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TMI Blog2015 (7) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... 08. Therefore,considering the facts of the case and the decisions delivered in Sumitomo Mitsui Banking Corporation [2012 (4) TMI 80 - ITAT MUMBAI], Abu Dhabi Commercial Bank [2012 (7) TMI 703 - ITAT MUMBAI ] and Dalma Energy LLC (2012 (5) TMI 10 - ITAT, Ahmedabad ) we are deciding ground no.1 in favour of the assessee. Disallowance of loss on foreign exchange contract which were un-matured on the last date of the previous year - Held that:- When the market price of stock is lower than the purchase price, the market price is taken into account, and, accordingly, anticipated loss is taken into account. These dual standards in recognizing anticipated losses and anticipated profits are accepted accounting norms. In the case of Chainrup Sampatram Vs CIT (1953 (10) TMI 2 - SUPREME Court), Hon'ble Supreme Court took note of this position and observed that "while anticipated loss is taken into account, anticipated profit is not brought into account as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is lower, and it is now generally accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder insofar as the applicability of section 40(a)(i) is concerned. Consequently, the ground raised by the Revenue fails - Decided against revenue. - ITA No.4050/Mum/2004, ITA No.4093/Mum/2005, ITA No.4793/Mum/2005 - - - Dated:- 8-5-2015 - Sh. I P Bansal and Rajendra, JJ. For The Assessee : Shri Madhur Agarwal For The Revenue : Shri Vivek A. Perampurna Order u/s.254(1)of the Income-tax Act,1961(Act) Per Bench Challenging the orders of CIT(A)-XXXIII Mumbai,the Assessee and the Assessing Officer(AO) have raised various grounds of appeal for the above mentioned Assessment Years(AY.s.): ITA No.4050/Mum/2004-AY.1998-99: 1. The Commissioner of Incometax (Appeals)XXXIII, Mumbai [CIT(A)] erred in confirming the action of the Assessing Officer [AO] of restricting the deduction for head office expenses by applying the provisions of Section 44C of the Act, as against the appellants claim that the entire amount of ₹ 4,63,99,221 allocated to the Indian branches should be allowed as a deduction as per the provisions of Article 7(3) of the DTAA between the Government of U.A.E. and the Government of India (hereinafter referred to as the Tax Treaty). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in which the contracts mature. 4. The CIT(A) erred in upholding the AO's action of restricting the exemption in respect of interest on taxfree bonds to ₹ 3,17,117. The appellants submit that the entire interest on taxfree bonds of ₹ 27,81,617 is exempt under section 10(15)(iv)(h). The appellants pray that the AO be suitably directed in the matter. 5. In the event the decision of the CIT(A) Tribunal in the earlier years that the broken period interest paid on purchase of securities is allowable as a revenue expenditure in the respective years is reversed, then without prejudice the AO be directed to allow a deduction for the broken period interest disallowed by him in the earlier years in respect of securities sold during the previous year relevant to assessment year 199899. 6. Without prejudice to the appellants contention that broken period interest is allowable in the year of purchase, the CIT(A) ought to have directed the AO to allow a deduction for the broken period interest disallowed by him in the earlier years in respect of securities sold during the previous year relevant to assessment year 199899. The appellants crave leave to add to, am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring before us. The AR stated that ground no.5 and 6 were infructuous. Considering the statement made by the AR,we dismiss both the grounds. 2.Assessee-company,engaged in the business of banking, filed its return of income on 30.11.1998 declaring loss of ₹ 5.62 Crores. Lateron it filed a revised return on 05.08.1999 reducing the loss to ₹ 72.82 Lakhs.The AO finalised the assessment u/s. 143(3) of the Act on 19.01.2001 determining the income of the assessee at ₹ 6,05,32,220/-. 2.1.First ground of appeal is about restricting the deduction for Head Office Expenses (HOE). During the assessment proceedings, the AO found that the assessee had made a claim of ₹ 4.63 Crores under the head HOE. Before him, it was argued that the limits u/s 44C of the Act did not apply to HOE, that expenses should be allowed in full to the extent attributed in accordance with Article 7 of the agreement for avoidance of double taxation with U.A.E., that the agreement was effective from 18.11.1993, that as per the provisions of Article 7(3) deduction was allowable for all expenses irrespective of the fact as to whether such expenses were incurred in the state in which the permanen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under : 60. First we shall deal with the arguments of Shri Girish Dave based on the relevant provisions of the Indo-Japanese treaty. He has, inter alia, relied on article 23 of Indo-Japanese treaty which provides that the laws in force in either of the contracting State shall continue to govern the taxation of income in respective contracting state except where express provisions to the contrary are made in the convention. According to him, article 11 read with article 7 of the treaty contains such express provision and make the interest payable by the PE in India to the GE abroad the income of the GE chargeable to tax in India. Before we consider this argument of Shri Girish Dave in the light of the relevant provisions of the article 7 and 11 of the Indo-Japanese treaty, it is pertinent to discuss certain basic aspects of the matter which are relevant in this context. 61. Section 90(2) of the Income-tax Act, 1961 provides that where the Central Government has entered into an agreement with the Government of any country outside India or specific territory outside India, as the case may be, section (1) for granting relief of tax, or as the case may be, avoidance of double ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the earlier assessment years has been interpreted in the following manner : 14. To conclude the legal aspect of this issue, we have already reproduced Article 7 (in para 12.1 above) and on careful perusal, we have noted that in determining the profits of a PE the expenses which are incurred for the purposes of the business of the said PE, including general administrative expenses is to be allowed. At this stage of argument, we have categorically raised a question that if executive and general administrative expenses of a PE is to be allowed having been incurred for the purposes of the business of a PE, then what is the utility of the introduction of section 44C of the IT Act. Ld. AR Mr. Milin Mehta has answered that keeping in mind the controversy an amendment took place in the Articles and vide a protocol amending the agreement between the Government of the Republic of India and the Government of United Arab Emirates vide Notification No.282/2007, dated 28/11/2007 which is effective from 1st day of April, 2008, paragraph 3 of Article 7 (Business Profits) has been replaced by the following :- 3. In determining the profits of a permanent establishment, there shall be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its business in India including the head office expenses. We have gone through the amendment to the treaty but same is applicable w.e.f. 01.04.2008. Therefore,considering the facts of the case and the above referred decisions delivered by the Special Bench,Mumbai and Ahmedabad benches(Sumitomo Mitsui Banking Corp,Abu Dhabi Commercial Bank and Dalma Energy LLC,)we are deciding ground no.1 in favour of the assessee. 3.Ground No.3 is about disallowance of ₹ 1.54 Crores,being the loss on foreign exchange contract which were un-matured on the last date of the previous year.During the assessment proceedings, the AO found that the assessee had booked loss of ₹ 1.54 Crores on forward foreign exchange contract. Discussing the salient features of the forward contract,he held that in forward contracts the liability would arise only on the date contract would mature, that before it the liability was contingent in nature, that the loss claimed by the assessee was on a pure estimate basis, that same was not allowable as per the provisions of section 37 of the Act. Finally he added an amount of ₹ 1.54 Crores to the income of the assessee. Aggrieved by the order of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the balance sheet datdtate. The loss to claimed as a deduction was ₹ 10,14,045. The loss so computed is by this method. The assessee bank, like many other banking institutions, enters into an forward agreements to buy or sell foreign currencies at a, certain price on a specified date. The unmatured contracts as on the balance sheet dates are the contracts (n respect of which the date of sale or purchase is a date later than such a balance sheet date The difference between the prevailing market rate, and the agreed rate, as on tile date of balance sheet date is profit/loss on unmatured contract. For example, if the assessee bank agrees to sell US $ 10000 @ 42 on 10th May 1997 and the market rate of US $ as on 31.3.1997 is ₹ 45, the loss on this unmatured contract as on 31.3.1997 is ₹ 30,000. It is this loss which was claimed as a deduction by the assessee, The deduction was declined by the Assessing Officer on the ground that it is a contingent loss which depends on how the markets will move on a future date; the actual loss or profit will depend on the prevailing market price as on the date when tile contact is to mature e.g. on 10th May 1997 in this case, Rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 ITR 481), Hon'ble Supreme Court took note of this position and observed that while anticipated loss is taken into account, anticipated profit is not brought into account as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is lower, and it is now generally accepted as an established rule of commercial practice and accountancy . No doubt these observations were made in the context of valuation of stock but what is material is the theory underlying the principle of valuing closing stock at cost or market price whichever is lower and the fact that such a theory has tile acceptance of the Hon'ble Supreme Court. Just because anticipated profits are not assessed to tax, it would not follow, as a corollary thereto, that anticipated losses cannot be allowed as deduction in computation of business income. In the light of these discussions, we are of the considered view that the very basis of the action of the Assessing Officer was vitiated in law and on facts. We, therefore, deem it fit and proper to direct the Assessing to delete the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the predecessor we decide this ground in favour of the assessee. Respectfully, following the above order, we decide ground no. 4 in favour of the assessee. ITA No. 4793/Mum/2005,AY-2001-02 5.The assessee and the AO have filed cross appeal for the AY 2001-02.The assessee did not press ground no.2 as relief was already granted to it.Considering the fact we dismiss ground no.2 raised by the assessee for the year under appeal. 6.The first ground of appeal filed by the assessee is about HOE. Following our order for the AY.1998-99,we decide the issue in favour of the assessee. 7.Ground no.3 is about income earned by the assessee for mobilising deposits for SBI under the Indian Millennium Deposit Scheme (IMDS),amounting to ₹ 8.20 Crores.During the assessment proceedings,the AO found that the assessee had earned commission from SBI for mobilising IMDS,that State Bank of India (SBI)had launched IMDS in all countries where the local regulatory allowed them to implement the programme,that the acceptance of IMDS commenced on 21.10.2000 with the earlier closing dated 31.10.2000 and final closing date of 20.11.2000, that IMDS was a five year bank deposit product of SBI r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business profit the expenditure incurred by it would have to be allowed as deduction. 7.2.Before us,the AR contended that similar issue was decided in favour of the assessee in the cases of Abu Dhabi Commercial Bank(ITA/7560/Mum/2004-AY-2001-02 dated 10.07.13) and Credit Lyonnias(ITA/9596/Mum/2004 ITA/214/Mum/2005 dated 22.05.13).DR supported the order of the FAA. 7.3.We have heard the rival submission and perused the material before us. We find that in case of ABU Dbhai Com. Bank Ltd. (Supra) the matter has been dealt as under: 2.First Ground of appeal pertains to deletion of addition of ₹ 31.72 Crores on account of Arrangers Fees paid to Head Office / Overseas Branches, without deducting tax at source. During the course of assessment proceedings, AO found that assessee was appointed a collecting Bank by the State Bank of India (SBI) for Indian Millennium Deposits (IMD) Programme, that bank was to be paid 0.25% commission on the amount collected by their designated branches, that SBI Capital Markets Ltd.(SBI CAP) also appointed the assessee as an arranger for mobilis ing deposits from the eligible depositors for the IMD programme,that the assessee was entitled t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Crores that had accrued to the assessee,that in absence of specific article dealing with fees for technical services in the tax treaty between India and U.A.E. the aforesaid amount would fall in under Article 7,that said Article of the treaty dealt with business profit,that in computing the business profit deduction would have to be allowed for expenses incurred,that provisions of section 40(a)(i) were not applicable in the case under consideration,that there was no income chargeable to tax in India. Finally,he directed the AO to delete the addition. 2.2.Before us,Departmental Representative (DR) relied upon the orders of the AO.Authorised Representative(AR) submitted that similar issue had arisen in the case of M/s Credit Lyonnais for AY 200102, that the issue was decided by the Tribunal in favour of the assessee while deciding the ITA No. 9596/Mum/2004 and ITA No. 214/Mum/2005. He referred paragraph nos. 9 to 21 of the order dated 22.05.2013 of M/s Credit Lyonnais. 2.3.We have heard the rival submissions and perused the material before us.We find that in the case of Credit Lyonnais (Supra) issue of arrangers fees with regard to mobilizing the deposits under IMD Programme h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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