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2011 (4) TMI 706 - AT - Income TaxInterest accrued on securities but not falling due for payment - method of accounting - receipt basis vs accrual basis - dis-allowance of interest income u/s 14A while computing the book profit u/s 115JB Held that - Interest accrues only on the specified coupon dates and not on day to day basis therefore, assessee is justified in offering the income for taxation on receipt basis. See DCIT vs. Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI). Disallowance of interest income u/s 14A by applying the Rule 8D of the Income Tax Rules, 1962 while computing the book profit u/s 115JB - Held that - In view of the decision taken in grounds of appeal no.1 in favour of the assessee, the disallowance to that extent is not sustainable. The disallowance on other income has to be computed as per the decision of Hon. Jurisdictional High Court in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai.Vs.Dy. Commissioner of Income Tax, reported 2010 (8) TMI 77 - BOMBAY HIGH COURT . Accordingly set aside this issue to the record of the AO. Appeal of the assessee is partly allowed for statistical purposes.
Issues Involved:
1. Addition on account of interest accrued on securities but not due for payment. 2. Disallowance of interest and other expenditure under Section 14A. 3. Disallowance of loss on unmatured foreign exchange contracts. Issue-wise Detailed Analysis: 1. Addition on Account of Interest Accrued on Securities but Not Due for Payment: The assessee contested the addition of Rs. 44,16,08,111 representing interest accrued on securities but not due for payment. The AO observed that the assessee-bank followed the method of offering income for taxation on a receipt basis but recognized interest on securities on an accrual basis in its balance sheet. The CIT(A) confirmed the addition. The assessee argued that interest on securities is taxable only on the coupon date when it becomes due, not on a day-to-day basis. The Special Bench of the Tribunal in the case of DCIT v. Bank of Bahrain and Kuwait (41 SOT 29) supported this view, holding that interest on government securities accrues only on coupon dates. The Tribunal followed this precedent and decided in favor of the assessee, setting aside the lower authorities' order and deleting the addition. 2. Disallowance of Interest and Other Expenditure under Section 14A: The AO disallowed interest and other expenses under Section 14A in respect of the addition made under the interest income on securities on an accrual basis and directed the AO to recompute disallowance as per Rule 8D. The CIT(A) confirmed this by following the Special Bench decision in Daga Capital Management. However, given the Tribunal's decision favoring the assessee on the first issue, the disallowance under Section 14A was deemed unsustainable to that extent. The Tribunal directed the AO to recompute the disallowance on other income as per the jurisdictional High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. Commissioner of Income Tax (234 CTR (Bom)-1). 3. Disallowance of Loss on Unmatured Foreign Exchange Contracts: This issue was not specifically detailed in the provided judgment text. However, it can be inferred that the Tribunal's decision on the first two issues would impact the treatment of losses on unmatured foreign exchange contracts, aligning with the principles established in the aforementioned cases and decisions. Conclusion: The Tribunal allowed the assessee's appeal on the first issue, resulting in the deletion of the addition made on account of interest accrued on securities but not due for payment. Consequently, the disallowance under Section 14A was also reconsidered, directing the AO to recompute it following the jurisdictional High Court's guidelines. The appeal was partly allowed for statistical purposes, with the Tribunal setting aside the lower authorities' orders on these issues.
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