BANK OF BAHRAIN & KUWAIT B.S.C,MUMBAI vs. ADDL DIT (IT) 3, MUMBAI

The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the AO restored.

Briefly stated, the assessee which is a commercial bank having its Head office at Bahrain is involved in normal banking activities including financing of foreign trade and foreign exchange transactions. The assessee has its presence in India by way of two branches at Mumbai and Hyderabad. The assessee had filed its return of income for A.Y. 2003-04 on 01.12.2003, declaring its total income of Rs.5,42,78,327/-. The return of income filed by the assessee was P a g e | 4 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2).

The A.O while framing the assessment inter alia made the following additions/disallowances :

The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. A.R submitted that the issue pertaining to the addition of Rs.1,98,59,913/- that was made by the A.O in respect of the interest on securities, bonds debentures and zero coupon bonds on the basis of entries in the book of account, which had though accrued but was not due on 31st March, 2003, was squarely covered in favour of the assessee by the order passed by the Tribunal in its own case for A.Y. 2002-03 viz. ADIT(IT)-3(2), Mumbai Vs. Bank of Bahrain & Kuwait, dated 28.01.2011.(copy placed on record). Apart there from, it was submitted by the ld. A.R that the said issue was also covered in favour

Per contra, the ld. Departmental Representative (for short „D.R‟) fairly admitted that the issue pertaining to the addition of Rs. 1,98,59,913/- towards interest on securities, bonds, debentures and zero coupon bonds, which had accrued but was not due on 31st March, 2003, was squarely covered in favour of the assessee by the order of the Tribunal in the assesses own case for A.Y. 2002-03. Also, it was submitted by him that the issue as regards the allowing of the deduction under Sec.44C in respect of Head Office expenses/General Administrative expenses and NRI Desk expenses amounting to Rs.44,70,936/- and Rs.2,13,71,243/-, respectively, was also covered by the order passed by the aforesaid order of the Tribunal in the case of the assessee for A.Y. 2002-03. As regards the deletion by the CIT(A) of an addition of Rs. 61,21,073/- the ld. D.R relied on the assessment order.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record and also the judicial pronouncements relied upon by them. As is discernible from the assessment order, it was observed by the A.O that though the assessee was recognising its income from interest on securities on day-to-day accrual basis, however, in its return of income it had claimed that interest which had not became “due” for payment during the relevant preceding year could not be included in its total income. On being queried, it was submitted by the P a g e | 7 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) assessee that day-to-day accrual of interest on government securities, debentures and bonds were to be taxed only when such interest/dividend became due and payable. As observed by us hereinabove, the A.O not finding favour with the aforesaid explanation of the assessee made an addition of the interest not being due amounting to Rs.1,98,59,913/-.

As concurred by the authorized representatives for both the parties, we find that the issue pertaining to chargeability to tax on interest on securities, bonds, debentures and zero coupon bonds, which had accrued but was not due, is covered by the judgment of the Hon’ble High Court of Bombay in the case of DIT Vs. Credit Suisse First Boston (Cyprus) Ltd. (2013) 351 ITR 323 (Bom). In the said case, it was observed by the Hon‟ble High Court that when an instrument or an agreement stipulates interest to be payable at a specified date, interest does not accrue to the holder thereof on any date prior thereto, and the same would accrue or arise only on the date specified in the instrument. Apart there from, we find that as observed by the CIT(A), the aforesaid issue is also covered by the order passed by the Tribunal in the assessee own case for A.Y. 1996-97 in ITA No. 198/Mum/2000. We find that the CIT(A) following the view taken by the Tribunal in the assesses own case for A.Y. 1996-97, had observed as under: “3.2 I have considered the arguments of the A.R and also seen the facts. The Hon'ble I.T.A.T. have considered the issue for A.Y.1996-97 in the appellant's own case in their order dt. 27.02,2004 in ITA.No.198/M/2000. The Hon'ble I.T.A.T. has held that interest in respect of government securities accrues only on the specified coupon date and not on day-to- day basis. The Hon'ble I.T.A.T. has observed as under in para 4 of the order. “4. The Revenue is in appeal before us to contend that the decision of the CIT(Appeals) is erroneous. The Id. Counsel for the assessee on the other hand has filed copies of the order of the Mumbai "C" Bench of the Tribunal dated 23.12.2003 in for the A, Y. 1989-90 in the case of Union Bank of India vs. DCIT and submitted the identical issue has been P a g e | 8 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) decided in the case of a Bank and the should be followed by us. We have carefully perused the order of the Tribunal cited above in that case also, the issue was identical namely, whether in the case of government Securities, interest accrues only on the coupon dates and not on day to day basis in coming to this conclusion, the Tribunal placed reliance on the judgment of the Lahore High Court in Ha veil Shah Sardarilal v. CIT, Punjab (4 ITR 297) the Full Bench judgment of the Patna High Court in Ranjit Prasad Singh v. CIT Bihar & Orissa ( 4 ITC 264) and the Karnataka High Court judgment in Addl.CIT / Mysore v. The Vijaya Bank Ltd. Mangalore (1976) Tax LR 524. It was also noticed by the Tribunal that the contention advanced on behalf of the Revenue before the Tribunal in that case was totally contradictory to the contention advanced by the Revenue before the Karnataka High Court in the case of Vijaya Bank (Supra). Before the Tribunal the department had placed reliance on the judgment of the Hon'ble Bombay High Court in the case of American Express International Banking Corporation v CIT (258 ITR 602) and Taparia Tools Ltd. v. ]CIT ( 260 ITR 102). These two judgments have been considered by the Tribunal in paragraphs 14 to 17 of the order cited above and it was held that these judgments are not applicable to the facts of Union Bank's case. In paragraphs 20 & 21 to the Tribunal has also considered the objection of the department that the assessee cannot credit the interest on Govt. securities in the profit and loss account on day to day basis but contend that for purposes of income-tax only the interest that accrued on the coupon dates can be assessed. The Tribunal noticed the judgment of the Supreme Court in the case of another Bank, namely, United Commercial Bank (240 ITR 355). In this case the Supreme Court reversed the judgment of the Calcutta High Court which held that the assessee cannot prepare the computation of its income for income-tax purposes in a manner different from the method under which it keeps accounts. Applying the judgment of the Supreme Court, the Tribunal held that Union Bank of India cannot be prevented from urging in the return that the interest on Govt. securities accrued only on the specified coupon dates, notwithstanding that credit has been taken in the profit and loss account for the interest on day to day basis. Thus, the issue has been decided in favour of the view that the interest accrues only on the specified coupon dates and not on day to day basis. Since the facts of the present case are identical, following the order of the Tribunal in the case of Union Bank of India (supra) we uphold the vie taken by the CIT(Appeals) and dismiss the appeal.” Following the above order, ground of appeal No. 1 is allowed and addition of Rs.1,98,59,913/- is deleted.” On the basis of our aforesaid observations, we are of the considered view that the CIT(A) had rightly vacated the addition of interest income of Rs.1,98,59,913/- made by the A.O. Accordingly, finding no infirmity on the order of the CIT(A) in context of the aforesaid issue under consideration , we uphold the same. The Ground of appeal No. 1 raised by the revenue is dismissed.

On appeal, it was observed by the CIT(A) that as the claim of deduction under Sec.44C in respect of the H.O expenses was claimed by the assessee at Rs.44,70,936/-, therefore, the reduction of the allocated expenses of Rs.70,95,000/- as claimed by the assessee to be pertaining to the Indian Branch to an amount of Rs.47,31,406/-by the TPO would not be of any relevance at all. Accordingly, the CIT(A) observed that deduction as regards the H.O expenses of Rs.44,70,936/- claimed by the assessee was in order.

As regards the NRI Desk expenses, the CIT(A) observed that the allocation of the said expenses as claimed by the assessee as against that held by the TPO was as under:

Aggrieved, the revenue has carried the matter in appeal before us. As concurred by authorized representatives for both parties, the P a g e | 12 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2)

We find that the facts and the issue involved in the appeal for the year under consideration before us remains the same as was there in the case of the assessee for A.Y. 2002-03. In fact, the said factual position had duly been admitted by the authorised representatives for both the parties. Accordingly, we herein proceed with and adjudicate the issue as regards the allowability of the expenses in the hands of the assessee by following the view taken by the Tribunal in the case of the assessee for A.Y. 2002-03. As is discernible from the CIT(A) order,

Next are the allocated staff costs incurred by the OBD and various other head office support centres given at Serial No. 3(a) to (f) of the table aggregating to Bahraini Dinars: 35,035 and allocated General and Administration costs mentioned at Serial No. 4(a) to (d) of the table at Bahraini Dinar: 33,751. We find that in respect of the aforesaid expenses there is a two fold controversy viz. (i) the basis of P a g e | 15 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) allocation of such expenses; and (ii) the inclusion or otherwise of such expenses under Sec.44C. As is discernible from the aforesaid table, the TPO had accepted the allocation of the aforesaid expenses at Serial No. 3 & 4 of the said table except for three items viz. Serial No. 3(a) - allocated expenses of the office of the head of OBD Bahraini Dinar 12,867; Serial No. 4(c) – allocated advertising expenses: Bahraini Dinar 3,395; and Serial No. 4(d) other allocated expenses : Bahraini Dinar 6,243. Accordingly, we find that the allocation of the other expenses as claimed by the assessee had been accepted by the TPO. As regards the allowability of the expenses at Serial No. 3 and Serial No. 4, we find that the Tribunal while disposing off the appeal in the assesses own case for A.Y 2002-03, had observed, that the items of head office expenses mentioned hereinabove viz. under Serial No.3 (a) to (f) and Serial No. 4 (a) to (d) can be considered only under Sec.44C and there is no scope for granting separate deduction as regards the same under the general provisions of the Act. Accordingly, finding ourselves to be in agreement with the view taken by the Tribunal, we respectfully follow the same and herein direct that the items of head office expenses mentioned in the above table under Serial No. 3 (a) to (f) and Serial No.4 (a) to (d) be considered only under Sec.44C. In terms of our aforesaid observations, we set aside the order of the CIT(A).

We shall now advert to the aspect as to whether the items of head office expenses mentioned in the above table under Serial No.3(a) to (f) and Serial No. 4 have been actually incurred by the head office for the Indian branch. In our considered view the acceptance of allocation by TPO in respect of items, other than those at Serial No. 3 (a), 4(c) and 4 (d), meant that the said expenses were incurred for the Indian branches. We find that the controversy as regards the P a g e | 16 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) allocation of expenses between the assessee and the TPO had arisen only in respect of three items viz. Serial No. 3(a) - Office of the head of Overseas Business Division (OBD) amounting to Bahraini Dinar 12,867, Serial No. 4(c): advertising amounting to Bahraini Dinar 3,395; and Serial No. 4 (d) other expenses amounting to Bahraini Dinar 6,243. A perusal of the orders of the lower authorities reveals, that as the assessee could not produce any evidence to support allocation of the expenses which were claimed to have been incurred by OBD towards staff costs, therefore, the same for the said reason were disallowed. It was the claim of the assessee before the CIT(A) that the expenses incurred by the OBD towards staff cost was allocated on the basis of management experience after considering the time devoted to NRI Desks and other divisions. The CIT(A) finding favour with the aforesaid claim of the assessee had concluded that the staff expenses of OBD were also required to be allocated to the NRI Desks. Accordingly, the CIT(A) observed that the TPO had incorrectly disallowed the claim of allocation of expenses of Bahraini Dinar 12,867 pertaining to the staff costs incurred by the office of the head of OBD. As regards the advertisement expenses of Bahraini Dinar 3,395 and other general administration costs of the H.O of Bahraini Dinar 6,243, the TPO observed that as the assessee had not submitted any justification as regards allocation of the same, therefore, they were not required to be allocated. Accordingly, the CIT(A) was not persuaded to subscribe to the aforesaid view of the TPO and observed, that advertisement which was brought out by the H.O also included expenses on the advertising resulting to generation of NRI deposits and NRI business. Further, it was observed by him that as the other general and administration costs of Bahraini Dinar 6,243 were required to be incurred for the purpose of NRI Desks, therefore, the said expenses were also required to be allocated. On the basis of his

We have given a thoughtful consideration to the aforesaid observation of the CIT(A) and are unable to persuade ourselves to accept the same. Admittedly, the assessee could not produce any evidence to justify the allocation of the expenses of Bahraini Dinar 12,867 claimed by the assessee to have been incurred by the OBD towards staff costs for the NRI desks, therefore, the same were disallowed by the A.O/TPO. In our considered view, if there is no evidence for incurring expenditure by the assessee, the deduction as regards the same cannot be allowed. In order to verify the veracity of the aforesaid allocation of expenses pertaining to the allocation of staff costs as regards the office of the head of OBD amounting to Bahraini Dinar 12,867 as claimed by the assessee, we set aside the issue to the file of the A.O, with a direction to verify as to whether the aforesaid amount of Bahraini Dinar 12,867 was remitted by the assessee to the head office or not. In case the assessee is able to demonstrate that the remittance of the said amounts was made either during the year itself or in the succeeding year, then the inclusion of such amount in the overall limit for Sec. 44C will be justified. Further, if the assessee fails to conclusively prove that the amount of Bahraini Dinar 12,867 was paid or adjusted in any manner with the head office, then the said

We shall now advert to the remaining two items of expenses the allocation of which have not been allowed by the TPO, viz. (i). advertising expenses : Bahraini Dinar 3,395; and (ii). other expenses: Bahraini Dinar 6,243. As the assessee had failed to furnish any justification for allocation of the advertising expenses of Bahraini Dinar 3,395 and other general administration costs of Bahraini Dinar 6,243 towards the Indian branch of the assessee, therefore, the same were disallowed by the A.O/TPO. The fact that such expenses were incurred by the head office in relation to NRI Desks had however not been controverted by the TPO. In our considered view once it is established that expenses were actually incurred for the business purposes of the assessee, then there would be no need to justify the allocation of such cost. Accordingly, we are of the considered view that the aforesaid two items of allocated head office expenses are liable to be included in the overall limit of Sec.44C. The order of the CIT(A) is upheld to the said extent.

To sum up, the direct and exclusive NRI Desk expenses incurred by the head office („A‟), being items at Serial No. 1 & 2 of the table extracted hereinabove, are to be allowed in full as per the general provisions of the Act and would not be fettered by Sec.44C; allocated/shared/apportioned staff costs incurred by OBD and various other head office support centres to NRI Desks („B‟) being the items at Serial No. 3 & 4 of the aforesaid table, subject to verification of item at Serial No. 3(a) in terms of our aforesaid directions, and also the other head office expenses are to be considered within the purview

Resultantly, the appeal of the revenue is partly allowed in terms of our aforesaid observations.

We shall now advert to the appeal of the assessee for A.Y 2008- 09. The present appeal filed by the assessee is directed against the order passed by the CIT(A)-10, Mumbai, dated 31.10.2013, which in turn arises from the order passed by the A.O under Sec.144C(3) r.w.s 143(3) of Income Tax Act, 1961 dated 02.02.2012 for A.Y. 2008-09. The assessee has assailed the order of the CIT(A) by raising before us the following grounds of appeal :

Leave to add, alter and/or supplement grounds of appeal.

Briefly stated, the assessee had filed its return of income for A.Y. 2008-09 on 29.09.2008, declaring a total loss of Rs.4,86,82,039/- and „book profit‟ under Sec.115JB of Rs.13,31,88,214/-. Subsequently, the assessee filed a revised return of income declaring a total loss of Rs.4,86,82,039/- and a „book loss‟ under Sec.115JB of Rs.2,88,15,468/-. Thereafter, the case of the assessee was selected for scrutiny assessment under Sec. 143(2).

In the course of the assessment proceedings the A.O made a reference to the Transfer Pricing Officer (for short „TPO‟) for computation of the „Arms Length Price‟ (for short „ALP‟) of the International Transactions carried out by the assessee with its Associate Enterprise (for short „AE‟) during the year under consideration. The TPO in his order passed under Sec.92CA(3), dated 29.07.2011 made a total adjustment of Rs.2,69,73,078/- viz. (i) adjustments on account of NRI Desk expenses: Rs.2,16,96,895/-; (ii) adjustment on account of interest amount received at below the benchmark rates on the funds placed with the Head Office: Rs.9,668;

The A.O while framing the assessment restricted the claim of the assessee in respect of expenses incurred towards NRI/Other expenses at the head office which were in the nature of general administrative expenses as per the limits prescribed under Sec.44C of the Act. Thereafter, the A.O after making the TP adjustments of Rs.2,69,73,078/- as suggested by the TPO assessed the loss in the hands of the assessee at Rs.2,17,08,961/-.

Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after necessary deliberations partly allowed the appeal of the assessee.

The assessee being aggrieved with the order passed by the CIT(A) has carried the matter in appeal before us. It was submitted by the ld. Authorized Representative (for short „A.R‟) for the assessee, that though the assessee had neither debited the head office overheads in its „books of accounts‟ nor claimed the same as an expense in its return of income, however, the lower authorities had erroneously added/sustained the addition of Rs.52,66,515/- as regards the ALP of the H.O overheads as determined by the TPO.

Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. As regards the multiple contentions raised by the assessee before us, viz. (i) that, the CIT(A) was in error in holding that the amounts, other than the amounts spent on „direct staff costs‟ and P a g e | 22 & 647/Mum/2007 & AYs. 2003-04 & 2008-09 Bank of Bahrain & Kuwait Vs. Asst. Director of Income Tax (IT)-3(2) „transfer and communication‟ of the NRI Desks were governed by the provisions of Sec.44C of the Act; (ii) that, the CIT(A) had failed to appreciate that the other costs were directly attributable to and connected with the business of the Indian branch and were wholly and exclusively incurred for the Indian branch, therefore, Sec.44C was not applicable; and (iii) that, the CIT(A) failed to appreciate that the entire cost including other costs, as certified by an independent firm of chartered accountants as having been incurred by the head office for and on behalf of the Indian branches of the assessee, we find that the said contentions of the assessee are squarely covered by the order passed by the Tribunal in the assesses own case for A.Y. 2002-03 i.e ADIT (IT)-3(2), Mumbai, Vs. Bank of Bahrain & Kuwait (ITA No. 6731/Mum/2006, dated 28.01.2011). As had been observed by us at length hereinabove, the Tribunal in the aforesaid case had observed that the expenses representing to “Direct Staff Costs” & “Transfer and Communication Expenses” having been incurred exclusively by the head office for the Indian branch, were thus to be allowed in full under the general provisions of the Act. However, as regards the allocated staff costs incurred by the OBD and various other head office support centres, and also the allocated General and Administration Costs, it was observed by the Tribunal that the said items of head office expenses were to be considered only under Sec.44C and there was no scope for granting separate deduction under the general provisions of the Act. Finding ourselves to be in agreement with the aforesaid view taken by the Tribunal, we respectfully follow the same. Accordingly, finding no infirmity in the view taken by the CIT(A) in context of the aforesaid issue under consideration, we uphold the same. The Ground of appeal No. 1 raised by the assessee is dismissed.

We have given a thoughtful consideration to the issue before us and find substantial force in the claim of the assessee that as it had neither debited the H.O overheads in its „books of account‟ nor claimed the said sum as an expense in its return of income, therefore, there was no occasion for making an addition of Rs.52,66,515/- on the basis of the transfer pricing adjustment determined by the TPO. The aforesaid factual position had not been controverted by the ld. D.R. Accordingly, we are of the considered view that in the absence of the aforesaid claim of expense of share of H.O overheads of Rs.52,66,515/- by the assessee either in its books of accounts or in its return of income, no addition of the same could have been made on the basis of the TP adjustment of the said expenses whose ALP was determined at nil by the TPO. Accordingly, the A.O/TPO is directed to delete the addition of Rs.52,66,515/- made in the hands of the assessee. The Ground of appeal No. 2 raised by the assessee before us is allowed.

The Ground of appeal No. 3 being general in nature is dismissed as not pressed.

The appeal of the assessee is partly allowed in terms of our aforesaid observations.

The appeal of the assessee for A.Y 2003-04 i.e is dismissed, and that for A.Y 2008-09 i.e is partly allowed. As for the appeal of the revenue