2007 (11) TMI 438 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of broken period interest.
2. Exclusion of interest accrued after the coupon date.
3. Allowance of entrance fees and annual subscription of the club.
4. Deletion of expenses incurred on staff get-together.
5. Taxability of interest received from overseas branches.
6. Taxability of interest credited to suspense account.
7. Disallowance of interest paid on amounts received under Portfolio Management Scheme (PMS).

Issue-wise Detailed Analysis:

1. Deletion of Broken Period Interest:
The revenue's appeal on the deletion of broken period interest was rejected. The Tribunal upheld the decision of the CIT(A), following the precedent set by the Jurisdictional High Court in the case of American Express International Banking Corpn. v. CIT and the Co-ordinate Bench in the assessee's own case for the assessment year 1989-90. The Tribunal found that the securities were held as investments and not stock-in-trade, thus supporting the deletion of broken period interest.

2. Exclusion of Interest Accrued After the Coupon Date:
The assessee conceded that the interest accrued after the coupon date should be included in taxable income. Consequently, the Tribunal reversed the CIT(A)'s decision and restored the Assessing Officer's inclusion of this interest. This ground of appeal was allowed in favor of the revenue.

3. Allowance of Entrance Fees and Annual Subscription of the Club:
The Tribunal found this issue in favor of the assessee, citing the Jurisdictional High Court's decision in Otis Elevator Co. (India) Ltd. v. CIT and the Co-ordinate Bench's decision in the assessee's own case for the assessment year 1989-90. The expenses on entrance fees and annual subscription were deemed allowable, and the revenue's ground was rejected.

4. Deletion of Expenses Incurred on Staff Get-Together:
The Tribunal upheld the CIT(A)'s decision to allow the expenses incurred on staff get-together, referencing the Co-ordinate Bench's decision in the assessee's own case for the assessment year 1989-90. The expenses were considered incurred exclusively for the employees, and the revenue's ground was rejected.

5. Taxability of Interest Received from Overseas Branches:
The Tribunal restored the addition of Rs. 3,99,686, which was deleted by the CIT(A). The Tribunal followed the Co-ordinate Bench's decision in Dresdner Bank AG v. Asstt. CIT and the Supreme Court's approval in CIT v. Hyundai Heavy Industries Co. Ltd. The Tribunal held that the interest income from overseas branches must be taxed in India, treating the Indian branch as a separate profit center.

6. Taxability of Interest Credited to Suspense Account:
The Tribunal upheld the CIT(A)'s decision to tax the interest credited to the suspense account, following the Supreme Court's decision in State Bank of Travancore v. CIT. The Tribunal directed that such amounts should not be taxed again in the year of actual receipt to avoid double taxation.

7. Disallowance of Interest Paid on Amounts Received Under Portfolio Management Scheme (PMS):
The Tribunal confirmed the disallowance of Rs. 8,74,321. The Assessing Officer found that the bank had violated RBI guidelines by offering a fixed rate of return under PMS, which was not permissible. The Tribunal agreed with the CIT(A) that the excess interest paid was rightly disallowed, as the assessee failed to provide sufficient evidence that the amounts were given under PMS.

Conclusion:
The revenue's appeal was partly allowed, and the assessee's cross objection and appeal were dismissed. The Tribunal's decisions were based on precedents, statutory guidelines, and the principle of treating the Indian branch as a separate profit center for tax purposes.