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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI MANOJ KUMAR AGGARWAL
IN THE INCOME TAX APPELLATE TRIBUNAL “I” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER
ITA no.4357/Mum/2016 (Assessment Year : 2011–12)
Dy. Commissioner of Income Tax ……………. Appellant Circle–2(1)(1), Mumbai v/s Bank of India Star House, C–5, G–Block Bandra Kurla Complex ……………. Respondent Bandra (E), Mumbai 400 051 PAN – AAACB0472C
ITA no.4491/Mum/2016 (Assessment Year : 2011–12)
Bank of India Star House, C–5, G–Block Bandra Kurla Complex ……………. Appellant Bandra (E), Mumbai 400 051 PAN – AAACB0472C v/s Dy. Commissioner of Income Tax ……………. Respondent Circle–2(1)(1), Mumbai
Revenue by : Shri Ajit Kumar Shrivastava Assessee by : Shri C. Naresh
Date of Hearing – 03.04.2018 Date of Order – 25.05.2018
2 Bank of India O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid cross appeals are against a common order, dated 16th March 2016, passed by the learned Commissioner (Appeals)–4, Mumbai, for the assessment year 2011–012.
ITA no.4491/Mum./2016 Assessee’s Appeal
In ground no.1, assessee has challenged part disallowance of deduction claimed under section 36(1)(viii) of the Income Tax Act, 1961 (for short “the Act”).
Brief facts are, the assessee a Public Sector Banking company is engaged in the business of banking and related financial activities. All activities of the assessee are governed by the guidelines issued by the Reserve Bank of India from time to time. For the assessment year under dispute, the assessee filed its return of income on 29th September 2011, declaring total income of ` 1683,33,73,335. Subsequently, assessee filed a revised return of income on 18th March 2013, declaring total income of ` 1187,66,91,972. During the assessment proceedings, while verifying the computation of total income filed by the assessee, the Assessing Officer noticed that assessee has claimed deduction of ` 200 crore under section
3 Bank of India 36(1)(viii) of the Act in respect of special reserve created for income from eligible business of long term finance for industrial and agricultural development and for development of infrastructure facility for construction or purchase of residential house. After calling upon the assessee to furnish the details relating to the working of deduction claimed and the basis thereof and examining them the Assessing Officer found that as per the working submitted by the assessee the eligible income is ` 200 crore. Further, on examining the working of the assessee, he found that basis for arriving at the allocable operational expenses is incorrect, since, the assessee has made such allocation on the basis of proportionate expenses on the funds deployed for earning the eligible income. Whereas, while considering the total deployed fund, the assessee has wrongly considered some of the assets as well as the liability instead of either of them. Thus, the Assessing Officer proceeded to re–compute the deduction under section 36(1)(viii) of the Act by restricting it to ` 157.33 crore as against ` 200 crore claimed by the assessee. Resultantly, the difference of ` 42,67,00,000 was disallowed and added back to the income of the assessee.
Being aggrieved of such addition, assessee preferred appeal before the first appellate authority. However, the learned
4 Bank of India Commissioner (Appeals) sustained the addition stating that similar disallowance made in assessment year 2010–11 was upheld by him.
Learned Counsels appearing for the rival parties have agreed before us that the issue in dispute has been decided in favour of the assessee in its own case for assessment year 2009–10. Our attention was also drawn to a copy of the order dated 7th November 2017 passed in ITA no.2833 and 3082/Mum./2015, for the assessment year 2009–10. On a perusal of the aforesaid order of the Co–ordinate Bench passed in assessee’s own case for assessment year 2009–10, it is found that the Tribunal following its own order for assessment year 2007–08 and 2008–09, has decided the issue in favour of the assessee observing as under:–
“6.2.It was brought to our notice that identical issue was deliberated and decided upon by the Tribunal on 13/7/2016,while deciding the Appeals for AY.s 2007-08 and 2008-09 (ITA.s 2966/Mum/2014 and 3085/Mum/2014 and other two appeals).We would like to reproduce paragraph No.14, of the said order of the Tribunal and it reads as under :- “14. We shall now take up individual issue urged in the years under consideration. In AY 2007-08, the assessee is contesting the disallowance of claim made u/s 36(1)(viii) of the Act. We notice that this issue has been decided in favour of the assessee by the co-ordinate bench of Tribunal in AY 2006-07. The tax authorities had rejected the claim by holding that the provisions of sec. 36(1)(viii) shall be applicable only to “financial Corporations”. The Tribunal has held that the banks will also be covered by the inclusive definition given for the expression “financial Corporations” in sec. 36(1)(viii) of the Act. Consistent with the view taken therein, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the claim.”
5 Bank of India Respectfully following the above order of the Tribunal,we decide first Ground of appeal in favour of the assessee.”
There being no material difference in facts brought to our notice, respectfully following the consistent view of the Tribunal in assessee’s own case, we allow assessee’s claim of deduction u/s 36(1)(viii), thereby, deleting the addition made. Ground raised is allowed.
In ground no.2, assessee has challenged disallowance of ` 59,76,26,012 made u/s 14A of the Act r/w rule 8D of the rules.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has earned exempt income amounting to ` 18,07,69,806 through interest and dividend, called upon the assessee to furnish necessary details and also to explain why disallowance should not be made under section 14A of the Act by applying the provisions of rule 8D. Though, the assessee objected to the proposed disallowance by stating that all the securities are held as stock–in–trade and were made out of own funds, however, the Assessing Officer rejecting the claim of the assessee proceeded to compute disallowance under section 14A of the Act by applying rule 8D which was quantified at ` 59,76,26,012.
Assessee challenged the disallowance before the first appellate authority. However, learned Commissioner (Appeals) taking note of
6 Bank of India the fact that similar disallowance was upheld by the first appellate authority in assessment year 2009–10 and he himself has upheld such disallowance in assessment year 2010–11, sustained the disallowance made by the Assessing Officer.
The learned Authorised Representative reiterating the stand taken before the Departmental Authorities submitted that no disallowance under section 14A r/w rule 8D is warranted since the assessee being a banking company holds all its securities as stock–in– trade. In support of such contentions, he relied upon the following decisions:–
i) India Advantage Securities, 380 ITR 471’; ii) HDFC Bank v/s CIT, 383 ITR 529; and iii) State Bank of Patiala, 391 ITR 218.
The learned Authorised Representative submitted, while deciding similar issue in assessee’s own case for assessment year 2009–10, the Tribunal has restored back to the Assessing Officer for deciding afresh keeping in view the ratio laid down in certain judicial precedents.
The learned Departmental Representative submitted, there is complete change in the scenario after the decision of the Hon'ble Supreme Court in case of Maxopp Investment Ltd. v/s CIT, [2018] 91 taxmann.com 154, wherein, the Hon'ble Supreme Court has held that
7 Bank of India even if the shares and securities are held as stock–in–trade, still, disallowance under section 14A of the Act has to be made.
In rejoinder, the learned Authorised Representative drawing our attention to Para–40 of the judgment in case of Maxopp Investment Ltd.(supra) submitted that the Hon'ble Supreme Court rejecting the contention of the Department has upheld the decision of the Hon'ble Punjab & Haryana High Court in State Bank of Patiala (supra) by approving the view taken by the High Court that in case of a Bank the shares are held as stock–in–trade, hence, it becomes the business activity of the assessee and the dividend is earned in such process. Thus, he submitted, it cannot be said that even in case of a Bank the shares and securities held as stock–in–trade would still be subjected to disallowance under section 14A.
We have considered rival submissions and perused materials on record. The basic contention of the assessee is, since the assessee being a Bank the shares and securities are held as stock–in–trade and it constitutes a business activity, hence, no disallowance under section 14A of the Act should be made. Notably, in assessment year 2009–10, while considering similar dispute relating to disallowance under section 14A, the Tribunal in order dated 8th November 2017 (supra) has restored the issue to the Assessing Officer. It is also relevant to mention, in the meanwhile, the judgment of the Hon'ble Supreme
8 Bank of India Court in the case of Maxopp Investment Ltd. (supra) has been delivered. It is to be noted that in the said decision the Hon'ble Supreme Court has specifically dealt with the decision of the Hon'ble Punjab & Haryana High Court in case of State Bank of Patiala (supra) on identical issue. Undisputedly, the aforesaid decision of the Hon'ble Supreme Court having been delivered recently, the Departmental Authorities while deciding the issue did not have the benefit of it. In view of the aforesaid, we restore the issue to the file of the Assessing Officer for deciding afresh after considering the submissions made by the assessee and applying the ratio laid down by the Hon'ble Supreme Court in case of Maxopp Investment Ltd. (supra) and specifically keeping in view the observations made in Para–39 and 40 of the said judgment. This ground is allowed for statistical purposes.
In ground no.3, the assessee has challenged disallowance of deduction claimed under section 36(1)(viia) of the Act in respect of provisions of bad and doubtful debts.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of ` 1376,51,30,099 under section 36(1)(viia) of the Act called for the necessary details to verify assessee’s claim. On verifying the details he found that the assessee has made provisions for doubtful debt in its books of account for the relevant financial year to the extent of `
9 Bank of India 1365,95,14,045. Thus, the Assessing Officer concluded that the assessee has made excess claim of deduction under section 36(1)(viia) of the Act. Accordingly, he reduced the claim of deduction under the said provision to ` 1365,95,14,045, which resulted in addition of an amount of ` 10,56,16,054. Assessee challenged the addition before the first appellate authority.
The learned Commissioner (Appeals), however, following the decision of the Hon'ble Punjab and Haryana High Court in State Bank of Patiala, 272 ITR 054 (P&H) upheld the disallowance made by the Assessing Officer.
The learned Authorised Representative submitted that the issue has been decided by the Tribunal, Delhi Bench, in case of ACIT v/s Pratima Bank, ITA no.4090/Del./2013, dated 14th July 2017. In this context, he specifically drew our attention to Para–20 of the said order. Without prejudice to the aforesaid submissions, the learned Authorised Representative submitted that the provision made in the books should be the basis and not the provisions made during the previous year for allowing deduction under section 36(1)(viia) of the Act. In support of such contention, he relied upon the decision of the Tribunal, Ahmedabad Bench, in DCIT v/s Survodaya Sahakari Bank Ltd. v/s DCIT, [2014] 48 taxmann.com 82.
10 Bank of India 19. The learned Departmental Representative relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).
We have considered rival submissions and perused materials on record. It is evident from the facts on record, though, the assessee in its books of account has made provision for bad and doubtful debt under section 36(1)(viia) of the Act on account of advances made by the Rural Branches amounting to ` 1365.95 crore, however, it has claimed deduction under the said provision for an amount of ` 1376.51 crore which works out to 10% of the aggregate average advances made by the rural branches. Thus, it is evident that the deduction claimed by the assessee under section 36(1)(viia) of the Act is not as per the provisions made in the books of account. A reading of the aforesaid provision, makes it clear that the deduction allowable is in respect of the provision made for bad and doubtful debt not exceeding certain amount as provided under sub–clause (a) of the said provision. That being the case, assessee’s claim that 10% of the aggregate average advances made by the Rural Branches and 7.5% of the total income has to be allowed as deduction irrespective of the provisions made in the books of account is not acceptable in view of the ratio laid down by the Hon'ble Punjab & Haryana High Court in State Bank of Patiala (supra). However, accepting the without prejudice submissions
11 Bank of India made by the learned Counsel for the assessee we hold that the deduction under section 36(1)(viia) of the Act to the extent of provision made and available in the books of account, whether made in the current previous year or in the preceding previous years, is allowable as held by the Tribunal, Ahmedabad Bench, in Sarvodaya Sahakar Bank Ltd. (supra). The Assessing Officer is directed to examine the facts and compute the deduction under section 36(1)(viia) of the Act accordingly. This ground is partly allowed for statistical purposes.
In ground no.4, the assessee has challenged the disallowance of amortization of lease premium amounting to ` 2,61,38,514, paid in respect of various lease hold properties.
Brief facts are, in course of assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of an amount of ` 2,61,38,514, on account of amortization of lease premium called upon the assessee to furnish details and also justify the claim. In response to the queries raised by the Assessing Officer, the assessee furnished necessary details and also submitted that the amount paid is allowable as revenue expenditure. The Assessing Officer, however, rejecting the claim of the assessee held that the expenditure incurred is capital in nature. While doing so, he also observed that similar disallowances have been made in the earlier
12 Bank of India assessment years. Being aggrieved of such disallowance, assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) following his order passed in assessee’s own case for assessment years 2009–10 and 2010–11 sustained the disallowance. However, he directed the Assessing Officer to verify assessee’s claim of excess disallowance of ` 6,93,000 on this count.
Learned Authorised Representative fairly submitted that the Tribunal in assessee’s own case for assessment year 2004–05 has decided the issue against the assessee.
The learned Departmental Representative agreed with the aforesaid submissions of the assessee.
We have considered rival submissions and perused materials on record. As could be seen from the facts on record, this is a recurring dispute between the assessee and the Department from the preceding assessment years. While deciding identical issue arising in assessee’s own case for assessment year 2004–05 in ITA no.5977/Mum./2011, dated 26th July 2017, the Tribunal following its own order passed in assessee’s case for assessment year 2003–04 has sustained the disallowance by concurring with the view expressed by the Departmental Authorities. Respectfully following the aforesaid decision
13 Bank of India of the Co–ordinate Bench in assessee’s own case, we uphold the order of the learned Commissioner (Appeals) on this issue. Ground raised is dismissed.
In ground no.5, the assessee has challenged the decision of the Departmental Authorities in including the profits of the foreign branches in the income of the assessee.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that while computing the income the assessee has excluded the profits of the foreign branches amounting to ` 551,23,42,097 resorting to section 90 of the Act, called upon the assessee to explain why such income should not be included after considering the expenses against the income of the foreign branches. In reply, it was submitted by the assessee, the foreign branches from which the assessee has received such income are situated in countries with whom the Government of India has entered into double taxation avoidance agreements (DTAA). It was submitted, since the branches of the assessee in those countries constitute permanent establishment under the relevant tax treaties, the business income of the branches are taxable in the respective countries. That being the case, such profit is not taxable in India in terms of section 90 of the Act. In this context, the assessee also relied upon certain case laws. The Assessing Officer, however, did not accept the claim of the assessee
14 Bank of India and held that the income of foreign branches have to be assessed at the hands of the assessee. Accordingly, he added back the amount of ` 551,23,42,097 to the income of the assessee.
Though, the assessee challenged the addition before the learned Commissioner (Appeals), however, the learned Commissioner (Appeals) rejecting the contention of the assessee sustained the addition.
The learned Authorised Representative submitted that the Tribunal in assessee’s own case for assessment year 2004–05 and 2009–10 has decided the issue in favour of the assessee.
The learned Departmental Representative, though, agreed that the issue has been decided in favour of the assessee, however, he relied upon the observations of the learned Commissioner (Appeals).
We have considered rival submissions and perused materials on record. As could be seen, the disputed issue relates to taxability of the income of the foreign branches in India. Notably, while deciding identical issue arising in assessee’s own case in assessment year 2009–10, the Tribunal in order dated 8th November 2017, in ITA no. 3082/Mum./2015, followed its order passed in assessee’s own case for assessment year 2004–05 and held as under:–
15 Bank of India “5.Last ground of appeal pertains to income of foreign branches.It was brought to our notice that while deciding the appeals for the AY.2004-05(ITA/5977/Mum/2011 and 6016/Mum/ 2011,dtd. 26/7/2017)in assessee’s own case the Tribunal had dealt with the identical issue.We are reproducing the relevant portion of the order of the Tribunal and it reads as under: 5.The next issue in this appeal of Revenue in ITA No. 6016/Mum/2011 against the order of CIT(A) in deleting/excluding the income of foreign branches For this Revenue has raised following ground No. 1: - “On the facts and in the circumstances of the case and in law the Ld.CIT(A)erred in directing the A.O. to exclude the income of foreign branches in violation to Central Government Notification No.S.O.2123(E)dt.28.8.2008 which clearly indicates its inclusion while arriving at the total income.” 2.At the outset it is noticed that this issue has already been deliberated by the Tribunal in assessee’s own case for AY 2003-04 in ITA No. 3534/Mum/2011 vide order dated 15-06-2012 and has allowed the claim of the assessee vide Para 34 and 35 as under: - “34. The next two grounds are interlinked, wherein the assessee has sought relief of Rs. 90,63,29,812/- in respect of profit in foreign branches. The AR submitted that complete and comprehensive submissions made before the CIT(A), who after considering the submissions, allowed the assessee’s appeal. The AR, thus pointed out the relevant portion of the written submissions also placed before us. “The respondent had excluded the income from foreign branches based on Double Tax Avoidance Agreement entered into between the Govt. of India and the Govt. of the respective countries. The AO had granted relief only in respect of branches at Singapore and Japan and in respect of the other branches denied the benefit to the appellant. The CIT (A) allowed the claim of the respondent based on the decision of Hon’ble ITAT in appellant’s own case. The respondent submits that this issue has been decided in favour of the assessee by Supreme Court of India in CIT Vs PV.AL.Kulandagan Chettiar, reported in 267 ITR 654 which upheld the decision of ITAT Chennai in the case of PV.AL.Kulandagan Chettiar Vs ITO (3 ITD 426). The ITAT had held that “So the argument that the agreement must be so interpreted as to retain the taxation powers with the Government of India in order to prevent fiscal evasion has only to be rejected. The agreement is mainly for avoidance of double taxation. That means the income shall not be taxed at the same time in both the countries in India and Malaysia. So, if we interpret the agreement to mean that the
16 Bank of India Indian Government and the Malaysian Government both still retain even after the execution of the agreement the power to tax at the same time the same income it will only frustrate the object with which the agreement is executed”. The ITAT had therefore concluded, “As regards business profits paragraph I of Article 7 provides that the profits of an enterprise of a contracting state shall be taxable only in that contracting state. We will take it that the assessee being a resident of India, the enterprise is an Indian enterprise. So the Profits are taxable in India. But this power of India to tax, as further provided in the Article, exists only when the enterprise does not carry on business in Malaysia through a permanent establishment situated in Malaysia. This is an undisputed fact. So the right of the Indian Government to levy tax in respect of business profits of these types of Indian Enterprise as provided in opening paragraph of Article 7 is taken away because a permanent establishment is situated in Malaysia.” In the appellant’s case also in all the foreign countries the operation is carried out through its branches which is a permanent establishment situated outside India. Hence the income attributable to these branches cannot be taxed in India. This issue has also been decided in favour of the appellant by ITAT in appellant’s own case in ITA No. 1679/Mum/2001 dated 27/03/2008 for the AY 1997-98, wherein the coordinate Bench has held, “.The Learned CIT(A) after examining articles 23, 24 and 25 of the different DTAAs found that the laws in force in either of the contracting states would govern the taxation of income in the respective contracting states, i.e. credit of tax paid in one state would be given in the other state. He also found that Article 7 stated that if enterprise of one State carries on business in another State through permanent establishment then the State where the business is carried out would levy tax on the profits attributable to the permanent establishment. On analysis of these provisions the learned CIT(A) found that Article 7 of the different DTAA.s are specific provision while Articles 23, 24 and 25 are general provisions. The coordinate Bench in the case of the assessee, in the earlier year’s case held, “As a result he also found that the issue already decided by the Tribunal in assessee’s own case for the earlier years have to be followed. We do not find any infirmity in the above finding of the CIT(A). Therefore consistent with the earlier finding of the Tribunal in assessee’s own case for the earlier years case, we do not see any merit in the ground taken by the Revenue”. The AR submitted that in the instant case also, the view should be taken in the assessee’s favour.” Even Hon’ble Bombay High Court also confirmed the decision of Tribunal in Income Tax Appeal No. 1630/Mum/2012 vide order
17 Bank of India dated 07-01-2015, wherein Hon’ble High Court has dismissed the Revenues contention by observing in Para 4 as under: - “4. With the assistance of Mr. Suresh Kumar and Sanjiv Shah, we have perused the memo of Appeal. The Assessing Officer was satisfied that the benefit of the Double Taxation Avoidance Agreement is admissible provided the proof is produced in relation to payment of taxes by the Assessee abroad. In other words, if the Assessee has permanent establishment abroad, then, the Assessee would have to produce evidence regarding payment of taxes pertaining to the income of these establishments abroad. On production of such evidence, the Assessee would be entitled to the benefit. That evidence was always available and as noted by the Commissioner of Income Tax (Appeals) and the Tribunal. In the circumstances, the authorities did nothing but follow their earlier orders based on identical facts and circumstances. The finding of fact, therefore, cannot be termed as perverse or vitiated by any error of law apparent on the face of the record.The Appeal does not raise any substantial question of law. It is devoid of merits and is,accordingly,dismissed. No costs.” As the issue is squarely covered in favour of assessee in assessee’s own case, respectfully following the Hon’ble Bombay High Court and co-ordinate Bench decision, we confirm the action of the CIT(A) and deleing the addition. This issue of Revenue’s appeal is dismissed. Considering the above,we decide last ground of appeal against the AO.”
There being no difference in facts brought to our notice by the Department, respectfully following the aforesaid decision of the Co– ordinate Bench, we delete the addition made by the Assessing Officer.
In ground no.6, assessee has challenged disallowance of broken period interest paid.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed deduction of `
18 Bank of India 83,55,04,653 towards payment of broken period interest on purchase of securities by treating it as revenue expenditure called upon the assessee to justify its claim. Though, the assessee relying upon certain judicial precedents submitted that broken period interest is allowable as revenue expenditure, however, the Assessing Officer did not accept it. He observed that as per the method of accounting adopted by it assessee is not offering interest income on securities on accrual basis. He observed that in respect of security on which broken period interest is paid if remains unsold at the end of accounting year, neither the broken period interest paid appears on credit side in the valuation of security nor the corresponding broken period interest accrued up to 31st March is offered as income on accrual basis. Thus, the assessee is booking the expenditure in anticipation of future profit which, according to the Assessing Officer, is against the basic principle of accountancy. Thus, ultimately the Assessing Officer disallowed the deduction claimed by the assessee on account of broken period interest paid and added back to the income of the assessee. Though, the assessee challenged the disallowance before the first appellate authority, however, the learned Commissioner (Appeals) sustained the disallowance made by the Assessing Officer.
The learned Authorised Representative submitted that the issue in dispute now stands settled in favour of the assessee by the decision
19 Bank of India of the Hon'ble Supreme Court in Citi Bank N.A. v/s CIT, Civil Appeal no.1549 of 2006 and also the decision of the Hon'ble Jurisdictional High Court in case of CIT v/s State Bank of India, ITA no.254 of 2014 and American Express International Banking Corporation v/s CIT, [2002] 125 taxman 488. The learned Authorised Representative submitted, as per the system of accounting followed by the assessee it offers broken period interest as income when it is received. Similarly, when the broken period interest is paid at the time of purchase of securities it is claimed as expenditure. He submitted that the distinction the Department is trying to make has already been answered by the Hon'ble Jurisdictional High Court in case of State Bank of India (supra).
The learned Departmental Representative relied upon the observations of the learned Commissioner (Appeals).
We have considered rival submissions and perused materials on record. Before we proceed to decide the issue, it is necessary to understand the exact nature of broken period interest. As mandated by the Reserve Bank of India, every bank has to maintain Statutory Liquidity Ratio. For that purpose banks invest in Government securities. Therefore, depending on the requirement a bank purchases and sells Government securities. Generally, interest in Government securities is payable on half yearly basis. When Government securities
20 Bank of India are traded the purchaser has to pay to the seller not only the purchase price of the securities but also the interest accrued from the Government securities from the last due date of the interest till the date of purchase of the securities. This interest from the last due date till the date of purchase is referred to as broken period interest. While the purchaser of the Government security pays the broken period interest the seller receives it. It is evident on record, assessee’s claim of broken period interest paid has been disallowed by the Assessing Officer on the reasoning that the assessee is not offering broken period interest on accrual basis. In our view, the aforesaid reasoning of the Departmental Authorities do not stand to reason. If the assessee is consistently following an accounting method as per which the broken period interest is offered as income when it is received, the broken interest paid while purchasing the securities cannot be disallowed merely on the reasoning that the assessee is not showing the broken period interest income on accrual basis. As could be seen, the Hon'ble Jurisdictional High Court in case of State Bank of India, vide judgment dated 1st August 2016, after following the decision of the said Court in case of American Express International Corporation (supra) has rejected Revenue’s appeal against allowance of assessee’s claim of deduction in respect of broken period interest paid. While doing so, the Hon'ble High Court has also upheld the decision of the Tribunal in holding that the broken period interest income has to be taxed on due
21 Bank of India basis instead of accrual basis. It is evident, the aforesaid decision of the Hon'ble Jurisdictional High Court was neither referred to nor examined by the Departmental Authorities while deciding the issue. In view of the aforesaid, we restore the issue to the Assessing Officer for deciding afresh keeping in view the decisions of the Hon'ble Jurisdictional High Court referred to above and only after due opportunity of being heard to the assessee. This ground is allowed for statistical purposes.
Ground no.7 is not pressed, hence, dismissed.
In ground no.8, the assessee has challenged the disallowance of ` 211,08,34,546, on account of loss arising out of payment made to Lehman Brothers Special Financing Inc.
Brief facts are, the assessee Bank is an authorized dealer in derivative, forward contract, interest rate swaps, currency swaps, etc. As per section 6 of Banking Regulation Act, the assessee is also authorized to deal in foreign exchange. As stated by the assessee, it is bound by International Swaps and Derivatives Association (ISDA) agreement as a member of dealer in derivatives. In course of such activities, assessee undertook forward contract with its customers and to safeguard its interest against fluctuation in the value of foreign exchange in respect of forward contract, the assessee entered into a
22 Bank of India hedging agreement with Lehman Brothers Special Financing Inc. (LBSFI) as a counter party for the said transaction. After coming to know that LBSFI has filed for bankruptcy on 3rd October 2008, for mitigating the loss the assessee invoked early settlement of derivative contracts. As per the terms of the ISDA agreement the assessee was required to calculate its loss in the prescribed manner whenever there is early closure of the contract. However, the assessee did not calculate loss in respect of transaction with LBSFI and did not reimburse any amount to them. As a result, LBSFI calculated the loss on its own and asked the assessee to pay a sum of U.S. $ 42.25 million. The assessee contested the claim of LBSFI and took a stand that only a sum of U.S. $ 22.55 million was payable. The dispute between the parties was ultimately referred to London Court of International Arbitration and an award was passed on 23rd December 2010, directing the assessee to pay a sum of U.S. $ 40.82 million along with interest at LIBOR + 4.5%. Thus, on the basis of such award, assessee paid an amount of ` 211,08,34,546 to LBSFI which was claimed as loss in the return of income filed by the assessee. The Assessing Officer while examining the claim of the assessee observed that the assessee has not brought any documentary evidence to prove that the transactions are not speculative transaction. Thus, he concluded, as per the provisions of section 73 of the Act the loss arising out of speculation business cannot be set–off against income
23 Bank of India under any other head and can only be set–off against speculation income. Accordingly, he disallowed assessee’s claim.
Though, the assessee challenged the disallowance in an appeal preferred before the learned Commissioner (Appeals), however, he also sustained the disallowance agreeing with the view expressed by the Assessing Officer.
The learned Authorised Representative submitted that the assessee is dealer in forex and in course of such activity customers come to the assessee for entering into forward contract. He submitted that for hedging loss on forward contract, the assessee has entered into an agreement with LBSFI. He submitted, being aware of the fact that LBSFI has filed bankruptcy proceedings the assessee wanted to terminate the forward contract which led to arbitration proceedings and in pursuance to such arbitration proceedings an award was passed against the assessee and the assessee had to pay compensation to LBSFI. He submitted, the loss arising to the assessee on payment of compensation is in course of its regular business activity, hence, cannot be treated as speculation loss. Therefore, the provisions of section 73 of the Act are not applicable. The learned Counsel for the assessee submitted that as per section 43(5) of the Act, transaction relating to trading in derivative by banks are not treated as speculative transaction. He submitted, whenever there is gain from forward
24 Bank of India contract the assessee has offered it as business income and the Assessing Officer has also accepted it. Thus, he submitted, if the profit from forward contract is treated as business income, the loss arising there from cannot be treated as speculation loss. The learned Counsel for the assessee submitted, in any case of the matter, loss arising to the assessee is on account of payment of liquidate damages, hence, allowable.
The learned Departmental Representative strongly relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).
We have considered rival submissions and perused materials on record. Undisputedly, the assessee has entered into forward contract with its customers in respect of derivative transactions. It is also a fact on record that LBSFI was taken as a counter party in order to hedge the forward contract entered with the customer. In fact, the learned Commissioner (Appeals) while dealing with the disputed issue has given a categorical finding that the payment made on arbitration award and incidental expenses are related to hedging agreement. Thus, once the payment made by the assessee is treated to be towards hedging agreement it cannot be termed as speculative transaction. Explanation 1 to the proviso to section 43(5) of the Act excludes the transactions relating to trading in derivatives carried on
25 Bank of India by the Banks from the ambit of speculative transactions. Further, learned Authorised Representative has demonstrated before us that whenever there is profit from forward contracts assessee has offered it as business income and the Department has accepted it. If that is the case, the loss from forward contract cannot be treated as speculation loss. In any case of the matter, there is no dispute to the fact that the payment by the assessee to LBSFI is in pursuance to an award passed by a International Court of Arbitration, therefore, it is allowable as business expenditure. Thus, looked at from any angle assessee’s claim is allowable. In view of the aforesaid, we set aside the order of the learned Commissioner (Appeals) on this issue and delete the addition made by the Assessing Officer. This ground is allowed.
In the result, assessee’s appeal is partly allowed.
ITA no.4357/Mum./2016 Revenue’s Appeal
Grounds no.1 being of general nature does not require adjudication.
In ground no.2, the Revenue has challenged certain observations of the learned Commissioner (Appeals) with regard to the inclusion of profit relating to foreign branches.
26 Bank of India 49. While deciding ground no.5 of assessee’s appeal in ITA no.4491/ Mum./2016, we have allowed assessee’s claim that profit of foreign branches cannot be included at the hands of the assessee. In view of the aforesaid, this ground is dismissed.
In ground no.3 and 4, Revenue has challenged the decision of the learned Commissioner (Appeals) with regard to applicability of the provisions of section 115JB of the Act to the assessee.
We have considered rival submissions and perused materials on record. As could be seen, learned Commissioner (Appeals) relying upon certain judicial precedents held that as per the provisions of section 115JB of the Act applicable to the relevant assessment year, it cannot be extended to Banking companies.
The learned Counsels appearing for the parties have fairly agreed that the issue is covered by various judicial precedents as referred to in Para–19.2 of the order of the learned Commissioner (Appeals). In view of the aforesaid, we dismiss this ground.
In ground no.5, the Revenue has challenged the directions of the learned Commissioner (Appeals) with regard to allowing credit for TDS of foreign branches.
27 Bank of India 54. We have considered rival submissions and perused materials on record. The Assessing Officer while completing the assessment did not allow credit for TDS on dividend from foreign associates amounting to 1,03,67,614. The learned Commissioner (Appeals) after considering the submissions of the assessee observed that as per the provisions of section 199 of the Act credit for TDS is to be given only when such tax is deposited with the Central Government. He also observed that as per section 91 of the Act if any person residing in India proves that in respect of his income which accrued or arose in the relevant previous year outside India and in respect of which he has paid tax in any country with which there is no double taxation avoidance agreement, then, such person shall be entitled to deduction from the income tax payable by him a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the same country whichever is lower or at the Indian rate of tax if both the rates are equal. He, therefore, directed the Assessing Officer to decide the issue as per law. As could be seen from the observations of the learned Commissioner (Appeals), he has simply issued a direction to the Assessing Officer to decide the issue of credit of TDS keeping in view the provisions of section 199 and section 91 of the Act. We fail to understand how the Department can be aggrieved with the aforesaid directions of the learned Commissioner (Appeals). In view of the aforesaid, ground raised is dismissed.
28 Bank of India
In the result, Revenue’s appeal is dismissed.
To sum up, assessee’s appeal is partly allowed and Revenue’s appeal is dismissed.
Order pronounced in the open Court on 25.05.2018
Sd/- Sd/- MANOJ KUMAR AGGARWAL SAKTIJIT DEY ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 25.05.2018 Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Sr. Private Secretary) ITAT, Mumbai