessee not to oppose the Departmental appeal about the chargeability of interest on NOSTRO account before the Hon'ble Bombay High Court for assessment year 1996-97, in respect of which substantial question of law has been admitted. In view of these rival but common submissions we are of the considered opinion that the assessment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch as it is also not in dispute that the interest received by the assessee from its H.O. and overseas branches has been taxed in the hands of the assessee. This very issue has been considered by the Special Bench of the Tribunal In the case of Sumitomo Mitsui Banking Corpn. (supra) wherein it has been held (Headnote page 76):- "Keeping in view all the facts of the case and the legal position emanating from the interpretation of the relevant provisions of domestic law as well as that of the treaty as discussed above, it is held that although interest paid to the head office of the assessee bank by its Indian branch which constitutes its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is deductible while determining the profit attributable to the PE which is taxable in India as per the provisions of articles 7(2) 7(3) of the Indo-Japanese treaty read with paragraph 8 of the protocol which are more beneficial to the assessee. The said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st income is not exempt. He has not made any disallowance of expenses incurred in relation to such exempt income presumably u/s 14A of the Act. Neither it is the learned CIT(A) who considered and decided the question of disallowance u/s 14A. As this issue does not emerge out of the orders of the authorities below, we desist from examining it. This ground is allowed". 18. Respectfully following the consistent view of the Tribunal, we are of the view that the ld. CIT(A) was not justified in upholding the addition of interest received by the assessee from its H.O. and overseas branches and accordingly the same are deleted. The ground taken by the assessee is, therefore, allowed. 19. Ground No. 3 reads as under:- "The CIT(A) erred in not allowing the claim of Rs. 24,460,000/- in respect of amount paid under guarantee as a deductible trading loss under section 28 of the Act". 20. At the time of hearing the ld. Counsel for the assessee submits that since the above claim has been allowed in subsequent year, he does not want to press the said ground of appeal which was not objected to by the ld. D.R. 21. That being so and in the absence of any other supporting material place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,250/- whereas the total income determined under section 115JA is at Rs. 2,16,95,649/-. Needless to say, when in a case the total income under the normal provisions of the Act is much more than the book profits as determined under MAT provisions, there is no question of applicability of section 115JA in such a situation. Therefore, the question of section 115JA in the present case is merely academic in nature and need not be adjudicated. This ground of appeal is therefore treated as dismissed." Since the above issue has not been adjudicated by the ld. CIT(A) by way of a speaking order, therefore, in the interest of justice, we consider it fair and reasonable that the matter should to back to the file of the ld. CIT(A) and accordingly we set aside the order passed by the ld. CIT(A) on this account and send back the matter to his file to decide the same afresh and in accordance with law after considering the decisions relied on by the parties. The ground taken by the assessee is, therefore, partly allowed for statistical purpose. 26. Ground No. 5 reads as under:- The CIT(A) erred in not deciding on merits as to whether amount representing 'provision for bad debts' should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D.R. while relying on the order of the A.O. submits that the decision of the Hon'ble jurisdictional High Court in the case of American Express International Banking Corpn. (supra) has been distinguished by the Hon'ble Rajasthan High Court in the case of CIT v. Bank of Rajasthan Ltd. (2009) 316 ITR 391 (Raj.) therefore, the broken period interest is not allowable. The reliance was also placed on the decision of the Hon'ble jurisdictional High Court in Credit Suissee First Boston (supra) wherein the issue has been dealt with specifically in para 12, 13 14 of the judgment holding that the interest does not accrue during the broken period. He, therefore, submits that the disallowance of broken period interest made by the A.O. be restored. 33. On the other hand, the ld. Counsel for the assessee submits that this issue now stands covered in favour of the assessee by the decision of the Hon'ble Supreme Court in CIT v. Citi Bank N.A. [Civil Appeal No. 1549 of 2006 dtd. 12-8-2008] wherein the decision of the Hon'ble Bombay High Court in American Express International Banking Corporation (supra) relied on by the ld. CIT(A) has been approved, therefore, the order passed by the ld. CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any exempt part of income, it cannot be said that a part of the expenditure relates to exempt income only for the reason that a part of the income is exempt from tax, therefore, no disallowance is called for. However, the A.O. held that proportionate expenses of interest paid and other operating expenses should be reduced from such interest and balance can only be allowed as exempt u/s 10(15)(iv)(fa), which was worked out to Rs. 3,66,938/- (Rs. 18,63,438 - Rs. 14,96,500) only as per working appearing at page No. 20 of the assessment order. On appeal, the ld. CIT(A) while observing that when it is found that there is no nexus proved between foreign currency deposits placed with scheduled banks and interest bearing funds and on the other hand there are sufficient funds to finance such deposits, the action of the A.O. in disallowing exemption u/s 10(15)(iv)(fa) of part of interest cannot be sustained and accordingly directed the A.O. to delete the disallowance made in this regard. 38. At the time of hearing, the ld. D.R submits that in view of the decision of the Tribunal in assessee's own case Dresdner Bank AG v. Asstt. CIT [2007] 108 ITD 375 (Mum.) wherein it has been held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial precedents, it becomes apparent that exemption u/s 10(15) is to be allowed on gross interest and not on the net interest. 10. Now we turn to evaluate the contention of the learned Departmental Representative that when interest is held to be exempt u/s 10(15) then the proportionate disallowance should be sustained u/s 14A of the Act. Though the proposition put forth by the ld. DR is correct, but the same cannot be accepted in the facts and circumstances as are now prevailing in this case for two reasons. Firstly, the Assessing Officer himself mentioned in the assessment order that: "It is not the department's case that expenditure proportionately incurred in earning the income which is exempt from tax should be disallowed". Second reason is the finding recorded by the learned CIT(A) that the investment in tax free securities was made out of sufficient interest free funds available with the assessee. The learned CIT(A) has tabulated this position through Annexure-A to the impugned order. The learned Departmental Representative could not controvert the factual position as recorded by the learned CIT(A). As per this position the assessee utilized interest free funds at its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A) partly allowed the appeal. 43. Ground No. 1 reads as under:- "The CIT(A) erred in holding that interest accrued but not due as at 31 March 2000 of Rs. 27,979,639 as the 'income' of your Appellant." 44. The A.O. observed that this issue has been examined in the earlier year also. The A.O. following the same reasons as in the earlier years, added an amount of Rs. 27,989,639/- to the total income of the assessee. On appeal, the ld. CIT(A) following the appellate order for A.Y. 1999-2000 while directing the A.O. to verify the amount and exclude the interest accrued but not due as on 31-3-1989 which has already been taxed in A.Y. 1999-2000 upheld the addition made by the A.O. 45. At the time of hearing both the parties have agreed that the facts of the above issue are similar to the facts of the assessee's case for A.Y. 1999-2000, therefore, in view of the plea taken by them, the issue may be decided accordingly. 46. After hearing the rival parties and perusing the material available on record and keeping in view of our finding recorded in para 8 of this order, the addition made by the A.O. and sustained by the ld. CIT(A) is deleted. The ground taken by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear to provide a true and fair view of the financial statements. Further, this method of year end valuation has been consistently followed by the bank, and in fact, profits on revaluation have been offered to tax in other years, which has been accepted by the Revenue. He further submits that this issue is covered in favour of the assessee by the order of the Tribunal in Dy. CIT v. Bank of Bahrain Kuwait [2010] 41 SOT 290 (Mum)(SB). 50. On the other hand, the ld. D.R. supports the order of the A.O. and the ld. CIT(A). 51. We have carefully considered the submissions of the rival parties and perused the material available on record. We find merit in the plea of the ld. Counsel for the assessee that the issue stands covered in favour of the assessee by the decision of the Special Bench of the Tribunal in Bank of Bahrain and Kuwait (supra) wherein it has been held that where forward contract is entered into by the assessee to sell foreign currency at an agreed price on a future date falling beyond last date of accounting period, loss is incurred to the assessee on account of evaluation of contract on last date of accounting period, that is, before the date of maturity of forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keeping in view of our finding recorded in paras 15 to 18 of this order, delete the disallowance of deduction of interest of Rs. 3,244,213/- and accordingly the ground taken by the assessee is allowed. 56. Ground No. 4 reads as under:- "The CIT(A) erred in not allowing the claim of Rs. 3,50,000,000 in respect of amount paid under guarantee as a deductible trading loss under section 28 of the Act." 57. At the time of hearing the ld. Counsel for the assessee submits that he does not want to press the above ground which was not objected to by the ld. D.R. 58. That being so and in the absence of any supporting material placed on record by the ld. Counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed. 59. Ground No. 5 reads as under:- "The CIT(A) erred in not deciding on merits regarding the applicability of provisions of section 115JA of the Act to your Appellant." 60. At the time of hearing both the parties have agreed that the facts of the present issue are similar to the ground No. 4 of assessee's appeal for A.Y. 1999-2000, therefore, the plea taken by them in the said appeal be considered while deciding the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On appeal, the ld. CIT(A) following the appellate order for A.Y. 1999-2000, however, allowed the claim of the assessee. 64. At the time of hearing both the parties have agreed that the facts of the present issue are similar to the ground No. 1 of Revenue's appeal for A.Y. 1999-2000, therefore, the plea taken by them in the said appeal be considered while deciding the above ground of appeal. 65. After hearing the rival parties and perusing the material available on record and in the absence of any other contrary material placed on record by the Revenue, we keeping in view of our finding recorded in para 34 and 35 of this order, decline to interfere with the order passed by the ld. CIT(A) in allowing the claim of the assessee. The ground taken by the Revenue is, therefore, rejected. 66. Ground No. 2 reads as under:- "On the facts and the circumstances of the case and in law, the ld. CIT(A) erred in holding that no portion of interest expenditure and operating expenditure would be attributed to the income claimed exempt u/s 10(15) and deleting the proportional disallowance made." 67. Brief facts of the above issue are that during the financial year ended on 31-3-2000 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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