THE DY DIT (IT) 1(2), V. M/S. CERDIT AGRICOLE INDOSUEZ,

ITA 2270/MUM/2005

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8897 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 03-09-2012
• Assessment Year: 2000-2001
• Appeal Filed On: 24-03-2005
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P J PARDIWALLA
• Keywords: Double taxation relief; Opportunity of being heard; Earning of tax free income
• Section: 234B; 14A

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L, MUMBAI .. , ! '# $% , & !, ' BEFORE SHRI R.S.SYAL, AM AND SHRI AMIT SHUKLA, JM ./ ITA NO.3098/MUM/2000 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR : 1994-95) THE DY.COMMISSIONER OF INCOME-TAX SPECIAL RANGE 27 MUMBAI. M/S.BANQUE INDOSUEZ (KNOWN AS CREDIT AGRICOLE INDOSUEZ) RAMON HOUSE 169 BACKBAY RECLAMATION MUMBAI 400 020. PAN : AAACB3537A. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) -.' ./ CO NO.156/MUM/2000 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR :1994-95) M/S.BANQUE INDOSUEZ (KNOWN AS CREDIT AGRICOLE INDOSUEZ) MUMBAI 400 020. THE DY.COMMISSIONER OF INCOME-TAX SPECIAL RANGE 27 MUMBAI. ( -.' / CROSS OBJECTOR) ) ) ) ) / VS. ( -.+,/ RESPONDENT) ./ ITA NO.5040/MUM/2004 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR :1998-99) THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 1(2) MUMBAI. M/S.CREDIT AGRICOLE INDOSUEZ RAMON HOUSE MUMBAI 400 020. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) ./ ITA NO.4520/MUM/2004 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR : 1998-99) M/S.CREDIT AGRICOLE INDOSUEZ ( NOW CALYON BANK) MUMBAI 400 020. THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 1(2) MUMBAI. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) ./ ITA NO.7919/MUM/2004 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR :1999-2000) THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 1(2) MUMBAI. M/S.CALYON BANK (FORMERLY KNOWN AS AGRICOLE INDOSUEZ) RAMON HOUSE 169 BACKBAY RECLAMATION MUMBAI 400 020. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 2 ./ ITA NO.7993/MUM/2004 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR : 1999-2000) M/S.CALYON BANK (FORMERLY KNOWN AS AGRICOLE INDOSUEZ) MUMBAI 400 020. THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 1(2) MUMBAI. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) ./ ITA NO.2270/MUM/2005 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR :2000-2001) THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 1(2) MUMBAI. M/S.CREDIT AGRICOLE INDOSUEZ MUMBAI 400 021. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) ./ ITA NO.2464/MUM/2005 ( &) * &) * &) * &) * / / / / ASSESSMENT YEAR : 2000-2001) M/S.CREDIT AGRICOLE INDOSUEZ MUMBAI 400 021. THE DY.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) 1(2) MUMBAI. ( +, / // / APPELLANT) ) ) ) ) / VS. ( -.+,/ RESPONDENT) / / / / 0 00 0 1 1 1 1 / REVENUE BY : SHRI MAHESH KUMAR &) 2# &) 2# &) 2# &) 2# 0 1 0 1 0 1 0 1 / ASSESSEE BY : SHRI P.J.PARDIWALLA ) 0 # / / / / DATE OF HEARING : 05.09.2012 34* 0 # / DATE OF PRONOUNCEMENT : 21.09.2012 !$ !$ !$ !$ / / / / O R D E R PER BENCH : THIS BATCH OF EIGHT APPEALS INVOLVES ASSESSMENT YEA RS 1994-95, 1998-99, 1999-2000 AND 2000-2001. SINCE SOME OF THE ISSUES RAISED IN THESE APPEALS ARE COMMON WE ARE, THEREFORE, DISP OSING THEM OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE . 2. AT THE VERY OUTSET WE WILL LIKE TO MENTION THAT CROSS APPEALS OF THIS ASSESSEE FOR THE ASSESSMENT YEAR 1997-1998 ALO NG WITH ONE CROSS OBJECTION BY THE ASSESSEE FOR THE SAME YEAR CAME UP FOR HEARING ON 03.09.2012. SUCH APPEALS HAVE BEEN DISPOSED OFF VID E OUR SEPARATE ORDER DATED 12.09.2012 . THE ISSUES SIMILAR TO TH OSE INVOLVED IN THE APPEALS FOR A.Y. 1997-98 WERE NOT SEPARATELY ARGUED BY THE RIVAL ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 3 PARTIES IN THE COURSE OF THE ARGUMENTS FOR THE APPE ALS UNDER CONSIDERATION BY ACCEPTING THAT THE FACTS AND CIRCU MSTANCES ARE SIMILAR, UNLESS OTHERWISE SEPARATELY SUBMITTED, WHI CH WE WILL ADVERT TO DISTINCTLY. ASSESSMENT YEAR : 1994-1995 3. FIRST GROUND OF THE REVENUES APPEAL IS AGAINST THE DELETION OF ADDITION OF ` 15,57,491 BEING THE NET INTEREST AND COMMISSION RECEIVED BY THE ASSESSEE FROM HEAD OFFICE. BRIEFLY STATED THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE RECEIVED CERTAIN INTEREST / COMMISSION FROM ITS HO / OVERSEAS BRANCHES AND ALSO SIMULTANEOUSLY PAID INTEREST / COMMISSION TO ITS HO / OVERSEAS BRA NCHES. SUCH INCOME / EXPENDITURE WAS CREDITED / DEBITED TO THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE. HOWEVER, WHILE COMPUTING THE TOTAL INCOME THE ASSESSEE EXCLUDED THE INTEREST / COMMISSION INC OME AND ALSO ADDED BACK THE INTEREST / COMMISSION EXPENDITURE. T HE ASSESSING OFFICER HELD THAT THE INTEREST / COMMISSION INCOME WAS CHARGEABLE TO TAX. THIS RESULTED INTO AN ADDITION OF ` 15,57,491. THE LEARNED CIT(A) OVERTURNED THE ASSESSMENT ORDER ON THIS POINT. IT I S OBSERVED THAT SIMILAR ISSUE WAS RAISED IN THE APPEALS FOR ASSESSM ENT YEAR 1997-98. RELYING ON THE SPECIAL BENCH ORDER IN THE CASE OF SUMITOMO MITSUI BANKING CORPN. V. DDIT [(2012) 19 TAXMANN.COM 364 ( MUM.) (SB)], THE TRIBUNAL HAS HELD THAT NEITHER ANY INTEREST / COMMISSION RECEIVED BY THE INDIAN PE FROM HO / OTHER OVERSEAS BRANCHES CAN BE CHARGED TO TAX, NOR THERE CAN BE ANY DEDUCTION TOWA RDS INTEREST / COMMISSION EXPENDITURE INCURRED BY THE ASSESSEE TOW ARDS HO / ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 4 OVERSEAS BRANCHES. WE HAVE RESTORED THE MATTER TO T HE FILE OF ASSESSING OFFICER WITH A DIRECTION TO EXCLUDE THE A MOUNT OF INTEREST / COMMISSION RECEIVED BY THE INDIAN PE FROM ITS HO / OVERSEAS BRANCHES AND ALSO NOT TO GRANT DEDUCTION IN RESPECT OF INTEREST / COMMISSION RECEIVED FROM THE OVERSEAS HO / BRANCHES . FOLLOWING THE PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER AND RES TORE THE MATTER TO THE FILE OF A.O. FOR DECIDING THIS ISSUE ACCORDINGL Y. 4. GROUND NO.2 IS AGAINST THE DISALLOWANCE OF ` 64,76,781 BEING BROKEN PERIOD INTEREST ON PSU BONDS. THE FACTS APRO POS THIS GROUND ARE THAT UP TO ASSESSMENT YEAR 1993-94 THE ASSESSEE WAS FOLLOWING THE PRACTICE OF INCLUDING BROKEN PERIOD INTEREST PAID O N THE PURCHASE OF ALL SECURITIES AND BONDS IN THE COST OF THE SECURIT Y AND COMPUTING ITS GAIN / LOSS ON SALE OF SECURITIES ACCORDINGLY. IN T HE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION , THE ASSESSEE MODIFIED ITS ACCOUNTING POLICY IN RELATION TO VALUA TION OF PUBLIC SECTOR BONDS BY DIRECTLY CHARGING BROKEN PERIOD INTEREST T O THE PROFIT AND LOSS ACCOUNT, THEREBY DEVIATING FROM ITS EARLIER PO SITION OF INCLUDING SUCH INTEREST IN THE PURCHASE PRICE OF PSU BONDS. T HE AUDITOR REPORTED THAT DUE TO CHANGE IN THE ACCOUNTING POLIC Y, THE INTEREST INCOME WAS DECLARED LOWER BY A SUM OF ` 64.76 LAKH. ON BEING CALLED UPON TO JUSTIFY ITS STAND ON THIS ISSUE, THE ASSES SEE SUBMITTED THAT IT HAS SWITCHED OVER FROM ONE ACCEPTED METHOD TO ANOTH ER ACCEPTED METHOD INSOFAR AS VALUATION OF PSU BONDS IS CONCERN ED AND THIS CHANGED METHOD HAS BEEN CONSISTENTLY FOLLOWED IN TH E LATER YEAR AS WELL. THE ASSESSING OFFICER REJECTED THIS CONTENTI ON BY OBSERVING ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 5 THAT THE ASSESSEE HAD VALUED ALL OTHER GOVERNMENT S ECURITIES ETC. AS PER THE UNCHANGED METHOD AND SUCH CHANGE IN THE MET HOD OF VALUATION WAS ONLY IN RESPECT OF PSU BONDS. HE, THE REFORE, DISALLOWED BROKEN PERIOD INTEREST OF ` 64.77 LAKH ON PURCHASE OF PSU BONDS WHICH WAS DEBITED TO THE PROFIT AND LOSS ACCO UNT. THE LEARNED CIT(A) OVERTURNED THE ASSESSMENT ORDER ON THIS POIN T. 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS OBSERVED FROM THE ORDER PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1996-1997 IN ITA NO.3121/MUM/2000, A COPY OF WHICH HAS BEEN PLAC ED ON RECORD, THAT SIMILAR ISSUE WAS RAISED IN THAT YEAR AS WELL. AFTER CONSIDERING THE EARLIER ORDER PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1991-92, THE TRIBUNAL DECIDED IT IN FAVOUR OF THE ASSESSEE BY HOLDING THAT INTEREST PAID ON BROKEN PE RIOD WAS LIABLE TO BE ALLOWED AS DEDUCTION AGAINST THE INTEREST RECEIV ED IN RESPECT OF THE BROKEN PERIOD. FROM PARA NO.25 OF THE TRIBUNAL ORDE R FOR ASSESSMENT YEAR 1996-97 IT CAN BE SEEN THAT THE TRIBUNAL, WHI LE FOLLOWING THE ORDER FOR ASSESSMENT YEAR 1991-92, ALSO TOOK INTO CONSIDERATION THE VIEW TAKEN BY THE TRIBUNAL FOR ASSESSMENT YEARS 198 7-88 AND 1988- 89. BE THAT AS IT MAY IT IS PALPABLE THAT THE ASSE SSEE SWITCHED OVER FROM ONE RECOGNIZED METHOD OF VALUATION OF BONDS AN D SECURITIES TO ANOTHER RECOGNIZED METHOD IN THE PREVIOUS YEAR RELE VANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION IN RESPECT OF P SU BONDS. BROKEN PERIOD INTEREST WHICH WAS HITHER TO CAPITALIZED CAM E TO BE CONSIDERED ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 6 AS DEDUCTION IN THE YEAR OF PURCHASE. THIS CHANGED METHOD HAS BEEN UNDISPUTEDLY FOLLOWED BY THE ASSESSEE CONSISTENTLY IN SUBSEQUENT YEARS. IN VIEW OF THESE FACTS WE FIND NO REASON TO DISTURB THE VIEW CANVASSED BY THE LEARNED CIT(A) ON THIS ISSUE. RATH ER SUCH VIEW IS SUPPORTED BY THE TRIBUNAL ORDER PASSED FOR THE EARL IER YEARS IN ASSESSEES OWN CASE. THIS GROUND IS NOT ALLOWED. 6. CROSS OBJECTION OF THE ASSESSEE FOR THE YEAR IS ONLY IN SUPPORT OF THE ORDER PASSED BY THE LEARNED CIT(A). 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS PART LY ALLOWED FOR STATISTICAL PURPOSES AND THE CROSS OBJECTION OF THE ASSESSEE IS DISMISSED AS INFRUCTUOUS. ASSESSMENT YEAR 1998-99 8. GROUND NO.1 OF THE REVENUES APPEAL IS AGAINST T HE DIRECTION OF THE LEARNED CIT(A) TO DELETE THE CHARGING OF INTERE ST ON NOSTRO ACCOUNT AMOUNTING TO ` 3.98 CRORE. GROUND NOS.1 TO 4 OF THE ASSESSEES APPEAL ARE AGAINST THE ENHANCEMENT BY TH E LEARNED CIT(A) TO THE TUNE OF ` 27,31,95,602 U/S 14A IN RESPECT OF THE INTEREST INC OME OF ` 3.98 CRORE WHICH WAS HELD BY HIM TO BE NOT CHARGEAB LE TO TAX. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THESE GROUNDS ARE MUTATIS MUTANDIS SIMILAR TO THOSE FOR ASSESSMENT YEAR 1997-98. THIS ISSUE HAS BEEN DISCUSSED BY THE TRIBUNAL FOR ASSESSMENT YEAR 1997-98 IN PARAS 2 TO 5. IT HAS BEE N HELD THAT INTEREST ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 7 ON NOSTRO ACCOUNT IS CHARGEABLE TO TAX AND CONSEQUE NTLY NO DISALLOWANCE U/S 14A IS CALLED FOR. IN VIEW OF THE FACT THAT THERE IS NO DIFFERENCE IN THE FACTS AND CIRCUMSTANCES OF THESE GROUNDS FOR THE YEAR UNDER CONSIDERATION VIS--VIS THOSE FOR ASSESSMENT YEAR 1997-98 AS DISCUSSED ABOVE, FOLLOWING THE PRECEDENT, WE HOLD THAT INTEREST OF ` 3.98 CRORE IS CHARGEABLE TO TAX AND RESULTANTLY THE DISALLOWANCE U/S 14A MADE TO THE TUNE OF ` 27.31 CRORE IS DELETED. ACCORDINGLY GROUNDS RAISED BY THE ASSESSEE AS WELL AS REVENUE IN THIS R EGARD ARE ALLOWED. 9. GROUND NO.5 OF THE ASSESSEES APPEAL IS AGAINST TAXABILITY OF INCOME OF THE ASSESSEE AT THE RATE OF 48% AS APPLIC ABLE TO NON- RESIDENT COMPANY. THE LEARNED COUNSEL FOR THE ASSES SEE FAIRLY ADMITTED THAT THIS ISSUE HAS BEEN DECIDED AGAINST T HE ASSESSEE IN EARLIER YEARS. WE FIND THAT SIMILAR GROUND WAS ALSO THERE IN THE YEAR RELEVANT TO THE ASSESSMENT YEAR 1997-98. RELEVANT D ISCUSSION HAS BEEN MADE IN PARA 13 OF THE SAID ORDER. AFTER CONSI DERING THE DECISION TAKEN IN EARLIER YEARS, THE TRIBUNAL HAS NOT ALLOW ED THIS GROUND. IN VIEW OF THE FOREGOING DISCUSSION WE UPHOLD THE IMPU GNED ORDER ON THIS ISSUE FOR THE CURRENT YEAR AS WELL AND DISMISS THIS GROUND. 10. GROUND NO.6 OF THE ASSESSEES APPEAL IS AGAIN ST THE DIRECTION OF THE LEARNED CIT(A) THAT INTEREST / COMMISSION RECEI VED FROM HO / BRANCHES SHOULD NOT BE CHARGED TO TAX. ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 8 11. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT SIMILAR ISSUE WAS THERE IN APPEAL FOR THE ASSESSMENT YEAR 1 997-98. AFTER CONSIDERING THE DECISION OF THE SPECIAL BENCH OF TH E TRIBUNAL IN THE CASE OF SUMITOMO MITSUI BANKING CORPN.(SUPRA), THE BENCH HAS DIRECTED THE ASSESSING OFFICER TO EXCLUDE THE AMOUN T OF INTEREST / COMMISSION RECEIVED BY INDIAN PE FROM ITS HO / OVE RSEAS BRANCHES AND ALSO NOT TO GRANT DEDUCTION IN RESPECT OF INTER EST / COMMISSION INCURRED TOWARDS HO / OVERSEAS BRANCHES. WE FOLLOW THE SAME VIEW FOR THIS YEAR AS WELL AND DIRECT THE ASSESSING OFFI CER ACCORDINGLY. 12. GROUND NO.7 OF THE ASSESSEES APPEAL IS TO THE EFFECT THAT INTEREST AMOUNTING TO ` 11,02,79,210 RECEIVED FROM BRANCHES ON PLACEMENT OF OVERSEAS DEPOSITS SHOULD NOT BE CHARGED TO TAX. THE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THOUGH THIS ISSUE D OES NOT ARISE OUT OF THE IMPUGNED ORDER BUT THE FACTS ARE AVAILABLE ON R ECORD INASMUCH AS THE ASSESSEE CREDITED SUCH AMOUNT OF INTEREST TO IT S PROFIT AND LOSS ACCOUNT. IT WAS, THEREFORE, PRAYED THAT THE ASSESSE E BE ALLOWED TO ARGUE THIS GROUND EVEN THOUGH IT DOES NOT ARISE OUT OF THE IMPUGNED ORDER. THE LEARNED DEPARTMENTAL REPRESENTATIVE OPPO SED THE TAKING UP OF THIS GROUND. 13. HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE IT IS FOUND THAT THE ISSUE OF NON-TAXABILITY OF INTEREST / COMMISSION RECEIVED BY INDIAN PE FROM ITS OVERSEAS BRANCHES / HO IS CONSISTENTLY ARISING IN ALL THE EARLIER YEARS WHICH HAS BEEN DEC IDED IN ASSESSEES ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 9 FAVOUR. SINCE THE ADJUDICATION OF THIS GROUND DOES NOT REQUIRE ANY FRESH INVESTIGATION OF FACTS, WE ADMIT THIS GROUND FOR DISPOSAL ON MERITS. THE CASE OF THE ASSESSEE IS THAT THE INTERE ST OF ` 11.02 CRORE RECEIVED FROM BRANCHES SHOULD NOT BE CHARGED TO TAX AS IT IS A TRANSACTION WITH SELF. IN PRINCIPLE, WE AGREE WITH THIS CONTENTION, WHICH VIEW HAS CONSISTENTLY BEEN TAKEN IN EARLIER Y EARS. SINCE THE EXACT AMOUNT OF INTEREST RECEIVED BY THE ASSESSEE F ROM ITS HO / OVERSEAS BRANCHES IS NOT EMANATING FROM RECORD, WE DIRECT THE ASSESSING OFFICER TO FIND OUT SUCH AMOUNT OF INTERE ST RECEIVED FROM HO / OVERSEAS BRANCHES AND EXCLUDE IT FROM THE COMP UTATION OF TOTAL INCOME. IN THE SAME BREATH, IT IS ALSO DIRECTED THA T THE INTEREST / COMMISSION PAID BY THE ASSESSEE TO ITS HO / OVERSEA S BRANCHES SHOULD ALSO NOT BE ALLOWED AS DEDUCTION. THIS GROUND IS, T HEREFORE, ALLOWED FOR STATISTICAL PURPOSES. 14. GROUND NO.8 IS AGAINST THE DISALLOWANCE OF LOSS ON REVALUATION OF UNMATURED FORWARD FOREIGN EXCHANGE (FOREX) CONTR ACTS AS ON 31.03.1998 AMOUNTING TO ` 7,14,63,831. THE ASSESSEE CLAIMED DEDUCTION AMOUNTING TO ` 7.14 CRORE TOWARDS LOSS ON REVALUATION OF FOREX CONTRACTS AS AT THE YEAR ENDING ON 31.03.1998 . IN SUPPORT OF THE DEDUCTION IT WAS STATED THAT THE FOREIGN EXCHANGE T RANSACTIONS WERE REQUIRED TO BE VALUED AT THE MARKET PRICE OF FOREIG N EXCHANGE AS AT THE END OF THE YEAR AS PER THE RULES OF FEDAI AND THE L OSS ON SUCH REVALUATION WAS DEDUCTIBLE. THE ASSESSING OFFICER H ELD SUCH LOSS TO BE CONTINGENT AND DID NOT ALLOW ANY DEDUCTION BY HO LDING THAT THE ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 10 LIABILITY ON SUCH ISSUE WILL ARISE ONLY ON THE DATE OF MATURITY OF THE CONTRACT. THE LEARNED CIT(A) UPHELD THE ASSESSMENT ORDER ON THIS POINT. 15. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE ASSESS EE ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACT DURING THE YEAR. IN RESPECT OF THE UNMATURED CONTRACTS AS AT THE YEAR END, THE ASSESS EE VALUED SUCH UNMATURED FORWARD FOREIGN EXCHANGE CONTRACTS AT THE RATE OF EXCHANGE PREVAILING AS AT THE END OF THE YEAR WHICH RESULTED INTO LOSS OF ` 7.14 CRORE. IT CAN BE CONSIDERED BY WAY OF SIMPLE EXAMPL E. IF THE ASSESSEE UNDERTAKES A FORWARD FOREIGN EXCHANGE CONTRACT AS O N 18 TH JANUARY, 1998, ON WHICH THE RATE OF DOLLAR IS ` 42. FURTHER SUPPOSE THAT THE CONTRACT IS TO MATURE ON 30 TH APRIL AT THE PRICE OF ` 46 PER DOLLAR. SUPPOSE AT THE END OF THE YEAR 31 ST MARCH, THE RATE OF DOLLAR HAS GONE UP TO ` 43, THE ASSESSEES CLAIM IS THAT THE DIFFERENCE OF ` 1 ( ` 43 42) AS ON 31 ST MARCH, 1998 SHOULD BE TAKEN AS LOSS AND ALLOWED DE DUCTION ACCORDINGLY. THE SPECIAL BENCH OF THE TRIBUNAL IN T HE CASE OF DCIT V. BANK OF BAHRAIN & KUWAIT [(2010) 41 SOT 290 (MUM .) ((SB)] HAS HELD THAT THE LOSS INCURRED BY THE ASSESSEE ON ACCO UNT OF EVALUATION OF THE CONTRACT ON THE LAST DAY OF THE ACCOUNTING YEAR I.E. BEFORE THE DATE OF MATURITY OF THE FORWARD CONTRACT, IS ALLOWABLE AS DEDUCTION. IN THAT VIEW OF THE MATTER THIS LOSS OF ` 7.14 CRORE REPRESENTING DIFFERENCE OF ` 1 ( ` 43 42) IS LIABLE TO BE ALLOWED AS DEDUCTION. ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 11 16. AT THIS JUNCTURE, THE LEARNED DEPARTMENTAL REP RESENTATIVE ARGUED THAT IF THIS LOSS OF ` 1 IN THE HYPOTHETICAL EXAMPLE IS TO BE ALLOWED IN THIS YEAR, THEN IN THE SUBSEQUENT YEAR WHEN THE CONTRACT ACTUALLY MATURED, THE LOSS SHOULD BE COMPUTED AT ` 3 ( ` 46 43) AND NOT AT ` 4 ( ` 46 42). THE LEARNED DEPARTMENTAL REPRESENTATIVE R AISED AN ORAL GROUND IN THIS REGARD FOR SUITABLE DIRECTIO N TO BE GIVEN FOR THE SUBSEQUENT YEAR THAT THE LOSS ALLOWED IN THE CURREN T YEAR AMOUNTING TO ` 7.14 CRORE SHOULD BE TAKEN INTO CONSIDERATION WHILE COMPUTING THE LOSS. THE LEARNED COUNSEL FOR THE ASSESSEE WAS FAIR ENOUGH TO ADMIT THAT IF THE LOSS OF ` 7.14 CRORE IS ALLOWED IN THIS YEAR THEN SUITABLE AMENDMENT BE MADE IN THE ASSESSMENT ORDER FOR THE S UBSEQUENT YEAR SO THAT THE ASSESSEE DOES NOT GET DEDUCTION OF ` 7.14 CRORE TWICE. 17. IN THE LIGHT OF THE AFORE-NOTED SPECIAL BENCH O RDER IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA) IT IS APPARENT THAT THE ASSESSEE IS ENTITLED TO DEDUCTION OF ` 7.14 CRORE TOWARDS LOSS ON REVALUATION OF UNMATURED FORWARD FOREIGN EXCHANGE CONTRACT FOR THE YEAR UNDER CONSIDERATION. IT IS OBSERVED FROM THE ORDER PASSED BY THE LEARNED CIT(A) FOR ASSESSMENT YEAR 1999-2000 THAT VIDE PARA 10 PAGE 12 OF HIS ORDER IT HAS BEEN DIRECTED THAT : INCOME / LOS S IN RESPECT OF SUCH FOREX CONTRACTS AS HAVE MATURED DURING THE YEAR SHO ULD BE COMPUTED WITHOUT CONSIDERING THE REVALUATION EFFECTED IN THE BOOKS OF ACCOUNT IN ASSESSMENT YEAR 1998-99 IS ACCEPTABLE AND THE A. O. IS DIRECTED TO CALCULATE ACCORDINGLY. WITH THE ALLOWING OF GROUND NO.8 OF THE ASSESSEES APPEAL FOR ASSESSMENT YEAR 1998-99, THIS DIRECTION GIVEN ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 12 BY THE LEARNED CIT(A) IN HIS ORDER FOR ASSESSMENT Y EAR 1999-2000 SHALL AUTOMATICALLY STAND VACATED. THE ASSESSING OF FICER IS, THEREFORE, DIRECTED TO ALLOW LOSS OF ` 7.14 CRORE IN THIS YEAR AND COMPUTE LOSS / PROFIT ON FOROX CONTRACT MATURING IN THE PREVIOUS Y EAR RELEVANT TO THE ASSESSMENT YEAR 1999-2000 BY CONSIDERING THE IMPACT OF ALLOWING OF LOSS OF ` 7.14 CRORE. IN OTHER WORDS, THE ASSESSING OFFICER SHOULD ENSURE THAT THE LOSS OF ` 7.14 CRORE IS NOT ONCE AGAIN ALLOWED IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 1999- 2000. THIS GROUND RAISED BY THE ASSESSEE FOR THE CURRENT YEAR IS ALLO WED. 18. GROUND NO.2 OF THE REVENUES APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) TO ALLOW THE BROKEN PERIOD INTER EST PAID OF ` 4,35,90,306 AS AN EXPENSE. THIS ISSUE HAS BEEN DISC USSED BY US IN OUR ORDER FOR ASSESSMENT YEAR 1997-1998 AND THE DEC ISION HAS BEEN TAKEN FOR ALLOWING BROKEN PERIOD INTEREST AS AN EXP ENSE. THIS GROUND IS ACCORDINGLY NOT ALLOWED. 19. GROUND NO.3 IS AGAINST THE ALLOWING OF EXEMPTIO N IN RESPECT OF GROSS INTEREST EARNED FROM TAX FREE SECURITIES U/S 10(15) OF THE ACT. THE LEARNED DEPARTMENTAL REPRESENTATIVE FAIRLY SUBM ITTED THAT THIS IS ALSO A RECURRING ISSUE. HE HOWEVER ARGUED THAT THE EXPENDITURE IN CONNECTION WITH THE EARNING OF SUCH TAX FREE INTERE ST INCOME SHOULD BE DISALLOWED U/S 14A. ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 13 20. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD WE FIND THAT THE FACTS AND CIRCU MSTANCES OF THE GROUND AS WELL AS THE ARGUMENTS RAISED BY THE LEARN ED DEPARTMENTAL REPRESENTATIVE IN RESPECT OF DISALLOWANCE U/S 14A A RE SIMILAR TO THOSE FOR ASSESSMENT YEAR 1997-98. WHILE DISPOSING OFF TH IS GROUND FOR ASSESSMENT YEAR 1997-98 WE HAVE HELD THAT EXEMPTION U/S 10(15) IS TO BE ALLOWED ON GROSS INTEREST AND NOT ON THE NET INT EREST. FURTHER, IT HAS BEEN HELD BY THE LD. CIT(A) THAT INVESTMENT IN TAX FREE SECURITIES WAS MADE BY THE ASSESSEE OUT OF INTEREST FREE FUNDS AVA ILABLE AT ITS DISPOSAL. SUCH CONTENTION HAS REMAINED ONCONTROVER TED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. FOLLOWING THE PRECEDENT WE SUSTAIN THE IMPUGNED ORDER ON THIS ISSUE BY HOLDING THAT EXEMPTION U/S 10(15) IS TO BE ALLOWED ON GROSS INTEREST. THE FURTHER CONTENTION RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE A BOUT THE DISALLOWANCE U/S 14A IS NOT ACCEPTABLE IN VIEW OF T HE DETAILED REASONS GIVEN IN OUR ORDER FOR ASSESSMENT YEAR 1997-98. 21. GROUND NO.4 OF THE REVENUES APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) TO DISREGARD THE REFUND WHILE CA LCULATING THE INTEREST U/S 234B OF THE ACT. THE LEARNED CIT(A) VI DE PARA 9.3 OF THE IMPUGNED ORDER HELD THAT SECTION 234D WAS BROUGHT I NTO THE STATUTE BY THE FINANCE ACT, 2003 WITH EFFECT FROM 01.06.200 3 AND AS SUCH THE ASSESSING OFFICER WAS NOT JUSTIFIED IN CHARGING INT EREST U/S 234B WITH REFERENCE TO THE FUND ISSUED U/S 143(1)(A) EARLIER. ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 14 22. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD IT IS OBSERVED THAT THE LEARNED CIT(A) HAS RIGHTLY CONSIDERED THE MANDATE OF SECTIONS 234B AND 234D. O BVIOUSLY, THE INTEREST U/S 234B IS REQUIRED TO BE CALCULATED ON T HE BASIS OF TOTAL INCOME COMPUTED WITHOUT CONSIDERING THE REFUND DETE RMINED U/S 143(1) OF THE ACT. WE, THEREFORE, UPHOLD THE IMPUGN ED ORDER ON THIS ISSUE. THIS GROUND IS NOT ALLOWED. 23. GROUND NO.5 IS AGAINST THE DIRECTION OF THE LEA RNED CIT(A) FOR GIVING DEDUCTION OF ` 24,11,100 INDEPENDENT OF THE PROVISIONS OF SECTION 44C. 24. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD WE FIND THAT IT IS AN U NDISPUTED POSITION THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE SIMILAR TO THOSE PREVAILING IN THE EARLIER YEARS IN WHICH IT HAS BEE N HELD THAT THE DEDUCTION HAS TO BE ALLOWED INDEPENDENT OF THE PROV ISIONS OF SECTION 44C. THE LEARNED DEPARTMENTAL REPRESENTATIVE COULD NOT POINT OUT ANY DISTINGUISHING FEATURE IN THE FACTS OF THE CURR ENT YEAR VIS--VIS THE EARLIER YEAR. FOLLOWING THE PRECEDENTS WE UPHOLD TH E IMPUGNED ORDER ON THIS ISSUE. THIS GROUND IS NOT ALLOWED. 25. GROUND NO.6 IS AGAINST THE DELETION OF DISALLOW ANCE OF ` 1,05,18,450. THE ASSESSING OFFICER NOTED THAT THE A SSESSEE HAD BORROWED FUNDS BY WAY OF FCNR-B DEPOSIT AND THESE F UNDS WERE ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 15 KEPT BY THE HO IN US$ ACCOUNT. THE BALANCE TO THE C REDIT OF THIS ACCOUNT WAS AVAILABLE AS US$ FLOAT TO THE HO TO BE DRAWN AS AND WHEN REQUIRED. THE A.O. OBSERVED THAT THE INTEREST EARNED FROM HO WAS LOWER AS COMPARED TO INTEREST PAID FOR FCNR-B D EPOSIT. SUCH EXCESS INTEREST OF ` 1,05,18,450 WAS HELD BY THE ASSESSING OFFICER TO BE NOT DEDUCTIBLE. THE LEARNED CIT(A) DELETED THIS ADDITION. 26. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD IT IS SEEN THAT THE ASSESSEE KEP T CERTAIN DEPOSITS RECEIVED FROM CLIENTS ABROAD IN NOSTRO ACCOUNT MAIN TAINED WITH THE BTC BY THE HO TO BE USED AS DOLLAR FLOAT FUND F OR ITS GLOBAL OPERATIONS. WHETHER AND AT WHAT POINT OF TIME SUCH D EPOSITS WERE TO BE BROUGHT INTO INDIA WAS A DECISION TO BE TAKEN BY THE ASSESSEE TAKING INTO CONSIDERATION VARIOUS FACTORS SUCH AS T HE FOREIGN EXCHANGE RATE PREVAILING AT THE TIME OF RECEIPT OF DEPOSITS. SUCH DEPOSITS WERE NOT WITH THE HO OF THE BANK BUT WERE IN NOSTRO ACCO UNT. SIMPLY BECAUSE THE ASSESSEE PAID INTEREST ON DOMESTIC DEPO SITS AT A LITTLE HIGHER RATE THAN THAT IT RECEIVED ON FCNR-B DEPOSIT S, IT CANNOT BE SAID THAT THE INTEREST PAID SHOULD BE DISALLOWED TO THAT EXTENT. IN OUR CONSIDERED OPINION THERE IS NO FORCE IN THE SUBMISS IONS ADVANCED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE IN THIS REG ARD. THIS GROUND IS NOT ALLOWED. 27. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLO WED. ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 16 ASSESSMENT YEAR 1999-2000 28. FIRST GROUND OF THE REVENUES APPEAL IS AGAINST THE DELETION OF CHARGING OF INTEREST ON NOSTRO ACCOUNT AMOUNTING TO ` 92,69,377 AND FIRST FOUR GROUNDS RAISED BY THE ASSESSEE ARE O N ACCOUNT OF ENHANCEMENT MADE BY THE LEARNED CIT(A) AMOUNTING TO ` 5.11 CRORE U/S 14A IN RESPECT OF SUCH INTEREST INCOME. BOTH TH E SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THESE GROUNDS ARE SIMILAR TO THOSE FOR THE EARLIER YEARS. FOLLOWING THE VIEW CONSISTENTLY TAKEN BY US FROM THE ASSESSMENT YEARS 1997-98 ONWAR DS, WE HOLD THAT THE INTEREST OF ` 92.69 LAKH IS CHARGEABLE TO TAX AND AT THE SAME TIME NO DISALLOWANCE U/S 14A AMOUNTING TO ` 5.11 CRORE IS WARRANTED. THE GROUNDS RAISED BY THE ASSESSEE AS WELL AS REVEN UE IN THIS REGARD ARE ALLOWED. 29. GROUND NO.5 OF THE ASSESSEES APPEAL IS ABOUT T AXABILITY OF ITS INCOME AT THE RATE OF 48% AS APPLICABLE TO NON-RESI DENT COMPANY. THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE ALSO SIM ILAR TO THOSE DISPOSED OFF EARLIER. FOLLOWING THE VIEW TAKEN HERE INABOVE, WE DISMISS THIS GROUND OF APPEAL. 30. GROUND NOS.6 AND 7 ARE AGAINST THE DIRECTION OF THE LEARNED CIT(A) TO TAX INTEREST / COMMISSION RECEIVED FROM H O / BRANCHES AND ALSO CONSIDERING THE INTEREST / COMMISSION PAID TO THE HO / BRANCHES. THE FACTS AND CIRCUMSTANCES OF THESE TWO GROUNDS AR E SIMILAR TO THOSE ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 17 DISCUSSED ABOVE. WE HAVE HELD IN RELATION TO EARLIE R YEARS THAT THE INTEREST / COMMISSION RECEIVED BY THE PE FROM ITS H O / OVERSEAS BRANCHES IS NOT CHARGEABLE TO TAX AND SIMULTANEOUSL Y THE ASSESSEE IS NOT ENTITLED TO DEDUCTION IN RESPECT OF INTEREST PA ID TO HO / OVERSEAS BRANCHES. THE AO IS DIRECTED TO GIVE EFFECT TO THIS DIRECTION. THESE GROUNDS ARE DISPOSED OFF ACCORDINGLY. 31. LAST GROUND OF THE ASSESSEES APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) IN ALLOWING WRITE OFF OF PREMIUM PAID ON PURCHASE OF SECURITIES AMORTISED OVER THE LIFE OF I NVESTMENTS. THE ASSESSING OFFICER DISALLOWED A SUM OF ` 3,27,85,891 BEING AMORTIZATION OF PREMIUM ON INVESTMENT. THE LEARNED CIT(A) UPHELD THE DISALLOWANCE OF PREMIUM PAID ON INVESTMENTS. HE HOWEVER AGREED WITH THE ALTERNATIVE PLEA OF THE ASSESSEE TH AT : AS AND WHEN THESE SECURITIES ARE SOLD, INCOME FROM THEM SHOULD BE COMPUTED WITH REFERENCE TO THE COST OF PURCHASE OF SECURITIES BY IGNORING ADJUSTMENT MADE IN BOOKS OF ACCOUNT IN THIS RESPECT BY THE APP ELLANT. THE A.O. IS DIRECTED ACCORDINGLY. THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE WROTE OFF PREMIUM PAID ON PURCHASE OF SECURITIES WH ICH WAS AMORTIZED OVER THE LIFE OF INVESTMENT. THE LEARNED CIT(A) HELD THAT WHEN SECURITIES ARE PURCHASED FROM MARKET AT MARKET VALUE, THERE CAN BE NO QUESTION OF CARRYING THE STOCK AT A LOWER PRI CE BY WRITING OFF THE PREMIUM PAID ON PURCHASE OF SECURITIES, AS DONE BY THE ASSESSEE. WE ARE IN AGREEMENT WITH THE VIEW CANVASSED BY THE LEARNED CIT(A) FOR THE OBVIOUS REASON THAT WHEN THE ASSESSEE IS PU RCHASING SECURITIES ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 18 AS STOCK-IN-TRADE, THERE CAN BE NO QUESTION OF AMOR TIZING THE PREMIUM PAID FOR THE PURCHASE OF SECURITIES OVER THE LIFE O F SUCH SECURITIES. THE PURCHASE PRICE SO PAID HAS TO BE TAKEN AS SUCH BY D ISREGARDING THE ASSESSEES VIEW POINT THAT THE PREMIUM ON PURCHASE OF SECURITIES SHOULD BE AMORTIZED OVER THE LIFE OF INVESTMENT. TO THIS EXTENT WE APPROVE THE VIEW TAKEN BY THE LEARNED CIT(A). THE L EARNED AR ARGUED THAT IF THIS WAS TO BE UPHELD THEN THE DIREC TION OF THE LEARNED CIT(A) BE MODIFIED IN THE SENSE THAT NOT ONLY WHEN THE SECURITIES ARE NOT ONLY SOLD BUT ALSO EVEN WHEN THESE GET MATURED, INCOME FROM THEN SHOULD BE COMPUTED WITH REFERENCE TO THE COST OF PURCHASE OF SECURITIES. WE ARE AGREEABLE WITH THIS CONTENTION. T HE OBVIOUS REASON IS THAT THE SECURITIES CAN BE SOLD OR MATURE OVER T HE PERIOD. ONCE THE AMORTIZATION IS NOT ALLOWED, PURCHASE PRICE IS TO B E TAKEN AS SUCH IRRESPECTIVE OF THE FACT WHETHER THE SECURITIES ARE SOLD OR GET MATURED. THE DIRECTION GIVEN BY THE LEARNED CIT(A) TO THE AL TERNATIVE PLEA OF THE ASSESSEE, IS ACCORDINGLY MODIFIED. 32. SECOND GROUND OF THE REVENUES APPEAL IS AGAINS T THE DIRECTION OF THE LEARNED CIT(A) TO ALLOW BROKEN PERIOD INTERE ST PAID OF ` 2,77,10,645 AS AN EXPENSE. 33. WE FIND THAT THE ISSUE RAISED IN THIS GROUND HAS BEEN DEALT WITH BY US IN EARLIER YEAR AS WELL. WE HAVE HELD THAT SUC H INTEREST IS ALLOWABLE AS DEDUCTION. IN THE ABSENCE OF ANY DISTI NGUISHING FEATURE HAVING BEEN BROUGHT TO OUR NOTICE, WE APPROVE THE V IEW TAKEN BY THE LEARNED CIT(A) ON THIS ISSUE. THIS GROUND IS NOT AL LOWED. ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 19 34. GROUND NO.3 OF THE REVENUES APPEAL IS AGAINST THE GRANTING OF EXEMPTION ON GROSS INTEREST U/S 10(15). THE LEARNED DEPARTMENTAL REPRESENTATIVE FAIRLY CONCEDED THAT THE FACTS AND C IRCUMSTANCES OF THIS GROUND ARE SIMILAR TO THOSE OF EARLIER YEARS W ITH THE EXCEPTION THAT THE ASSESSEE DID NOT FURNISH ANY EVIDENCE ABOU T THE INVESTMENT IN SUCH TAX FREE SECURITIES AS IS BORNE OUT FROM PAGE 12 OF THE ASSESSMENT ORDER. 35. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD WE FIND THAT INSOFAR AS THE QUESTION OF GRANTING EXEMPTION U/S 10(15) IS CONCERNED, IT HAS BEEN DECIDED BY US IN EARLIER YEARS BY HOLDING THAT EXEMPTION IS TO BE ALLOWED ON GROSS INTEREST. AS REGARDS THE CONTENTION OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT THE ASSESSEE DID NOT FURNISH AN Y EVIDENCE BEFORE THE A.O. TOWARDS THE PURCHASE OF TAX FREE SECURITIE S, WE FIND FROM THE STATEMENT OF FACTS FILED BEFORE THE LEARNED CIT(A) THAT THE ASSESSEE FILED SUCH DETAILS BEFORE THE A.O. VIDE ITS LETTER DATED 24 TH JANUARY, 2002. IT IS ON THE BASIS OF THESE DETAILS THAT THE LEARNED CIT(A) HAS RECORDED A CATEGORICAL FINDING IN PARA 6 OF HIS IMP UGNED ORDER THAT THE AGGREGATE INVESTMENT IN TAX FREE SECURITIES HAS REMAINED UNCHANGED THOUGH THERE IS SWITCH OVER FROM ONE TAX FREE SECURITIES TO ANOTHER TAX FREE SECURITIES. WE ARE UNABLE TO SEE A S TO HOW THIS CONTENTION ADVANCES THE CASE OF THE REVENUE. ONCE T HE SOURCE OF TAX FREE SECURITIES IS INTEREST FREE FUNDS, IT MAKES NO DIFFERENCE WHEN ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 20 THERE IS CHANGE IN TAX FREE SECURITIES FROM ONE TO ANOTHER. THE RELEVANT CRITERIA IS TO SEE THE SOURCE OF INVESTMENT. WE, TH EREFORE, FIND NO REASON TO DISTURB THE FINDING GIVEN BY THE LEARNED CIT(A) IN THIS REGARD. THIS GROUND IS NOT ALLOWED. 36. GROUND NO.4 IS AGAINST THE DIRECTION OF THE LEA RNED CIT(A) TO ALLOW DEDUCTION OF ` 3.50 CRORE INDEPENDENT OF THE PROVISIONS OF SECTION 44C. THE A.O. DISCUSSED THIS ISSUE ON PAGE 13 OF HIS ORDER. HE NOTED THAT THESE EXPENSES WERE CLAIMED TO HAVE B EEN INCURRED BY THE HO, WHICH ARE AGAIN CLAIMED TO BE SPECIFIC TO THE INDIAN OPERATIONS, THE CORRECTNESS OF WHICH CANNOT BE VERI FIED. THE LEARNED CIT(A) ACCEPTED THE ASSESSEES STAND. 37. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD IT IS OBSERVED THAT THE ASSESSEE DID FURNISH ITS EXPLANATION TO THE A.O. VIDE ITS LETTER DATED 6 TH MARCH, 2002 ABOUT THE DETAILS OF EXPENSES INCURRED AND THE REASON AS TO WHY THESE EXPENSES WERE ALLOWABLE INDEPENDENT OF SECTION 44C. THIS FACT IS BORNE OUT FROM THE STATEMENT OF FACTS FILED BEFORE THE LEARNED CIT(A). THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS NOT BRO UGHT ANY MATERIAL ON RECORD TO INDICATE THAT THE EXPENSES CL AIMED BY THE ASSESSEE AS ALLOWED BY THE LEARNED CIT(A) INDEPENDE NT OF SECTION 44C WERE SPECIFIC TO INDIAN OPERATIONS. IN VIEW OF THESE FACTS WE ARE OF THE CONSIDERED OPINION THAT THE LEARNED CIT(A) W AS JUSTIFIED IN ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 21 DIRECTING TO ALLOW THE DEDUCTION OF ` 3.50 CRORE INDEPENDENT OF THE PROVISIONS OF SECTION 44C. 38. GROUND NO.5 OF THE REVENUES APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) TO REDUCE THE TAXABLE INCOME BY ` 13,37,157 BEING THE AMOUNT OF GAIN ON FOREX CONTRACT. THIS ISSUE HA S BEEN DISCUSSED BY US IN AN EARLIER PARA OF THE ORDER. IN THE SAID EARLIER YEAR, THERE WAS LOSS ON THE FOREX UNMATURED CONTRACT. WE HAVE H ELD THAT SUCH LOSS IS TO BE ALLOWED AS DEDUCTION AS THE ASSESSEE IS CONSISTENTLY FOLLOWING THIS PRACTICE OF VALUING UNMATURED FOREIG N EXCHANGE CONTRACTS AT THE PREVAILING RATE OF EXCHANGE AT TH E YEAR END. THOUGH IN THE EARLIER YEAR THERE WAS A LOSS WHICH HAS BEEN HELD TO BE ALLOWABLE, IN THE CURRENT YEAR THERE IS A PROFIT O N THE UNMATIRED FOREX CONTRACT. FOLLOWING THE VIEW AND BY ADOPTING THE PR INCIPLE OF CONSISTENCY, THE IMPUGNED ORDER IS REVERSED AND IT IS DIRECTED TO INCLUDE ` 13.37 LAKH IN THE TOTAL INCOME OF THE ASSESSEE. THI S GROUND IS ALLOWED. 39. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLO WED. ASSESSMENT YEAR 2000-2001 40. GROUND NO.2 OF THE REVENUES APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) TO DELETE THE CHARGING OF INTERE ST ON NOSTRO ACCOUNT AMOUNTING TO ` 44,80,914. GROUND NOS. 1 TO 4 OF THE ASSESSEES APPEAL ARE AGAINST THE ENHANCEMENT OF TH E ASSESSMENT BY ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 22 THE LEARNED CIT(A) TO THE TUNE OF ` 1,85,43,259 U/S 14A IN RESPECT OF INTEREST ON NOSTRO ACCOUNT HELD BY HIM TO BE NOT CH ARGEABLE TO TAX. THIS ISSUE IS CONSISTENTLY COMING IN ALL THE YEARS. WE HAVE HELD THAT INTEREST ON NOSTRO ACCOUNT IS CHARGEABLE TO TAX AND RESULTANTLY NO DISALLOWANCE U/S 14A IS WARRANTED. FOLLOWING THE SA ME VIEW WE ALLOW GROUND NO.2 OF THE REVENUES APPEAL AND GROUN D NOS.1 TO 4 OF THE ASSESSEES APPEAL. 41. GROUND NOS. 5 AND 6 OF THE ASSESSEES APPEAL AR E AGAINST TAXING INTEREST / COMMISSION FROM HO / BRANCHES AND ALSO J USTIFYING THE A.O.S STAND IN CONSIDERING INTEREST / COMMISSION P AID TO HO / BRANCHES IN COMPUTING INCOME. 42. WHILE DISPOSING OFF THE APPEALS FOR EARLIER YEA RS WE HAVE HELD THAT THE INTEREST / COMMISSION RECEIVED BY THE ASSE SSEE FROM HO / OVERSEAS BRANCHES IS NOT CHARGEABLE TO TAX AND IN T HE SAME MANNER THE INTEREST / COMMISSION PAID TO HO / OVERSEAS BRANCH IS NOT ALLOWABLE AS DEDUCTION. THE SAME VIEW IS REITERATED HERE. THE AO IS DIRECTED TO GIVE EFFECT TO THIS DIRECTION. THESE GROUNDS ARE, T HEREFORE, DISPOSED OFF ACCORDINGLY. 43. GROUND NOS. 7 AND 8 OF THE ASSESSEES APPEAL AR E AGAINST MAKING OF DISALLOWANCE U/S 40(A)(I) IN RESPECT OF DEDUCTIO N U/S 55,82,037 BEING INTEREST PAID TO HO AND ` 42,539 BEING THE INTEREST PAID TO OVERSEAS BRANCHES. WHILE DISPOSING OFF GROUND NOS.5 AND 6, WE HAVE ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 23 HELD THAT THE ASSESSEE IS NOT ENTITLED TO DEDUCTION IN RESPECT OF INTEREST / COMMISSION PAID TO HO / OVERSEAS BRANCHES. ONCE T HE ASSESSEE IS NOT ENTITLED TO DEDUCTION, THERE CAN BE NO QUESTION OF MAKING ANY DISALLOWANCE U/S 40(A)(I) AS THE DEDUCTION IS DENIE D AT THE VERY OUTSET ITSELF. 44. GROUND NO.9 OF THE ASSESSEES APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) NOT TO ALLOW LOSS ON REVALUATION OF UNMATURED FORWARD FOREIGN EXCHANGE CONTRACTS AS ON 31 ST MARCH, 2000 AMOUNTING TO ` 1,56,70,296. THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE SIMILAR TO THOSE DISCUSSED IN THE EARLIE R PART OF THIS ORDER. FOLLOWING THE VIEW TAKEN HEREINABOVE WE HOLD THAT T HE ASSESSEE IS ENTITLED TO DEDUCTION OF LOSS OF ` 1.56 CRORE AGAINST THE INCOME FOR THE CURRENT YEAR. AT THE SAME TIME, THE A.O. IS DIRECT ED NOT TO ALLOW SUCH LOSS OF ` 1.56 CRORE IN THE SUCCEEDING YEAR WHEN THE FOREX CO NTRACT GET MATURED. AS THE LEARNED AR HAS AGREED TO FOREGO ITS CLAIM OF DEDUCTION OF ` 1.56 CRORE IN THE SUCCEEDING YEAR SUBJECT TO THE CONDITION OF ALLOWABILITY OF SUCH LOSS IN THE CURRE NT YEAR, WE DIRECT THE ASSESSING OFFICER TO ALLOW DEDUCTION FOR THIS F OREX LOSS IN THE CURRENT YEAR AND MAKE CORRESPONDING ADDITION IN THE SUBSEQUENT YEAR. 45. GROUND NO.10 ABOUT THE APPLICATION OF RATE OF 4 8% IS NOT ALLOWED IN VIEW OF SIMILAR STAND TAKEN IN EARLIER P ART OF THIS ORDER. THE IMPUGNED ORDER IS UPHELD ON THIS ISSUE. ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 24 46. GROUND NO.1 OF THE REVENUES APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) TO ALLOW EXEMPTION U/S 10(15) ON GROSS INTEREST. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE SIMILAR TO THOSE FOR EARLIER YEARS. FOLLOWING THE VIEW TAKEN HEREINABOVE, WE HOLD THAT THE GROSS INTEREST IS ELIGIBLE FOR EXEMPTION U/S 10(15). FURTHER NO DISALLOWANCE U/S 1 4A CAN BE MADE IN RESPECT OF SUCH EXEMPT INCOME. 47. GROUND NO.3 OF THE REVENUES APPEAL IS AGAINST THE DELETION OF BROKEN PERIOD INTEREST CLAIMED AS EXEMPT FROM THE T OTAL TAXABLE INCOME. THE LEARNED DEPARTMENTAL REPRESENTATIVE FAI RLY ACCEPTED THAT THE FACTS AND CIRCUMSTANCES OF THIS GROUND ARE MUTATIS MUTANDIS SIMILAR TO THOSE FOR THE EARLIER YEARS. FOLLOWING T HE VIEW TAKEN HEREINABOVE WE UPHOLD THE IMPUGNED ORDER ON THIS IS SUE. THIS GROUND IS NOT ALLOWED. 48. LAST GROUND OF THE REVENUES APPEAL IS AGAINST THE DIRECTION OF THE LEARNED CIT(A) TO DELETE THE EXPENSES CLAIMED B Y THE ASSESSEE ON ACCOUNT OF HO EXPENSES INDEPENDENT OF THE PROVISION S OF SECTION 44C. THE ASSESSEE CLAIMED DEDUCTION FOR HO EXPENSES AT ` 1,06,49,590. THE ENTIRE EXPENDITURE WAS CLAIMED BY WAY OF DEDUCTION ON THE GROUND THAT IT WAS DIRECTLY ATTRIB UTABLE TO THE INDIAN BRANCH. IT WAS CLAIMED THAT THE CEILING PROVIDED U/ S 44C SHALL NOT APPLY. THE A.O. OBSERVED FROM INVOICES SUBMITTED BY THE ASSESSEE THAT THESE EXPENSES WERE ALLOCATED TO THE ASSESSE E. IT WAS FURTHER ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 25 OBSERVED THAT IN SOME CASES EVEN THE BASIS OF ALLOC ATION WAS NOT GIVEN. IN THE LIGHT OF THESE FACTS THE A.O. HELD SU CH AMOUNT TO BE COVERED WITHIN THE CEILING PRESCRIBED U/S 44C. THE LEARNED CIT(A) DIRECTED TO ALLOW INDEPENDENT DEDUCTION DISTINCT FR OM SECTION 44C. 49. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD IT IS OBSERVED THAT THE A.O. HAS MADE OUT A CASE THAT THE EXPENSES TO THE TUNE OF ` 1.06 CRORE WERE ALLOCATED TO THE ASSESSEE AND ARE NOT INCURRED EXCLUSIVELY BY THE HO FOR THE ASSESSEE. THE A.O. OBSERVED THESE FEATURES FROM THE INVOICES SUBMITTED BY THE ASSESSEE. THE LEARNED AR HAS INVITED OUR ATTENTION TOWARDS THE STATEMENT OF FACTS FILED BEFORE THE LEARNED CIT(A) IN WHICH IT HAS BEEN SUBMITTED THAT THE DETAILS OF EXPENSES AND REA SON AS TO WHY SUCH EXPENSES WERE ALLOWABLE INDEPENDENT OF SECTION 44C WERE MADE AVAILABLE TO THE A.O. VIDE ITS LETTER DATED 19 TH MARCH, 2003. THE LEARNED AR SUBMITTED THAT AS PER THE TERMS OF ARTIC LE 7 OF THE DTAA, ALL THE EXPENSES INCURRED BY THE ASSESSEE FOR BUSIN ESS PURPOSES WERE TO BE ALLOWED AS DEDUCTION. 50. WE ARE NOT CONVINCED WITH THE SUBMISSION MADE BY THE LEARNED AR IN THIS REGARD FOR THE REASON THAT AS PER THE MA NDATE OF ARTICLE 7, THE DEDUCTION IS TO BE ALLOWED IN CONFORMITY WITH T HE PROVISIONS OF THE INCOME-TAX ACT, 1961. ONCE SECTION 44C IS THERE , THERE CAN BE NO ESCAPE UNLESS IT IS PROVED THAT THE EXPENSES INCURR ED ARE NOT COVERED WITHIN THE MANDATE OF SECTION 44C OF THE ACT. THE T ERM HEAD OFFICE ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 26 EXPENSES HAS BEEN DEFINED IN EXPLANATION TO SECTION 44C TO MEAN EXECUTIVE AND GENERAL ADMINISTRATION EXPENDITURE I NCURRED BY THE ASSESSEE OUTSIDE INDIA. IT IS AXIOMATIC THAT WHERE HO INCURS EXPENSES EXCLUSIVELY FOR ITS INDIAN PE, THOSE ARE TO BE ALLOWED AS DEDUCTION INDEPENDENT OF SECTION 44C. WHERE, HOWEV ER THE EXPENSES OF THE NATURE DEFINED IN EXPLANATION TO SECTION 44C ARE ALLOCATED OR APPORTIONED TO THE ASSESSEE, THEN SUCH APPORTIONED EXPENSES WOULD FALL WITHIN THE AMBIT OF SECTION 44C. UNLESS IT IS PROVED THAT THE EXPENSES INCURRED BY THE HO WERE EXCLUSIVELY FOR TH E ASSESSEE AND THUS APPORTIONED, THESE WILL BE COVERED BY SECTION 44C. SINCE THE ASSESSEE COULD NOT ADDUCE ANY DETAIL IN THIS REGARD NOR PRODUCE A COPY OF ITS LETTER DATED 19 TH MARCH, 2003 CLAIMED TO BE CONTAINING DETAILS OF EXPENSES, WE ARE OF THE CONSIDERED OPINI ON THAT THE IMPUGNED ORDER ON THIS ISSUE CANNOT BE UPHELD. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER AND RESTORE THE MATTER TO THE FILE OF A.O. FOR DECIDING THIS ISSUE AS PER LAW AFTER ALLOWING A REA SONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. IT IS MADE CLEAR TH AT IF DURING THE FRESH EXAMINATION, THE ASSESSING OFFICER FINDS THAT THE EXPENSES OF ` 1.06 CRORE OR ANY PART THEREOF REPRESENT APPORTIONMENT O F HO EXPENSES AS PER EXPLANATION TO SECTION 44C, SUCH ALLOCATED EXPENSES WILL NOT B E ALLOWED AS DEDUCTION INDEPENDENT OF SECTION 44C. TO THE EXTENT THE EXPENSES ARE FOUND TO BE EXCLUSIVELY INCURRED BY HO FOR THE ASSESSEE, THEY WILL NOT FALL WITHIN THE DEFINITION OF HO EXPE NSES AND ACCORDINGLY ALLOWED AS DEDUCTION INDEPENDENT OF SEC TION 44C. THIS GROUND IS, THEREFORE, ALLOWED FOR STATISTICAL PURPO SES. ITA NO.3098/MUM/2000 & ORS. M/S.CREDIT AGRICOLE INDOSUEZ. 27 51. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLO WED. ORDER PRONOUNCED ON THIS 21 ST DAY OF SEPTEMBER, 2012. !$ 0 34* 5!)6 4 0 7 SD/- SD/- (AMIT SHUKLA) (R.S.SYAL) & ! & ! & ! & ! / JUDICIAL MEMBER ! ! ! ! / ACCOUNTANT MEMBER MUMBAI ; 5!) DATED : 21 ST SEPTEMBER, 2012. DEVDAS* !$ 0 -&#'8 98*# !$ 0 -&#'8 98*# !$ 0 -&#'8 98*# !$ 0 -&#'8 98*#/ COPY OF THE ORDER FORWARDED TO : 1. +, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. : () / THE CIT(A)-XXXI, MUMBAI. 4. : / CIT 5. 8=7 -&#&) , , / DR, ITAT, MUMBAI 6. 7> ? / GUARD FILE. !$) !$) !$) !$) / BY ORDER, .8# -&# //TRUE COPY// @ @ @ @/ // /A / A / A / A / ( DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI