2012 (11) TMI 896 - AT - Income Tax

Whether in the case of Government securities, interest accrues on day to day basis or only on the coupon dates Held that - Interest accrues only on the specified coupon dates and not on day to day basis - in favour of the assessee Disallowance of loss on unmatured foreign exchange contracts Held that - If the date of maturity of the contract falls within the same financial year then the difference between the exchange rate as prevailing on the balance sheet date and contracted rate is an allowable deduction - forward foreign exchange contract creates a continuing binding obligation on the date of contract against the assessee to fulfill the same on the date of maturity and it is in the nature of hedging contract because it is a contract entered into against possible financial losses - 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 - loss on unmatured foreign exchange contract have to be allowed as deduction Disallowance u/s. 43B of interest accrued but not due on subordinated debts Held that - Interest can only be allowable when the same is actually paid and not merely because the same is due as per the method of accounting adopted by the assessee - Assessee cannot on the one hand say that interest liability has accrued under the mercantile system of accounting and on the other hand say that for the purposes of Sec. 43B(d) of the Act, the interest is not payable - in favour of the Revenue

Summary

Issues Involved:
1. Accrued interest on securities not due for payment.
2. Disallowance under Section 14A of the Income Tax Act.
3. Disallowance of loss on unmatured foreign exchange contracts.
4. Disallowance under Section 43B of interest accrued but not due on subordinated debts.

Detailed Analysis:

Issue 1: Accrued Interest on Securities Not Due for Payment
The primary issue raised by the assessee was the confirmation of an amount of Rs. 51,53,26,248/- representing accrued interest on securities that had not yet fallen due for payment. The assessee, a banking company, argued that only the interest income received on investments should be added to the total income, not the accrued interest which was not due. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this contention, leading to an appeal before the Tribunal. The Tribunal referred to its earlier decision in the assessee's own case for A.Y 2000-01, where it was held that interest on Government Securities does not accrue on a day-to-day basis but only on fixed dates. The Tribunal cited the ITAT (SB) decision in the case of DCIT v. Bank of Bahrain and Kuwait, which supported the view that interest accrues only on coupon dates. Consequently, the Tribunal decided in favor of the assessee and allowed the ground, directing the deletion of the addition.

Issue 2: Disallowance Under Section 14A of the Income Tax Act
The second issue concerned the disallowance of Rs. 17,02,608/- under Section 14A, related to expenses incurred in earning exempt income. The Tribunal noted that a similar issue had been remanded to the AO for fresh consideration in light of the Bombay High Court's decision in the case of Godrej Boyce Manufacturing Company Ltd. Therefore, the Tribunal set aside the order of the CIT(A) and remanded the issue back to the AO for fresh consideration.

Issue 3: Disallowance of Loss on Unmatured Foreign Exchange Contracts
The third issue involved the disallowance of a loss amounting to Rs. 1,83,34,409/- on unmatured foreign exchange contracts. The AO and CIT(A) had disallowed this loss, considering it notional. However, the Tribunal referred to its earlier decision in the assessee's own case for A.Y. 2000-01 and the Special Bench decision in the case of Bank of Bahrain & Kuwait, which held that such losses are allowable deductions. The Tribunal concluded that the loss on unmatured foreign exchange contracts should be allowed as a deduction and allowed the ground.

Issue 4: Disallowance Under Section 43B of Interest Accrued but Not Due on Subordinated Debts
The fourth issue was the disallowance of Rs. 52,00,000/- under Section 43B for interest accrued but not due on subordinated debts. The CIT(A) upheld the AO's disallowance, citing that interest payable to banks and financial institutions is allowable only on a payment basis as per Section 43B. The Tribunal referred to the Delhi High Court's decision in Triveni Engineering & Industries Ltd. v. CIT, which held that interest can only be allowed when actually paid, not merely accrued. The Tribunal concluded that the assessee's claim was not allowable under Section 43B(d) and dismissed the ground.

Other Grounds:
- Ground No. 2 was not pressed and was dismissed.
- Grounds No. 6 and 7 were also not pressed and were dismissed.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the deletion of the addition for accrued interest on securities, remanding the Section 14A disallowance for fresh consideration, allowing the deduction for loss on unmatured foreign exchange contracts, and upholding the disallowance under Section 43B for interest accrued but not due.