2012 (12) TMI 640 - AT - Income Tax

Interest income on NOSTRO and overseas placements maintained with branches outside India - deduction towards interest expenditure on such accounts. - interest income u/s 9(1)(v) - held that - Tribunal in the case of ABN Amro Bank NV v. Asstt. DIT 2005 (8) TMI 294 - ITAT CALCUTTA-E (SB) has held that the branch of the assessee bank cannot be treated as a separate entity. The transactions between the Head office and branch resulting into interest income or interest expenditure are to be viewed as transaction with self. On the basis of mutuality, it has been held that there can be neither any income in respect of interest earned from its overseas branches, nor there can be deduction for interest expenditure paid by the Indian branch to Head office or the other overseas branches. - the interest income of Rs. 4.88 crore which has resulted only from the assessee s dealings with its Head office or overseas branches cannot be charged to tax on the principle of mutuality will apply. Accordingly no tax can be levied on the interest earned by the assessee from its Head office or overseas branches. There is a clear distinction between the NOSTRO interest earned/paid by the assessee from/to its own Head office/overseas branches and NOSTRO interest paid/earned to/from other than assessee s own Head office or branches. Whereas in the first situation, the principle of mutuality will apply and in the later case it will not. No deduction on account of interest expenditure can be allowed which has been incurred by the assessee in relation to its own Head office and overseas branches. Both the grounds of assessee and revenue allowed.

Issues Involved:
1. Charging business income at the rate applicable to foreign companies.
2. Taxation of interest income on NOSTRO and overseas placements and deduction towards interest expenditure on such accounts.
3. Disallowance of entertainment expenses under Section 37(1) of the Income-tax Act.
4. Deduction of loss on valuation of securities.
5. Taxing estimated profit on unmatured forward exchange contracts.
6. Disallowance of expenses incurred on earning tax-free income under Section 14A.
7. Application of interest under Section 234C of the Income-tax Act.

Detailed Analysis:

1. Charging Business Income at the Rate Applicable to Foreign Companies:
The first ground of the assessee's appeal concerned the direction to charge business income at the rate of 48%, applicable to foreign companies. The Tribunal upheld the decision against the assessee, referencing a similar case (M/s. Credit Agricole Indosuez) where the issue was decided similarly. This ground was not allowed.

2. Taxation of Interest Income on NOSTRO and Overseas Placements and Deduction Towards Interest Expenditure:
The second ground of the assessee's appeal and the first ground of the Revenue's appeal dealt with the taxation of interest income of Rs. 4.88 crore on NOSTRO and overseas placements. The Tribunal observed that NOSTRO accounts were maintained with the assessee's head office and overseas branches. Following the principle of mutuality, it was held that interest income from dealings with its head office or overseas branches cannot be taxed. Similarly, no deduction for interest expenditure paid to the head office or overseas branches was allowed. Both grounds were allowed.

3. Disallowance of Entertainment Expenses Under Section 37(1):
Ground no.3 of the assessee's appeal and ground no.2 of the Revenue's appeal concerned the disallowance of Rs. 50,000 on account of entertainment expenses under Section 37(1). The Tribunal noted that Section 37(2), which provided for disallowance of entertainment expenses, was omitted from 01.04.1998. Therefore, no disallowance could be made if the expenses were incurred for business purposes. The Tribunal allowed the assessee's ground and dismissed the Revenue's ground.

4. Deduction of Loss on Valuation of Securities:
Ground no.4 of the assessee's appeal and ground no.4 of the Revenue's appeal pertained to the disallowance of Rs. 2.99 crore for loss on valuation of shares in Patheja Brothers and the deletion of a disallowance of Rs. 2.41 crore for other securities. The Tribunal upheld the deduction of Rs. 2.41 crore, noting that the loss on valuation of securities held as stock-in-trade is deductible. The Tribunal directed the Assessing Officer to verify the facts regarding the Rs. 2.99 crore and allow the loss if there was a reduction in value at the year-end. The assessee's ground was allowed for statistical purposes, and the Revenue's ground was not allowed.

5. Taxing Estimated Profit on Unmatured Forward Exchange Contracts:
Ground no.5 of the assessee's appeal concerned the inclusion of an estimated profit of Rs. 10.45 crore on unmatured forward exchange contracts. The Tribunal upheld the inclusion, noting the principle of consistency and referencing a similar view taken in the case of Credit Agricole Indosuez. This ground was not allowed.

6. Disallowance of Expenses Incurred on Earning Tax-Free Income Under Section 14A:
The only other ground in the Revenue's appeal was against the deletion of an addition of Rs. 10 lakh for expenses related to tax-free income. The Tribunal noted that the assessee had sufficient interest-free funds to cover the investments in tax-free securities. Following the jurisdictional High Court's decision in CIT v. Reliance Utilities & Power Ltd., no disallowance for interest expenditure was warranted. However, the Tribunal directed the Assessing Officer to disallow 2% of the total exempt income for administrative and management expenses. The ground was partly allowed.

7. Application of Interest Under Section 234C:
Ground no.4 of the assessee's appeal for the assessment year 2000-2001 concerned the application of interest under Section 234C. Since the primary ground was dismissed, this consequential ground was also dismissed.

Separate Judgments:
The judgment covered multiple assessment years (1998-1999 to 2000-2001), and the Tribunal delivered a consolidated order for convenience. The Tribunal's decisions were consistent across the years, following precedents and principles established in previous cases.

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