2012 (12) TMI 730 - AT - Income Tax

Net interest and commission received from head office - CIT(A) deleted the addition - Held that - Following the precedent for assessment year 1997-98 wherein relying on the case of Sumitomo Mitsui Banking Corpn. v. Dy. DIT (IT) 2012 (4) TMI 80 - ITAT MUMBAI wherein held that neither any interest/commission received by the Indian PE from HO/other overseas branches can be charged to tax, nor there can be any deduction towards interest/commission expenditure incurred by the assessee towards HO /overseas branches & restored the matter to the file of AO with a direction to exclude the such amount and also not to grant deduction in respect of interest/commission received from the overseas HO/branches. Disallowance of broken period interest on PSU bonds - Held that - The assessee switched over from one recognized method of valuation of bonds and securities to another recognized method in the previous year relevant to the assessment year under consideration in respect of PSU bonds. Broken period interest which was hither to capitalized came to be considered as deduction in the year of purchase. This changed method has been undisputedly followed by the assessee consistently in subsequent years. Considering the earlier order passed by the Tribunal in assessee s own case for AY 1991-92, the Tribunal decided it in favour of the assessee by holding that interest paid on broken period was liable to be allowed as deduction against the interest received in respect of the broken period - in favour of assessee. Interest on NOSTRO account - CIT(A) deleted charging of interest & enhancement to the tune of Rs. 27,31,95,602 u/s 14A - Held that - Following the precedent for assessment year 1997-98 the interest of Rs. 3.98 crore on NOSTRO account is chargeable to tax and resultantly the disallowance u/s 14A made to the tune of Rs. 27.31 crore is deleted - grounds raised by the assessee as well as Revenue in this regard are allowed. Taxability of income at the rate of 48% as applicable to non-resident company - Held that - The assessee fairly admitted that this issue has been decided against the assessee in earlier years - The impugned order on this issue for the current year as well and dismiss this ground. Interest received from branches on placement of overseas deposits - should it be charged to tax - Held that - The interest received from branches should not be charged to tax as it is a transaction with self, the view has consistently been taken in earlier years but since the exact amount of interest received by the assessee from its HO/overseas branches is not emanating from record, AO is directed to find out such amount of interest received from HO/overseas branches and exclude it from the computation of total income - in favour of assessee for statistical purposes. Disallowance of loss on revaluation of unmatured forward foreign exchange (Forex) Contracts - Held that - As decided in DCIT Versus Bank of Bahrain & Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI the loss incurred by the assessee on account of evaluation of the contract on the last day of the accounting year i.e. before the date of maturity of the forward contract, is allowable as deduction - AO directed to allow loss of Rs. 7.14 crore in this year and compute loss/profit on Forox contract maturing in the previous year relevant to the assessment year 1999-2000 by considering the impact of allowing of loss of Rs. 7.14 crore - in favour of assessee. Exemption of gross interest earned from tax free securities u/s 10(15) - Held that - Exemption u/s 10(15) is to be allowed on gross interest and not on the net interest. Disregard the refund while calculating the interest u/s 234B - Held that - CIT(A) has rightly considered the mandate of sections 234B and 234D. Obviously, the interest u/s 234B is required to be calculated on the basis of total income computed without considering the refund determined u/s 143(1). Disallowance of interest earned from HO was lower as compared to interest paid for FCNR-B Deposit - Held that - Simply because the assessee paid interest on domestic deposits at a little higher rate than that it received on FCNR-B Deposits, it cannot be said that the interest paid should be disallowed to that extent. Write off of premium paid on purchase of securities amortised over the life of investments - Held that - In agreement with the view canvassed by the CIT(A) as that when the assessee is purchasing securities as stock-in-trade, there can be no question of amortizing the premium paid for the purchase of securities over the life of such securities. The purchase price so paid has to be taken as such by disregarding the assessee s view point that the premium on purchase of securities should be amortized over the life of investment. To this extent the view taken by the CIT(A) approved with a little modification that not only when the securities are not only sold but also even when these get matured, income from then should be computed with reference to the cost of purchase of securities. Deduction independent of the provisions of section 44C - CIT(A)deleted the expenses claimed by the assessee on account of HO expenses independent of the provisions of section 44C - Held that - Facts and circumstances of this ground are similar to those prevailing in the earlier years in which it has been held that the deduction has to be allowed independent of the provisions of section 44C - if during the fresh examination, the AO finds that the expenses of Rs. 1.06 crore or any part thereof represent apportionment of HO expenses as per Explanation to section 44C, such allocated expenses will not be allowed as deduction independent of section 44C. To the extent the expenses are found to be exclusively incurred by HO for the assessee, they will not fall within the definition of HO expenses and accordingly allowed as deduction independent of section 44C. This ground is, therefore, allowed for statistical purposes.

Summary

Issues Involved:
1. Deletion of addition of net interest and commission received from head office.
2. Disallowance of broken period interest on PSU bonds.
3. Charging of interest on NOSTRO account.
4. Taxability of income at the rate applicable to non-resident company.
5. Taxability of interest/commission received from head office/branches.
6. Disallowance of loss on revaluation of unmatured forward foreign exchange contracts.
7. Allowance of broken period interest paid as an expense.
8. Exemption in respect of gross interest earned from tax-free securities.
9. Calculation of interest under section 234B.
10. Deduction independent of the provisions of section 44C.
11. Disallowance of excess interest paid on FCNR-B Deposit.
12. Write off of premium paid on purchase of securities.
13. Disallowance under section 40(a)(i) in respect of interest paid to head office and overseas branches.
14. Deletion of gain on Forex Contract.
15. Expenses claimed by the assessee on account of head office expenses independent of section 44C.

Detailed Analysis:

1. Deletion of Addition of Net Interest and Commission Received from Head Office:
The issue pertains to the deletion of Rs. 15,57,491 being the net interest and commission received by the assessee from its head office and overseas branches. The Tribunal relied on the Special Bench order in Sumitomo Mitsui Banking Corpn. v. Dy. DIT (IT) [2012] 136 ITD 66, directing the Assessing Officer to exclude the amount of interest/commission received and not to grant deduction in respect of interest/commission incurred towards the head office/overseas branches. The matter was restored to the file of the Assessing Officer for a decision in line with this precedent.

2. Disallowance of Broken Period Interest on PSU Bonds:
The assessee changed its accounting policy for PSU bonds, charging broken period interest to the profit and loss account instead of capitalizing it. The Assessing Officer disallowed Rs. 64,76,781, but the CIT(A) overturned this disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the assessee consistently followed the new method in subsequent years and similar issues had been decided in favor of the assessee in earlier years.

3. Charging of Interest on NOSTRO Account:
For the assessment year 1998-99, the Tribunal held that interest on NOSTRO account amounting to Rs. 3.98 crore is chargeable to tax, following the precedent set for the assessment year 1997-98. Consequently, no disallowance under section 14A was warranted. The same view was reiterated for subsequent years.

4. Taxability of Income at the Rate Applicable to Non-Resident Company:
The issue of taxability at the rate of 48% applicable to non-resident companies was decided against the assessee, following the decision in earlier years.

5. Taxability of Interest/Commission Received from Head Office/Branches:
The Tribunal directed the Assessing Officer to exclude the amount of interest/commission received by the Indian PE from its head office/overseas branches and not to allow deduction for interest/commission paid to the head office/overseas branches, following the decision in Sumitomo Mitsui Banking Corpn.

6. Disallowance of Loss on Revaluation of Unmatured Forward Foreign Exchange Contracts:
The Tribunal allowed the deduction of Rs. 7.14 crore for the loss on revaluation of unmatured forward foreign exchange contracts, following the Special Bench decision in Bank of Bahrain & Kuwait [2010] 41 SOT 290 (Mum.). The Assessing Officer was directed to ensure that this loss is not allowed again in the subsequent year when the contracts mature.

7. Allowance of Broken Period Interest Paid as an Expense:
The Tribunal upheld the allowance of broken period interest paid as an expense, following the decision in earlier years.

8. Exemption in Respect of Gross Interest Earned from Tax-Free Securities:
The Tribunal held that exemption under section 10(15) is to be allowed on gross interest and not net interest. It was also noted that the assessee's investment in tax-free securities was made from interest-free funds, and no disallowance under section 14A was warranted.

9. Calculation of Interest Under Section 234B:
The Tribunal upheld the CIT(A)'s decision that interest under section 234B should be calculated without considering the refund determined under section 143(1).

10. Deduction Independent of the Provisions of Section 44C:
The Tribunal upheld the CIT(A)'s direction to allow deduction independent of section 44C, noting that similar issues had been decided in favor of the assessee in earlier years.

11. Disallowance of Excess Interest Paid on FCNR-B Deposit:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 1,05,18,450 for excess interest paid on FCNR-B Deposit, noting that the deposits were kept in a NOSTRO account and used for global operations.

12. Write Off of Premium Paid on Purchase of Securities:
The Tribunal upheld the CIT(A)'s view that the premium paid on the purchase of securities should not be amortized over the life of the investment but should be considered at the purchase price. The direction was modified to include income computation when securities mature, not just when sold.

13. Disallowance Under Section 40(a)(i) in Respect of Interest Paid to Head Office and Overseas Branches:
The Tribunal held that since the interest/commission paid to the head office/overseas branches is not deductible, there is no question of disallowance under section 40(a)(i).

14. Deletion of Gain on Forex Contract:
The Tribunal directed the inclusion of Rs. 13.37 lakh in the total income, following the principle of consistency, as the assessee consistently valued unmatured foreign exchange contracts at the prevailing rate at year-end.

15. Expenses Claimed by the Assessee on Account of Head Office Expenses Independent of Section 44C:
The Tribunal restored the matter to the Assessing Officer to decide whether the expenses were exclusively incurred by the head office for the assessee and thus allowable independent of section 44C. If the expenses were allocated, they would fall under section 44C.

Conclusion:
The appeals were partly allowed for statistical purposes, with several issues restored to the Assessing Officer for re-evaluation and others decided based on precedents and consistent practices followed in earlier years.