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2013 (11) TMI 1363 - AT - Income TaxAddition of Interest accrued but not due accrual of income - broken periods - Held that - Observation has been made by Hon ble High Court in the case of American Express International Banking Corpn 2002 (9) TMI 96 - BOMBAY High Court that the right to receive interest on the Government securities vested in the respondent only on the due date mentioned in the securities. Consequently, interest accrued on the securities only on the due dates and cannot be said to have accrued to the respondent on any date other than the date stipulated therein. The contention that interest accrues for broken periods between two consecutive dates stipulated in the agreement/instrument for payment of interest is without any basis in law Observed that in respect of the securities held by the respondent on 31st March, 2001, the due date for payment of interest thereon had not arrived on 31st March, 2001 and that the assessee sold some of such securities prior to the next due date for payment of interest. It is only the holder of the security on such date to whom interest can be said to have accrued Following the above observation by the Hon ble High Court, in any event interest did not accrue to the respondent on 31st March, 2001, as admittedly interest was not payable on that date as per the terms of the said securities Addition on account of interest deleted Decided in favor of Assessee. Addition of interest amount received from the foreign Head Office Held that - Relying upon the Special Bench judgment in the case of Sumitomo Mitsui Banking Corpn 2012 (4) TMI 80 - ITAT MUMBAI , it has been held that interest, cannot be taxed in India in the hands of assessee bank, a foreign enterprise being payment to self which cannot give rise to income that is taxable in India as per the domestic law Decided in favor of Assessee. Addition of Provision of Bad Debt for computing book profit under section 115JA of the Act Held that - In view of the retrospective amendment made by the Finance (No. 2) Act , 2009 w.r.e.f. 1-4-1998, the A.O. was justified in making the addition of the said provision of bad debts while computing the book profit/s 115JA of the Act Decided against the Assessee. No portion of interest expenditure and operating expenditure would be attributed to the income claimed exempt u/s 10(15) and deleting the proportional disallowance made - Assessee has claimed exempt interest on foreign currency deposits with schedule banks and the same is exempt u/s 10(15)(iv)(fa) of the Act Held that - Reliance has been placed upon the assessee s own case Dresdner Bank AG v. Asstt. CIT 2006 (10) TMI 175 - ITAT BOMBAY-F , wherein it has been held that exemption is allowable u/s 10(15) in respect of gross amount of interest - Any expenditure incurred in relation to earning to the exempt income is to be disallowed u/s 14A Decided against the Assessee. Interest receivable by the Indian branch from its Head Office/Overseas Branches is the income Held that - In the absence of any contrary material placed on record by the Revenue, deleted the disallowance of deduction of interest of Rs. 3,244,213/- - Decided in favor of Assessee.
Issues Involved:
1. Accrual of interest on securities. 2. Taxability of interest receivable by the Indian branch from its Head Office/Overseas Branches. 3. Deductibility of amount paid under guarantee as a trading loss. 4. Applicability of provisions of section 115JA of the Income Tax Act. 5. Addition of provision for bad debts to net profit while computing book profit under section 115JA. 6. Allowability of broken period interest as a deduction. 7. Attribution of interest expenditure and operating expenditure to income claimed exempt under section 10(15). Issue-wise Detailed Analysis: 1. Accrual of Interest on Securities: The assessee claimed a deduction for interest accrued but not due on securities. The AO included this interest in the income, citing the mercantile system of accounting. The CIT(A) upheld the AO's decision but directed verification of previously taxed interest. The Tribunal, referencing the jurisdictional High Court's decision in DIT (International Taxation) v. Credit Suisse First Boston (Cyprus) Ltd., ruled that interest accrues only on due dates, not on the last day of the financial year. Consequently, the Tribunal deleted the addition of Rs. 3,18,36,688/- for A.Y. 1999-2000 and Rs. 27,979,639/- for A.Y. 2000-01. 2. Taxability of Interest Receivable by the Indian Branch from its Head Office/Overseas Branches: The AO added interest received from the Head Office and overseas branches to the taxable income, treating the branches as independent entities. The CIT(A) upheld this view. The Tribunal, however, followed the Special Bench decision in Sumitomo Mitsui Banking Corpn. and other cases, ruling that such interest is not taxable as it is considered a payment to self. Consequently, the Tribunal deleted the additions of Rs. 6,48,83,337/- for A.Y. 1999-2000 and Rs. 3,244,213/- for A.Y. 2000-01. 3. Deductibility of Amount Paid Under Guarantee as a Trading Loss: The assessee did not press this ground for A.Y. 1999-2000 and A.Y. 2000-01. Consequently, the Tribunal rejected the ground being not pressed. 4. Applicability of Provisions of Section 115JA of the Income Tax Act: The CIT(A) did not adjudicate on the applicability of section 115JA, deeming it academic since the total income under normal provisions exceeded the book profits under MAT provisions. The Tribunal remanded the issue to the CIT(A) for a fresh decision in light of relevant judicial precedents. 5. Addition of Provision for Bad Debts to Net Profit While Computing Book Profit Under Section 115JA: The AO added provisions for bad debts to book profits under section 115JA, which the CIT(A) upheld. The Tribunal affirmed this addition, referencing the retrospective amendment by the Finance (No. 2) Act, 2009. 6. Allowability of Broken Period Interest as a Deduction: The AO disallowed broken period interest, treating it as capital expenditure. The CIT(A) allowed the deduction, referencing the jurisdictional High Court's decision in American Express International Banking Corpn. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's approval in CIT v. Citi Bank N.A., thus allowing broken period interest as a revenue expenditure for both assessment years. 7. Attribution of Interest Expenditure and Operating Expenditure to Income Claimed Exempt Under Section 10(15): The AO disallowed a portion of interest and operating expenses related to exempt income under section 10(15). The CIT(A) deleted the disallowance, noting no nexus between interest-bearing funds and exempt income. The Tribunal remanded the issue to the AO for fresh computation of disallowance under section 14A, consistent with judicial precedents, for both assessment years. Conclusion: The Tribunal's decisions comprehensively addressed each issue, often relying on higher judicial precedents to ensure consistency and fairness in tax assessments. The remands to the CIT(A) and AO for specific issues reflect a commitment to thorough review and application of relevant legal principles.
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