Partial success in tax appeal: interest expenses partly upheld, swap cost remanded. Interest on securities, depreciation disallowance dismissed.

The appeal resulted in the partial allowance of the assessee's appeal and the revenue's appeal being partly allowed. The disallowance of interest expenses under section 14A was partly upheld, while the swap cost disallowance was remanded for verification. The taxability of interest accrued on securities not due for payment was ruled in favor of the assessee. The depreciation disallowance on leased assets was dismissed. The reduction of deduction under section 36(1)(vii) was reversed in favor of the assessee. The disallowance of loss on unmatured foreign exchange contracts was also overturned.

---

---

Issues Involved:
1. Disallowance of interest expenses under section 14A.
2. Disallowance of swap cost.
3. Taxability of interest accrued on securities but not falling due for payment.
4. Disallowance of depreciation on leased assets.
5. Reduction of deduction under section 36(1)(vii).
6. Disallowance of loss on unmatured foreign exchange contracts.

Detailed Analysis:

1. Disallowance of Interest Expenses under Section 14A
Ground No. 1 of Revenue's Appeal and Ground No. 4 of Assessee's Appeal:
The issue concerns the disallowance of Rs. 7,27,80,949/- made by the A.O. under section 14A of the Income Tax Act, 1961, which was sustained by the CIT(A) to the extent of Rs. 21,46,159/-. Both parties agreed that a similar issue for the preceding year (A.Y. 2001-02) was remanded to the A.O. by the Tribunal. Following the Tribunal's decision in earlier years, the issue was restored to the A.O. for fresh adjudication. This was done in light of the Hon'ble Bombay High Court's decision in the case of Godrej Boyce Mfg. Company Ltd. The issue was treated as partly allowed for statistical purposes.

2. Disallowance of Swap Cost
Ground No. 2 of Revenue's Appeal:
The assessee, a banking company, claimed Rs. 2,04,28,235/- as swap cost for foreign currency deposits, which was disallowed by the A.O. on the grounds that it was not proportionate to the period of swap transactions. The CIT(A) allowed the claim after verifying that the amount was indeed proportionate. However, the Tribunal remanded the issue back to the A.O. for verification of the proportionate cost, treating the ground as allowed for statistical purposes.

3. Taxability of Interest Accrued on Securities but Not Falling Due for Payment
Ground No. 1 of Assessee's Appeal:
The assessee challenged the disallowance of Rs. 76,10,78,436/- representing interest accrued on securities but not due for payment. Both parties agreed that the issue was covered in favor of the assessee by the Tribunal's decision for A.Y. 2000-01, which followed the Special Bench decision in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait. The Tribunal held that interest on government securities accrues only on coupon dates, not on a day-to-day basis. The addition made by the A.O. and confirmed by the CIT(A) was deleted, and the ground was allowed.

4. Disallowance of Depreciation on Leased Assets
Ground No. 2 of Assessee's Appeal:
The assessee did not press this ground at the time of hearing. Consequently, the ground was dismissed as not pressed.

5. Reduction of Deduction under Section 36(1)(vii)
Ground No. 3 of Assessee's Appeal:
The issue involved the reduction of deduction for bad debts by Rs. 5,29,01,270/-. The CIT(A) disallowed the deduction on the grounds that the provision for bad debts should be reduced from the bad debts claimed. Both parties agreed that the issue was covered in favor of the assessee by the Tribunal's decision for A.Y. 2000-01, which followed the decision in the case of Oman International Bank SAOG vs. DCIT. The Tribunal reversed the CIT(A)'s decision, allowing the ground.

6. Disallowance of Loss on Unmatured Foreign Exchange Contracts
Ground No. 5 of Assessee's Appeal:
The assessee's claim for loss on unmatured foreign exchange contracts was disallowed by the A.O. and confirmed by the CIT(A). Both parties agreed that the issue was covered in favor of the assessee by the Tribunal's decision for A.Y. 2000-01, which followed the Special Bench decision in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait. The Tribunal deleted the disallowance, allowing the ground.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the Revenue was treated as partly allowed. The order was pronounced in the open court on 03rd July 2013.

---