2004 (10) TMI 263 - AT - Income Tax

Summary

Issues involved:
1. Whether 'gross interest' or 'net interest' earned on foreign currency deposits should be considered for deduction under s. 10(15)(iv)(fa) of the IT Act, 1961.

Comprehensive Analysis:
The appeal was filed by the Revenue against the order passed by the CIT(A) for the assessment year 1997-98 regarding the deduction of interest income on foreign currency deposits under s. 10(15)(iv)(fa) of the IT Act, 1961. The Revenue contended that 'gross interest' should be considered for deduction, whereas the CIT(A) allowed the deduction based on 'net interest' as per the decision in Escorts Ltd. vs. Union of India. The factual background revealed that the assessee, a foreign bank operating in India, revised its claim of exemption of interest income during the assessment proceedings. The AO rejected the revised claim, citing the inability to further change the taxable income figure once the revised return was filed. The AO also argued that the exemption under s. 10 should be based on the net income, not gross receipts, and proportionate expenses should be determined if accurate expenses cannot be ascertained. However, the CIT(A) disagreed, citing the judgment in Rajasthan State Warehousing Corpn. vs. CIT and concluded that the exemption should be on a gross basis. The Revenue appealed the CIT(A)'s decision.

Upon hearing both parties and examining the legal provisions, the Tribunal noted that the Revenue's reliance on the Escorts Ltd. case was misplaced as the issue did not involve double deduction. The core issue was whether the exemption under s. 10(15)(iv)(fa) should be on a net or gross basis. The Revenue argued that only net income should be exempt, considering the cost of funds for earning the interest income. However, the assessee claimed not to have incurred any expenditure for earning the interest income. The Tribunal observed that the Revenue did not challenge this assertion, making the objection academic. As no specific costs were identified, the Tribunal declined to adjudicate on whether the exemption should be on a gross or net basis. Consequently, the Revenue's grievance was deemed devoid of substance, and the appeal was dismissed.