ADIT (IT) -3(2), MUMBAI vs. M/S. BARCLAYS BANK PLC., MUMBAI

PDF · subscribers
ITA 6977/MUM/2006Status: DisposedITAT Mumbai30 June 2026AY 2001-200211 pages

In favour of the Revenue: the Revenue's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that interest received by an Indian branch from its head office or overseas branches is not taxable as it is considered a payment to self. Consequently, Section 14A is not applicable to such income.

What were the facts?

Barclays Bank PLC, a UK-based bank with Indian branches, received interest income from its head office and overseas branches. The Assessing Officer treated this interest as taxable, while the CIT(A) disallowed expenditure related to this interest under Section 14A.

What were the issues?

Whether interest income received by an Indian branch from its head office/overseas branches is taxable in India and if Section 14A applies to disallow expenditure related to such income.

Which sections of the Income-tax Act were involved?

Section 14A,Section 9(1)(i),Section 9(1)(v)(c)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “I” BENCH, MUMBAI

Before: SHRI SAKTIJIT DEY & SHRI BIJAYANANDA PRUSETHDr. Annie Besant Road, Dr. Annie Besant Road,

For Respondent: Shri Sridhar G. Menon (Sr. DR)
Hearing: 15.06.2026Pronounced: 30.06.2026

Heard together (2 matters)

CO No. 281/Mum/2013
ITA No. 354/Mum/2007

Read from the judgment's own cause title. This page is filed under one of them.

IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, VICE PRESIDENT AND SHRI BIJAYANANDA PRUSETH, ACCOUNTANT MEMBER

ITA No. 354/Mum/2007 (Assessment Year: 2001-02) Barclays Bank PLC DDIT(IT)-1(1) Office No. 801 to 808 Scindia House, Ballard Pier, 8th Floor, Ceejay House, Mumbai-400 038 “F” Plot, Shivasagar Estate, Vs. Dr. Annie Besant Road, Worli, Mumbai-400 018 PAN/GIR No. AAACB 4876 G (Assessee) : (Revenue) ITA No. 6977/Mum/2007 (Assessment Year: 2001-02) ADIT(IT)-3(2) Barclays Bank PLC Scindia House, Office No. 801 to 808 Room No. 132, 1st Floor, 8th Floor, Ceejay House, N. M. Road, Mumbai-400 038 Vs. “F” Plot, Shivasagar Estate, Dr. Annie Besant Road, Worli, Mumbai-400 018 PAN/GIR No. AAACB 4876 G (Revenue) : (Assessee) CO No. 281/Mum/2013 (Arising out of ITA No. 354/Mum/2007) (Assessment Year: 2001-02) DIT(IT)-II Barclays Bank PLC Room No. 7, Ground Floor, Office No. 801 to 808 Scindia House, N. M. Road, 8th Floor, Ceejay House, Ballard Estate, Mumbai-400 038 Vs. “F” Plot, Shivasagar Estate, Dr. Annie Besant Road, Worli, Mumbai-400 018 PAN/GIR No. AAACB 4876 G (Revenue) : (Assessee)

2 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) : Shri P. J. Pardiwala – Sr. Adv./ Asseessee by Shri Madhur Agrawal Revenue by : Shri Sridhar G. Menon (Sr. DR) Date of Hearing : 15.06.2026 Date of Pronouncement : 30.06.2026 O R D E R Per Saktijit Dey, Vice President: Captioned cross appeals and cross objection by the Department, arise out of order dated 13.09.2006 of learned Commissioner of Income Tax Appeals, Mumbai (‘ld. CIT(A)’ for short) for the assessment year (‘A.Y.’ for short) 2001-02.

ITA No. 354/Mum/2007 (Assessee's appeal) 2. In ground no. 1, the assessee has challenged the disallowance of expenditure amounting to Rs.4,78,43,945/- allegedly attributable towards earning interest income from Nostro account and overseas placement with head office and overseas branches.

3.

Briefly, the facts are, the assessee is a non-resident banking company incorporated in United Kingdom (‘UK’ for short). The assessee has opened branches in Mumbai and Delhi, which are its permanent establishment (‘PE’ for short). The Indian branches had opened Nostro accounts and placed funds with the head office and overseas branches on which interest amounting to Rs.4,78,43,945/- was received. Being of the view that such interest received from head office/overseas branches is not taxable under the domestic law, the assessee did not offer it to tax.

4.

The Assessing Officer (‘A.O.’ for short), however, was not convinced with the reasoning of the assessee. He held that the interest income is taxable u/s.9(1)(i) as also u/s.9(1)(v)(c) of the Income Tax Act (‘the Act’ for short). Accordingly, he added back the

3 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) interest received of Rs.4,78,43,945/- at the hands of the assessee, being income attributable to the PE.

5.

The assessee contested the aforesaid addition before learned First Appellate Authority, reiterating the stand taken before the AO.

6.

After considering the submissions of the assessee, learned Commissioner (Appeal) agreed that in terms with ratio laid down by the ITAT Special Bench in case of ABN Amro Bank N.V. vs. Assistant Director of Income Tax (2005) 97 ITD 89 (Kol)(SB), the interest paid/received to/from head office and other overseas branches, being covered under the principle of mutuality, would not be taxable. However, he was of the view that such interest received by the Indian branch being in the nature of exempt income, the provisions of section 14A would apply and expenditure attributable to earning of exempt income has to be disallowed. Accordingly, he disallowed the amount of Rs.4,78,43,945/-.

7.

We have considered rival submissions and perused the materials available on record. The issue regarding the applicability of section 14A of the Act to the interest received by the Indian branch from Head Office and overseas branches and vice versa is no more res integra in view of the decision of the ITAT Special Bench in case of J.P. Morgan Chase Bank, N.A. vs. Joint Commissioner of Income-tax (JCIT) (in ITA No. 9189/Mum/2004 & CO No. 139/Mum/2013 in order dated 10.10.2025). While dealing with identical nature of dispute, the ITAT Special Bench has held as under: 9. The income of an assessee carrying on business in India is to be taxed as per the provisions of Chapter IV-D consisting of sections 28 to 43 and 44BA. A bank, a corporate body, and carrying on banking business in India is liable to be taxed in India in respect of the profit earned in India by virtue of section 5(2) in respect of the profit earned in India by virtue of section 5(2) read with section 28 to 44BA. Since it carried on the business through a branch in India which was a PE, it is to be assessed only in respect of that profit which was relatable to the activities and attributable

4 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) to the PE both by virtue of section 5 as well as section 9. Further in view of the existence of DTAA, the taxability is to be judged with reference to the provisions under the DTAA as well. 10. Be that as it may, it is noted that the present case involves a reverse transaction of the issue considered by the Hon'ble Special Bench in Sumitomo (supra). However, the moot question that has been placed before this Bench is to examine whether section 14A would be applicable if a receipt, falls within the ambit of "doctrine of mutuality" which arises with reference to the cross objection of the Department. In other words the issue before this special bench is not to determine as to whether, "doctrine of mutuality" applies in the instant case. The said issue is for the division bench to decide while considering assessee's appeal. 10.1 Before we advert to analyse the above issue under consideration, it is necessary to consider section 14A, that reads as under: Section 14A Expenditure incurred in relation to income not includible in total income. (1) For the purposes of computing the total income under this Chapter, 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. 10.2 The above section was first introduced by Finance Act 2001. It is also relevant to understand the intention of the legislature to bring in the provision to the statue with retrospective effect from 01/04/1962. The extract of the memorandum is reproduced as under: No deduction for expenditure incurred in respect of exempt income against taxable income Certain incomes are not includable while computing the total income as these are exempt under various provisions of the act's there have been cases where deductions have been claimed in respect of such exempt income this in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, Le., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the legislature since the inception of the income tax act, 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the income tax act. The proposed amendment will take effect retrospectively from 01/04/1962 and will accordingly, apply in relation to the assessment year 1962-1963 and subsequent assessment years. 10.3 The above memorandum makes it abundantly clear that the legislative intent behind section 14A is to apply its provisions to incomes which are exempt under various provisions of the Act and, therefore, are not includable in the total income for the purpose of computing tax in the hands of the assessee. By way of illustration, if a company engaged in business through industrial undertakings also derives agricultural income, such agricultural income would not be includable in the computation of total Income under the Act, being exempt under section 10 thereof. It is to such exempt incomes that the provisions of section 14A are intended to apply. 10.4 The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On this analogy the exemption is also in respect of the net income. Further the expenses can be allowed only in respect of earning of taxable income. Section 14

5 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. 10.5 In section 14A, the 1st phrase is "For the purposes of computing the total income under this Chapter", which makes it clear that various heads of income as prescribed under chapter VI would fall within section 14A. The next phrase, "in relation to income that does not form part of total income under the act" means that, if an income does not form part of the total income by virtue of provisions under the act, then the related expenditure falls within the ambit of applicability of section 14A. Therefore, for attracting the provisions of section 14A, there has to be proximate cause for disallowance, which is its relationship with the tax exempt income. 10.6 The provisions of the act are clear on the aspect of the receipts that partake the character of income, however not includable in computing the total income in the hands of an assessee by virtue of various provisions contained in the act. Chapter III of the income tax act deals with such receipts that partake the character of income and are exempt. Thus disallowance under section 14A of the act would apply only to such category of income that is exempt from tax by virtue of the provisions of the act. The language of section 14A are therefore similarly worded with that of the provisions under section 10 in JP Morgan Chase Bank chapter III. For the purposes of highlighting the difference between the provisions that are dealing with exemptions and the provisions that deal with deduction the Ld.Sr.Counsel on behalf of the assessee referred to the decision of Hon'ble Karnataka High Court in case of ITO vs Stumpp Schedule and Somappa Pvt. Ltd. reported in (1977) 106 ITR 399.He also relied on the decision of Hon'ble Bombay High Court in case of CIT us Century Spg.&Mfg. Co. Ltd., reported in (1978) 111 ITR 6, approved by Hon'ble Supreme Court reported in (1991) 187 ITR 108. 10.7 The issue that was considered by Hon'ble High Courts referred to herein above was in the context of levy of surtax. Hon'able Court observed that according to the provisions of this Act charged profits, i.e., the total income of an assessee computed under the Act after making adjustments in accordance with the 1st schedule thereof was liable to surtax. And a statutory deduction was allowed being amount equal to 10% of the capital of the company in accordance with the provisions of the 2nd schedule. Hon'ble Court observed that rule 4 of the 2nd schedule provided as under: "Where a part of the income, profits and gains of a company is not includable in its total income as computed under the income tax act, its capital shall be the sum ascertained in accordance with rules 1, 2 and 3, diminished by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total of its income, profits and gains" 10.8 Hon'ble Court held that, "The provisions of rule 4 will be attracted only if a part of the income, profits and gains of a company's includable in its total income". The court further emphasised that, "Normally, the provisions of rule 4, as stated above, will be applicable only to the items of the income which are included in chapter 3 which do not form part of the total income." 10.9 From the above it is clear that a distinction has to be drawn between cases where the receipt is not bearing the character of 'income' and cases where the receipt is in the nature of 'income', but is 'exempt' by virtue of various provisions under the act. Thus section 14A would apply only to cases where the receipt is in the nature of income, but is exempt from the tax by virtue of various provisions under the act. 10.10 The "doctrine of mutuality" relates to a notion that a person cannot make profit from himself. An amount received from oneself is not regarded as "income" and is therefore cannot be subjected to tax. Only such income that comes within the definition of sec. 2(24)

6 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) of the Act is subject to tax. Based on the above discussion, in the present case, if the division bench takes the view that the interest received by the Indian Branch Office is covered by the "doctrine of mutuality", then by its very nature, such income will not fall within the scope of 'income' as defined in soetions 2(24) and 4 of the Act, based on various Judicial pregetlents that consistently recognised this position. JUS 10. Now coming to the applicability of section 14A, it is noted that section 14A, as explained in the legislative memorandum, was introduced only to deal with incomes which are exempt or under specific provisions of the Act but are otherwise includable in total income as observed by Hon'ble Supreme Court in case of CIT us M/s. Walfort Shares & Stock Brokers Pvt.Ltd., reported in (2010) 192 Тахтman 211 vide paragraphs 12, 138 14. Similar observation has been well founded by Hon'ble Delhi High Court in case of Maxopp Investments Ltd vs. CIT reported in (2011) 15 taxmann.com 390 vide paragraphs 15, 16, 17, 24 & 25. 10.12. Receipts under the principle of mutuality are of a different character. They are not exempt income but are simply not income at all. It thus naturally follows that section 14A has no application to such receipts. Thus the issue referred before this Special Bench is answered in negative. 8. Thus, keeping in view the ratio laid down in the decision referred to above, we hold that no disallowance u/s. 14A of the Act can be made. Accordingly, the AO is directed to delete the disallowance.

9.

In ground no. 2, the assessee has contested the disallowance of Rs.2,23,125/-, being guarantee commission received by the assessee.

10.

Briefly, the facts are, in course of assessment proceeding, the AO noticed that though during the year under consideration, assessee received guarantee commission of Rs.81,38,646/-, however, the assessee has offered an amount of Rs.79,15,521/-, leaving out an amount of Rs.2,23,125/-. When the AO called upon the assessee to explain the reasons for not offering such amount to tax, the assessee explained that the income has not accrued during the year. The AO, however, did not accept the claim of the assessee and proceeded to tax the amount as the assessee has received it at the time of issue of guarantee.

7 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) 11. Though, the assessee contested the addition before ld. First appellate authority, however, it was unsuccessful.

12.

Before us, ld. counsel appearing for the assessee submitted that though the assessee receives the guarantee commission upfront at the time of issue of guarantee, however, the guarantee commission is apportioned over the period of guarantee. He submitted that assessee is following such accounting method on regular basis in terms with Accounting Standard-9.

13.

Ld. Counsel submitted, if it is made taxable in the year under consideration, the Department has to reduce such income offered by the assessee in subsequent assessment years, which, keeping in view the assessment year involved, would not be a prudent thing to do as it would require necessary modification of income of subsequent assessment year. He submitted, since there is only a timing difference, the addition should not be made. He submitted, in assessee's own case in AY 2004-05, the co-ordinate bench has directed the AO to consider the issue in the perspective that the income is not assessed twice. In this context, he also relied upon another decision in assessee’s own case in A.Ys.2002-03 and 2003-04 in ITA No.2050/Mum/2007 and others vide order dated 22.06.2016.

14.

Having considered rival submissions and perused materials on record, we are of the view that a quietus has to be given to the issue at this stage without prolonging the matter further by directing the A.O. to grant consequential relief to assessee in the assessment year wherein the assessee has offered the income. We have come to the aforesaid conclusion, basis the fact that there is no dispute between the parties that the assessee has offered the

8 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) alleged short fall amount in the subsequent assessment year. Accordingly, we direct the A.O. to delete the addition.

15.

In ground no. 3, the assessee has challenged the disallowance of an amount of Rs.8,81,182/-, being interest paid to Reserve Bank of India for maintaining inadequate cash surplus ratio on balances.

16.

Having considered rival submissions and perused material on record, we find that the issue is squarely covered by the decision of the co-ordinate bench in assessee's case in A.Ys. 2002-03 and 2003-04. While deciding identical nature of dispute, the co-ordinate bench in ITA No. 2050/Mum/2005 and others, order dated 22.06.2016 has held as under: 19. Heard both the parties, perused the orders of the lower authorities and the decision relied on. In the case of Bank of America NA, the Co-ordinate Bench following the decision of the Jurisdictional High Court in the case of CIT Vs Bank of Baroda held that interest paid to RBI for shortfall in maintenance of CRR and SLR is to be allowed as deduction observing as under: “7. Ground No.7 and 8 are regarding disallowance in respect of amount paid to RBI for shortfall in maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Reserve (SLR). The AO disallowed a sum of Rs.3,74,704/- paid to RBI for shortfall in maintenance of CRR as well as an amount of Rs.9,30,377/- paid to RBI for not complying with the SLR requirements. These disallowances were made by AO on the ground that the payments are infraction of law and therefore, cannot be allowed u/s. 36(1). The ld. CIT(A) has confirmed the disallowance made by Assessing Officer. 7.1 We have heard the ld. Sr. Counsel as well as the ld. DR and considered the relevant material on record. The ld. Sr. Counsel has submitted that this issue has been considered and decided by the Tribunal in Assessee’s own case for the assessment year 1992-93 in ITA No.141/Bom/96 in favour of assessee. He has further submitted that an identical issue has been decided by the Hon'ble Jurisdictional High Court in case of Bank of Baroda vide order dated 15.02.2011 in Income Tax appeal No.4169 of 2009. On the other hand the ld. DR has relied upon the orders of authorities below. 7.2 Having considered the rival submissions and careful perusal of record we note that this issue is covered by the decision of Hon'ble Jurisdictional High Court in the case of CIT vs. Bank of Baroda (supra), wherein the Hon'ble High Court has held as under:- “The only question raised by the revenue in this appeal is, whether the interest paid by the assessee for non maintenance of the cash reserve ratio/ statutory liquidity ratio as per Section 24 of the Banking Regulation Act, 1949 and Section 42 of the Reserve Bank of India Act, 1934 constitute penalty so as to disallow the interest claim. The Tribunal following the decision in the case of DCIT V/s. Dhanalakshmi Bank Ltd. (Cochin) reported in 76 TTJ 439 held that the interest paid to the RBI was not penalty and accordingly the interest expenditure is

9 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) allowable. SLP filed by the revenue against similar decision of the Tribunal in the case of Dhanalakshmi Bank Ltd. (supra) has been dismissed by the Apex Court as reported in [2005] 277 ITR (ST) 3. In this view of the matter, we find no merit in the appeal and the same is dismissed with no order as to costs.” 7.3 Following the decision of the Hon'ble High Court we decide this issue in favour of the Assessee and against the Revenue. Respectfully following the decision of the Jurisdictional High Court and Co-ordinate Bench, we allow the ground of appeal of the assessee on this issue. 17. Respectfully following the decision of the co-ordinate bench noted above, we delete the disallowance.

18.

In the result, the appeal is allowed. ITA No. 6977/Mum/2020 (By Revenue) 19. At the outset, learned counsel appearing for the assessee submitted that the tax effect on the amount disputed by the department is below the monetary limit of Rs.60 lakhs.

20.

Ld. DR fairly conceded to the aforesaid factual position.

21.

Thus, keeping in view the fact that the appeal filed by the department is not maintainable due to low tax effect as per the extant Circular issued by CBDT, we dismiss the appeal.

CO No. 281/Mum/2013 (by the Revenue) 22. The department has filed an application seeking condonation of delay of 615 days in filing the cross-objection. It is necessary to observe that assessee’s appeal was filed on 12.01.2007, whereas, the cross-appeal was filed by the Revenue on 21.12.2006. The cross- objection was filed on 06.12.2013. Thus, actually, there is a delay of more than 6 years in filing the cross-objection. However, the department has recognized delay from the date of decision in case of Sumitomo Mitsui Banking Corpn. Vs. DDIT [2012] 19 taxmann.com 364 (Mum)(SB) delivered on 31.03.2001. In our view, the reasoning of the department

10 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) cannot be accepted. It is established on record that the delay is more than 6 years, which by any standard is inordinate. Therefore, the assessee has to explain the delay of 6 years and not 615 days. Even, for argument’s sake, accepting department's contention that the delay has to be recognized from the date of decision rendered in case of Sumitomo Mitsui Banking Corpn. (supra), the Department has not shown any justifiable reason for condoning delay. Therefore, the cross-objection deserves to be dismissed in limine without condoning delay. Suffice to say, even otherwise also, the cross-objection on the issue of applicability of section 14A of the Act to the interest received on Nostro account/ overseas placements of fund with head office and overseas branches is not acceptable in view of the decision of ITAT (SB) in case of J.P. Morgan Chase Bank, N.A. vs. Joint Commissioner of Income-tax (JCIT) (in ITA No. 9189/Mum/2004 & CO No. 139/Mum/2013 vide order dated 10.10.2025) wherein the Bench has held that the interest received/paid from/to head office and overseas branches being payment to self is not in the nature of income, hence, would not enter the computation stream at all. Therefore, the provision of section 14A would not be applicable. Respectfully following the ratio laid down by the Special Bench in the decision referred to above, we dismiss the cross objection.

23.

In the result, the appeal by the assessee is allowed. Whereas, the appeal and cross objection by the department are dismissed. Order pronounced in the open court on 30.06.2026

Sd/- Sd/- (Bijayananda Pruseth) (Saktijit Dey) Accountant Member Vice President Mumbai; Dated : 30.06.2026 Roshani, Sr. PS

11 ITA No. 354/Mum/2007 & others (A.Y. 2001-02) Barclays Bank PLC vs. DDIT(IT) Copy of the Order forwarded to : 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT - concerned 5. DR, ITAT, Mumbai 6. Guard File BY ORDER,

(Dy./Asstt. Registrar) ITAT, Mumbai

More judgments on Section 14A

All 15,875 judgments and leading authorities on Section 14A →

Recent GST High Court judgments

Search GST case law →