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2013 (5) TMI 374 - AT - Income TaxNet loss on foreign exchange contracts outstanding as at March 31,1998 - disallowance on account of notional loss from revaluation of foreign exchange forward contracts - Held that - As decided in DCIT (International Taxation) v. Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI) where forward contract is entered into by the assessee to buy or sell the foreign currency at an agreed price at a future date falling beyond the last date of the accounting period, the loss incurred by the assessee on account of revaluation of contract on the last date of the relevant accounting period is an allowable deduction. In view of this Special Bench decision, it is clear that the assessee is entitled to deduction of the said loss - AO is directed to verify and ensure that the preceding year s notional loss from revaluation of foreign exchange forward contracts not allowed by him but eventually allowed at the appellate level, is properly considered so that there is no corresponding reduction of income once again at the time of settlement of such contracts. Tax neutrality in respect of interest income received on funds placed with its Head Office / Overseas branches - Held that - As decided in ABN Amro Bank NV v. ADIT 2005 (8) TMI 294 - ITAT CALCUTTA-E there cannot be transactions with self and as such branch of the assessee bank cannot be treated as a separate entity insofar as the transactions between the Head Office and the Indian branch resulting into interest income or interest expenditure are concerned. As decided in Sumitomo Mitsui Banking Corporation case 2012 (10) TMI 443 - ITAT MUMBAI there can be neither any income in respect of interest earned by the assessee branch from its HO/ overseas branches nor there can be any deduction for interest paid by the Indian branch to the HO / other overseas branches on the basis of principle of mutuality. Thus following the principle of mutuality arising from the above special bench orders, overturn the impugned order on this issue and direct that neither the interest income should be charged to tax nor the interest expenditure be allowed as deduction. Broken period interest paid on securities - treatment to the securities as stock-in-trade or investment - CIT(A) deleted the addition - Held that - As decided in American Express International Banking Corporation v. CIT 2002 (9) TMI 96 - BOMBAY High Court once the broken period interest received by the assessee bank on Government securities was charged to tax as business income u/s 28, deduction for payment made for broken period interest at the time of purchase of these securities could not be denied when the assessee s method of accounting does not result in loss of tax / revenue for the Department - direct the AO to verify that the cost of the securities for the purposes of computing profit at the time of their sale should be taken at the net of broken period interest figure and not the gross figure. Against revenue. Addition on account of guarantee commission - CIT(A) deleted the addition - Held that - As decided in Bank of Bahrain and Kuwait case (2010 (8) TMI 578 - ITAT, MUMBAI) if the guarantee commission is refundable on the revocation of guarantee, then it cannot be said that the absolute right to the commission has accrued to the assessee at the time of execution of the contract for furnishing the guarantee, and the commission is to be spread over the period for which the guarantee is given - set aside the impugned order on this issue and remit the matter to the file of A.O. for deciding it afresh in accordance with the ratio laid down in the above case. Interest expenditure incurred for earning interest on tax free bonds - CIT(A) deleted the addition - Held that - CIT(A) has recorded a categorical finding that the interest free funds available with the assessee in the shape of capital and reserves are far in excess of the amount invested in bonds. In that view of the matter there can be no disallowance of any interest u/s 14A. However, the administrative and other expenses etc. are required to be disallowed u/s 14A on some reasonable basis. Thus AO is directed to compute such disallowance - partly in favour of revenue. Disallowance of net interest earned from head office / other overseas branches in computing the book profit for the purpose of section 115JA - Held that - The Tribunal in the case of Krung Thai Bank PCL (2010 (9) TMI 18 - ITAT, MUMBAI) has held that the provisions of section 115JB can apply only when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Companies Act. The assessee being a foreign bank in that case, was held to be not governed by the provisions of section 115JB. The instant assessee is also a foreign bank thus also not required to draw its Profit and loss account as per the Companies Act. In the absence of any contrary view brought to notice by the DR, case of Krung Thai Bank PCL (supra) is applicable. As this issue has been raised for the first time and neither taken up nor considered by the authorities below, it will be in the fitness of things if the AO is directed to decide this aspect of the matter as per law Rectification of mistake - Adjustment of bad debts - whether against the opening balance under section 36(1)(viia) as per CIT(A) OR against the closing balance as done by AO - Held that - CIT(A) has simply held that for allowing deduction in respect of bad debt u/s 36(1)(vii), only opening balance of the provision for bad and doubtful debts will have to be considered. He directed the A.O. to work out the amount of allowable bad debts accordingly. DR as well as AR failed to point out the correct controversy involved in this appeal from the order of the AO. Even the application filed u/s 154 was not available. Thus impugned order on this issue is set aside and the matter is restored to the file of AO for reconsideration.
Issues Involved:
1. Disallowance of net loss on foreign exchange contracts. 2. Tax neutrality in respect of interest income and expenditure between the assessee and its Head Office/Overseas branches. 3. Disallowance of professional fees. 4. Addition towards broken period interest. 5. Addition on account of guarantee commission. 6. Disallowance of interest expenditure incurred for earning interest on tax-free bonds. 7. Computation of book profit under section 115JA. 8. Deduction under section 36(1)(viia) for bad debts. 9. Applicability of section 115JB to foreign banks. 10. Interest paid by the Indian branch to the Head Office and its tax implications. Detailed Analysis: 1. Disallowance of Net Loss on Foreign Exchange Contracts: The assessee contested the disallowance of a net loss of Rs. 9,16,59,604 on foreign exchange contracts. The Tribunal referenced the Special Bench decision in DCIT (International Taxation) v. Bank of Bahrain and Kuwait, which allowed such losses as deductible. The AO was directed to verify the consistency of notional losses across years to avoid double deductions. The ground was allowed. 2. Tax Neutrality in Respect of Interest Income and Expenditure: The assessee argued for tax neutrality on interest income of Rs. 5,48,15,653 received from and Rs. 1,43,929 paid to its Head Office/Overseas branches. Citing the Special Bench decisions in ABN Amro Bank NV v. ADIT and Sumitomo Mitsui Banking Corporation v. DDIT, the Tribunal held that transactions between the Head Office and branches are not taxable based on the principle of mutuality. The ground was allowed. 3. Disallowance of Professional Fees: The assessee did not press the ground related to the disallowance of professional fees amounting to Rs. 30,67,903. Consequently, this ground was dismissed as not pressed. 4. Addition Towards Broken Period Interest: The Revenue's appeal against the deletion of an addition of Rs. 3,28,07,147 towards broken period interest was discussed. The Tribunal upheld the jurisdictional High Court's decision in American Express International Banking Corporation v. CIT, allowing the deduction of broken period interest when securities are treated as stock-in-trade. The AO was directed to verify that there is no double deduction. The ground was not allowed. 5. Addition on Account of Guarantee Commission: The Tribunal referred to the Special Bench decision in Bank of Bahrain and Kuwait, which differentiated between refundable and non-refundable guarantee commissions. The matter was remitted to the AO for fresh adjudication based on these principles. 6. Disallowance of Interest Expenditure for Earning Interest on Tax-Free Bonds: The Tribunal referenced its decision in JCIT v. American Express Bank Limited, allowing exemption under section 10(15)(iv) on a gross basis but requiring disallowance of related expenses under section 14A. The AO was directed to compute such disallowance reasonably. The ground was partly allowed. 7. Computation of Book Profit under Section 115JA: The Tribunal upheld the inclusion of net interest income from the Head Office/Overseas branches in the book profit for section 115JA purposes, citing the Supreme Court's ruling in Apollo Tyres Ltd. v. CIT. However, the applicability of section 115JA to foreign banks was remitted to the AO for fresh consideration, following the Tribunal's decision in Krung Thai Bank PCL v. JCIT. 8. Deduction under Section 36(1)(viia) for Bad Debts: The Tribunal remitted the issue of deduction under section 36(1)(viia) for bad debts to the AO for fresh adjudication, emphasizing the need for a speaking order and allowing the assessee an opportunity to be heard. 9. Applicability of Section 115JB to Foreign Banks: The Tribunal remitted the issue of the applicability of section 115JB to foreign banks to the AO, directing a fresh examination in light of the decision in Krung Thai Bank PCL v. JCIT. 10. Interest Paid by the Indian Branch to the Head Office: The Tribunal upheld the CIT(A)'s decision that no income arises to the Head Office from interest paid by the Indian branch, based on the principle of mutuality as established in the Special Bench decisions of ABN Amro Bank NV v. ADIT and Sumitomo Mitsui Banking Corporation v. DDIT. The ground was dismissed. Conclusion: The appeals were disposed of with directions for fresh adjudication on certain issues and upholding the principle of mutuality for transactions between the assessee and its Head Office/Overseas branches. The Tribunal provided detailed instructions to the AO to ensure consistency and avoid double deductions.
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