M/S. BANK OF AMERICAN , N.A,MUMBAI vs. THE JT DIT (I.T)3, MUMBAI

ITA 4154/MUM/2004Status: DisposedITAT Mumbai18 March 2026AY 2000-200138 pages
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What did the Tribunal hold?

The Tribunal held that the learned CIT(A) correctly upheld the view that only net income out of interest earned on tax-free bonds and interest from lending/investment in infrastructure projects can be allowed as exemption under sections 10(15)(iv)(h) and 10(23G) of the Act, due to the specific wording in the opening sentence of section 10. However, the Tribunal disagreed with the AO's formula for working out net income. It found that the CIT(A) correctly considered the position of interest-free funds available with the assessee and the position of lending to infrastructure projects and investment in tax-free bonds. The Tribunal noted that in the year of making such lending and investment, the assessee had sufficient interest-free funds. Therefore, on the basis that there is no nexus between funds for lending/investment and interest-bearing funds, and sufficient interest-free funds were available, the Tribunal upheld the deletion of the disallowance of part interest made by the AO. The disallowance of Rs.14,63,82,201 was deleted.

What were the facts?

The assessee, Bank of America N.A., is a commercial bank with its head office in the USA and five branches in India. The Revenue is the Deputy Director of Income Tax (International Taxation). The assessment year in question is 2000-01. The appeals are against an order dated 19/03/2004 passed by the Commissioner of Income Tax (Appeals)-XXXI, Mumbai, under section 250 of the Income Tax Act, 1961. The assessee claimed exemption for interest income earned on tax-free bonds (Rs. 45 lakh) under section 10(15) and interest income from loans for infrastructure projects (Rs. 14,18,82,201) under section 10(23G). The Assessing Officer (AO) disallowed expenditure incurred in earning this income, restricting the exemption to net income and disallowing Rs. 14,63,82,201. The CIT(A) deleted this disallowance, holding that the assessee had sufficient interest-free funds to finance these investments.

What were the issues?

1. Whether, on the facts and in law, the learned CIT(A) erred in deleting the addition of Rs.14,63,82,201/- on account of expenditure incurred in earning income claimed exempt under sections 10(15) and 10(23G) of the Income Tax Act, 1961. Assessee's contention: The assessee argued that it is the gross receipt which is exempt under sections 10(15) and 10(23G) and that it had not incurred any direct expenditure in earning this income. It further contended that it had sufficient interest-free funds for making investments for earning tax-free income. Revenue's contention: The Revenue contended that only net income is exempt under section 10, not gross receipts, and that allowing exemption on gross interest would amount to deducting expenditure twice. It relied on CBDT's Circular No. 780 and section 14A, arguing no deduction can be allowed for expenditure incurred in earning exempt income. The Revenue also argued that the assessee failed to establish a direct correlation between available funds and investments.

Which sections of the Income-tax Act were involved?

Section 10(15),Section 10(23G),Section 37(1),Section 44C,Section 36(1)(viia),Section 14A,Section 250,Section 2(42C),Section 50B,Section 2(19AA)

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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI

Before: SHRI OM PRAKASH KANTSHRI SANDEEP SINGH KARHAIL

For Appellant: Shri Percy Pardiwala, Ms. Vasanti Patel
For Respondent: Shri Krishna Kumar, Sr.DR
Hearing: 12/01/2026

Heard together (2 matters)

ITA No.4090/MUM/2004
ITA No.4154/MUM/2004

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

PER SANDEEP SINGH KARHAIL, J.M.

The present cross appeals have been filed against the impugned order dated 19/03/2004, passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals)-XXXI, Mumbai ["learned CIT(A)"], fo

The order continues below.

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