2012 (12) TMI 730 - AT - Income Tax

Tribunal Decisions on Tax Appeals: Re-evaluation, Deductions, and Exclusions

The Tribunal partly allowed the appeals, directing the Assessing Officer to re-evaluate certain issues and deciding others based on precedents and ... Taxability of interest on NOSTRO account - treatment of interest/commission between permanent establishment and head office/overseas branches - allowability of broken period interest on purchase of bonds - deductibility of loss on revaluation of unmatured forward foreign exchange contracts - exemption of gross interest under section 10(15) - disallowance under section 14A - deduction of head office expenses independent of section 44C - prohibition on amortisation of premium on purchase of securities for stock-in-trade - interaction between interest computation and sections 234B/234DTaxability of interest on NOSTRO account - disallowance under section 14A - Whether interest credited to the assessee's books from NOSTRO accounts is taxable and whether expenditure disallowance under section 14A is warranted. - HELD THAT: - The Tribunal, following its consistent view in earlier years, held that interest on NOSTRO accounts is chargeable to tax and therefore no disallowance under section 14A is called for in respect of that interest. The decision was applied uniformly to the assessment years under consideration, reversing deletions of taxability where applicable and deleting corresponding section 14A disallowances where the AO had treated the interest as not chargeable. [Paras 8, 28, 40]Interest on NOSTRO account is taxable; consequential disallowance under section 14A is not sustained.Treatment of interest/commission between permanent establishment and head office/overseas branches - Whether interest/commission receipts from head office/overseas branches of the assessee's Indian permanent establishment are taxable and whether payments to head office/branches are deductible. - HELD THAT: - The Tribunal followed the Special Bench precedent and its own earlier decisions to hold that amounts of interest/commission received by the Indian PE from its head office/overseas branches are transactions with self and are not to be charged to tax; conversely, interest/commission paid by the PE to the head office/overseas branches is not allowable as a deduction. The matter was directed to the AO for exclusion of such receipts and for disallowance of corresponding deductions, to be applied across the relevant years. [Paras 3, 11, 30, 42]Interest/commission received from HO/overseas branches excluded from taxable income; interest/commission paid to HO/overseas branches not allowed as deduction.Allowability of broken period interest on purchase of bonds - Whether broken period interest debited to profit and loss account on purchase of PSU bonds is allowable as deduction or must be capitalised. - HELD THAT: - The Tribunal accepted that the assessee changed from capitalising broken period interest to charging it to profit and loss for PSU bonds, adopting another recognised accounting method which it thereafter consistently followed. Relying on the assessee's earlier favourable decisions in its own case, the Tribunal found no reason to disturb the CIT(A)'s allowance and held the broken period interest deductible in the year charged to P&L. [Paras 4, 5, 18, 33, 47]Broken period interest on PSU bonds charged to P&L is allowable as deduction where the change to a recognised method is consistently followed.Deductibility of loss on revaluation of unmatured forward foreign exchange contracts - Whether loss on revaluation of unmatured forward forex contracts at the year-end is deductible in the year of revaluation and whether such loss must be adjusted in the year of maturity to avoid double claim. - HELD THAT: - Relying on the Special Bench precedent, the Tribunal held that losses on revaluation of unmatured forward forex contracts at the accounting year-end are deductible in that year. It directed the AO to allow the loss for the relevant year and ensure that the same loss is not allowed again in the subsequent year when the contract matures, by appropriate adjustment in computation for the year of maturity. [Paras 15, 16, 17, 44]Loss on revaluation of unmatured forward forex contracts is deductible in the year of revaluation; AO to ensure no duplicate allowance in the year of maturity.Exemption of gross interest under section 10(15) - disallowance under section 14A - Whether exemption under section 10(15) is to be allowed on gross interest from tax-free securities and whether expenditure connected with earning such exempt income can be disallowed under section 14A. - HELD THAT: - The Tribunal consistently held that exemption under section 10(15) is to be allowed on gross interest, not net interest after deduction of related expenses. Where the assessee had shown that investments in tax-free securities were made out of interest-free funds, the Department's contention for section 14A disallowance was rejected following earlier reasoning and precedent in the assessee's cases. [Paras 20, 35, 46]Exemption under section 10(15) allowed on gross interest; no disallowance under section 14A where facts follow the precedents and investments sourced from interest-free funds.Deduction of head office expenses independent of section 44C - Whether head office expenses claimed as deduction independent of section 44C should be allowed or are to be governed by the ceiling/allocations under section 44C. - HELD THAT: - The Tribunal upheld allowance of head office expenses independent of section 44C where the assessee furnished evidence that such expenses were exclusively incurred for the Indian PE and supported the claim; however, where the AO found on invoices that expenses were merely allocated/apportioned and the assessee failed to produce details, the Tribunal set aside the CIT(A)'s direction and remanded the matter to the AO for fresh examination, observing that apportioned HO expenses fall within section 44C and will not be allowed independent of it unless exclusively incurred for the PE. [Paras 36, 49, 50]HO expenses allowed independent of section 44C only if proved to be exclusively incurred for the Indian PE; apportioned/allocated HO expenses fall within section 44C and require verification-issue remanded where proof was lacking.Prohibition on amortisation of premium on purchase of securities for stock-in-trade - Whether premium paid on purchase of securities (stock-in-trade) can be amortised over the life of the investments or must be treated as part of purchase cost. - HELD THAT: - The Tribunal agreed with the CIT(A) that where securities are held as stock-in-trade, premium paid at purchase cannot be amortised over the life of the securities; the full purchase price must be taken in computation of income. The Tribunal modified the CIT(A)'s direction to clarify that purchase price must be taken as such when securities are sold or when they mature. [Paras 31]Amortisation of premium on purchase of securities treated as purchase price is not permissible for stock-in-trade; purchase cost to be taken as such on sale or maturity.Interaction between interest computation and sections 234B/234D - Whether refund determined under section 143(1) should be considered while computing interest under section 234B and the relevance of section 234D. - HELD THAT: - The Tribunal upheld the CIT(A)'s view that section 234D was introduced later and interest under section 234B must be calculated on total income computed without considering refunds determined under section 143(1). Therefore refund should not be taken into account for section 234B computation in the years in question. [Paras 21, 22]Interest under section 234B to be computed on total income without adjusting refunds determined under section 143(1); CIT(A)'s view upheld.Final Conclusion: The Tribunal disposed the consolidated appeals for AYs 1994-95, 1998-99, 1999-2000 and 2000-2001 largely following its earlier precedents: interest on NOSTRO accounts held taxable; receipts from HO/overseas branches excluded and payments to them not deductible; broken period interest on PSU bonds and revaluation losses on unmatured forex contracts allowed; exemption under section 10(15) to be on gross interest; HO expenses allowed independent of section 44C only if proved exclusive otherwise remanded for verification; amortisation of premium on securities held as stock-in-trade disallowed and AO directed to give consequential effect where necessary. Issues Involved:1. Deletion of addition of net interest and commission received from head office.2. Disallowance of broken period interest on PSU bonds.3. Charging of interest on NOSTRO account.4. Taxability of income at the rate applicable to non-resident company.5. Taxability of interest/commission received from head office/branches.6. Disallowance of loss on revaluation of unmatured forward foreign exchange contracts.7. Allowance of broken period interest paid as an expense.8. Exemption in respect of gross interest earned from tax-free securities.9. Calculation of interest under section 234B.10. Deduction independent of the provisions of section 44C.11. Disallowance of excess interest paid on FCNR-B Deposit.12. Write off of premium paid on purchase of securities.13. Disallowance under section 40(a)(i) in respect of interest paid to head office and overseas branches.14. Deletion of gain on Forex Contract.15. Expenses claimed by the assessee on account of head office expenses independent of section 44C.Detailed Analysis:1. Deletion of Addition of Net Interest and Commission Received from Head Office:The issue pertains to the deletion of Rs. 15,57,491 being the net interest and commission received by the assessee from its head office and overseas branches. The Tribunal relied on the Special Bench order in Sumitomo Mitsui Banking Corpn. v. Dy. DIT (IT) [2012] 136 ITD 66, directing the Assessing Officer to exclude the amount of interest/commission received and not to grant deduction in respect of interest/commission incurred towards the head office/overseas branches. The matter was restored to the file of the Assessing Officer for a decision in line with this precedent.2. Disallowance of Broken Period Interest on PSU Bonds:The assessee changed its accounting policy for PSU bonds, charging broken period interest to the profit and loss account instead of capitalizing it. The Assessing Officer disallowed Rs. 64,76,781, but the CIT(A) overturned this disallowance. The Tribunal upheld the CIT(A)'s decision, noting that the assessee consistently followed the new method in subsequent years and similar issues had been decided in favor of the assessee in earlier years.3. Charging of Interest on NOSTRO Account:For the assessment year 1998-99, the Tribunal held that interest on NOSTRO account amounting to Rs. 3.98 crore is chargeable to tax, following the precedent set for the assessment year 1997-98. Consequently, no disallowance under section 14A was warranted. The same view was reiterated for subsequent years.4. Taxability of Income at the Rate Applicable to Non-Resident Company:The issue of taxability at the rate of 48% applicable to non-resident companies was decided against the assessee, following the decision in earlier years.5. Taxability of Interest/Commission Received from Head Office/Branches:The Tribunal directed the Assessing Officer to exclude the amount of interest/commission received by the Indian PE from its head office/overseas branches and not to allow deduction for interest/commission paid to the head office/overseas branches, following the decision in Sumitomo Mitsui Banking Corpn.6. Disallowance of Loss on Revaluation of Unmatured Forward Foreign Exchange Contracts:The Tribunal allowed the deduction of Rs. 7.14 crore for the loss on revaluation of unmatured forward foreign exchange contracts, following the Special Bench decision in Bank of Bahrain & Kuwait [2010] 41 SOT 290 (Mum.). The Assessing Officer was directed to ensure that this loss is not allowed again in the subsequent year when the contracts mature.7. Allowance of Broken Period Interest Paid as an Expense:The Tribunal upheld the allowance of broken period interest paid as an expense, following the decision in earlier years.8. Exemption in Respect of Gross Interest Earned from Tax-Free Securities:The Tribunal held that exemption under section 10(15) is to be allowed on gross interest and not net interest. It was also noted that the assessee's investment in tax-free securities was made from interest-free funds, and no disallowance under section 14A was warranted.9. Calculation of Interest Under Section 234B:The Tribunal upheld the CIT(A)'s decision that interest under section 234B should be calculated without considering the refund determined under section 143(1).10. Deduction Independent of the Provisions of Section 44C:The Tribunal upheld the CIT(A)'s direction to allow deduction independent of section 44C, noting that similar issues had been decided in favor of the assessee in earlier years.11. Disallowance of Excess Interest Paid on FCNR-B Deposit:The Tribunal upheld the CIT(A)'s decision to delete the disallowance of Rs. 1,05,18,450 for excess interest paid on FCNR-B Deposit, noting that the deposits were kept in a NOSTRO account and used for global operations.12. Write Off of Premium Paid on Purchase of Securities:The Tribunal upheld the CIT(A)'s view that the premium paid on the purchase of securities should not be amortized over the life of the investment but should be considered at the purchase price. The direction was modified to include income computation when securities mature, not just when sold.13. Disallowance Under Section 40(a)(i) in Respect of Interest Paid to Head Office and Overseas Branches:The Tribunal held that since the interest/commission paid to the head office/overseas branches is not deductible, there is no question of disallowance under section 40(a)(i).14. Deletion of Gain on Forex Contract:The Tribunal directed the inclusion of Rs. 13.37 lakh in the total income, following the principle of consistency, as the assessee consistently valued unmatured foreign exchange contracts at the prevailing rate at year-end.15. Expenses Claimed by the Assessee on Account of Head Office Expenses Independent of Section 44C:The Tribunal restored the matter to the Assessing Officer to decide whether the expenses were exclusively incurred by the head office for the assessee and thus allowable independent of section 44C. If the expenses were allocated, they would fall under section 44C.Conclusion:The appeals were partly allowed for statistical purposes, with several issues restored to the Assessing Officer for re-evaluation and others decided based on precedents and consistent practices followed in earlier years.