DCIT 2(3), MUMBAI V. M/s. INDUS IND BANK LTD., MUMBAI

ITA 4535/MUM/2005

• Counselvise Citation: 453519914 RSA 2005
• Duration Of Justice: 6 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 12-05-2011
• Assessment Year: 2001-2002
• Appeal Filed On: 17-06-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GOLI SRINIVAS RAO
• Assessee Lawyers: B P BAPAT
• Keywords: Capital asset; Depreciation; Revenue expenditure
• Section: 45(2); 14A; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H, MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A .M) ITA NO.4343/MUM/2005(A.Y. 2001-02) INDUSIND BANK LIMITED, 8 TH FLOOR, TOWER ONE, ONE INDIABULLS CENTRE, 841, SENAPATI BAPAT MARG, ELPHINSTON ROAD, (W), MUMBAI 13 PAN: AAACI 1314G (APPELLANT) VS. THE ADDL. CIT, RANGE 2(3), AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (RESPONDENT) ITA NO.4535/MUM/2005(A.Y. 2001-02) THE DCIT, RANGE 2(3), AAYKAR BHAVAN, MK ROAD, MUMBAI 20. (APPELLANT) VS. INDUSIND BANK LIMITED, 8 TH FLOOR, TOWER ONE, ONE INDIABULLS CENTRE, 841, SENAPATI BAPAT MARG, ELPHINSTON ROAD, (W), MUMBAI 13 PAN: AAACI 1314G (RESPONDENT) ASSESSEE BY : SHRI B.P.BAPAT REVENUE BY : SHRI GOLI SRINIVAS RAO ORDER PER BENCH, ITA NO.4343/M/05 IS AN APPEAL BY THE ASSESSEE WHI LE ITA NO.4535/M/05 IS AN APPEAL BY THE REVENUE. BOTH THE SE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 24/3/2005 OF CIT(A) XXXIII, MUMBAI RELATING TO THE ASSESSMENT YEAR 2001-02. ITA NO.4343/M/05-ASSESSEES APPEAL: 2. GROUND NO.1 RAISED BY THE ASSESSEE READS AS FOL LOWS: ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN CONFIRMING AN AMOUNT OF RS. 84,71,6 2,630/- REPRESENTING ACCRUED INTEREST ON SECURITIES BUT NOT FALLING DUE FOR PAYMENT. SUCH INTEREST, WHICH IS IN THE PROCESS OF ACCRUAL, IS AT THE INCIPIENT AND INCHOATE STAGE, MATURING INTO TAXABLE INCOME ONLY WHEN IT BECOMES DUE AND PAYABLE IN TERMS OF ISSUE OF SUC H SECURITY. 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF BANKING. THE ASSESSEE DID NOT OFFER TO TAX INTEREST INCOME OF RS . 84,71,62,630/- ON THE GROUND THAT INTEREST INCOME RECEIVED ON INVESTMENTS WAS ALONE ADDED TO THE TOTAL INCOME. INCOME ACCRUED ON THE INVESTMENT ON THE BALANCE SHEET DATE WHICH WAS NOT DUE NOR RECEIVED WAS NOT OFFERED TO T AX. THE PRINTED BALANCE SHEET OF THE ASSESSEE, AS PER SCHEDULE XVII-6 THE P RINCIPLE ACCOUNTING POLICIES IN CASE OF REVENUE RECOGNITION WAS GIVEN A S UNDER: INCOME RECOGNITION: INCOME BY WAY OF INTEREST AND DISCOUNT ON PERFORMIN G ASSETS HAS BEEN RECOGNIZED ON ACCRUAL BASIS AND ON NON-PERFORMING A SSETS THE SAME IS ACCRUED ON THE BASIS OF REALIZATION. INCOME ON GOV T. SECURITIES, DEBENTURES AND OTHER FIXED INCOME SECURITIES HAS BE EN RECOGNIZED AS ACCRUAL BASIS. AS PER THE TAX AUDIT REPORT, METHOD OF ACCOUNTING F OLLOWED WAS GIVEN IN ANNEXURE III WHICH WAS AS FOLLOWS: METHOD OF ACCOUNTING: METHOD OF ACCOUNTING EMPLOYED BY THE BANK IS GENERA LLY MERCANTILE EXCEPT ITEM NO.6.1 AND 6.3 MENTIONED IN SCHEDULE XV II TO FINAL ACCOUNTS FOR WHICH THE METHOD OF ACCOUNTING IS ON C ASH BASIS. 4. THE ASSESSING OFFICER FOR THE REASONS DISCUSSED ON AN IDENTICAL ISSUE IN A.Y 2000-01 HELD THAT INTEREST ACCRUED BUT NOT DUE SHOULD ALSO BE ADDED TO THE TOTAL INCOME. 5. ON APPEAL THE CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER GIVING RISE TO GROUND NO.1 BY THE ASSESSEE BEFORE T HE TRIBUNAL. IN DOING SO ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 3 THE CIT(A) FOLLOWED HIS PREDECESSORS ORDER IN ASSES SEES OWN CASE FOR A.Y 2000-01. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE HAS RAISED GROUND NO.1 BEFORE THE TRIBUNAL. BEFORE US IT IS NOT DISP UTE THAT THIS TRIBUNAL HAD ALREADY CONSIDERED IDENTICAL ISSUE IN A.Y 2000-01 I N ITA NO.931/M/04AND HELD AS FOLLOWS: 2. APROPOS GROUND NO.2, MATERIAL FACTS ARE LIKE THI S. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NO TICED THAT THE ASSESSEE HAD EXCLUDED `. 91,99,67,252/- ON THE GROU ND THAT THIS AMOUNT THOUGH ACCRUED BUT NOT RECEIVED DURING THE Y EAR BEING NOT DUE, HENCE NOT ELIGIBLE TO TAX. THE AO REJECTED TH E CONTENTION OF THE ASSESSEE AND AFTER EXCLUDING `. 62,63,63,964 BEING THE AMOUNT ALREADY TAXED IN THE ASSESSMENT YEAR 1999-2000, ADDED THE B ALANCE AMOUNT OF `. 29,36,03,288 TO THE TOTAL INCOME OF THE ASSES SEE. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BUT WITHOUT A NY SUCCESS. 4. AT THE TIME OF HEARING, LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THIS ISSUE IS COVERED BY THE DECISI ON OF THE ITAT MUMBAI (SB) IN THE CASE OF DCIT (INTERNATIONAL TAX ATION) VS. BANK OF BAHRAIN AND KUWAIT, 41 SOT 290 (MUM)(SB). ON THE O THER HAND, LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE HONBLE SUPREME COURT JUDGEMENT IN THE CASE OF RAMABAI V.CIT, 181 I TR 400(SC) AND CONTENDED THAT INCOME HAS TO BE TAKEN ON ACCRUAL BA SIS. 5. HAVING HEARD BOTH THE SIDES, WE FIND THAT THE IS SUE IS SQUARELY COVERED BY THE DECISION OF THE ITAT (SB) IN THE CAS E OF DCIT V. BANK OF BAHRAIN AND KUWAIT (SUPRA), WHEREIN, IT WAS HELD AS FOLLOWS:- 11.LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE IS COVERED IN ASSESSEES OWN CASE FOR THE ASSESSMENT Y EARS 1992- 93, 1993-94, 1995-96 AND 1996-97. LD COUNSEL SUBMI TTED THAT INTEREST ON GOVERNMENT SECURITIES DOES NOT ACCRUE O N DAY TO DAY BASIS BUT ON FIXED DATES AND THE ENTRY MADE IN THE BOOKS ARE NOT RELEVANT FOR INCOME TAX PURPOSES. 12. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RE CORDS OF THE CASE. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1992- 93, 1993-94, 1995-96 AND 1996-97. IN A.Y. 1996-97, THE ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 4 TRIBUNAL HAS ALLOWED THE ASSESSEES APPEAL, INTER A LIA, OBSERVING AS UNDER:- WE HAVE CAREFULLY PERUSED THE ORDER OF THE TRIBUNA L CITED ABOVE. IN THAT CASE ALSO, THE ISSUE WAS IDENTICAL, NAMELY, WHETHER IN THE CASE OF GOVERNMENT SECURITIES, INTER EST ACCRUES ON DAY TO DAY BASIS OR ONLY ON THE COUPON D ATES. THE TRIBUNAL HELD THAT INTEREST ACCRUES ONLY ON THE COUPON DATES AND NOT ON DAY TO DAY BASIS. IN COMING TO THI S CONCLUSION, THE TRIBUNAL PLACED RELIANCE ON THE JUD GMENT OF THE LAHORE HIGH COURT IN HAVELI SHAH SARDARILAL V CIT,PUNJAB, 4 ITR 297, THE FULL BENCH OF THE PATNA HIGH COURT IN RANJIT PRASAD SINGH V CIT, BIHAR & ORISSA (4 ITC 264) AND THE KARNATAKA HIGH COURT JUDGMENT IN ADDL CIT, MYSORE V. THE VIJAY BANK LTD., MANGALORE (1976) TAX LR 524. IT WAS ALSO NOTICED BY THE TRIBUNAL THAT THE CONTENTION ADVANCED ON BEHALF OF THE REVENUE BEFORE TRIBUNAL I N THAT CASE WAS TOTALLY CONTRADICTORY TO THE CONTENTION AD VANCED BY THE REVENUE BEFORE THE KARNATAKA HIGH COURT IN T HE CASE OF VIJAY BANK(SUPRA) BEFORE THE TRIBUNAL. THE DEP ARTMENT HAD PLACED RELIANCE ON THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION V CIT, 258 ITR 60 2 AND TAPARIA TOOLS LTD V. JCIT, 269 ITR 102. THESE TWO JUDGMENTS HAVE BEEN CONSIDERED BY THE TRIBUNAL IN PARAGRAPHS 14 TO 17 OF THE ORDER CITED ABOVE AND IT WAS HELD THAT THESE JUDGEMENTS ARE NOT APPLICABLE TO TH E FACTS OF UNION BANKS CASE. IN PARAGRAPHS 20 AND 21, THE TRI BUNAL HAS ALSO CONSIDERED THE OBJECTION OF THE DEPARTMENT THAT THE ASSESSEE CANNOT CREDIT THE INTEREST ON GOVERNMENT S ECURITIES IN THE PROFIT & LOSS ACCOUNT ON DAY TO DAY BASIS BU T CONTENDED THAT FOR PURPOSES OF INCOME TAX ONLY THE INTEREST THAT ACCRUED ON THE COUPON DATES CAN BE ASSESSED. THE TRIBUNAL NOTICED THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF ANOTHER BANK, NAMELY UNITED COMMERCIAL BANK , 240 ITR 355. IN THIS CASE, THE SUPREME COURT HAS R EVERSED THE JUDGEMENT OF THE CALCUTTA HIGH COURT, WHICH HEL D THAT THE ASSESSEE CANNOT PREPARE THE COMPUTATION OF ITS INCOME FOR INCOME TAX PURPOSES IN A MANNER DIFFERENT FROM THE METHOD UNDER WHICH IT KEEPS ACCOUNTS. APPLYING THIS JUDGMENT OF THE SUPREME COURT, THE TRIBUNAL HELD TH AT UNION BANK OF INDIA CANNOT BE PREVENTED FROM URGING IN THE RETURN THAT THE INTEREST ON GOVT. SECURITIES ACCRUE D ONLY ON THE SPECIFIED COUPON DATES NOTWITHSTANDING THAT CRE DIT HAS BEEN TAKEN IN THE PROFIT & LOSS ACCOUNT FOR THE INT EREST ON ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 5 DAY TO DAY BASIS. THUS, THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE VIEW THAT THE INTEREST ACCRUES ONLY O N THE SPECIFIED COUPON DATES AND NOT ON DAY TO DAY BASIS. SINCE THE FACTS OF THE PRESENT ARE IDENTICAL, FOLLOWING T HE ORDER OF THE TRIBUNAL IN THE CASE OF UNION BANK OF INDIA (SU PRA), WE UPHOLD THE ACTION TAKEN BY THE CIT (APPEALS) AND DI SMISS THE APPEAL. CONSISTENT WITH THE PRECEDENTS, WE DISMISS THIS GRO UND OF THE REVENUE. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MAT TER THAN THE VIEW SO APPROVED BY THE SPECIAL BENCH. AS REGAR DS, HONBLE SUPREME COURTS JUDGEMENT IN THE CASE OF RAMABAI ( SUPRA), THE RATIO OF THIS JUDGEMENT WOULD NOT APPLY ON INTEREST ON SE CURITIES, SINCE, AS NOTED BY THE TRIBUNAL IN THE ABOVE CASE, IN THE CAS E OF GOVERNMENT SECURITIES, INTEREST DOES NOT ACCRUE ON DAY TO DAY BASIS BUT ONLY ON THE FIXED DATES. THAT SITUATION IS MATERIALLY DIFFEREN T FROM INTEREST ON COMPENSATION AWARDS WHICH WERE DEAL WITH BY HONBLE SUPREME COURT. RESPECTFULLY FOLLOWING THE DECISION OF THE SPECIAL BENCH (SUPRA), WE DECIDE THE ISSUE IN FAVOUR OF THE ASSE SSEE. THIS GROUND IS ALLOWED. 7. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL WE DIRECT THAT THE ADDITION MADE BE DELETED. GROUND NO.1 IS ACCOR DINGLY ALLOWED. 8. GROUND NO.2 WAS NOT PRESSED AND THE SAME IS DISM ISSED AS NOT PRESSED. 9. GROUND NO.3 RAISED BY THE ASSESSEE READS AS FOLL OWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF LOSS AMOUNTING TO RS.8,74,029/- ON UNMATURED FOREIGN EXCHANGE CON TRACTS AND IGNORING THE FACT THAT THE APPELLANT MAINTAINS THE ACCOUNTS ON MERCANTILE SYSTEM, WHERE LIABILITY ALREADY ACCRUED THOUGH DISCHARGED AT A FUTURE DATE IS A PROPER DEDUCTION REGARD BEING HAD TO THE ACCEPTED PRINCIPLE OF COMMERCIAL PRACTICE AND ACCOUNTANCY. WITHOUT PREJUDICE, THE CIT(A) FURTHER ERRED IN NOT ACCEPTING THE ASSESSEES CONTENTION THAT RS.1,70,90,159 BEING THE PROFIT ON UNMATURED FORWARD CONTRACTS BE REDUCED FROM THE TAX ABLE INCOME BY ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 6 THE SAME PRINCIPLE ON WHICH LOSS ON FORWARD EXCHANG E CONTRACT IS DISALLOWED. 10. THE ASSESSEE HAD BOOKED A NET PROFIT OF RS. 1,70,90,159/- AS FORWARD PROFIT AS PER THE CHART FILED ALONGWITH LETTER DATE D 11.10.2003. FROM THE DETAILS THE AO NOTICED THAT THE ASSESSEE HAS INCURR ED LOSS ON FORWARD FOREIGN EXCHANGE CONTRACTS WHICH WERE UNMATURED ON THE DATE OF BALANCE SHEET AMOUNTING TO RS.8,74,029/-. THE DETAILS IN THIS RE GARD WERE AS FOLLOWS: CAD (-) 1,50,677.00 DEM (-) 23,634.00 FRF (-) 9,000.00 HKD (-) 10,212.00 SGD (-) 6,80,506.00 (-) 8,74,029.0 0 ---------- ----- THE ASSESSEE ENTERS INTO FORWARD CONTRACTS WITH CLI ENTS TO BUY OR SELL FOREIGN EXCHANGE AT AN AGREED PRICE ON A FUTURE DATE, WHICH MAY BE BEYOND THE LAST DATE OF THE FINANCIAL YEAR I.E., THE BALANCE SHEET DATE. THIS FUTURE PRICE IS ESTIMATED ACCORDING TO CERTAIN NORMS SUCH AS FORWAR D PREMIUM RATES FOR CERTAIN CURRENCIES. WHEN SUCH A CONTRACT IS ENTERE D INTO THE BANK MAY NORMALLY BOOK LOSS OR PROFIT DEPENDING UPON THE DIF FERENCE BETWEEN PREVAILING EXCHANGE RATE ON THE DATE OF BALANCE SHE ET AND RATE PREVAILING ON THE DATE OF CONTRACT VIZ., CONTRACT RATE. ON THE M ATURITY OF CONTRACT, THE SAME PROFIT OR LOSS BOOKED EARLIER IS REVERSED AND THE ACTUAL PROFIT OR LOSS INCURRED BASED ON THE DIFFERENCE BETWEEN THE EXCHAN GE RATE ON THAT DATE AND DELIVERY RATE OF THE CONTRACT RATE IS BOOKED. IN T HE CASE OF UNMATURED FORWARD CONTRACTS, THE PROFIT OR LOSS IS BOOKED AS ON THE BALANCE SHEET DATE BASED ON THE EXCHANGE RATE ON THAT DATE. THE EXCHA NGE AS ON THE DATE OF CONTRACT IS SUBSTITUTED BY THE EXCHANGE RATE PREVAI LING AS ON THE DATE OF THE BALANCE SHEET AND LOSS IS BOOKED. THE ASSESSING OFFICER AS WELL AS THE CIT(A) WERE HOWEVER OF THE VIEW THAT THE LOSS WAS N OTIONAL AND CANNOT BE ALLOWED AS A DEDUCTION. ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 7 9. BEFORE US IT IS NOT IN DISPUTE THAT IDENTICAL IS SUE HAD COME UP FOR CONSIDERATION IN ASSESSEES OWN CASE IN A.Y. 2000-0 1 IN ITA NO.931/M/04 AND THIS TRIBUNAL HELD AS FOLLOWS: 7. APROPOS GROUND NO.3, LEARNED COUNSEL CONTENDED T HAT THIS ISSUE IS ALSO SQUARELY COVERED BY THE DECISION OF THE ITA T (SB) IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA). HOWEVER, LEARNED D.R. RELIED UPON THE ORDER OF THE AUTHORITIES BELOW. 8. HAVING HEARD BOTH THE SIDES, WE FIND THAT THIS I SSUE IS ALSO SQUARELY COVERED BY THE SPECIAL BENCH DECISION IN T HE CASE OF BANK OF BAHRAIN & KUWAIT(SUPRA) IN ASSESSEES FAVOUR, WHERE IN, IT WAS, INTER ALIA, HELD AS FOLLOWS: THERE IS NO DISPUTE THAT IF THE DATE OF MATURITY O F THE CONTRACT FALLS WITHIN THE SAME FINANCIAL YEAR THEN THE DIFFERENCE BETWEEN THE EXCHANGE RATE AS PREVAILING ON THE BALANCE SHEET DATE AND CONTRACTED RATE IS AN ALLOW ABLE DEDUCTION. THE MOOT POINT FOR CONSIDERATION IS WHET HER KEEPING IN VIEW THE NATURE OF CONTRACT, CAN IT BE S AID THAT A LIABILITY ACCRUED ON 31 ST MARCH IN RESPECT OF UNMATURED FORWARD FOREIGN EXCHANGE CONTRACT ON ACCOUNT OF FLU CTUATION IN RATE OF FOREIGN CURRENCY OR NOT. THEREFORE, IT I S NECESSARY TO FIRST EXAMINE THE NATURE OF CONTRACT ENTERED IN TO BY THE ASSESSEE. FORWARD FOREIGN EXCHANGE CONTRACT MEANS A N AGREEMENT TO EXCHANGE DIFFERENT CURRENCIES AT A FO RWARD RATE. FORWARD RATE IS A SPECIFIED RATE FOR EXCHAN GE OF CURRENCY AT A SPECIFIED DATE. THE ASSESSEE ENTERS INTO FORWARD CONTRACT WITH CLIENTS TO BUY OR SELL FOREIG N EXCHANGE AT AN AGREED PRICE AT A FUTURE DATE IN ORDER TO HED GE AGAINST THE POSSIBLE FUTURE FINANCIAL LOSS ON ACCOUNT OF WI DE FLUCTUATION IN THE RATE OF FOREIGN CURRENCY. THUS, FIRSTLY, FORWARD FOREIGN EXCHANGE CONTRACT CREATES A CONTINU ING BINDING OBLIGATION ON THE DATE OF CONTRACT AGAINST THE ASSESSEE TO FULFILL THE SAME ON THE DATE OF MATURIT Y AND SECONDLY, IT IS IN THE NATURE OF HEDGING CONTRAC T BECAUSE IT IS A CONTRACT ENTERED INTO AGAINST POSSIBLE FINANC IAL LOSSES . IN VIEW OF THE ABOVE DISCUSSION, WE ALLOW THE ASSES SEES APPEAL FOR THE FOLLOWING REASONS:- ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 8 I) A BINDING OBLIGATION ACCRUED AGAINST THE ASSESSE E THE MINUTE IT ENTERED INTO FORWARD FOREIGN EXCHANGE CON TRACTS. II) A CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY ASSESSEE CANNOT BE DISREGARDED ONLY ON THE GROUND T HAT A BETTER METHOD COULD BE ADOPTED. III) THE ASSESSEE HAS CONSISTENTLY FOLLOWED THE SAM E METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PR OFIT OR LOSS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANGE C ONTRACT AS PER THE RATE PREVAILING ON MARCH 31. IV) A LIABILITY IS SAID TO HAVE CRYSTALISED WHEN A PENDING OBLIGATION ON THE BALANCE SHEET DATE IS DETERMINABL E WITH REASONABLE CERTAINITY. THE CONSIDERATIONS FOR ACCOU NTING THE INCOME ARE ENTIRELY ON DIFFERENT FOOTING. V) AS PER AS-11, WHEN THE TRANSACTION IS NOT SETTLE D IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCU RRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOU NTING PERIOD. VI) THE FORWARD FOREIGN EXCHANGE CONTRACTS HAVE ALL THE TRAPPINGS OF STOCK-IN-TRADE. VII) IN VIEW OF THE DECISION OF HONBLE SUPREME COU RT IN THE CASE OF WOODWARD GOVERNOR INDIA (I) P.LTD., THE ASSESSEES CLAIM IS ALLOWABLE. VIII) IN THE ULTIMATE ANALYSIS, THERE IS NO REVENUE EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOSS/PROFIT. WE, ACCORDINGLY, HOLD THAT WHERE A FORWARD CONTRACT IS ENTERED INTO BY THE ASSESSEE TO SELL THE FOREIGN CU RRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF ACCOUNTING PERIOD, THE LOSS IS INCURRED TO THE A SSESSEE ON ACCOUNT OF EVALUATION OF THE CONTRACT ON THE LAST D ATE OF THE ACCOUNTING PERIOD I.E. BEFORE THE DATE OF MATURITY OF THE FORWARD CONTRACT. ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 9 RESPECTFULLY FOLLOWING THE DECISION OF THE SPECIAL BENCH (SUPRA) WE ALLOW THIS GROUND OF APPEAL OF THE ASSESSEE. 10. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE TRIBUNAL WE HOLD THAT LOSS ON UNMATURED FOREIGN EXCHANGE CONTRACT HAVE TO BE ALLOWED AS DEDUCTION. GROUND NO.3 IS ACCORDINGLY ALLOWED. 11. GROUND NO.4 RAISED BY THE ASSESSEE READS AS FO LLOWS: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN GIVING DIRECTION TO REVALUE THE SECURITIES IN THE BEGINNING OF THE YEAR ON THE SAME BASIS OF VALUATIO N AT THE YEAR END WHICH HAD CHANGED DURING THE YEAR PURSUANT TO THE M ANDATORY RESERVE BANK OF INDIA (RBI) GUIDELINES ISSUED IN OC TOBER 2000. SHE OUGHT TO HAVE APPRECIATING THE FACT THAT THE CHANGE IN CATEGORIZATION AND VALUATION OF SECURITIES WAS BONAFIDE, THE VALUA TION POLICY CANNOT BE APPLIED RETROSPECTIVELY AS IT IS NOT MANDATED BY THE GUIDELINES AS WELL AS BY THE ACCEPTED ACCOUNTING PRINCIPLES. 11. AS PER THE TAX AUDIT REPORT IN POINT 11 IT WAS MENTIONED BY THE AUDITOR THAT RESERVE BANK OF INDIA VIDE THEIR STAT EMENT ON MID-TERM REVIEW OF MONETARY AND CREDIT POLICY DATED 10 TH OCTOBER, 2001 ADVISED CERTAIN MODIFICATIONS IN CLASSIFICATION AND VALUATION OF IN VESTMENT PORTFOLIO OF THE BANK. THE BANK HAS ACCORDINGLY COMPLIED WITH THESE GUIDELINES (REFER PARA 3.2 OF SCHEDULE XVII TO FINAL ACCOUNTS). PURSUANT TO THIS CHANGE, THE PROFIT FOR THE YEAR WAS LOWER BY RS. 82,90,204/-. VIDE OR DER SHEET ENTRY DATED 26.12.2004 THE AO CALLED UPON THE ASSESSEE TO EXPLA IN AND JUSTIFY THE CHANGE METHOD OF VALUATION OF INVESTMENT PORTFOLIO WHICH HAS LEAD TO DECLARATION OF PROFITS LOWER BY RS.82,90,204/-. VI DE LETTER DATED 06.01.2004 THE ASSESSEE SUBMITTED AS UNDER: NOTE ON CHANGE IN ACCOUNTING POLICY: DURING THE YEAR, DUE TO THE CHANGE IN CATEGORIZATIO N AND VALUATION OF SECURITIES PURSUANT TO THE RBI GUIDELINES ISSUED IN OCTOBER 2000, THE COMPANY HAD TO CHANGE ITS VALUATION POLICY FOR CERT AIN CLASS OF GOVERNMENT SECURITIES. THE TAX AUDITOR HAD INSERTE D A NOTE TO CLARIFY ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 10 THE POSITION STATING THE IMPACT OF THE CHANGE. WE ARE SUBMITTING THE VALUATION BY BOTH THE METHODS. DEPRECIATION WITHOU T CATEGORIZATION IS RS. 59,251,160 WHILE DEPRECIATION WITH CATEGORIZATI ON IS RS. 67,541,364. PURSUANT TO THIS, THE PROFIT FOR THE Y EAR IS LOWER BY RS. 82,90,204/- 12. THE ASSESSING OFFICER HOWEVER HELD THAT FOR IN COME TAX PURPOSES THE ASSESSEE HAVE CONSISTANT BASIS FOR VALUATION FOLLOW ED IN THE PREVIOUS YEAR. THE ASSESSING OFFICER HELD THAT IN THE PREVIOUS YEA R, THE ASSESSEE VALUED THE INVESTMENT AS CURRENT INVESTMENT AS A WHOLE, THEREF ORE, THE CHANGED METHOD OF VALUATION CANNOT BE ACCEPTED. THE ASSESSING OFF ICER ACCORDINGLY MADE ADDITION OF RS.82,90,204/- TO THE TOTAL INCOME OF T HE ASSESSEE. 13. ON APPEAL BY THE ASSESSEE THE CIT(A) HELD AS FO LLOWS: 15.3 THE APPELLANT HAS SUBMITTED THAT BEING A BAN K, IT IS GOVERNED BY THE RBI GUIDELINES AND SO HAD TO MAKE A BONA FID E CHANGE IN ITS VALUATION POLICY. IT IS FOLLOWING THIS NEW METHOD OF VALUATION CONSISTENTLY EVER SINCE THIS FINANCIAL YEAR 2000-20 01. AND THAT IT IS WELL SETTLED BY THE COURT THAT A BONA FIDE CHANGE I N METHOD OF VALUATION OF STOCK CANNOT BE DISREGARDED. SO, THE ADJUSTMENT ON CHANGE IN VALUATION POLICY IS DEDUCTIBLE. IN THIS REGARD, THE APPELLANT HAS RELIED ON THE FOLLOWING DECISIONS: CIT V. ATUL PRODUCTS [2002] 125 TAXMAN 727 (GUJ) CIT V. MOPEDS INDIA LTD. [1988] 173 ITR 347 (AP) HARINAGAR SUGAR V. CIT 207 ITR 901 GARDEN REACH V. CIT 132 ITR 814 CIT V. CARBORUNDUM UNIVERSAL 149 ITR 759 INDO-COMM BANK V. CIT 44 ITR 22 (34-35) 16. I HAVE CONSIDERED THE RIVAL SUBMISSION AND ABO VE FACTS OF THE CASE. THE HONBLE SUPREME COURT IN THE CASE OF UNI TED COMMERCIAL BANK VS. CIT 240 ITR 355 REVERSING THE DECISION OF THE HIGH COURT HELD THAT NATIONALISED BANK GOVERNED BY BANKING REG ULATION ACT. BANK IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING B OTH FOR BOOK KEEPING AS WELL AS TAX PURPOSES. BANK IS VALUING S TOCK IN TRADE (INVESTMENTS) AT COST IN BALANCE SHEET IN ACCORDA NCE WITH BANKING REGULATION ACT AND VALUING VERY SAME INVESTMENTS A T COST OR MARKET VALUE WHICHEVER WAS LOWER FOR INCOME-TAX PURPOSES. METHOD FOLLOWED CONSISTENTLY WAS VALID AND COULD NOT BE REJECTED. IN THE PRESENT CASE ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 11 THE CHANGE IN ACCOUNTING POLICY IS A BONA FIDE CHAN GE NECESSITATED DUE TO CHANGE IN THE RBI GUIDELINES THAT THE APPELLANT HAS TO MANDATORILY FOLLOW AND ALSO WHICH THE APPELLANT HAS CONTINUED T O FOLLOW IN THE SUBSEQUENT YEAR. THE AO IS, THEREFORE, DIRECTED TO ALLOW THE REVALUATION OF SECURITIES. HOWEVER, FOR THE COMPUT ATION OF DEPRECIATION ALLOWABLE, THE AO IS ALSO DIRECTED TO REVALUE THE S ECURITIES IN THE SAME MANNER IN THE BEGINNING OF THE YEAR ALSO. IN THE R ESULT, THE APPEAL IS PARTLY ALLOWED. 14. AGGRIEVED BY THE DIRECTION GIVEN BY THE CIT(A) TO REVALUE THE SECURITIES IN THE BEGINNING OF THE YEAR ALSO, THE ASSESSEE HA S RAISED GROUND NO.4 BEFORE THE TRIBUNAL. AGGRIEVED BY THE ORDER OF T HE CIT(A) UPHOLDING CHANGED METHOD OF VALUATION OF INVESTMENT THE REVEN UE HAS RAISED GROUND NO.5.1 TO 5.3 IN ITS APPEAL AND THESE GROUNDS READ AS FOLLOWS: 5.1 THE CIT(A) ERRED IN HOLDING THAT THE SUM OF R S. 82,90,204/- BEING THE DEPRECIATION ON REVALUATION OF SECURITIES DUE TO THE CHANGE IN THEIR CATEGORIZATION, SHOULD BE ALLOWED AS DEDUCTION IN I TS ENTIRETY. 5.2 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT IF A NY SECURITY, HELD AS LONG TERM CAPITAL ASSET IN THE NATURE OF HELD TO M ATURITY IS RECLASSIFIED AS STOCK-IN-TRADE THEN, NOTWITHSTANDIN G THE RBI GUIDELINES, THE PROVISIONS OF SECTION 45(2) OF THE INCOME TAX ACT WOULD COME INTO PLAY, AND ANY LOSS ON REVALUATION, BEING LOSS UNDER THE HEAD CAPITAL GAINS CANNOT BE SET OFF AGAINST THE OTHER INCOME IN VIEW OF THE EXPRESS PROVISIONS OF SECTION 74 OF THE INCOME TAX ACT. 5.3 THE CIT(A) OUGHT TO HAVE, IN ANY CASE, APPRECI ATED THAT ANY LOSS DUE TO ANY REVALUATION DONE DURING THE ACCOUNTING Y EAR IS ONLY NOTIONAL AND THEREFORE, CANNOT BE SET OFF AGAINST T HE TAXABLE INCOME. 15. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. C OUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH C OURT IN THE CASE OF MELMOULD CORPORATION VS. CIT 202 ITR 789 (BOM), WH EREIN IT WAS HELD AS FOLLOWS: THE TWO PRINCIPLES APPLICABLE WITH REGARD TO THE V ALUATION OF STOCK ARE THAT THE ASSESSEE IS ENTITLED TO VALUE THE CLOSING STOCK EITHER AT COST PRICE OR MARKET VALUE, WHICHEVER IS LOWER, AND THAT THE CLOSING STOCK MUST BE THE VALUE OF THE OPENING STOCK IN THE SUCCE EDING YEAR. IT IS, THUS CLEAR THAT IRRESPECTIVE OF THE BASIS ADOPTED F OR VALUATION IN THE ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 12 EARLIER YEARS, THE ASSESSEE HAS THE OPTION TO CHANG E THE METHOD OF VALUATION OF THE CLOSING STOCK AT COST OR MARKET PR ICE, WHICHEVER IS LOWER, PROVIDED THE CHANGE IN BONA FIDE AND FOLLOWE D REGULARLY THEREAFTER. THUS, THE VALUE OF THE CLOSING STOCK O F THE PRECEDING YEAR MUST BE THE VALUE OF THE OPENING STOCK OF THE NEXT YEAR. THE CHANGE, THEREFORE, HAS TO BE EFFECTED BY ADOPTING THE NEW M ETHOD FOR VALUING THE CLOSING STOCK WHICH WILL, IN ITS TURN, BECOME T HE VALUE OF THE OPENING STOCK OF THE NEXT YEAR. IF, INSTEAD, A PRO CEDURE IS ADOPED FOR CHANGING THE VALUE OF THE OPENING STOCK, IT WILL LE AD TO A CHAIN REACTION OF CHANGES IN THE SENSE THAT THE CLOSING VALUE OF THE STOCK OF THE YEAR PRECEDING WILL ALSO HAVE TO CHANGE AND CORRESPONDIN GLY THE VALUE OF THE OPENING STOCK OF THAT YEAR AND SO ON.- CIT V. C ARBORANDUM UNIVERSAL LTD. [1984] 149 ITR 759 (MAD); CIT VS. MO PEDS INDIA LTD. [1988] 173 ITR 347 (AP) & TRIVENI ENGINEERING WORKS LTD. VS. CIT (1987] 167 ITR 742 (ALL) FOLLOWED. CONCLUSION. OPENING STOCK IS NOT REQUIRED TO BE VALUED WHEN THE ASSESSEE HAS BEEN PERMITTED TO CHANGE THE METHOD OF VALUATION OF CLOSING STOCK AS THE VALUE OF CLOSING STOCK WILL BECOME THE VALUE OF OPENING STOCK OF NEXT YEAR. 16. THUS ACCORDING TO THE LD. COUNSEL FOR THE ASSE SSEE THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE HAS TO BE ACCEP TED. THE CHANGE IN THE METHOD OF ACCOUNTING BECAME NECESSARY BECAUSE OF TH E RBI GUIDELINES AND THEREFORE IT CANNOT BE SAID THAT THE CHANGE IN THE METHOD OF VALUATION WAS NOT BONAFIDE. THE DIRECTION TO CHANGE THE VALUE OF OPENING STOCK WILL RESULT IN DISTORTION OF PROFITS AND NO REAL EFFECT BEING G IVEN TO THE CHANGED METHOD OF VALUATION. WITH REGARD TO THE PROVISIONS OF SEC TION 145A ON WHICH THE LD. D.R PLACED HIS RELIANCE, THE LD. COUNSEL FOR THE AS SESSEE SUBMITTED THAT SECTION 145A IS A STATUTORY COMPULSION WITH REGARD TO VALUATION OF INVENTORY WHICH WOULD NECESSARILY INCLUDE THE OPENING STOCK A LSO. ACCORDING TO THE LD. COUNSEL FOR THE ASSESSEE AS FAR AS THE CASE OF THE ASSESSEE IS CONCERNED IT FALLS WITHIN THE AMBIT OF SECTION 145. IN TERMS O F SECTION 145A THE METHOD OF ACCOUNTING AND THE CHANGE IN THE METHOD OF ACCOU NTING REGULARLY FOLLOWED CAN BE ALLOWED, PROVIDED THE CHANGED METHOD OF ACCO UNTING IS BONA FIDE AND ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 13 FOLLOWED REGULARLY THEREAFTER. IT WAS CONTENDED BY HIM THAT IF SECURITIES AS ON THE BEGINNING OF THE YEAR IS ALSO REVALUED THE T HEN CHANGED METHOD OF ACCOUNTING WILL BECOME MEANINGLESS. THE LEARNED D.R . REITERATED THE STAND OF THE REVENUE AS REFLECTED IN THE ORDER OF THE AO. 17. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. WE FIND THAT THE CHANGE IN THE METHOD OF ACCOUNTING BECAME NECESSARY BECAUSE O F THE RBI GUIDELINES AND THEREFORE IT CANNOT BE SAID THAT THE CHANGE IN THE METHOD OF VALUATION WAS NOT BONAFIDE. THE DIRECTION TO CHANGE THE VALU E OF OPENING STOCK WILL RESULT IN DISTORTION OF PROFITS AND NO REAL EFFECT BEING GIVEN TO THE CHANGED METHOD OF VALUATION. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT PROVISIONS OF SECTION 145A OF THE ACT, IS A STATUTORY COMPULSION WITH REGARD TO VALUATION OF INVENTORY, WHICH WOULD NECESSARILY INCLUDE THE OPENING STOCK ALSO. AS FAR AS THE CASE OF THE ASSESSEE IS CONCERNED, THE CHANGE IN METHOD OF ACCOUNTING FALLS WITHIN THE AMBIT OF SECTION 145 OF THE ACT. IN TERMS OF SECTION 145 O F THE ACT, THE METHOD OF ACCOUNTING AND THE CHANGE IN THE METHOD OF ACCOUNTI NG, IF IT IS BONAFIDE, AND IF IT IS REGULARLY FOLLOWED THEREAFTER HAS TO BE AC CEPTED AS IT IS. THE REVENUE IN SUCH CIRCUMSTANCES CANNOT PLACE ANY CONDITION TH AT THE OPENING VALUE OF SECURITIES SHOULD ALSO BE CHANGED. IF SECURITIES A S ON THE BEGINNING OF THE YEAR IS ALSO REVALUED THE THEN CHANGED METHOD OF AC COUNTING WILL BECOME MEANINGLESS. WE, THEREFORE, HOLD THAT IN A CASE OF VOLUNTARY CHANGE IN THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSE, ALL T HAT HAS TO BE SEEN IS AS TO WHETHER THE CHANGE IS BONA FIDE AND REGULARLY FOLLO WED THEREAFTER. IF THE ABOVE CONDITION IS SATISFIED, THEN THE CHANGED METH OD OF ACCOUNTING HAS TO BE ACCEPTED. IN SUCH AN EVEN THERE IS NO NEED TO R EVALUE THE SECURITIES AS ON THE BEGINNING OF THE YEAR. THE LD. D.R SOUGHT TO P LACE RELIANCE ON THE DECISION OF THE PRIVY COUNSEL IN THE CASE OF CIT VS . AHMEDABAD NEW COTTON MILL COMPANY LTD.,AAR 1930 PC 56. IN THAT CASE TH ERE WAS A MISTAKE IN VALUATION OF STOCK AND, THEREFORE, IT WAS HELD THAT THE MISTAKE HAS TO BE ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 14 RECTIFIED BOTH IN THE OPENING VALUE AS WELL AS CLOS ING VALUE. AS RIGHTLY CONTENDED BY THE LD. COUNSEL FOR THE ASSESSEE THAT DECISION WOULD NOT BE APPLICABLE TO A CASE WHERE THERE IS A CHANGE IN THE METHOD OF ACCOUNTING FOLLOWED BY AN ASSESSE, ESPECIALLY WHEN SUCH CHANGE IS NECESSITATED BY REASON OF THE POLICY DECISION OF THE REGULATOR, RES ERVE BANK OF INDIA. WE ARE THEREFORE, OF THE VIEW THAT THE DIRECTION OF THE CI T(A) TO REVALUE THE SECURITY AS AT THE BEGINNING OF THE YEAR SHOULD BE DELETED A ND WE DIRECT ACCORDINGLY. 18. AS FAR AS GRIEVANCE PROJECTED BY THE REVENUE I N ITS GROUNDS OF APPEAL IS CONCERNED WE ARE OF THE VIEW THAT THE CHANGED METHO D OF ACCOUNTING IS BAONA FIDE AND IS NECESSITATED BY THE BANKS REGULAT OR, RESERVE BANK OF INDIA. WE, THEREFORE, CONFIRM THE ORDER OF THE CIT (A) IN SO FAR AS IT RELATES TO ACCEPTING THE CHANGE IN THE VALUATION OF SECURITIES BY DIFFERENT METHOD( VALUATION ON THE BALANCE SHEET DATE). THUS GROUND N O.5.1 TO 5.3 OF THE REVENUE IS DISMISSED WHILE GROUND NO.4 OF THE ASSES SEE IS ALLOWED. 19. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. ITA NO.4535/MUM/05:REVENUES APPEAL: 20. GROUND NO.1 TO 3.2 OF THE REVENUES GROUNDS OF APPEAL READ AS FOLLOWS: 1. THE CIT(A)S ORDER IS OPPOSED TO LAW AND FACTS OF THE CASE IN RELATION TO THE GROUNDS HEREUNDER. 2.1 THE CIT(A) ERRED IN HOLDING THAT NO DISALLOWAN CE U/S. 14A SHOULD BE MADE IN RESPECT OF INTEREST ON THE BORROWED FUN DS. 2.2 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE ASSESSEE HAS NOT ESTABLISHED DIRECT NEXUS BETWEEN OWN FUNDS AND THEI R APPLICATION FOR PURCHASES OF THE TAX FREE BONDS ETC. THE INCOME FR OM WHICH IS EXEMPTED U/S. 10. 3.1 THE CIT(A) ERRED IN HOLDING THAT THE DISALLOWA NCE UNDER SECTION 14A OF THE ADMINISTRATIVE EXPENSES ATTRIBUTABLE TO THE EARNING OF THE EXEMPTED INCOME SHOULD BE RESTRICTED TO ONLY 1% OF SUCH EXPENSES AS AGAINST 2% THEREOF DISALLOWED BY THE AO. ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 15 3.2 THE CIT(A) ERRED IN ALLOWING RELIEF ON THIS AC COUNT WITHOUT CITING ANY REASONABLE BASIS OR MATERIALS. 21. THE ABOVE GROUNDS RELATES TO DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. IT IS NOT IN DISPUTE BEFORE US THAT IN RE SPECT OF IDENTICAL ISSUE THIS TRIBUNAL IN ASSESSMENT YEAR 1998-99 AND 1999-00 IN ITA NO.2462&2463/M/09 REMANDED THE ISSUE TO THE ASSESSI NG OFFICER FOR FRESH CONSIDERATION IN THE LIGHT OF THE DECISION OF THE H ONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING COMPANY L TD. ITA 626 OF 2010 DATED 12/8/2010. WE ACCORDINGLY SET ASIDE THE ORDE R OF THE CIT(A) ON THIS ISSUE AND REMAND THE SAME TO THE ASSESSING OFFICER FOR FRESH CONSIDERATION IN THE LIGHT OF THE DIRECTION OF THE TRIBUNAL GIVEN IN THE EARLIER YEAR REFERRED TO ABOVE. 22. GROUND NO.4.1 TO 4.3 RAISED BY THE REVENUE READ AS FOLLOWS: 4.1 THE CIT(A) ERRED IN DELETING THE DISALLOWANCE OF THE CLAIM FOR PAYMENT OF BROKEN PERIOD INTEREST ON RS. 11,67,04,6 53/-. 4.2 THE CIT(A) OUGHT TO HAVE APPRECIATED THAT THE BROKEN PERIOD INTEREST FORMING PART OF THE COST OF THE SECURITIES THAT WERE HELD NOT AS STOCK IN TRADE BUT AS INVESTMENTS, COULD NOT BE CON SIDERED FOR DEDUCTION UNDER THE HEAD PROFITS AND GAINS OF BUSI NESS OR PROFESSION, BUT CAN BE DEDUCTED ONLY AS PART OF PU RCHASE CONSIDERATION OF SUCH SECURITIES UNDER THE HEAD CA PITAL GAINS WHEN SUCH SECURITIES ARE ACTUALLY DISPOSED OF. 4.3 THE CIT(A) OUGHT TO HAVE FURTHER APPRECIATED T HAT THE CASES RELIED UPON BY HER ARE NOT APPLICABLE TO THE FACTS OF THIS CASE WHEREAS THE RATIO OF THE DECISION OF THE SUPREME COURT IN THE C ASE OF VIJAYA BANK (187 ITR 541) SQUARELY APPLIES ON FACTS. 23. THE AO IN THE COURSE OF ASSESSMENT PROCEEDINGS CALLED UPON THE ASSESSEE TO EXPLAIN WHY THE INTEREST FOR THE BROKEN PERIOD SHOULD NOT BE DISALLOWED. THE ASSESSEE VIDE LETTER DATED 19.12.2 003 SUBMITTED THAT- ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 16 THE BANK HAS IN THE PREVIOUS ACCOUNTING YEAR CHANG ED ITS METHOD OF ACCOUNTING FOR BROKEN PERIOD INTEREST IN THAT THE SAME WAS INCLUDED IN THE ACQUISITION OF COST OF SECURITIES THE BROKEN PERIOD INTEREST WAS DEBITED TO THE P&L A/C. IN ACCORDANCE WITH THE DIRE CTIONS FROM THE RESERVE BANK OF INDIA ADDRESSED TO THE BANK IN THIS BEHALF. HOWEVER, THE AO IN THE PREVIOUS YEAR HAS DISALLOWED THE CHAN GE IN THE METHOD OF ACCOUNTING AND ADDED BACK A SUM OF RS. 14.92 CRO RES TO THE INCOME OF OUR CLIENTS IN THE PREVIOUS YEAR WHICH NEEDS TO BE DEDUCTED FROM CURRENT YEARS INCOME AS THE SAME AS ALREADY FORMED A PART OF TAXABLE INCOME OF THE CURRENT YEAR. IN THE CURRENT YEAR BR OKEN PERIOD INTEREST ON THE SECURITIES OUTSTANDING AS AT THE END OF PREV IOUS YEAR AMOUNT OF RS.11,67,04,653/-. IT IS OUR CLIENTS CONTENTION T HAT THE SAME CANNOT BE CONSIDERED AS CAPITAL COST AS THE ENTIRE PORTFOL IOS OF SECURITIES OWNED BY OUR CLIENT IS IN THE CURRENT CATEGORY AND THE CHANGE IN THE METHOD OF ACCOUNTING OF BROKEN PERIOD INTEREST WAS A BONA FIDE CHANGE MANDED BY RBI. 24. THE AO HOWEVER DID NOT AGREE WITH THE SUBMISSI ONS OF THE ASSESSEE. HE HELD THAT THE CLAIM FOR EXCLUSION OF BROKEN PERIOD INTEREST FOR RS. 11,67,04,653/- IN RESPECT OF VARIOUS PURCHASES OF S ECURITIES DURING THE YEAR REPRESENTED INTEREST ACCRUED UPTO THE DATE OF PURCH ASE OF SECURITIES IS PART OF THE PURCHASE CONSIDERATION AND THE BROKEN PERIOD INTEREST CANNOT BE ALLOWED AS DEDUCTION. IN DOING SO THE ASSESSING OF FICER FOLLOWED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. VIJAYA BANK, 187 ITR 541 (SC) 25. ON APPEAL BY THE ASSESSEE THE CIT(A) HELD THAT THE BROKEN PERIOD INTEREST HAS TO BE ALLOWED AS A DEDUCTION. IN DOI NG SO THE CIT(A) FOLLOWED HIS PREDECESSORS ORDER IN ASSESSMENT YEAR 2000-01 A ND THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF AMERICAN E XPRESS INTERNATIONAL BANKING CORPORATION VS. CIT, 258 ITR 601 (BOM). 26. BEFORE US IT WAS SUBMITTED THAT THE ISSUE HAS B EEN CONSIDERED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF AMERICAN E XPRESS INTERNATIONAL BANKING CORPORATION (SUPRA), WHEREIN IT WAS HELD TH AT PURCHASE PRICE OF THE SECURITIES SHOULD BE BIFURCATED INTO (1) INTEREST A CCRUED UPTO THE DATE OF ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 17 PURCHASE AND (2) BALANCE OF THE PRICE AND INTEREST SHOULD BE ALLOWED AS REVENUE EXPENDITURE IN THE YEAR OF PURCHASE PROVIDE D THE BANK FOLLOW SUCH A PRACTICE . IN VIEW OF THE ABOVE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A). CONSEQUENTLY GROUND NO.4.1 TO 4.3 RAISED B Y THE REVENUE ARE DISMISSED. 27. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED. 28. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED WHILE APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 17 TH DAY OF JUNE, 2011. SD/- SD/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED. 17 TH JUNE.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RH BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR, I TAT, MUMBAI BENCHES MUMBAI. VM. ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) 18 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 7/6/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 8/6/11 SR.PS/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/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER