2011 (4) TMI 791 - AT - Income Tax

Disallowance - Head office expenses - The expenditure mainly consisted of salaries to expatriate employees working in India - The expenditure also included expenses on posts, telephone, telex, courier, internal audit, information technology, computer maintenance etc - The assessee submitted before Assessing Officer that these expenses had been incurred by the head office specifically for the operations of the Indian branches and were supported by the statutory audit report - Hence, the same issue had been considered by the Tribunal in assessee s own case in assessment year 1997-98 in ITA No. 122/M/2001 and the claim of the assessee had been allowed by the Tribunal Decided in favour of assessee. Profit - Revaluation of outstanding foreign exchange contracts - the issue raised in this ground is settled by the decision of the special bench of the Tribunal in case of Dy. CIT v. Bank of Bahrain & Kuwait - In the said case the Special Bench held that where forward contract is entered into to sell foreign currency at an agreed price on a future date falling beyond the last day of accounting period, the losses incurred on account of revaluation of contract on the last day of accounting period i.e., before the date of maturity of the contract has to be allowed as deduction - Therefore set aside the order of CIT(A) and confirm the addition made by the Assessing Officer. Exemption of the interest income from tax free bonds u/s 10(15)(iv) - The judgment of Hon ble High Court of Karnataka in case of Sridev Enterprises (supra) in which the Hon ble High Court held that nature and status of the investment on the first day of the accounting year was the same as on the last day of previous year and if in the previous year, the same was explained out of own fund, the revenue could not be permitted to take a different stand in the subsequent years. Therefore even if the provisions of section 14A applied, no disallowance could be made. We accordingly see no infirmity in the order of CIT(A) allowing the claim of the assessee and the same is therefore upheld. Loss arising on account of diminution in the value of investment - The same issue had been considered by the Hon ble High Court of Mumbai in case of Bank of Baroda in which the assessee had been valuing the investment at cost or market whichever is lower and in that particular year the assessee had incurred loss which was claimed as deduction - The High Court allowed the claim - Therefore respectfully following the said judgment,no infirmity in the order of CIT(A) and confirmed the same. Compensatory interest - Provisions of section 43(3) of RBI Act itself provide for payment of interest in case of shortfall for not maintaining the minimum balances by not maintaining the CRR the assessee had derived some advantage for which it had to pay compensatory interest. Therefore in our view nature of interest even if it had been referred to as penal has to be considered as compensatory in nature - Judgment of Hon ble Supreme Court in case of Mahalakshmi Sugar Mills Co. also supports the case of the assessee - Therefore no infirmity in the order of CIT(A) and the same is accordingly upheld.

Issues Involved:
1. Disallowance of head office expenses.
2. Additions on account of revaluation of outstanding foreign exchange contracts.
3. Allowability of exemption of the interest income from tax-free bonds under section 10(15)(iv) of the Income-tax Act.
4. Disallowance of diminution in the value of investment (specific to assessment year 1999-2000).
5. Allowability of compensatory interest paid to RBI (specific to assessment year 1999-2000).

Issue-wise Detailed Analysis:

1. Disallowance of Head Office Expenses:
The first dispute concerns the disallowance of head office expenses claimed by the assessee for the assessment years 1999-2000, 2000-01, and 2001-02. The expenses included salaries to expatriate employees and other operational costs like postage, telephone, and computer maintenance. The Assessing Officer disallowed these expenses, suggesting they should be covered under section 44C. However, the CIT(A) allowed the expenses based on the judgment in CIT v. Emirates Commercial Bank Ltd., which stated that expenses exclusively incurred for Indian branches by the head office should be allowed under section 37. The Tribunal upheld this view, allowing staff costs and remanding other expenses back to the Assessing Officer for verification.

2. Additions on Account of Revaluation of Outstanding Foreign Exchange Contracts:
The second dispute involves the additions made by the Assessing Officer due to notional profit from revaluation of outstanding foreign exchange contracts. The CIT(A) ruled that notional profit should not be assessed, referencing the judgment in CIT v. Indian Overseas Bank. However, the Tribunal, following the Special Bench decision in Dy. CIT v. Bank of Bahrain & Kuwait, held that any profit from revaluation on the last day of the accounting period should be treated as income, thus setting aside the CIT(A)'s order and confirming the Assessing Officer's addition.

3. Allowability of Exemption of Interest Income from Tax-Free Bonds under Section 10(15)(iv):
The third dispute addresses whether the entire interest from tax-free bonds should be exempted under section 10(15)(iv). The Assessing Officer allowed only the net interest income after excluding related expenses. The CIT(A) allowed the full exemption, referencing the Tribunal's decision in British Bank of Middle East v. Jt. CIT. The Tribunal upheld this view, stating that the gross interest is exempt under section 10(15)(iv). Furthermore, it was noted that the investment was made from the assessee's own funds, and no borrowed funds were used, thus no interest expenses could be attributed to the investment.

4. Disallowance of Diminution in the Value of Investment (Specific to Assessment Year 1999-2000):
The fourth dispute, specific to the assessment year 1999-2000, involves the disallowance of Rs. 26,25,000 for diminution in the value of investment. The CIT(A) allowed the claim, referencing the judgment in CIT v. Bank of Baroda, where similar claims were allowed. The Tribunal upheld the CIT(A)'s decision, confirming that the loss due to diminution in the value of investment is allowable.

5. Allowability of Compensatory Interest Paid to RBI (Specific to Assessment Year 1999-2000):
The fifth dispute, also specific to the assessment year 1999-2000, concerns the disallowance of Rs. 24,007 paid as compensatory interest to RBI for not maintaining proper balances. The CIT(A) allowed the claim, referencing the Supreme Court judgments in Prakash Cotton Mills (P.) Ltd. v. CIT and Mahalakshmi Sugar Mills Co. v. CIT, which distinguished between compensatory and penal interest. The Tribunal upheld the CIT(A)'s decision, confirming that the interest paid was compensatory in nature and therefore allowable.

Conclusion:
The Tribunal partly allowed the appeals of the revenue, confirming some of the CIT(A)'s decisions and remanding others back to the Assessing Officer for further examination.

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