M/s. DBS BANK LTD., MUMBAI V. ITO (I.T) - 2(1), MUMBAI

ITA 248/MUM/2007

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 71249 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 8 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: L
• Next Hearing Date: 21-01-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 09-01-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: MADHUR AGARWAL IZRFKHZ DH LS
• Keywords: Source of fund
• Section: 14A

Judgement Text

DBS BANK LIMITED - 1 - VK;DJ VIHYH; VF/KDJ.K ,Y U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUM BAI JH JKTSUNZ FLAG YS[KK LNL; ,OA JH VFER 'KQDYK] U;KF ;D LNL; DS LE{K BEFORE SHRI RAJENDRA SINGH ACCOUNTANT MEMBER AND SH RI AMIT SHUKLA JUDICIAL MEMBER VK;DJ VIHY LA[;K /ITA NO. 248/MUM/2007 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2003-04 DBS BANK LIMITED 3 RD FLOOR, FORT HOUSE, 221, DR D.N. ROAD, FORT, MUMBAI 400 001. CUKE@ VS. THE INCOME TAX OFFICER (INTERNATIONAL TAXATION)-2(1), 1 ST FLOOR, SCINDIA HOUSE, N.M. MARG, BALLARD ESTATE MUMBAI 400 038. PAN:- AAACT4652J VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VK;DJ VIHY LA[;K /ITA NO. 744/MUM/2007 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2003-04 DDIT (INTERNATIONAL TAXATION_-1(2) ROOM NO. 117, 1 ST FLOOR, SCINDIA HOUSE, BALLARD PIER, MUMBAI 400038. CUKE@ VS. DBS BANK LIMITED 3 RD FLOOR, FORT HOUSE, 221, DR D.N. ROAD, FORT, MUMBAI 400 001. VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VIHYKFKHZ DH VKSJ LS @ ASSESSEE BY SHRI MADHUR AGARWAL IZR;FKHZ DH VKSJ LS @ REVENUE BY SHRI NARENDRA KUMAR VKNS'K@ VKNS'K@ VKNS'K@ VKNS'K@ ORDER PER RAJENDRA SINGH, AM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DA TED 10.10.2006 OF CIT (A) FOR THE ASSESSMENT YEAR 2003-04 . THE DISPUTE LQUOKBZ DH RKJH[K @ DATE OF HEARING 07-10-2013 ?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT 07-10-2013 DBS BANK LIMITED - 2 - RAISED IN THIS APPEAL RELATE TO DISALLOWANCE OF INTERE ST AND DISALLOWANCE OF LOSS ON ACCOUNT OF REVALUATION OF FOREIGN EXCHANGE CO NTRACTS. THESE CROSS APPEALS WHICH WERE HEARD TOGETHER AND RELATE TO THE S AME YEAR ARE BEING DISPOSED OFF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. WE FIRST TAKE UP THE APPEAL OF THE ASSESSEE IN I TA NO 248/MUM/2007. THE ONLY DISPUTE RAISED BY THE ASSESS EE IN THIS APPEAL IS REGARDING DISALLOWANCE OF INTEREST PAID BY THE ASS ESSEE TO THE HEAD OFFICE/OVERSEAS BRANCHES AMOUNTING TO RS. 14,07,999/ -. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE CLAIM OF INTE REST SHOULD NOT BE DISALLOWED 40(A)(I) AS THE ASSESSEE HAD NOT DEDUCTE D TAX AT SOURCE. THE ASSESSEE SUBMITTED THAT THE BANK WHICH WAS INCORPORA TED IN SINGAPORE WAS CARRYING ON THE BUSINESS OF BANKING IN INDIA THR OUGH BRANCHES SITUATED IN INDIA. IT WAS ARGUED THAT THE INDIAN BRAN CHES CONSTITUTED A PE OF THE BANK AND, THEREFORE, WHILE COMPUTING ITS IN COME INTEREST PAYMENT TO HEAD OFFICE HAS TO BE ALLOWED. IT WAS AL SO SUBMITTED THAT INTEREST PAYMENT WAS NOT TAXABLE IN THE HANDS OF TH E HEAD OFFICE AND, THEREFORE, NO TAX WAS REQUIRED TO BE DEDUCTED. AO HOWE VER DID NOT ACCEPT THE CONTENTIONS RAISED AND OBSERVED THAT INTEREST WAS CHARGEABLE IN THE HANDS OF THE HEAD OFFICE AND SINCE THE ASSESSEE HAD FAILED TO DEDUCT TAX AT SOURCE, THE CLAIM OF INTEREST EXPENDITURE WAS NOT ALLOWABLE. ACCORDINGLY HE DISALLOWED THE CLAIM AND ADDED THE SA ME TO THE TOTAL INCOME. 2.1 IN APPEAL CIT(A) FOLLOWING THE DECISION OF SPEC IAL BENCH OF TRIBUNAL IN CASE OF ABN AMRO BANK NV (97 ITD 89) HELD THAT I NTEREST PAYMENT BY INDIAN BRANCHES TO THE HEAD OFFICE OR OVERSEAS BRANCH ES WAS NOT ALLOWABLE AS DEDUCTION. ACCORDINGLY HE CONFIRMED THE DISALLOWANCE MADE BY AO, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 2.2 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUBMITTE D THAT THE ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIO N OF LARGER SPECIAL DBS BANK LIMITED - 3 - BENCH OF TRIBUNAL IN CASE OF SUMITOMO MITSUI BANKING CORPN. VS. DCIT ( 136 ITD 66). LEARNED DR FAIRLY CONCEDED THAT THE ISSU E WAS COVERED. 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MAT TER CAREFULLY. THE DISPUTE IS REGARDING DEDUCTION ON ACCOUNT OF INTE REST PAID BY THE ASSESSEE, BEING AN INDIAN BRANCH TO THE HEAD OFFICE OF THE BANK. WE FIND THAT THE SAME ISSUE HAD BEEN CONSIDERED BY THE LARGE R SPECIAL BENCH OF TRIBUNAL IN CASE OF SUMITOMO MITSUI BANKING CORPN. VS. DCIT (SUPRA) AND SPECIAL BENCH IN THAT CASE HELD THAT UNDER THE D OMESTIC LAW THE INTEREST PAID BY THE INDIAN BRANCH TO THE HEAD OFFI CE WAS NOT ALLOWABLE AS DEDUCTION AS THIS WAS PAYMENT TO SELF. FURTHER IT WA S ALSO HELD THAT THE INTEREST PAYMENT WAS ALLOWABLE AS DEDUCTION WHILE D ETERMINING THE PROFIT ATTRIBUTABLE TO THE PE BEING THE INDIAN BRANCH UNDER THE PROVISIONS OF ARTICLE 7(2) AND 7(3) OF INDO JAPANESE TREATY READ WI TH PARAGRAPH 8 OF THE PROTOCOL. THE SPECIAL BENCH ALSO HELD THAT THE SAID INTEREST CANNOT BE TAXED IN THE HANDS OF THE ASSESSEE BANK IN INDIA UN DER THE DOMESTIC LAW AS IT WAS PAYMENT TO SELF. THERE WAS NO EXPRESS PROVIS IONS IN THE RELEVANT TAX TREATY WHICH WAS CONTRARY TO THE DOMESTIC LAW. TH EREFORE, INTEREST PAYMENT WAS NOT TAXABLE IN THE HANDS OF THE BANK AN D THUS THERE WAS NO QUESTION OF ANY TAX DEDUCTED AT SOURCE. THE ISSUE IS THUS COVERED IN FAVOUR OF THE ASSESSEE AND WE ACCORDINGLY SET ASIDE THE ORDER OF CIT(A) AND ALLOW THE CLAIM OF EXPENDITURE ON ACCOUNT OF INT EREST. 3. APPEAL OF THE REVENUE IN ITA NO. 744/MUM/07. IN THIS APPEAL THE REVENUE HAS RAISED DISPUTES ON TWO DIFFERENT GROUNDS W HICH RELATES TO DISALLOWANCE OF INTEREST AND OTHER EXPENSES AND DISAL LOWANCE OF LOSS ON ACCOUNT OF REVALUATION OF FOREIGN EXCHANGE CONTRACTS. 3.1 WE FIRST TAKE UP THE DISPUTE RELATING TO DISALLOW ANCE OF INTEREST AND OTHER EXPENSES. THE ASSESSEE HAS EARNED INTEREST INCOM E OF RS. 65,86,233/- FROM 9.5% TAX-FREE BONDS OF NATIONAL HOUS ING BANK. THE SAID INTEREST INCOME WAS EXEMPT U/S 10(150) OF THE I T ACT. THE ASSESSEE DBS BANK LIMITED - 4 - HAD ALSO RECEIVED NET INTEREST INCOME OF RS. 1,18,12, 977/- FROM M/S PSA SICAL TERMINALS LTD, WHICH WAS EXEMPT U/S 10(23G) O F THE IT ACT. THE ASSESSEE SUBMITTED THAT IT HAD COMPOSITE SOURCES OF INCOME AND, THEREFORE, NO DISALLOWANCE OF EXPENSES COULD BE MADE IN VIEW OF THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF CIT V. RAJASTHAN STATE WAREHOUSING CORPORATION (242 ITR 450). THE AO HOWEVER OBSERVED THAT THE SAID JUDGMENT WAS NOT APPLICABLE IN VIEW OF THE SPECIFIC PROVISIONS OF SECTION 14A OF THE IT ACT. HE, THEREFORE, COMPUTED T HE INTEREST AND OTHER EXPENSES RELATABLE TO THE TAX FREE INTEREST INCOME O N PROPORTIONATE BASIS AND CALCULATED THE INTEREST EXPENSES AT RS. 88,87,97 7/- AND OTHER EXPENSES AT RS. 41,08,799/- ON PROPORTIONATE BASIS R ELATING TO THE EXEMPT INTEREST INCOME AND DISALLOWED THE SAME. 3.2 IN APPEAL, THE ASSESSEE SUBMITTED THAT INVESTME NT IN NHB BONDS HAD BEEN MADE ON 6.3.1998 TO THE TUNE OF RS. 7 CROR E WHICH HAS CONTINUED SINCE THEN. IT WAS POINTED OUT THAT THE A SSESSEE HAD INTEREST FREE CAPITAL AND STATUTORY RESERVES OF RS. 58.86 CRORE O N 31.3.1999 WHICH HAD INCREASED IN SUBSEQUENT YEARS AND, THEREFORE, INV ESTMENT IN NHB BONDS HAD BEEN MADE OUT OF OWN FUNDS AND NO DISALLO WANCE OF EXPENSES WAS CALLED FOR. AS REGARDS THE INTEREST FROM M/S PSC S ICAL TERMINALS LTD, IT WAS SUBMITTED THAT THE ASSESSEE HAD EARNED GROSS INTEREST INCOME OF RS. 5,64,47,586/- AGAINST WHICH INTEREST COST OF RS . 3,94,74,917/- AND OTHER EXPENSES OF RS. 51,59,692/- HAD BEEN INCURRED. T HERE WAS, THEREFORE, ONLY NET INTEREST INCOME OF RS. 1,18,12,97 7/- WHICH HAD BEEN CLAIMED AS EXEMPT. CIT(A) AFTER CONSIDERING THE SUBMI SSIONS OF THE ASSESSEE OBSERVED THAT THE NHB BONDS HAD BEEN ACQUIRE D OUT OF OWN FUNDS AND NO DISALLOWANCE HAD BEEN MADE IN EARLIER YE ARS. HE, THEREFORE, DELETED THE ADDITION MADE ON ACCOUNT OF NHB BONDS. AS REGARDS THE PSA SICAL TERMINALS LTD, CIT(A) OBSERVED THAT THE AO HA D NOT MADE ANY ATTEMPT TO FIND NEXUS BETWEEN BORROWED FUNDS AND INVE STMENT IN TAX FREE BONDS. THE AO HAD FAILED TO EXAMINE AS TO HOW THE A LLOCATION OF INTEREST AND OTHER EXPENSES EARNED BY THE ASSESSEE TOWARDS TH E INCOME FROM PSA DBS BANK LIMITED - 5 - SICAL TERMINALS LTD WAS NOT CORRECT. HE, THEREFORE, DIREC TED THE AO TO DELETE THE ADDITION AGGRIEVED BY WHICH THE REVENUE I S IN APPEAL BEFORE TRIBUNAL. 3.3 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECOR DS AND CONSIDERED THE MATTER CAREFULLY. IN SO FAR AS THE INCO ME FROM NHB BONDS IS CONCERNED, WE FIND THAT THE SAME ISSUE HAD ALREAD Y BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YE AR 2002-03 IN ITA NO. 6631/MUM/2006 IN WHICH THE TRIBUNAL NOTED THAT THE INVESTMENT HAD BEEN MADE ON 6.3.1998 AND IT WAS ESTABLISHED IN THE EARLIER YEARS THAT THE INVESTMENT HAD BEEN MADE FROM OWN CAPITAL AND FREE RESERVES. WE ALSO NOTE THAT THE SAME ISSUE HAD ALSO BEEN CONS IDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2001-02 IN ITA 2269/MUM/2005 IN WHICH THE TRIBUNAL NOTED IN PARA 4. 2 THAT THE SAME ISSUE HAD ALREADY BEEN CONSIDERED BY THE CIT(A) IN AS SESSMENT YEAR 1998-99 WHO GAVE A CLEAR FINDING THAT THERE WAS NEXU S BETWEEN THE BORROWED FUNDS AND THE INVESTMENTS. CIT(A) THEREAFTER DELETED THE ADDITION AND THE DECISION OF CIT(A) HAD BEEN ACCEP TED BY THE REVENUE. THEREFORE, NO DISALLOWANCE OF INTEREST COULD BE MADE IN RELATION TO NHB BONDS. ACCORDINGLY DECISION OF CIT(A) TO DELETE THE ADDITION IN RESPECT OF NHB BONDS IS UPHELD. AS REGARDS THE DISALLOWANCE OF E XPENSES IN RELATION TO INTEREST INCOME FROM PSC SICAL TERMINALS LTD, WE F IND THAT THE ASSESSEE ALLOCATED THE INTEREST EXPENDITURE OF RS. 3, 94,74,917/- AND OTHER EXPENSES OF RS. 51.59.682/- AGGREGATING TO RS. 1,29,96,776/- TOWARDS THE INTEREST INCOME. THIS ASPECT WAS NOT EXA MINED BY THE AO. CIT(A) HAS ALSO FAILED TO EXAMINE WHETHER BASIS OF A LLOCATION MADE BY THE ASSESSEE WAS CORRECT. CIT(A) HAS DELETED THE ADDITIO N ONLY ON THE GROUND THAT THE AO HAD FAILED TO EXAMINE THE MATTER WHICH IN OUR VIEW IS NOT CORRECT. CIT(A) HAS POWER CO-TERMINUS WITH THAT OF AO AND IN CASE THE AO HAS FAILED TO EXAMINE THE MATTER, IT IS WELL WITHIN THE JURISDICTION OF CIT(A) TO EXAMINE THE SAME IF NECESSARY BY REMANDING THE MATTER TO AO AND GIVE A CLEAR FINDING WHICH HAS NOT BEEN DONE IN THIS CASE. WE, DBS BANK LIMITED - 6 - THEREFORE, SET ASIDE THE ORDER OF CIT(A) IN RELATION T O DISALLOWANCE ON ACCOUNT OF INTEREST FROM PSA SICAL TERMINALS LTD AN D RESTORE THE MATTER BACK TO HIM FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. THE SECOND DISPUTE RAISED BY THE REVENUE IS REGARDI NG DISALLOWANCE OF LOSS ON ACCOUNT OF REVALUATION OF FOREIGN EXCHAN GE CONTRACTS AMOUNTING TO RS. 41,99,947/-. THE AO OBSERVED THAT THE FOREIGN EXCHANGE CONTRACTS WERE NOT IN THE NATURE OF STOCK IN TRADES AND THE LOSS WAS ONLY NOTIONAL ARISING ON ACCOUNT OF OUTSTANDING FOREIGN EXCHANGE CO NTRACTS. LOSS WAS, THEREFORE, CONTINGENT IN NATURE AND NOT ALLOWABLE. THE AO ACCORDINGLY DISALLOWED THE SAME. 4.1 IN APPEAL CIT(A) REFERRED TO THE DECISION OF TRIB UNAL IN CASE OF DEUTSCHE BANK AG VS. DCIT IN ITA 1726/BOM/1993 AND SUBSEQUENT JUDGMENT OF TRIBUNAL AS REPORTED IN 86 ITD 431 IN WHI CH IT HAS BEEN HELD THAT NOTIONAL PROFIT ON REVALUATION OF FOREIGN EXCHA NGE FORWARD CONTRACT ON THE LAST DAY OF PREVIOUS YEAR WAS REQUIRED TO BE B ROUGHT TO TAX AS INCOME. CIT(A), THEREFORE, HELD THAT LOSS WAS ALLOWAB LE AND ACCORDINGLY DIRECTED THE AO TO DELETE THE ADDITION, AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE TRIBUNAL. 4.2 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECOR DS AND CONSIDERED MATTER CAREFULLY. THE DISPUTE IS REGARDING AL LOWABILITY OF LOSS ON ACCOUNT OF REVALUATION OF FOREIGN EXCHANGE CONTRA CTS WHICH HAD NOT MATURED DURING THE YEAR ON THE BALANCE-SHEET DATE. TH E AO HAD DISALLOWED THE LOSS AS CONTINGENT IN NATURE AS CONT RACT HAD NOT MATURED AND ALSO HELD THAT IT WAS NOTIONAL. CIT(A) HAS ALLO WED THE CLAIM FOLLOWING SOME DECISIONS OF TRIBUNAL. WE FIND THAT THE ISSUE IS COVERED BY THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF CIT. VS. WOODWARD GOVERNOR INDIA PRIVATE LIMITED (312 ITR 224) IN WHICH IT HAS BEEN HELD DBS BANK LIMITED - 7 - THAT ADJUSTMENT ON ACCOUNT OF FOREIGN EXCHANGE FLUC TUATION CAN BE MADE ON EACH BALANCE-SHEET DATE IN RESPECT OF ANY FORWAR D FOREIGN EXCHANGE CONTRACT PENDING ACTUAL PAYMENT AND ANY LOSS ARISING THERE FROM HAS TO BE ALLOWED AS AN ITEM OF EXPENDITURE U/S 37(1). WE, THEREFORE, SEE NO INFIRMITY IN THE ORDER OF CIT(A) IN ALLOWING THE CLAI M OF LOSS OF THE ASSESSEE. THE ORDER OF CIT(A) IS, THEREFORE, UPHELD ON THIS ISSUE. 7. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED AND THAT BY THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 7-10-2013 SD/- SD/- (AMIT SHUKLA) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER SKS SR. P.S, MUMBAI DATED 7.10.2013 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, L BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI