2022 (9) TMI 1406 - HC - Income Tax

Disallowance of claim of deduction on account of commission on locker rent received in advance - HELD THAT - In CIT VS. Bank Of Tokyo Limited 1993 (5) TMI 172 - CALCUTTA HIGH COURT it is held that payability even though mandatory merely creates a tentative right to receive commission for unexpired period of the guarantee and not a perfected right. The right becomes perfected and crystallised only with the expiry of the unexpired period. The Calcutta High Court has also noted the Authority in E.D.Sassoon CO. LTD. 1954 (5) TMI 2 - SUPREME COURT wherein it has held that a debt must have come into existence and the assessee must have acquired a right to receive the payment. Unless and until his contribution or parenthood is effective in bringing into existence a debt or a right to receive the payment or in other words a debitum in praesenti solvendum in futuro it cannot be said that any income has accrued to the assessee. The Bank no doubt receives the locker rent in advance for future period. The said amount can be appropriated for the relevant future years when service is provided. The ITAT in our view has rightly applied the ratio in Bank of Tokyo Limited and held that no addition was warranted in respect of the locker rent received in advance. Accordingly we answer this question against the revenue and in favour of the assessee. Protection of foreign exchange fluctuation pertaining to forwards contracts - HELD THAT - Bank agrees to pay the money in Indian currency equal to the foreign exchange rate by entering into a contract in respect of the fluctuation of the foreign exchange value. In that scenario the Bank may either gain some money or lose money depending upon the exchange rate as on the date of the conclusion of the contract. In the interregnum period unrealized gain if any is a notional figure recorded in the books of accounts and the same will be subject to the completion of transaction at the end of the contract period. This aspect was considered by the Madras High Court in the case of Indian Overseas Bank 1990 (2) TMI 43 - MADRAS HIGH COURT - The Madras High Court following the authority in CIT Vs. Shoorji Vallabhdas and Co . 1962 (3) TMI 6 - SUPREME COURT has held that there cannot be a tax even though for the purposes of book-keeping an entry is made about hypothetical income. It is possible that at the end of the contract the Bank may infact gain or lose money based on the foreign exchange value as on the date of the conclusion of the transaction. We are in respectful agreement with the view taken by the Madras High Court which the ITAT has considered and accepted. Hence this question is also answered in favour of the assessee and against the revenue.

Summary

Issues:
1. Deduction on account of commission on locker rent received in advance.
2. Treatment of loss/depreciation on securities held by the bank.
3. Rejection of claim of notional income relating to forward contracts.

Analysis:
1. Deduction on account of commission on locker rent received in advance:
The main issue revolved around whether the locker rents collected in advance should be treated as income during the previous years of assessment and taxed accordingly. The Revenue contended that since the bank follows the mercantile system of accounting and has received rents for more than one year, the income should not be spread over future periods. However, the ITAT, following the decision in CIT VS. Bank Of Tokyo Limited, held that no debt is created in favor of the bank for the entire amount received in advance. The right of the customer to recall the payment for the unexpired period indicates that no perfected right exists until the expiry of the unexpired period. The Court agreed with the ITAT's reasoning and ruled against the Revenue, in favor of the assessee.

2. Treatment of loss/depreciation on securities held by the bank:
Regarding the treatment of loss/depreciation on securities held by the bank, the Revenue argued that investments shown as Stock in Trade should not be allowed as a deduction, as per Circular No 18 of 2015. The ITAT, however, considered the Madras High Court's decision in Indian Overseas Bank Vs. Commissioner of Income-tax, which held that hypothetical income entries for book-keeping purposes should not be taxed until the completion of the transaction. The Court concurred with the ITAT's decision, ruling in favor of the assessee and against the Revenue.

3. Rejection of claim of notional income relating to forward contracts:
The issue of rejecting the claim of notional income relating to forward contracts was also addressed. The bank entered into contracts to protect against foreign exchange fluctuations, leading to unrealized gains or losses. The Madras High Court's decision in CIT Vs. Shoorji Vallabhdas and Co. was cited, stating that hypothetical income entries should not be taxed until the actual gains or losses are realized. The ITAT's acceptance of this view was upheld by the Court, ruling in favor of the assessee and against the Revenue.

In conclusion, the Court dismissed the appeals, ruling against the Revenue on all three issues and in favor of the assessee.