THE DY DIT (I.T) 1(1), MUMBAI vs. M/S. BANK OF AMERICA N.A., MUMBAI

We have considered the submissions of both sides and perused the material available on record. The brief facts of the case are that the assessee is a commercial bank having its Head Office in Charlotte, USA. The assessee has five branches in India at Mumbai, New Delhi, Calcutta, Bangalore and & 4154/Mum/2004 (A.Y. 2000-01) 3 Chennai. The assessee is engaged in the normal banking activities, including financing of foreign trade and foreign exchange transactions. For the year under consideration, the assessee filed its return of income on 27/11/2000, declaring a total income of Rs. 255,41,03,744. The return filed by the assessee was selected for scrutiny, and statutory notices under section 143(2) and section 142(1) of the Act were issued and served on the assessee. During the year under consideration, the assessee earned interest income of Rs. 45 lakh on investments in tax-free bonds, which was claimed as exempt under section 10(15) of the Act. The assessee also earned interest income amounting to Rs. 14,18,82,201 from loans given for infrastructure projects, which was claimed as exempt under section 10(23G) of the Act. As per the assessee, it is the gross receipt which is exempt under section 10(15) and section 10(23G) of the Act, as it has not incurred any direct expenditure in earning this income.

The Assessing Officer (“AO”), vide order dated 28/03/2003 passed under section 143(3) of the Act, disagreed with the submissions of the assessee and held that the harmonious reading of section 10 of the Act would leave no doubt that what is meant to be exempt is the income earned, and the term “income” in no sense of the word can be said to be synonymous with gross receipts. The AO also placed reliance upon the CBDT’s Circular No. 780, dated 04/10/1999, in support of its conclusion that the assessee is entitled to a deduction under section 10 of the Act in respect of net income arising to it, and not in respect of the gross income. The AO further held that if the assessee is allowed an exemption on the gross interest received by it, it would & 4154/Mum/2004 (A.Y. 2000-01) 4 amount to allowing the expenditure incurred in earning the interest to be deducted twice, since the expenditure incurred has already been claimed in arriving at the net profit in the profit and loss account. The AO, placing reliance upon the provisions of section 14A of the Act, held that no deduction can be allowed to the assessee in respect of expenditure that it must have incurred in earning exempt income. The AO also rejected the submissions of the assessee that it had sufficient interest-free funds for making investments for earning tax-free income on the basis that the assessee had not been able to establish a direct correlation between the funds available with it by way of cash balances, on the date of the investment, and the investments made. The AO held that the opening capital balance available with the assessee in the year under consideration would not have been available to the assessee as surplus cash and bank balance for deployment in tax-free investments. Thus, for want of proof of specific correlation between the funds available with the assessee on the date of the investment and the investment so made, the AO rejected the contention of the assessee. Accordingly, on the basis that the gross interest received by the assessee is not eligible to be exempted under section 10 of the Act and only the net receipts would be allowed as an exemption, the AO restricted the exemption under section 10(15) and section 10(23G) of the Act to the total amount of Rs. 5,49,48,220 as against the claim of Rs. 45 lakh and Rs. 14,18,82,201 by the assessee.

Having considered the submissions of both sides and perused the material available on record, in the present case, it is evident that there is no dispute that the interest expenditure was disallowed by the AO while granting exemption under section 10(15) and section 10(23G) of the Act. During the hearing, the learned Senior Counsel, appearing for the assessee, reiterated the contention that the assessee had sufficient interest-free funds for making investments for earning tax-free income. From the details of own funds available with the assessee as of 31st March for the period from 1998 to 2000 and the statement of lending to infrastructure projects and investment in tax- free bonds, as noted in the foregoing paragraphs, it is sufficiently evident that the assessee's own funds were more than the investments for earning exempt & 4154/Mum/2004 (A.Y. 2000-01) 8 income. We find that the Hon'ble Jurisdictional High Court in CIT v/s HDFC Bank Ltd., reported in [2014] 366 ITR 505 (Bom.), held that where assessee's own funds and other non-interest bearing funds were more than the investment in tax-free securities, no disallowance under section 14A of the Act can be made. We further find that the Hon'ble Supreme Court in South Indian Bank Ltd. v/s CIT, reported in [2021] 438 ITR 001 (SC) held that disallowance under section 14A of the Act would not be warranted where interest-free own funds exceed the investment in tax-free securities and in such a case the investment would be presumed to be made out of assessee's own funds. Therefore, respectfully following the law laid down by the Hon'ble Supreme Court and the Hon'ble jurisdictional High Court in cases cited supra, we find no infirmity in the impugned order in deleting the disallowance of part interest while allowing exemption under section 10(15) and section 10(23G) of the Act. Accordingly, Ground No. 1, raised in Revenue’s appeal, is dismissed.

Ground No. 2, raised in Revenue’s appeal, pertains to the deletion of the disallowance made under section 44C of the Act.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee claimed expenditure amounting to Rs. 1,15,79,071 on account of expenses incurred overseas. Since these expenses were not paid by the assessee, the same were not debited to the profit and loss account. The claim of the deduction by the assessee was based on the allocation made by the Head Office and overseas branches of the assessee bank. As per the assessee, since these expenses & 4154/Mum/2004 (A.Y. 2000-01) 9 pertain to the NRI Desks at the Head Office/overseas branches of the assessee’s bank, they are directly attributable to the Indian branch. During the assessment proceedings, the assessee claimed that the limit prescribed under section 44C of the Act does not apply to its case and that the expenses should be allowed in full to the extent attributable to Indian operations. In this regard, the assessee also referred to the provisions of Article 7 of the DTAA. It was further submitted that the deduction is allowable for all expenses incurred as per the provisions of Article 7(3) of the DTAA, irrespective of the fact whether such expenses are incurred in the state in which the Permanent Establishment is situated or elsewhere.

During the hearing, the learned Departmental Representative (“learned DR”) submitted that this issue is squarely covered by the recent decision of & 4154/Mum/2004 (A.Y. 2000-01) 11 the Hon’ble Supreme Court in DIT v/s American Express Bank Ltd, reported in [2025] 181 taxmann.com 433 (SC), wherein the stand taken by the AO in the present case was upheld. The learned DR submitted that the provisions of section 44C of the Act are applicable to all expenses, whether common or exclusive, incurred by the Head Office which are attributable to its Indian branches. It was further submitted that the deduction claimed by the assessee in respect of expenditure incurred by overseas branches for its India operations was rightly restricted by the AO under section 44C of the Act. The written submissions filed by the learned DR are reproduced as follows, for ready reference: - “5.2 Brief Note of DR: The DR relied on the decision of the Hon'ble Supreme Court in the case of DIT(IT)-1, Mumbai v. American Express Bank Ltd. in Civil Appeal No. 8291 of 2015 and 4451 of 2016, as cited in [2025]181 taxmann.com 433(SC)[15.12.22025]. The salient features of this decision are enumerated hereunder: a. In para 28 to 40, the Hon'ble SC analyses the basic principles of interpretation and ultimately summarizes that: i. Taxation statute requires strict interpretation. ii. Where the words are plain and unambiguous, the court is bound to give effect to their plain meaning. iii. The determination of whether language is 'plain and unambiguous' is not a mechanical exercise, and it necessitates interpreting words within their specific context rather than in isolation. iv. The legislative intent is primarily to be gathered from the specific words used by the legislature. Reference to the object and purpose becomes crucial in those situations where the language is ambiguous and capable of multiple constructions. v. Under ordinary circumstances, it is impermissible for the Court to add or read words into the statute, especially when the language is plain and unambiguous, on the notion that such words would appear to better serve the legislative object or purpose. b. Thereafter, after analysis of provisions of Section 44C Of the Act, the Hon'ble Court observes that:

In view of the above, the Revenue strongly relies on the stand taken by the AO which was finally upheld, in principle, by the Hon'ble Apex Court in the case of American Express bank Ltd. and therefore the Revenue prays that grounds of appeal on this count may be allowed.”

Further, on perusal of the written submissions dated 14 January 2026 filed by the learned DR, reliance has been placed on the decision of the Hon'ble Supreme Court in the case of DCIT (IT) v. M/s American Express Bank Ltd. [2025) 181 taxmann.com 433 (SC), wherein it held that section 44C of the Act applies equally to both common and exclusive HO expenditure. However, the learned DR has not established as to how the aforesaid expenses are in the nature of "executive and general administration" expenses.

The Respondent draws reference to paragraph 75 as well as the concluding paragraph 85 of the Hon'ble Supreme Court in the case of American Express Bank Ltd. (supra) where it is stated that for an expenditure to qualify as 'head office expenditure' within the meaning of the Explanation to section 44C, the Assessing Officer has to establish the following three ingredients: a) First, the expenditure must be incurred outside India. b) Secondly, the expenditure must be in the nature of executive and general administration, i.e., a broad genus. c) Thirdly, the said executive and general administration expenditure must fall within the specific species enumerated in clauses (a). (b), and (c), or expressly prescribed under clause (d).

The Respondent submits that the aforesaid expenditure is incurred for generation of business of the India branches which is evident from the deposits raised by the NRIs. The said expenses are in the nature of marketing expenses incurred for the purpose of the Respondent's India business and not executive and general administration in nature.

We have considered the submissions of both sides and perused the material available on record. In the present case, the assessee has its Head Office in Charlotte, USA, with branches all over the world. In India, the assessee has five branches at Mumbai, New Delhi, Calcutta, Bangalore and Chennai. During the year under consideration, an amount of Rs. 1,15,79,071 was incurred by the assessee’s London and Singapore branches towards NRI Desks charges. As these expenses were incurred for operations in India, the same were claimed as deductions while computing the assessee's income from India operations. As per the assessee, NRI Desks are located in cities which have a high concentration of Indian nationals, and therefore, these desks help the assessee to survey the market, identify potential customers and render a more efficient service to them. It is the plea of the assessee that it has set up infrastructure at its branches for the express purpose of soliciting & 4154/Mum/2004 (A.Y. 2000-01) 16 deposits from NRIs, and it renders this exclusive function with separate staff and office space, which is completely unrelated to the typical banking business conducted in countries where NRI centres are located. Thus, as per the assessee, it would be impossible to solicit NRI deposits and earn profits without incurring these expenses. The assessee claimed these expenses to be in the nature of NRI marketing expenses, and the same pertain to: – (a) salaries of staff employed by the NRI centres; (b) the rent for office space dedicated to the NRI centres; (c) courier and postage charges incurred by the NRI centres; (d) telephone, telex and fax charges incurred by the NRI centres; (e) expenditures for electricity and water activation to the office space occupied by the NRI centres; and (f) equipment rentals, depreciation expenses, etc., attributable to the office space occupied by the NRI centres.

As per the assessee, the expenditure incurred at these overseas centres has been duly audited by the local accounting firms at these locations. In this regard, the assessee has also placed on record the sample local accountants' certificates in respect of the NRI Desks, which form part of the paper book from pages 127-130.

From the perusal of the submissions of the assessee before the lower authorities, it is also evident that the assessee claimed that the NRI Desks' expenses were incurred by overseas branches directly and solely for the purpose of the assessee’s India operations. Accordingly, the assessee claimed that these exclusive expenses do not fall within the scope of section 44C of the Act, as they cannot be construed as Head Office expenses. From the perusal of the impugned order, we find that the learned CIT(A) agreed with & 4154/Mum/2004 (A.Y. 2000-01) 17 the submissions of the assessee and held that the said expenses cannot be disallowed under section 44C of the Act, following the decisions of the Hon’ble Bombay High Court. From a careful perusal of the decision in American Express Bank Ltd (supra), we find that the Hon’ble Supreme Court has overturned the findings of the Hon’ble Bombay High Court and held that section 44C does not create a distinction between the common and exclusive Head Office expenditure, and therefore, the exclusive expenditure incurred by the overseas branches for the Indian branch also falls under the purview of section 44C of the Act.

In American Express Bank Ltd (supra), the Hon’ble Supreme Court also laid down the tests to determine whether an expenditure will qualify as “Head Office Expenditure” within the meaning of the Explanation to section 44C of the Act. In this regard, it is relevant to note the following observations of the Hon’ble Supreme Court in the aforesaid decision: - “75. In other words, for an expenditure to qualify as 'head office expenditure' within the meaning of the Explanation to Section 44C, the assessing officer has to be satisfied of the following three ingredients: (a) First, the expenditure must be incurred outside India. (b) Secondly, the expenditure must be in the nature of executive and general administration, i.e., a broad genus. (c) Thirdly, the said executive and general administration expenditure must fall within the specific species enumerated in clauses (a), (b), and (c), or expressly prescribed under clause (d).”

After laying down the aforesaid legal principles, the Hon’ble Supreme Court restored the matter to the file of the Tribunal to verify whether the disputed expenditures satisfy the tripartite test necessary to qualify as “Head Office Expenditure” under the Explanation to section 44C of the Act.

In the light of aforementioned facts and circumstances in the present case, it is the plea of the assessee that even though the Hon’ble Supreme Court in American Express Bank Limited (supra) has held that the provisions of section 44C of the Act are equally applicable to both common and exclusive Head Office expenditure, however, the Revenue has not established as to how the expenses incurred on the NRI Desk are in the nature of “exclusive and general administration” expenses. Thus, as per the assessee, not all expenditure incurred by the overseas branches for the Indian branch would be covered within the meaning of “exclusive and general administration” expenses. On the basis that the expenditure incurred on the NRI Desk has resulted in the generation of business for the Indian branches, as per the assessee, the said expenses are in the nature of marketing expenses and do not fall within the ambit of “exclusive and general administration” expenses.

Before proceeding further, it is important to note that the financial year under consideration is 1999–2000. Over 25 years ago, banks heavily relied on traditional channels, focusing on their extensive branch networks and mass media to attract customers. It is worth noting that this was an era before digital tools dominated banking, with online banking just emerging and being minimal. During that time, banks emphasised building personal relationships between branches and their customers. Banking has long been a customer- focused industry, prioritising trust, accessibility, and tailored financial solutions to build lasting relationships. Consequently, banks offered a variety of products for different segments of society, such as salaried employees, high-net-worth individuals, senior citizens, students, and others, to meet & 4154/Mum/2004 (A.Y. 2000-01) 19 diverse needs. The banks also provide branch access and personalised teller services to improve customer experience. Therefore, a stronger relationship with customers has always been pivotal for the banks to promote their products/services, thereby increasing their business. Needless to say, privileged services that create exclusivity and loyalty benefits, as well as privileges for high-value and long-standing customers, have also played an important role in building stronger customer relationships. The banks, through their branches, also expand their customer base through referrals and partnerships, thereby maintaining a constant connection with their customers. Thus, all these activities that build stronger customer relationships are part and parcel of the general banking business conducted by a branch, which ultimately results in increased business through higher customer deposits or interest income from lending funds. It is pertinent to note that such activities are conducted by the branch employees only, who have the knowledge about various schemes and products of the bank, and accordingly, they guide the customers. At this stage, it is important to note that over 25 years ago, banks also used other methods to reach out to customers, such as television and radio advertisements, print advertising like newspaper ads, flyers, brochures, and outdoor signage or billboards, to not only build their brand name but also promote new schemes or offers. However, these mass media efforts target broader segments or the general public.

Therefore, we are of the considered view that it is important to distinguish the marketing expenses on television commercials, print advertising, radio and billboard/signage from the general banking business & 4154/Mum/2004 (A.Y. 2000-01) 20 conducted by a branch, maintaining a stronger customer relationship through the bank employees.

Thus, we are of the considered view that in the present case, the fact that the assessee’s overseas branches had set up infrastructure at its branches for NRI Desks with separate staff and office space, which leads to the receipt of NRI deposits by the Indian branch, cannot lead to the conclusion that the expenses as enumerated in the foregoing paragraphs are in the nature of marketing expenses. These expenses, such as salaries of staff, office rental, courier and postage charges, telephone, telex and fax charges, electricity and water expenditure, equipment rentals, depreciation expenses, etc., are nothing but pertain to general banking business conducted at a branch, and thus are in the nature of “executive and general administration” expenses of the bank. Further, we find that these expenses also fall within the specific species enumerated in clauses (a) to (d) of Explanation to section 44C of the Act, which is reproduced as follows for ready reference: – “(a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession; (b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India; (c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and (d) such other matters connected with execution and general administration as may be prescribed."

Insofar as the decision of the Special Bench of the Tribunal in Inspecting Assistant Commissioner v/s Goodricke Group Ltd., reported in [1985] 12 ITD 1 (Cal.) (SB), relied upon by the assessee in its written submission, we find & 4154/Mum/2004 (A.Y. 2000-01) 21 that in the facts of that case, an agent was specifically appointed in London, inter alia, for supervising the sales of tea produced in India. However, such are not the facts of the present case, as no outside agency is involved, and the assessee’s own overseas branch employees conducted general banking business from the infrastructure at the branch. This fact is further evident from the details of expenditure as certified in the sample local accountant’s certificates, which also do not indicate any marketing/sales expenditure being incurred by the overseas branches in respect of the NRI Desks. Thus, we are of the considered view that the decision of the Special Bench relied upon by the assessee is factually distinguishable.

Since in the present case, it is undisputed that these expenditures were incurred outside India, accordingly, we are of the considered view that the tripartite test laid down by the Hon’ble Supreme Court in American Express Bank Ltd (supra) is satisfied in the present case, and the expenditure incurred by the assessee’s London and Singapore branches towards NRI Desks charges qualify as “Head Office Expenditure” under the Explanation to section 44C of the Act. Therefore, the provisions of section 44C of the Act are applicable in the present case. As a result, the impugned order on this issue is set aside, and the order passed by the AO restricting the deduction under section 44C of the Act is reinstated. Hence, Ground No. 2 raised in Revenue’s appeal is allowed.

Ground No. 3, raised in Revenue’s appeal, pertains to the computation of deduction under section 36(1)(viia) of the Act.

We have considered the submissions of both sides and perused the material available on record. The AO, vide assessment order passed under section 143(3) of the Act, computed the deduction under section 36(1)(viia) of the Act after allowing deduction under section 44C of the Act. As per the assessee, the deduction under section 36(1)(viia) of the Act should be computed before computing the deduction under section 44C of the Act. The learned CIT(A), vide impugned order, agreed with the contention of the assessee and allowed the deduction under section 36(1)(viia) before computation of deduction under section 44C of the Act. Being aggrieved, the Revenue is in appeal before us.

From the plain reading of the provisions of section 44C of the Act, it is evident that while computing the income chargeable under the head “profits and gains of business or profession”, the deduction of Head Office Expenditure is restricted either to an amount equal to 5% of the adjusted total income or the amount of Head Office Expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India, whichever is less. The term “adjusted total income” has been defined in the Explanation to section 44C as follows: -

From the plain reading of the above Explanation, it is evident that “adjusted total income” would mean total income without giving effect to the specified deductions as mentioned in the Explanation. We find that deduction under section 36(1)(viia) has not been expressly excluded for computation of “adjusted total income” as per the Explanation to section 44C of the Act. Thus, we are of the considered view that the effect of the deduction under section 36(1)(viia) has to be given prior to computation of deduction under section 44C of the Act. Accordingly, we do not find any infirmity in the findings of the learned CIT(A) on this issue, and the same are upheld. Accordingly, Ground No. 3 raised in Revenue’s appeal is dismissed.

In the result, the appeal by the Revenue is partly allowed.

The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, the assessee incurred an expenditure amounting to USD 133,249 on Croydon Data Processing Centre. The assessee used this facility for its business purposes. Since the cost incurred at this centre was allocated to various branches of the assessee globally on a proportionate basis, the cost apportioned to the Indian branch was claimed as a deduction while computing its profits. The AO, vide order passed under section 143(3) of the Act, treated the expenditure to be in the nature of Royalty for the usage of Croydon Data Processing Centre by the Indian branch. Since the assessee did not deduct TDS, the AO held that the assessee cannot be granted any deduction for this expenditure under section 40(a)(i) of the Act.

The learned CIT(A), vide impugned order, upheld the disallowance made by the AO by treating the expenditure as Royalty taxable in the hands of the overseas branch, placing reliance upon the decision of the Coordinate Bench of the Tribunal in M/s Asia Satellite Telecommunications Co. Ltd. vs. DCIT in ITA No. 166/Del/2001. The learned CIT(A) held that section 195 of the Act requires deduction of tax at source not only at the payment stage but also at the incurrence of liability. The relevant findings of the learned CIT(A), on this issue, are reproduced as follows: - “5.5 Therefore, firstly it will have to be seen whether the payment of Rs. 5,81,06,542/- to Croydon data center is liable to tax as "royalty" or not. The A.O. has drawn a parallel between the case of the appellant and the ruling in P. No. 30 of 1999(238 ITR 296) decided by the Hon'ble Authority for Advance Ruling. The facts of that case were that the applicant assessee "Y" was a company formed and incorporated in USA and belonged to the ABC Group of companies operating all over the world and was engaged in the credit card and travel business. To keep track of expenses incurred on such cards, cheques etc. it had a global CPU in USA. It had installed several IBM main frames and & 4154/Mum/2004 (A.Y. 2000-01) 25

We have considered the submissions of both sides and perused the material available on record. The assessee in its London branch has set up a global banking system data centre, known as Croydon Data Processing Centre, which supports, inter alia, the entire wholesale banking and capital market business of the assessee in India. As per the assessee, the cost incurred at this centre was allocated to various branches of the assessee globally on a proportionate basis by applying appropriate allocation keys. Accordingly, while computing the profits of the Indian branch, the proportionate cost was claimed as a deduction, even though the said cost was neither accounted for in the Indian financial statements nor paid to the overseas branch. As per the assessee, it is a well-settled principle that transactions between one branch and another branch, or between a branch and the Head Office, do not give rise to income or the incurring of expenditure. Accordingly, as per the assessee, even though the cost apportioned to the Indian branch towards Croydon Data Processing Centre is claimed as a deduction while computing the profits of the Indian branch, the same is not taxable in the hands of the assessee.

It is evident from the record that the lower authorities disagreed with the submissions of the assessee and, by treating the expenditure as Royalty, taxable in the hands of the assessee, disallowed the deduction under section 40(a)(i) of the Act since the tax was not deducted at source.

We find that the Coordinate Bench of the Tribunal in Shinhan Bank vs. Dy.DIT (IT), reported in [2022] 139 taxmann.com 563 (Mumbai), held that the fiction of hypothetical independence has a limited purpose of profits attributable to the Permanent Establishment, and the same cannot be used for the computation of profits of the General Enterprise. It was held that the fiction of hypothetical independence comes into play for the limited purpose of computing profits attributable to the Permanent Establishment only and is set out under the specified provisions, dealing with the computation of such profits in the tax treaties and there is nothing, therefore, to warrant or justify the application of the same principle in the computation of profits of the General Enterprise. Thus, it was held that the fiction of hypothetical independence is for the limited purpose of profit attribution to the Permanent Establishment. Therefore, respectfully following the aforesaid decision rendered by the Coordinate Bench of the Tribunal, we do not find any merit in the findings of the learned CIT(A) that once an expenditure has been claimed as a deduction, the assessee cannot turn around and deny the taxability of the income in its hands. In the present case, it is further pertinent to note that the deduction of the expenditure claimed by the assessee was denied as the assessee failed to deduct tax under section 195 of the Act. From the plain reading of the provisions of section 195 of the Act, we find that the liability to deduct tax on payment to a non-resident arises at the time of credit of such income to the account of the payee or at the time of payment thereof by the modes prescribed, whichever is earlier. However, in the present case, it is an undisputed fact that the amount was neither credited nor paid by the & 4154/Mum/2004 (A.Y. 2000-01) 28 assessee’s Indian branch to the overseas branch in respect of the cost allocated to the assessee of Croydon Data Processing Centre. Thus, without going into the question whether the cost was in the nature of Royalty income, we do not find any merit in the disallowance made under section 40(a)(i) of the Act, and the same is deleted. As a result, Ground No. 1 raised in assessee’s appeal is allowed.

Ground No. 2, raised in assessee’s appeal, pertains to the applicability of the provisions of section 50B of the Act in respect of the sale of Retail Banking Business by the assessee to M/s ABN Amro Bank N.V.

The brief facts of the case, pertaining to this issue, as emanating from the record are: During the assessment proceedings, from the perusal of the return filed by the assessee, it was observed that the assessee, during the year under consideration, sold off a certain part of its business to M/s ABN Amro Bank N.V. and received the following payments: (i) Sum of Rs. 384,864,770/- being the excess of the book value of assets over the book value of liabilities. (ii) Sum of Rs. 541,312,500/-, i.e., US $ 12.5 million, by way of purchase premium. (iii) Sum of Rs. 324,787,500/-, i.e., US $ 7.5 million, on account of non-compete agreement.

The assessee offered the consideration received on account of the non- compete agreement for taxation @ 48%. Further, the purchase premium amounting to Rs. 54,13,12,500/- was offered to tax by way of long-term & 4154/Mum/2004 (A.Y. 2000-01) 29 capital gains. Accordingly, the assessee was asked to submit the details regarding the sale transaction. In response, the assessee submitted that the bank was engaged in carrying on Retail Banking Business in India through various banking centres and retail offices. It was further submitted that this segment of the business comprised the activity of granting automobile, equity, and real estate loans, etc., including providing ATM services. It was clarified that the assets and liabilities of this segment of business were collectively referred to as the Retail Banking Business, which forms part of the assessee’s banking activity in India. The assessee submitted that vide agreement dated 19/05/1999, it was agreed to sell, assign, and transfer the Retail Banking Business to ABN Amro Bank N.V. for a consideration equal to the book value of the asset, less the book value of the liabilities, along with a sum of USD 12.5 million by way of purchase premium. In addition, the two banks entered into an agreement requiring the seller not to compete for a period of two years, for which payment was separately agreed. As per the assessee, under the agreement dated 19/05/1999, it has received the consideration based on the item-wise value of its several assets and liabilities, and accordingly, the assessee bank did not consider the capital gains arising to it on the basis of the transfer of the business as a whole. The assessee submitted that it has considered the capital gains arising to it on account of several assets as short- term or long-term capital gains based on the nature of the asset and the period for which it was held.

The AO, vide assessment order passed under section 143(3) of the Act, disagreed with the submissions of the assessee that the provisions of section & 4154/Mum/2004 (A.Y. 2000-01) 30 50B of the Act are not applicable to the sale transaction, on the basis that the sale transaction is in the nature of “Slump Sale”. The AO, by referring to the various covenants of the agreement entered into between the assessee and M/s. ABN Amro Bank N.V. held that the capital gains computed by the assessee item-wise are incorrect. The AO held that the lump sum amounting to USD 12.5 million also strikes down the assessee’s claim that the sale of its Retail Banking Business is not in the nature of a Slump Sale. Accordingly, the AO held that the sale transaction is in the nature of a Slump Sale and the provisions of section 50B of the Act are applicable. The AO computed long- term capital gains of Rs. 92,61,77,470. The relevant findings of the AO, vide assessment order, are reproduced as follows: - “6.3 It is seen from the perusal of the agreement, dated 19-05-1999, filed by the assessee vide reply dated 24-03-2003 that M/s. ABN Amro Bank had agreed to purchase from the assessee the Business and certain assets and certain deposits and other liabilities, and necessary to the operation of the business. It is further seen from the perusal of sec. 2.1, Article Il of the agreement dated 19-05-1999 that the seller had agreed to sell to the purchaser free of any encumbrances all of seller's rights, title and interest in the Business and the following assets associated with the Business (that expressly excluding the Excluded Assets): i) The Loans ii) The Security Interest iii) The Sale Coins and Currency iv) Subject as provided below in the sec.2.1, the Contracts (v) The Accounts Receivable (vi) The Property Leases Identified of the part 1 of schedule 6 (vii) Subject as provided below in the sec.2.1, the Equipment Leases (viii) Subject as provided below in the sec.2.1, the Equipment (ix) Subject as provided below in the sec.2.1, the Fixtures and Fittings, (x) The Records (xi) The Insurance Proceeds referred to in sec.8.9 6.4 It is further seen from the perusal of Article 3 titled 'Consideration", that sec.3.1 lays down that the aggregate consideration for the purchase of the business and sale of the assets, pursuant therewith, shall be a purchase price equal to the sum of the following : i) Excess of Book Value of the Sale Assets over the Book Value of the Assumed liabilities, and & 4154/Mum/2004 (A.Y. 2000-01) 31

The learned CIT(A), vide impugned order, upheld the action of the AO in treating the transaction of sale of Retail Banking Business as a Slump Sale and applying the provisions of section 50B of the Act. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, vide the agreement dated 19/05/1999 entered into between the assessee and ABN Amro Bank N.V., the assessee bank agreed to sell, assign, and transfer its Retail Banking Business to ABN Amro Bank N.V. As per the assessee, the Retail Banking Business comprised the activity of granting automobile, equity and real estate loans, etc., including providing ATM services. As per the assessee, under this agreement, it received the consideration based on the item-wise value of its several assets and liabilities and, accordingly, the capital gains were computed with respect to each asset on the basis of the nature of the asset and the period for which it was held. The AO as well as the learned CIT(A) disagreed with the submissions of the assessee and held that the sale transaction is in the nature of a Slump Sale, and thus the capital gains are to be computed as per the provisions of section 50B of the Act. The lower authorities also rejected the contention of the assessee regarding the item-wise sale of assets.

Before proceeding further, it is pertinent to note the provisions of the Act which are relevant for deciding this issue. Section 2(42C) of the Act defines the term “slump sale” as follows: - “(42C ) "slump sale" means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

Thus, “slump sale” means transfer of one or more undertakings for a lump sum consideration without values being assigned to the individual assets and the liabilities.

The term “undertaking” has been defined in Explanation-1 to section 2(19AA) of the Act as follows: - “Explanation 1.—For the purposes of this clause, "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.”

Therefore, from the combined reading of the aforesaid provisions, it is evident that even the transfer of any part of the undertaking for a lump sum consideration without value being assigned to the individual assets and liabilities is considered as a Slump Sale under the Act. At this stage, it is pertinent to note that the term “undertaking” does not include individual assets or liabilities or any combination thereof not constituting a business activity.

From the perusal of the Purchase and Assumption Agreement dated 19/05/1999 entered into between the assessee and ABN AMRO Bank N.V., whereby the assessee transferred the Retail Banking Business to ABN AMRO Bank N.V., forming part of the paper book from pages 1–124, we find that the assessee agreed to sell, assign and transfer free from all encumbrances its & 4154/Mum/2004 (A.Y. 2000-01) 34 rights, title and interest in the business and the following assets associated with the business, as per section 2.1 of the agreement: “(1) the loans; (2) the Security Interests; (3) the Sale Coins and Currency; (4) subject as provided below in this Section 2.1, the Contracts; (5) the Accounts Receivable; (6) the Property Leases identified in Part I of Schedule 6; (7) subject as provided below in this Section 2.1, the Equipment Leases; (8) subject as provided below in this Section 2.I. the Equipment; (9) subject as provided below in this Section 2.1, the Fixtures and Fittings; (10) the Records; and”

The term “business” of the assessee, as per Schedule 1, includes the following: - “BUSINESS The retail banking business carried on by Seller at or through the Banking Centers and Retail Office in India, principally comprising. (a) automobile "liquity" and real estate loans and credit lines, overdraft lines against time deposits, guarantees and other loans and lines of credit attributable to the retail banking business; (b) current, savings and time deposit accounts, and temporary overdrafts on such accounts; and (c) related banking services (including ATM services)”.

Thus, the Retail Banking Business carried out by the assessee at or through the banking centres and retail offices in India was transferred to ABN AMRO Bank N.V. We find that section 3.1 of the agreement contains the consideration for the transaction as follows: - “i) Excess of Book Value of the Sale Assets over the Book Value of the Assumed liabilities, and ii) A Purchase Premium of USD 12.5 million”

Thus, the difference between the book value of the assets and liabilities as per the assessee’s local statutory general ledger was the first component & 4154/Mum/2004 (A.Y. 2000-01) 35 of the purchase consideration apart from the lump sum purchase premium of USD 12.5 million.

During the hearing, the learned Senior Counsel submitted that the agreement explicitly lists out the individual assets to be transferred under section 2.1 of the agreement, which includes loans, accounts receivable and other specified items. It was further submitted that section 2.3 of the agreement sets out the individual liabilities the purchaser will assume. By referring to section 2.2 and Schedule 11 of the agreement, it was submitted that certain assets have been excluded from being transferred or sold. As regards the break-up value assigned to individual assets and liabilities, our attention was drawn to Exhibit A of the agreement, which reads as follows: - Cash due Purchaser for: US$ Rupees Deposit Liabilities (including accrued NIL 7,819,448,689.83 but unpaid or uncredited interest) Liabilities in respect of Non- NIL NIL discretionary Trust Accounts : BAMS Payables : NIL NIL Other Assumed Liabilities NIL 18,065,374.94 Putback Items: NIL NIL Pro rata taxes and expenses, under NIL NIL Section 2.7 (if any) Other payments due under this NIL NIL Agreement ( if any) TOTAL CASH DUE PURCHASER NIL 7,837,514,064.77 Cash due Seller for: US$ Rupees Purchase Premium 12,500,000 NIL Non-Compete Payment 7,500,000 NIL Loan (including accrued but unpaid NIL 7,981,853,063.3 or uncredited interest) Security Interests NIL NIL Sale Coins & Currency NIL 134,655,771.99 Contracts NIL NIL Accounts Receivable NIL NIL Sale Subsidiaries Shares NIL NIL Property Leases NIL NIL Equipment Leases NIL NIL Fixed Assets NIL 105,870,000 Records NIL NIL Trust Assets and Liabilities NIL NIL & 4154/Mum/2004 (A.Y. 2000-01) 36

Thus, it was submitted that what was transferred were certain specified assets of the undertaking, and the consideration was received for the individual items of assets and liabilities. Therefore, it was submitted that the sale of Retail Banking Business is not in the nature of a Slump Sale falling within the purview of section 2(42C) and, accordingly, the provisions of section 50B of the Act are not applicable.

During the hearing, a specific query was raised about whether the business was transferred as a going concern. In response thereto, it was submitted that the transfer of the business as a going concern would not impact the characterisation of the concern as an itemised sale or a Slump Sale, as the same is dependent on the manner in which the constituent of the assets transferred is determined.

Having considered the submissions of both sides and perused the material available on record, at the outset, from the break-up value assigned to assets and liabilities, as per Exhibit A of the agreement, noted in the foregoing paragraphs, we find that separate consideration is not placed for each and every item comprising the assets and liabilities and the value has been assigned to category of assets and liabilities. Therefore, we do not find any merit in the submissions of the assessee that values were assigned to the & 4154/Mum/2004 (A.Y. 2000-01) 37 individual items of assets and liabilities. Further, no valuation report in support of the details provided in Exhibit A of the agreement is placed on record. The very fact that the assessee received a lump sum purchase premium of USD 12.5 million over and above the excess book value of the sale of assets over the book value of liabilities goes on to prove that the consideration received by the assessee was not on the basis of values being assigned to the individual assets and liabilities.

At this stage, it is relevant to reiterate that the term “undertaking” does not include individual assets or liabilities or any combination thereof not constituting a business activity. In other words, if individual assets or liabilities or any combination thereof constitute a business activity, the same can be considered as an “undertaking” for the purpose of Explanation-1 to section 2(19AA) of the Act. In the present case, as per the assessee’s own admission, the Retail Banking Business was transferred to ABN AMRO Bank on an “as-is- where-is” basis. This aspect is relevant as the assessee claimed that not all assets and liabilities were transferred, and some of them were excluded from being transferred. Thus, the fact that the Retail Banking Business of the assessee was transferred to ABN AMRO Bank N.V. supports the contention of the Revenue that an “undertaking” was transferred, and the term also includes “any part of the undertaking”. Accordingly, in the present case, in the absence of an itemised sale of individual assets and liabilities, we affirm the findings of the lower authorities that the sale transaction was in the nature of a Slump Sale as per the provisions of section 2(42C) of the Act. Accordingly, the capital gains of the assessee are to be computed as per section 50B of the Act after & 4154/Mum/2004 (A.Y. 2000-01) 38 taking into consideration the computation of the “net worth” as per the Audit Report in Form 3CEA. We find that in this regard, the learned CIT(A) directed the AO to consider and verify the claim of the assessee on deduction of “net worth” for computing capital gains under section 50B of the Act. Accordingly, we do not find any infirmity in the findings of the learned CIT(A) on this issue, and the same are upheld. As a result, Ground No.2 raised in assessee’s appeal is dismissed.

In the result, the appeal by the assessee is partly allowed.

To sum up, the appeal by the Revenue and the cross appeal by the assessee are partly allowed. Order pronounced in the open Court on 18/03/2026