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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 13TH DAY OF SEPTEMBER, 2022
PRESENT
THE HON’BLE MR. JUSTICE P.S.DINESH KUMAR
AND THE HON’BLE MR. JUSTICE UMESH M ADIGA
INCOME TAX APPEAL No.268 OF 2018 C/W INCOME TAX APPEAL No.269 OF 2018
In I.T.A.No.268/2018:
BETWEEN:
THE COMMISSIONER OF INCOME-TAX
LTU, 7TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU - 560 095.
THE JOINT COMMISSIONER OF INCOME-TAX
LTU, 7TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU - 560 095.
...APPELLANTS
(BY SRI E I SANMATHI, STANDING COUNSEL)
AND:
M/s. CANARA BANK BSCA SECTION HEAD OFFICE, 112 JC ROAD BENGALURU - 560 002.
...RESPONDENT
(BY SRI P SURYANARAYANA, SR. COUNSEL FOR SMT. TANMAYEE RAJKUMAR, ADVOCATE)
THIS INCOME TAX APPEAL FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 15.09.2017 PASSED IN ITA No.1493/BANG/2014, FOR THE ASSESSMENT YEAR 2010- 2011 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE AND ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA No.1493/BANG/2014 DATED 15/09/2017 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE JOINT COMMISSIONER OF INCOME TAX, LTU, BENGALURU.
In I.T.A.No.269/2018:
BETWEEN:
THE COMMISSIONER OF INCOME-TAX
LTU, 7TH FLOOR,
BMTC BUILDING
80 FEET ROAD,
KORMANGALA
BENGALURU - 560 095.
THE JOINT COMMISSIONER OF INCOME-TAX
LTU, 7TH FLOOR,
BMTC BUILDING
80 FEET ROAD,
KORMANGALA
BENGALURU - 560 095.
...APPELLANTS
(BY SRI E I SANMATHI, STANDING COUNSEL)
AND:
M/s. CANARA BANK BSCA SECTION HEAD OFFICE, 112 JC ROAD, BENGALURU - 560 002. ....RESPONDENT
(BY SRI P SURYANARAYANA, SR. COUNSEL FOR SMT. TANMAYEE RAJKUMAR, ADVOCATE)
THIS INCOME TAX APPEAL FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 15.09.2017 PASSED IN ITA No.931/BANG/2016, FOR THE ASSESSMENT YEAR 2011- 2012 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE AND ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA No.931/BANG/2016 DATED 15/09/2017 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE JOINT COMMISSIONER OF INCOME TAX, LTU, BENGALURU. THESE INCOME TAX APPEALS COMING ON FOR FURTHER ORDERS, THIS DAY, P.S.DINESH KUMAR J, DELIVERED THE FOLLOWING:-
JUDGMENT
This appeal by the Revenue directed against the judgment in ITA No.1493/Bang/2-14 dated 15.09.2017 has been admitted to consider the seven questions of law.
Shri E.I.Sanmathi, learned Standing Counsel for the Revenue submits that only following three questions arise for consideration and remaining questions have been answered in ITA No.278/2018 decided on 30.06.2021. After hearing the learned Advocate for the appellants and Shri P.Suryanarayana, learned Senior Advocate and Shri Sanmathi, the third question is re-framed. Thus, following three questions have been considered in this appeal:
(1) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the disallowance of claim of deduction on account of commission on locker rent received in advance of Rs.112.84 Crore by following the decision of Apex Court in the case of
CIT vs. EXCEL INDUSTRIES (reported in 358 ITR page 295) and decision of Calcutta High Court in the case of Bank of Tokyo Ltd.?
(2) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside relying upon Circular No 18 of 2015 dated 2.11.2015, the fact that investments are shown as Stock in Trade in books of account, loss/depreciation on account of fall in value of securities held by assessee bank should be allowed as deduction and therefore the income arising therefrom should also be treated as business income ignoring Section 45(2) which requires investments are to be treated as Stock in Trade?
(3) Whether the Tribunal is right in setting aside the rejection of claim of assessee on notional income relating to forward contract by placing reliance on the decision of the Apex Court?"
At the outset, Shri Suryanarayana, learned Senior Advocate for the assessee submitted that the second question is covered by the decision of this
Court in Karnataka Bank Limited vs. Acit1 and CIT and Another vs. Canara Bank2. In his usual fairness, Shri Sanmathi did not dispute the said statement. Hence, only question Nos.1 and 3 remain for consideration.
The assessee Bank, in the course of its business collects locker rents in advance and letter of credits. It also protects foreign exchange fluctuation in international contracts of forward trading.
Shri E.I.Sanmathi, submitted that the Bank has in fact received the rents for more than one year. Therefore, locker rents collected must be treated as income during the previous years of assessment and it is taxable because the Bank follows the mercantile system of accounting and it cannot be permitted to spread over the income for the future period.
1 [2013] 34 taxmann.com 150 (Karnataka) 2 passed by this Court in ITA Nos.27 and 28 of 2017 decided on 30.11.2020
The ITAT has considered this aspect in extenso in para-25 of its order. Following the authority in CIT VS. Bank Of Tokyo Limited3, it has held that even though the assessee-bank has received the entire amount towards the guarantee commission, no debt is actually created in favour of the assessee- bank for the entire amount. The right of the customer is always reserved to recall the payment in respect of the unexpired period. The same reasoning has been applied by the ITAT in the case of locker rent also.
In CIT VS. Bank Of Tokyo Limited, it is held that payability, even though mandatory merely creates a tentative right to receive commission for unexpired period of the guarantee and not a perfected right. The right becomes perfected and crystallised only with the expiry of the unexpired period. The Calcutta High Court has also noted the Authority in
3 [1993]71 TAXMAN 85(Cal)
E.D.Sassoon & CO. LTD. VS. CIT4 wherein it has held that a debt must have come into existence and the assessee must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words, a debitum in praesenti, solvendum in futuro, it cannot be said that any income has accrued to the assessee. The Bank, no doubt receives the locker rent in advance for future period. The said amount can be appropriated for the relevant future years when service is provided. The ITAT, in our view has rightly applied the ratio in Bank of Tokyo Limited and held that no addition was warranted in respect of the locker rent received in advance. Accordingly, we answer this question against the revenue and in favour of the assessee.
The next question is with regard to the protection of foreign exchange fluctuation pertaining
4 [1954] 26 ITR 27 SC
to forwards contracts. In substance, the Bank agrees to pay the money in Indian currency equal to the foreign exchange rate by entering into a contract in respect of the fluctuation of the foreign exchange value. In that scenario, the Bank may either gain some money or lose money depending upon the exchange rate as on the date of the conclusion of the contract. In the interregnum period, unrealized gain, if any, is a notional figure recorded in the books of accounts and the same will be subject to the completion of transaction at the end of the contract period.
This aspect was considered by the Madras High Court in the case of Indian Overseas Bank Vs. Commissioner of Income-tax5. The Madras High Court following the authority in CIT Vs. Shoorji Vallabhdas and Co.6 has held that there cannot be a tax, even though for the purposes of book-keeping, an entry is made
5 [1990] 51 Taxman 283 (Madras) 6 [1962] 46 ITR 144 (SC)
about hypothetical income. It is possible that at the end of the contract, the Bank may infact gain or lose money based on the foreign exchange value as on the date of the conclusion of the transaction.
We are in respectful agreement with the view taken by the Madras High Court, which the ITAT has considered and accepted it in para-28 of its order. Hence, this question is also answered in favour of the assessee and against the revenue.
In view of the above discussion, these two appeals must fail and they are accordingly, dismissed. The questions of law are answered against the Revenue and in favour of the assessee.
No costs.
Sd/-
JUDGE
Sd/-
JUDGE DH