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TMI Blog2011 (4) TMI 791X X X X Extracts X X X X X X X X Extracts X X X X ..... eriod, the losses incurred on account of revaluation of contract on the last day of accounting period i.e., before the date of maturity of the contract has to be allowed as deduction - Therefore set aside the order of CIT(A) and confirm the addition made by the Assessing Officer. Exemption of the interest income from tax free bonds u/s 10(15)(iv) - The judgment of Hon'ble High Court of Karnataka in case of Sridev Enterprises (supra) in which the Hon'ble High Court held that nature and status of the investment on the first day of the accounting year was the same as on the last day of previous year and if in the previous year, the same was explained out of own fund, the revenue could not be permitted to take a different stand in the subsequent years. Therefore even if the provisions of section 14A applied, no disallowance could be made. We accordingly see no infirmity in the order of CIT(A) allowing the claim of the assessee and the same is therefore upheld. Loss arising on account of diminution in the value of investment - The same issue had been considered by the Hon'ble High Court of Mumbai in case of Bank of Baroda in which the assessee had been valuing the investment at cost o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claimed as incurred specifically for the Indian operations correctness of which could not be verified. Assessing Officer also referred to the decision of the Tribunal in case of American Express Bank Ltd. v. Dy. CIT [IT Appeal No. 7072/M/1990] in which it was held that such expenses have to be covered under section 44C. Assessing Officer therefore disallowed the expenses and observed that the necessary deduction could be claimed under section 44C. 2.1 The assessee disputed the decision of the Assessing Officer and submitted before CIT(A) that the expenditure had been incurred exclusively for running the Indian branches. It was pointed out that expatriate officers were rendering services in Indian branches and expenses were directly relatable to the Indian operations. The assessee referred to the judgment of Hon'ble High Court of Mumbai in case of CIT v. Emirates Commercial Bank Ltd. [2003] 262 ITR 55/[2004] 134 Taxman 682 in which it was held that only common expenses could be considered for limitation under section 44C and expenditure exclusively incurred for the Indian branches by the head office has to be allowed under section 37 of the Income-tax Act. CIT(A) was satisfied b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are identical. Though the details of other expenses had been filed before Assessing Officer the same had not been examined. Therefore in our view following the judgment of Hon'ble High Court in assessment year 1996-97 (supra) the expenses relating to staff cost are allowed and other expenses are restored to the Assessing Officer for fresh order after necessary examination as to whether the same were incurred exclusively for the Indian branches. 3. The second dispute is regarding additions on account of revaluation of outstanding foreign exchange contracts. The assessee during the course of business had entered into certain forward foreign exchange contracts. As per the method of accounting being followed by the assessee, these contracts which had not expired during the year had been revalued at the end of the accounting period resulting into notional profit to the tune of Rs. 1,36,25,321, Rs. 56,99,519 and Rs. 16,33,348 respectively for the assessment years 1999-2000 to 2001-02. These notional profits were added by the Assessing Officer to the total income. In appeal CIT(A) referred to the judgment of Hon'ble High Court of Madras in case of CIT v. Indian Overseas Bank [1985] 151 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x free interest income on the average rate. It was observed by him the average rate of interest on borrowings by the assessee was at 8.45 per cent and therefore at that rate he allocated the interest to the investment at Rs. 59,15,000 in August 2000 and granted exemption only in respect of balance interest income of Rs. 7,35,004 (6650004 - 5915000) Similar disallowances were also made which were Rs. 18,34,000 in assessment year 2000-01 and Rs. 12,44,662 in assessment year 2001-02. The assessee disputed the decision of the Assessing Officer and submitted before CIT(A) that the assessee had invested Rs. 7 crores in tax free bonds on 6-3-1998. It was pointed out that as on 31-3-1998 the assessee had own capital of Rs. 49.53 crores and reserve of Rs. 6.49 crores and therefore no borrowed funds were utilized. It was also pointed out that CIT(A) in assessment year 1998-99 had considered the same issue and held that there was no nexus established between borrowings and investments and therefore the provisions of section 14A were of no help to the revenue. The deduction was therefore allowed as claimed by the assessee. CIT(A) was satisfied by the submissions made and allowed the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 1998-99 and the said decision of the CIT(A) was accepted by the revenue. The interest income under consideration in these years is in respect of the same investment made in assessment year 1998-99 and therefore there being a finding that the investment in assessment year 1998-99 was out of own fund no interest expenditure can be attributed to the earning of income from the same investment in these years. This view gets support from the judgment of Hon'ble High Court of Karnataka in case of Sridev Enterprises (supra) in which the Hon'ble High Court held that nature and status of the investment on the first day of the accounting year was the same as on the last day of previous year and if in the previous year, the same was explained out of own fund, the revenue could not be permitted to take a different stand in the subsequent years. Therefore even if the provisions of section 14A applied, no disallowance could be made. We accordingly see no infirmity in the order of CIT(A) allowing the claim of the assessee and the same is therefore upheld. 5. The fourth dispute which is relevant only for assessment year 1999-2000 is regarding disallowance of Rs. 26,25,000 being the dimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the provisions of section 43(3) of the RBI Act, penal interest of 3 per cent above the bank rate was payable on the amount by which such balance with the banks fell short of the prescribed minimum balance and if the shortfall continued in the next fortnight, the penal interest increased to 5 per cent. The Learned AR submitted though the word used was 'penal' the nature was actually compensatory. CIT(A) referred to the judgment of Hon'ble Supreme Court in case of Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 201 ITR 684/67 Taxman 546 in which it was held that in order to understand the true nature of payment by way of damages/penalty, provisions of the statute have to be examined to find out whether the payment is compensatory or penal. He also referred to the judgment of Hon'ble Supreme Court in case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 in which it was held that interest paid under a statute could not be described as penalty for infringement of law. CIT(A) accordingly deleted the addition aggrieved by which the revenue is in appeal. 6.1 We have heard both the parties, perused the records and considered the matter carefully. The dispute is regarding allowabi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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