2013 (11) TMI 166 - AT - Income Tax

Addition towards Difference on Account of Broken Period Interest - Held that - The interest in question on account of relevant Government securities can be brought to tax in the hands of the assessee only on the relevant due dates when it could be said to have accrued to the assessee - Following CIT vs. Bank of Rajastan Ltd. 2010 (4) TMI 217 - BOMBAY HIGH COURT held while upholding the Tribunal s order in deleting the similar addition made on account of interest accrued but not realized on the Government securities that interest on Government securities could be said to accrue only when it becomes due and, therefore, there should not be a charge to such income until such time that it becomes due - in the case of Government securities, interest accrues only on the coupon dates and not on day to day basis - the addition made by the AO and confirmed by the learned CIT(Appeals) on this issue was deleted and allowing the assessee s appeal Decided in favour of Assessee. Determination of Head of Income - under which interest on income-tax refund was chargeable to tax whether income from other sources or profits and gains of business or profession Held that - The interest on income-tax refund received by the assessee as income from other sources and not profits and gains of business or profession - The source of such interest income being the income-tax refund arising from the income-tax proceedings, the same cannot be treated as business income of the assessee - the activity resulting into income-tax refund as well as interest payable thereon as per the provisions of section 244A of the Income-tax Act, 1961 cannot form part of business activity of the assessee and the same cannot even be treated as an activity incidental to the business of the assessee so as to say that such interest constitutes its business income Decided against the Assessee. Determination of the Head of Income - under which miscellaneous income earned by the assessee is chargeable to tax whether income from other sources or profits & gains of business or profession - Held that - Miscellaneous income earned by the assessee as the income from other sources and not business income was upheld by the learned CIT(Appeals) observing that the said income had no link with any organized and regular business activity of the assessee - order of the CIT(Appeals) was set aside on this issue and restore the matter to the file of the AO to decide the same afresh after ascertaining the exact nature of non banking assets claimed to be held by the assessee in the normal course of its banking business Decided against the Assessee. Additions made u/s 115JB - while computing its book profit u/s 115JB on account of the provision for doubtful debts Held that - Following Krung Thai Bank PCL vs. Joint Director of Income-tax 2010 (9) TMI 18 - ITAT, MUMBAI - the provisions of section 115JB cannot be applied in the case of the assessee being a banking company and there was thus no question of computation of book profit u/s 115JB or any addition to be made for this purpose - in the case of banking companies, the provisions of Schedule VI to the Companies Act, however, were not applicable in view of exemption set out under proviso to section 211(2) of the Companies Act and since the final accounts of the banking companies are required to be prepared in accordance with the provision of the Banking Regulation Act, the provisions of section 115JB cannot be applied to the case of a banking company - the question of computation of book profit under the said provisions or making any addition for this purpose does not arise at all - The addition made by the AO and confirmed by the learned CIT(Appeals) on account of provision for doubtful debts while computing the book profit u/s 115JB was deleted.

Summary

Issues Involved:
1. Addition of interest accrued but not realized on securities.
2. Determination of the head of income for interest on income-tax refund.
3. Determination of the head of income for miscellaneous income.
4. Addition of provisions for doubtful debts and expenses while computing book profit under section 115JB.

Issue-wise Detailed Analysis:

1. Addition of Interest Accrued but Not Realized on Securities:
The primary issue pertains to the addition of Rs. 2,23,17,656/- made by the AO towards interest accrued but not realized on securities held as stock in trade. The assessee, a banking company, argued that the interest should be considered income only upon realization, citing consistent accounting practices since assessment year 1991-92 and relevant judicial decisions, including American Express International Banking Corporation vs. CIT.

The AO, however, added the interest accrued but not realized, emphasizing the mercantile system of accounting and relevant judicial precedents like State Bank of Travancore and Taparia Tools Ltd. The CIT(A) upheld this addition, citing the assessee's right to receive interest under the mercantile system.

Upon appeal, the Tribunal referenced the Bombay High Court's decision in CIT vs. Bank of Rajasthan Ltd., which held that interest on government securities accrues only when due. The Tribunal, following this precedent and the Special Bench decision in DCIT vs. Bank of Bahrain and Kuwait, deleted the addition, ruling that interest on government securities should be taxed only when due.

2. Determination of Head of Income for Interest on Income-tax Refund:
The second issue involves whether interest on income-tax refund should be classified as "income from other sources" or "profits and gains of business or profession." The assessee argued for the latter, given its banking business.

The Tribunal, however, upheld the CIT(A)'s decision, referencing a coordinate bench's ruling in M/s Laxmi Centre vs. ITO, which determined that interest on income-tax refunds, arising from income-tax proceedings, should be classified as "income from other sources." The Tribunal dismissed the assessee's appeal on this ground.

3. Determination of Head of Income for Miscellaneous Income:
The third issue concerns the classification of miscellaneous income, which the AO and CIT(A) treated as "income from other sources" due to its lack of connection with the assessee's regular business activities.

The Tribunal noted the absence of detailed information on the non-banking assets generating this income. Consequently, it set aside the CIT(A)'s order and remanded the matter to the AO for a fresh decision after determining the nature of the non-banking assets. The Tribunal instructed the AO to provide the assessee an opportunity to be heard.

4. Addition of Provisions for Doubtful Debts and Expenses While Computing Book Profit Under Section 115JB:
The fourth issue relates to the addition of provisions for doubtful debts and expenses while computing book profit under section 115JB. The assessee argued that section 115JB does not apply to banking companies, which prepare accounts under the Banking Regulation Act, not the Companies Act.

The Tribunal agreed, citing the coordinate bench's decision in Krung Thai Bank PCL vs. Joint Director of Income-tax, which held that section 115JB does not apply to banking companies. Consequently, the Tribunal deleted the additions made by the AO and confirmed by the CIT(A) while computing book profit under section 115JB.

Conclusion:
The Tribunal allowed the assessee's appeals for assessment years 2003-04 and 2004-05 partly, and fully allowed the appeal for assessment year 2005-06, providing relief on the issues of interest accrued but not realized and the applicability of section 115JB to banking companies, while upholding the classification of interest on income-tax refunds as "income from other sources."