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2011 (6) TMI 812 - AT - Income TaxInterest Accrued but Not Due on Securities - Added to Total Income or not? - CIT(A) confirmed some amount representing accrued interest on securities, but not falling due for payment. Such interest, which is in the process of accrual, is at the incipient and inchoate stage, maturing into taxable income only when it becomes due and payable in terms of issue of such security. HELD THAT - Tribunal in own case followed the decision of DCIT VERSUS BANK OF BAHRAIN KUWAIT 2010 (8) TMI 578 - ITAT, MUMBAI , where following the decision of UNITED COMMERCIAL BANK VERSUS COMMISSIONER OF INCOME-TAX 1999 (9) TMI 4 - SUPREME COURT , where it was held that the Bank 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 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 - Decision in Favour of Assessee. Disallowance of Loss on Unmatured Forward Contracts - HELD THAT - We find that this issue is also squarely covered by the Special Bench decision in the case of DCIT VERSUS BANK OF BAHRAIN KUWAIT 2010 (8) TMI 578 - ITAT, MUMBAI in assessee s favour, wherein, it was held that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract. Respectfully following the aforesaid decision of the Tribunal we hold that loss on unmatured foreign exchange contract have to be allowed as deduction - Decision in Favour of Assessee. Change in Valuation of Securities as per RBI guidelines - Statutory Compulsion u/s 145A - Assessee made changes in valuation policy as per RBI guidelines which was not accepted by AO - CIT(A) held that the change in valuation policy was bonafide but it cannot be applied retrospectively and asked assessee to revalue the security as at the beginning of the year HELD THAT - We find that the change in the method of accounting became necessary because of the RBI guidelines and therefore it cannot be said that the change in the method of valuation was not bonafide. The direction to change the value of opening stock will result in distortion of profits and no real effect being given to the changed method of valuation. We agree with the contention of the learned counsel for the Assessee that provisions of section 145A, is a statutory compulsion with regard to valuation of inventory, which would necessarily include the opening stock also. As far as the case of the assessee is concerned, the change in method of accounting falls within the ambit of section 145 according to which the method of accounting and the change in the method of accounting, if it is bonafide, and if it is regularly followed thereafter has to be accepted as it is. The revenue in such circumstances cannot place any condition that the opening value of securities should also be changed. If securities as on the beginning of the year is also revalued the then changed method of accounting will become meaningless. We, therefore, hold that in a case of voluntary change in the method of accounting followed by the assesse, all that has to be seen is as to whether the change is bona fide and regularly followed thereafter. If the above condition is satisfied, then the changed method of accounting has to be accepted. In such an even there is no need to revalue the securities as on the beginning of the year. We are therefore, of the view that the direction of the CIT(A) to revalue the security as at the beginning of the year should be deleted and we direct accordingly. Interest for Broken Period - Allowed or Not as Deduction? - AO held, claim for exclusion of broken period interest in respect of various purchases of securities during the year represented interest accrued upto the date of purchase of securities is part of the purchase consideration and the broken period interest cannot be allowed as deduction - HELD THAT - Issue has been considered by the Hon ble Bombay High Court in the case of AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION VERSUS COMMISSIONER OF INCOME-TAX. 2002 (9) TMI 96 - BOMBAY HIGH COURT , wherein it was held that purchase price of the securities should be bifurcated into (1) interest accrued upto the date of purchase and (2) balance of the price and interest should be allowed as revenue expenditure in the year of purchase provided the bank follow such a practice. In view of the above, we do not find any infirmity in the order of the CIT(A).
Issues Involved:
1. Accrued Interest on Securities 2. Loss on Unmatured Foreign Exchange Contracts 3. Change in Valuation of Securities 4. Disallowance under Section 14A 5. Deduction of Broken Period Interest Accrued Interest on Securities: The assessee, a banking company, did not offer interest income of Rs. 84,71,62,630 on investments for taxation, arguing that only received interest should be taxed. The CIT(A) confirmed the Assessing Officer's (AO) addition of this accrued interest to the total income, following the precedent from the previous assessment year (A.Y. 2000-01). The Tribunal, referring to its decision in the assessee's own case for A.Y. 2000-01 and the Special Bench decision in DCIT v. Bank of Bahrain and Kuwait, held that interest on Government securities accrues only on coupon dates, not day-to-day. Consequently, the addition was deleted, and the ground was allowed in favor of the assessee. Loss on Unmatured Foreign Exchange Contracts: The assessee claimed a loss of Rs. 8,74,029 on unmatured foreign exchange contracts. The AO and CIT(A) disallowed this, considering it notional. The Tribunal, referring to its earlier decision in the assessee's case for A.Y. 2000-01 and the Special Bench decision in Bank of Bahrain & Kuwait, held that a binding obligation arises when a forward contract is entered, and such losses are allowable deductions. Thus, the ground was allowed in favor of the assessee. Change in Valuation of Securities: The assessee changed its valuation method for securities due to RBI guidelines, resulting in a lower profit by Rs. 82,90,204. The AO added this amount to the total income, but the CIT(A) allowed the change, directing revaluation of securities at the beginning of the year. The Tribunal upheld the change in valuation method as bona fide and necessitated by RBI guidelines, rejecting the need to revalue opening stock. The revenue's grounds against this change were dismissed, and the assessee's ground was allowed. Disallowance under Section 14A: The AO disallowed a portion of interest and administrative expenses under Section 14A, attributing them to tax-free income. The CIT(A) reduced the disallowance of administrative expenses from 2% to 1%. The Tribunal remanded the issue to the AO for fresh consideration in light of the Bombay High Court decision in Godrej Boyce Manufacturing Company Ltd. Deduction of Broken Period Interest: The AO disallowed the deduction of Rs. 11,67,04,653 as broken period interest, treating it as part of the purchase cost of securities. The CIT(A) allowed the deduction, following the Bombay High Court decision in American Express International Banking Corporation. The Tribunal upheld the CIT(A)'s decision, confirming that broken period interest should be allowed as a revenue expenditure. Conclusion: The assessee's appeal was partly allowed, with grounds on accrued interest, loss on unmatured contracts, and change in valuation of securities decided in its favor. The revenue's appeal was dismissed, with the Tribunal remanding the Section 14A issue for fresh consideration and upholding the deduction of broken period interest.
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