ADIT (I.T) 3(1), MUMBAI V. M/s. J.P. MORGAN CHASE BANK AS SUCCESOR OF THE MORGAN GUARANTEE TRUST CO. OF NEW YORK, MUMBAI

ITA 4429/MUM/2005

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4497 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 30-09-2010
• Assessment Year: 2001-2002
• Appeal Filed On: 15-06-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DR SENTHIL KUMAR
• Keywords: Rule of consistency; Revenue expenditure
• Section: 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH L,MUMBAI BEFORE SHRI N.V. VASUDEVAN (JM) & SHRI R.K. PANDA ( AM) I.T.A.NO.4429/MUM/2005 (A.Y. 2001-02) ADIT (IT)-3(1), SCINDIA HOUSE, R.NO.136, 1 ST FLOOR, NM RD., MUMBAI-38. VS. M/S. J.P. MORGAN CHASE BANK AS SUCCESSOR OF THE MORGAN GUARANTY TRUST CO. OF NEW YORK, C/0. S.R.BATLIBOI & CO., 18 TH FLOOR, EXPRESS TOWER, NARIMAN POINT, MUMBAI-21. PAN: AACCM4670M APPELLANT RESPONDENT APPELLANT BY DR. SENTHIL KUMAR. DEPARTMENT BY SHRI VIR AL SHAH. O R D E R PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 31-03- 2005 OF CIT(A)-XXXIII, MUMBAI, RELATING TO ASSTT. Y EAR 2001-02. 2. GROUND OF APPEAL NO.1 BY THE ASSESSEE READS AS U NDER : IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, ERRED IN ALLOWING THE BROKEN PERIOD INTEREST. 2.1 THE FACTS OF THE CASE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAS PAID AN AMOUNT OF RS.3,01,47,604/- TOWARDS BROKEN INTEREST ON SECURIT IES PURCHASED DURING THE FINANCIAL YEAR ENDING 2001 WHICH WAS UNSOLD AS ON 3 1-03-2001. THE AO ASKED THE ASSESSEE TO EXPLAIN THE CLAIM AND STATE WHY THI S SHOULD NOT BE DISALLOWED. RELYING ON A COUPLE OF DECISIONS AND THE ACCOUNTING STANDARD 9 ISSUED BY ICAI AND CIRCULARS ISSUED FROM TIME TO TIME BY RBI, IT WAS ARGUED THAT BROKEN PERIOD INTEREST SHOULD NOT BE ADDED TO THE TAXABLE INCOME. THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF AMERICAN EXPRESS I NTERNATIONAL BANKING CORPN. ITA 4429/M/05 J.P. MORGAN CHASE BANK 2 VS. CIT (258 ITR 601) WAS ALSO BROUGHT TO THE NOTIC E OF THE AO. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE NOTED THAT ALTHOUGH THE HONBLE BOMBAY HIGH COURT IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPN. (SUPRA) HAS HELD THAT THE INTEREST PAID ON BROKEN PERIOD IS ALLOWABLE AS REVENUE EXPENDITURE, HOWEVER , THE DECISION HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND SLP HAS BEEN FILED I N THE HONBLE SUPREME COURT AGAINST THE ORDER. HE ACCORDINGLY MADE THE ADDITION TO KEEP THE ISSUE ALIVE. 3. IN APPEAL, THE CIT(A) DELETED THE ADDITION MADE BY THE AO BY HOLDING AS UNDER : 5. I HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE FINDINGS OF THE A.O RESPECTFULLY FOLLOWING THE JUDGMENT OF HON BLE BOMBAY HIGH COURT IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION (SUPRA), IN PRINCIPLE I AGREE WITH THE CONTENTION OF THE APPELLANT. THE HONBLE COURT AFFIRMING THE DECISION OF THE APPELLATE TRIBUNAL HELD THAT ONCE THE DEPARTMENT SOUGHT TO AS SESS TO TAX THE INTEREST RECEIVED BY THE ASSESSEE FROM THE TRANSFER EES FROM THE BROKEN PERIOD UNDER THE HEAD BUSINESS THE DEPARTM ENT COULD NOT HAVE REJECTED THE ADJUSTMENT OF THE AMOUNTS PAID BY THE ASSESSEE TO THE TRANSFERORS FOR THE BROKEN PERIOD UNLESS THE DEPARTMENT PROVES THAT THE METHOD ADOPTED BY THE ASSESSEE DID NOT DISCLOSE THE TRUE AND PROPER INCOME. HOWEVER, SINCE THE INTEREST INCOME OF THE APPELLANTS BANK HAS BEEN TAXED BY THE DEPARTMENT O N ACCRUAL BASIS, INTEREST EXPENDITURE RELATABLE TO THE SAID INCOME I S ONLY TO BE ALLOWED. THE AO IS THEREFORE DIRECTED TO ALLOW BROK EN PERIOD INTEREST EXPENDITURE ONLY RELATABLE TO INTEREST INCOME TAXED ON ACCRUAL BASIS FOR THE YEAR UNDER CONSIDERATION. THE A.O. IS THERE FORE DIRECTED TO VERIFY AND ALLOW THE SAME ACCORDINGLY. APPELLANTS APPEAL ON THIS GROUND IS ALLOWED SUBJECT TO VERIFICATION. AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE REVENU E IS IN APPEAL BEFORE US. 4. AFTER HEARING BOTH SIDES, WE DO NOT FIND ANY INF IRMITY IN THE ORDER OF THE CIT(A). THE HONBLE BOMBAY HIGH COURT HAS HELD THAT INTEREST PAID ON BROKEN PERIOD IS ALLOWABLE AS REVENUE EXPENDITURE, A FACT BROUGHT ON RECORD BY THE AO. HE HAS SIMPLY MADE THE ADDITION TO KEEP THE ISSUE A LIVE SINCE THE DEPARTMENT HAS FILED SLP AGAINST THE ORDER OF THE JURISDICTION AL HIGH COURT. SINCE NOTHING HAS BEEN BROUGHT BEFORE US AGAINST THE DECISION OF THE JURISDICTIONAL HIGH COURT, ITA 4429/M/05 J.P. MORGAN CHASE BANK 3 THEREFORE, THE SAME IS BINDING ON THE REVENUE. WE, THEREFORE, UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUND RAISED BY THE REVE NUE. 5. GROUND OF APPEAL NO. 2 BY THE REVENUE READS AS U NDER : IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, ERRED IN DIRECTING TO ALLOW THE CLAIM OF INTEREST ON SWAP TRANSACTION UPTO THE END OF THE FINANCIAL YEAR. THE FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSE E HAD DEBITEDRS.1,36,92,861/- AS LOSS INCURRED ON INTEREST RATE SWIFT TRANSACTION S. ON BEING ASKED BY THE AO TO GIVE THE BREAK-UP OF THIS AND EXPLAIN THE SAME, THE ASSESSEE FILED DETAILS AS UNDER : UNREALIZED LOSSES RS.4,77,30,043/- UNREALIZED GAINS RS.3,40,37,182/- NOT BEING SATISFIED WITH THE VARIOUS EXPLANATIONS G IVEN BY THE ASSESSEE, THE AO DISALLOWED THE CLAIM OF NET LOSS OF RS.1,36,92,861/ - ON UNMATURED FORWARD FOREIGN EXCHANGE TRANSACTION AS A DEDUCTION AND ADD ED BACK TO THE TOTAL INCOME OF THE ASSESSEE. 6. BEFORE THE CIT(A), IT WAS SUBMITTED THAT THE ASS ESSEE MARKS TO MARKET ALL THE OUTSTANDING TRADING SWAP ON A DAILY BASIS. THIS WAS DONE BY COMPARING THE PRESENT VALUE OF FLOATING INTEREST, CASH FLOWS AS O F THAT DAY WITH THE PRESENT VALUE OF CASH FLOWS ON THE FIXED RATE. THE DIFFERENCE BET WEEN THE TWO AMOUNTS I.E. MTM GAIN OR LOSS IS RECORDED IN THE PROFIT & LOSS ACCOU NT. THUS, AT THE END OF THE FINANCIAL YEAR, ALL THE OUTSTANDING SWAPS ARE MARKE D TO MARKET AND THE MTM GAIN OR LOSS IS RECORDED IN THE PROFIT & LOSS ACCOUNT. I T WAS CONTENDED THAT THE LOSS ON REVALUATION OF INTEREST RATE SWAPS BEING TRADING SW APS AND DEBITED TO PROFIT & LOSS ACCOUNT SHOULD BE ALLOWED AS A DEDUCTION IN CO MPUTING THE TAXABLE INCOME IN ACCORDANCE WITH THE METHOD OF ACCOUNTING FOLLOWED. THE ASSESSEE HAD ALSO ITA 4429/M/05 J.P. MORGAN CHASE BANK 4 OFFERED ITS PROFIT ON REVALUATION OF INTEREST RATE SWAPS FOR THE PRIOR YEAR TO TAX IN ITS RETURN OF INCOME. 6.1 IT WAS FURTHER CONTENDED BEFORE THE CIT(A) THAT THE METHOD OF ACCOUNTING FOR PROFIT & LOSS ON IRS IS REGULARLY EMPLOYED BY T HE BANK SINCE IT IS A MANDATORY REQUIREMENT UNDER RBI GUIDELINES. BY APPLYING THESE GUIDELINES, THE ASSESSEE IS RECORDING ALL ITEMS OF PROFIT AND LOSS FOR THE YEAR . IT WAS FURTHER SUBMITTED THAT IT IS A SETTLED LAW THAT WHERE THE ASSESSEE FOLLOWS A METHOD OF ACCOUNTING, WHICH IS REASONABLE AND FOLLOWED CONSISTENTLY, THEN THE ACCO UNTS SHOULD BE RESPECTED. A NUMBER OF DECISIONS WERE CITED BEFORE HIM. 7. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE AND ON THE BASIS OF VARIOUS CASE DECISIONS, THE CIT(A) DIRECTED THE AO TO ALLOW THE CLAIM OF INTEREST ON SWAP TRANSACTIONS UPTO THE END OF THE FINANCIAL YEAR BY HOLDING AS UNDER : 6. I HAVE CAREFULLY CONSIDERED THE APPELLANTS SUB MISSION AS WELL AS THE FINDING OF THE AO. IT IS OBSERVED THAT THE A PPELLANT HAS BEEN FOLLOWING THE CONSISTENT METHOD OF ACCOUNTING FOR I NTEREST RATES SWAP (IRS) AS PER THE GUIDELINES ISSUED BY THE RBI. ACCORDINGLY ANY PROFIT ON IRS IS CREDITED TO THE PROFIT AND LOSS AC COUNT AND OFFERED TO TAX AND ANY LOSS IN RESPECT OF THE SAME IS CLAIMED DEBITED TO THE PROFIT AND LOSS ACCOUNT AND CLAIMED AS DEDUCTION. T HE APPELLANT HAS BEEN CONSISTENTLY FOLLOWING THE ACCOUNTING POLICY I N RESPECT OF IRS. THE RELIANCE IS PLACED ON THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF UNITED COMMERCIAL BANK VS. CIT 240 I TR 355 (SC). 6.1 IN PRINCIPLE, I AGREE WITH THE CONTENTION OF TH E APPELLANT THAT THE PREMIUM IS A DEFINITE COST OF THE SWAP TRANSACT ION TO THE APPELLANT AND AT THE END OF THE FINANCIAL YEAR, THE PROPORTIONATE PREMIUM ON THE OUTSTANDING SWAP CONTRACT IS WORKED OUT BASED ON THE NUMBER OF DAYS FOR WHICH THE CONTRACT IS HELD I N THE RELEVANT FINANCIAL YEAR AND THIS COST IS CHARGED TO THE APPE LLANTS PROFIT AND LOSS ACCOUNT. HOWEVER, THE CLAIM OF THE APPELLANT SHOULD BE ALLOWED WHICH IS RELATABLE TO THE PERIOD UPTO THE 31 ST MARCH ONLY. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. AGGRIEVED WITH SUCH ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 8. AFTER HEARING BOTH SIDES, WE DO NOT FIND ANY INF IRMITY IN THE ORDER OF CIT(A). ADMITTEDLY, THE ASSESSEE IS FOLLOWING THE C ONSISTENT METHOD OF ACCOUNTING ITA 4429/M/05 J.P. MORGAN CHASE BANK 5 FOR INTEREST RATES SWAP (IRS) AS PER THE GUIDELINES ISSUED BY RBI, A FACT BROUGHT ON RECORD BY THE CIT(A) AND NOT CONTROVERTED BY T HE REVENUE. THEREFORE, FOLLOWING THE RULE OF CONSISTENCY ITSELF, THE METHO D ADOPTED BY THE ASSESSEE HAS TO BE ACCEPTED SINCE THE CIT(A) HAS GIVEN A FINDING THAT THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED WHICH IS RELATABLE TO THE PERIOD UPTO 31 ST MARCH OF THE ACCOUNTING YEAR. THEREFORE, WE DO NOT FIND ANY INFI RMITY IN THE SAME. ACCORDINGLY, THE SAME IS UPHELD AND THE GROUND RAISED BY THE REV ENUE IS DISMISSED. 9. GROUND OF APPEAL NO. 3 BY THE REVENUE READS AS U NDER : IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, ERRED IN DIRECTING TO DELETE THE INTEREST CHARGED UNDER SECTION 234. AFTER HEARING BOTH SIDES, WE FIND THE AO COMPUTED I NTEREST U/S.234D AMOUNTING TO RS.6,89,959/- FOR THE PERIOD APRIL 2003 TO MARCH 2004 AS AGAINST JUNE 2003 TO MARCH 2004. THUS, ACCORDING TO THE ASSESSEE, THE AO COMPUTED EXCESS INTEREST U/S.234D AMOUNTING TO RS.1,34,626/-. 10. IT WAS SUBMITTED BEFORE THE CIT(A) THAT THE P ROVISIONS OF SEC. 234D OF THE ACT, WHICH WERE INSERTED BY THE FINANCE ACT 200 3 W.E.F. 01-06-2003, ARE EFFECTIVE FROM 01-06-2003. THEREFORE, IT WOULD BE APPLICABLE W.E.F. 01-06-2003. ACCORDING TO THE ASSESSEE, ALL THE INGREDIENTS FOR APPLICABILITY MUST TAKE PLACE AFTER ITS COMING INTO FORCE. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE, THE CIT(A) DIRECTED THE AO NOT TO CHARGE INTEREST U /S.234D WHERE REFUND HAS BEEN RECEIVED BY THE ASSESSEE BEFORE THE DATE OF IN SERTION OF SEC. 234D. AGGRIEVED WITH SUCH ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 11. AFTER HEARING BOTH SIDES, WE DO NOT FIND ANY IN FIRMITY IN THE ORDER OF CIT(A) WHERE SHE HAS DIRECTED THE AO TO CHARGE INTEREST U/ S.234D FROM 01-06-2003 TO MARCH 2004. ADMITTEDLY, THE PROVISIONS OF SECTION 2 34D, WHICH WERE INSERTED BY THE FINANCE ACT, 2003, ARE EFFECTIVE FROM 01-06-200 3. THEREFORE, THERE IS NO ITA 4429/M/05 J.P. MORGAN CHASE BANK 6 INFIRMITY IN THE ORDER OF CIT(A) DIRECTING THE AO T O CHARGE INTEREST U/S.234D FROM 01-06-2003. THE ORDER OF THE CIT(A) ON THIS ISSUE I S ACCORDINGLY UPHELD AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THE 30TH DAY OF SEPTEMBER, 201 0. SD/- SD/- (N.V. VASUDEVAN) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 30TH SEPT. , 2010. NG: COPY TO : 1. ASSESSEE. 2.DEPARTMENT. 3 CIT(A)-XXXIII,,MUMBAI. 4 DIT(IT),MUMBAI. 5.DR,L BENCH,MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER, ASST.REGISTRAR, ITAT, MUMBAI. ITA 4429/M/05 J.P. MORGAN CHASE BANK 7 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 21-09-2010 SR.PS/ 2 DRAFT PLACED BEFORE AUTHOR 22-09-2010 SR.PS/ 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER