2011 (1) TMI 1244 - AT - Income Tax

Amount accrued but not received - Accrued interest on securities Held that - The decision in DCIT (International Taxation) vs. Bank of Bahrain and Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI followed the interest accrues only on the coupon dates and not on day to day basis - Union Bank of India cannot be prevented from urging in the return that the interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit & loss account for the interest on day to day basis Decided in favour of Assessee. Disallowance of loss on unmatured foreign exchange contracts Held that - The decision in DCIT (International Taxation) vs. Bank of Bahrain and Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI followed Forward Foreign exchange contract means an agreement to exchange different currencies at a forward rate. Forward rate is a specified rate for exchange of currency at a specified date. The assessee enters into forward contract with clients to buy or sell foreign exchange at an agreed price at a future date in order to hedge against the possible future financial loss on account of wide fluctuation in the rate of foreign currency - where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract Decided in favour of Assessee. Reduction of claim of bad debt u/s 36(1)(vii) of the Act Held that - The decision in Oman International Bank, SAOG vs. DCIT 2003 (11) TMI 286 - ITAT BOMBAY-H followed - The deduction s. 36(1)(vii) is only supplemental in nature inasmuch as it comes to the play only when, and is admissible to the extent, the provision for bad and doubtful debts allowed u/s 36(1)(viia)(b) falls short of the actual bad debts written off as irrecoverable thus, the AO is directed to allow deduction u/s 36(1)(vii), without taking into account the admissible deduction u/s 36(1) (viia)(b) for the relevant previous year which can only be taken into account for computing deduction u/s 36(1)(vii) for subsequent year(s) Decided partly in favour of Assessee.

Summary

Issues Involved:

1. Accrued interest on securities not due for payment.
2. Disallowance of depreciation on leased assets.
3. Disallowance of loss on unmatured foreign exchange contracts.
4. Reduction of claim under section 36(1)(vii) due to double deduction of provisions.

Detailed Analysis:

1. Accrued Interest on Securities Not Due for Payment:

The assessee contested the addition of Rs. 29,36,03,288 representing accrued interest on securities that had not yet matured for payment. The Assessing Officer (AO) added this amount to the total income, which was upheld by the CIT(A). The assessee argued that the interest accrues only on coupon dates, not on a day-to-day basis, citing the ITAT Mumbai Special Bench decision in DCIT v. Bank of Bahrain and Kuwait. The Tribunal agreed with the assessee, stating that interest on government securities accrues only on fixed coupon dates, not daily. Thus, following the precedent, this ground was decided in favor of the assessee.

2. Disallowance of Depreciation on Leased Assets:

The assessee did not press this ground during the hearing. Consequently, this ground was dismissed as not pressed.

3. Disallowance of Loss on Unmatured Foreign Exchange Contracts:

The assessee argued that the disallowance of Rs. 98,27,032 on unmatured foreign exchange contracts was incorrect, citing the ITAT Special Bench decision in Bank of Bahrain & Kuwait. The Tribunal found that the issue was covered by the Special Bench decision, which allowed the deduction for losses on unmatured forward foreign exchange contracts. The Tribunal noted that a binding obligation arises when such contracts are entered into, and a consistent method of accounting should not be disregarded. Therefore, this ground was allowed in favor of the assessee.

4. Reduction of Claim Under Section 36(1)(vii):

The assessee contested the reduction of the claim under section 36(1)(vii) from Rs. 110,49,17,280 to Rs. 103,99,74,646 due to double deduction of provisions. The Tribunal referred to the ITAT Mumbai decision in Oman International Bank, which clarified the interplay between sections 36(1)(vii) and 36(1)(viia). It was held that the deduction under section 36(1)(vii) should be computed without considering the admissible deduction under section 36(1)(viia) for the relevant year. Following this precedent, the Tribunal directed the AO to allow the deduction under section 36(1)(vii) without taking into account the provision under section 36(1)(viia) for the relevant year. This ground was also decided in favor of the assessee.

Conclusion:

The appeal was partly allowed, with the Tribunal deciding in favor of the assessee on the grounds related to accrued interest on securities, loss on unmatured foreign exchange contracts, and the reduction of the claim under section 36(1)(vii). The ground related to the disallowance of depreciation on leased assets was dismissed as not pressed. The judgment was pronounced in the open court on 14th January 2011.