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of <h1>Tribunal favors assessee on interest, revenue deductions; remands Section 115JA, 14A issues for fresh decisions</h1> <h3>Dresdner Bank AG Versus Assistant Director of Income-tax (International Taxation), Circle-1(2)</h3> Dresdner Bank AG Versus Assistant Director of Income-tax (International Taxation), Circle-1(2) - [2013] 22 ITR 500 Issues Involved:1. Accrual of interest on securities.2. Taxability of interest receivable by the Indian branch from its Head Office/Overseas Branches.3. Deductibility of amount paid under guarantee as a trading loss.4. Applicability of provisions of section 115JA of the Income Tax Act.5. Addition of provision for bad debts to net profit while computing book profit under section 115JA.6. Allowability of broken period interest as a deduction.7. Attribution of interest expenditure and operating expenditure to income claimed exempt under section 10(15).Issue-wise Detailed Analysis:1. Accrual of Interest on Securities:The assessee claimed a deduction for interest accrued but not due on securities. The AO included this interest in the income, citing the mercantile system of accounting. The CIT(A) upheld the AO's decision but directed verification of previously taxed interest. The Tribunal, referencing the jurisdictional High Court's decision in DIT (International Taxation) v. Credit Suisse First Boston (Cyprus) Ltd., ruled that interest accrues only on due dates, not on the last day of the financial year. Consequently, the Tribunal deleted the addition of Rs. 3,18,36,688/- for A.Y. 1999-2000 and Rs. 27,979,639/- for A.Y. 2000-01.2. Taxability of Interest Receivable by the Indian Branch from its Head Office/Overseas Branches:The AO added interest received from the Head Office and overseas branches to the taxable income, treating the branches as independent entities. The CIT(A) upheld this view. The Tribunal, however, followed the Special Bench decision in Sumitomo Mitsui Banking Corpn. and other cases, ruling that such interest is not taxable as it is considered a payment to self. Consequently, the Tribunal deleted the additions of Rs. 6,48,83,337/- for A.Y. 1999-2000 and Rs. 3,244,213/- for A.Y. 2000-01.3. Deductibility of Amount Paid Under Guarantee as a Trading Loss:The assessee did not press this ground for A.Y. 1999-2000 and A.Y. 2000-01. Consequently, the Tribunal rejected the ground being not pressed.4. Applicability of Provisions of Section 115JA of the Income Tax Act:The CIT(A) did not adjudicate on the applicability of section 115JA, deeming it academic since the total income under normal provisions exceeded the book profits under MAT provisions. The Tribunal remanded the issue to the CIT(A) for a fresh decision in light of relevant judicial precedents.5. Addition of Provision for Bad Debts to Net Profit While Computing Book Profit Under Section 115JA:The AO added provisions for bad debts to book profits under section 115JA, which the CIT(A) upheld. The Tribunal affirmed this addition, referencing the retrospective amendment by the Finance (No. 2) Act, 2009.6. Allowability of Broken Period Interest as a Deduction:The AO disallowed broken period interest, treating it as capital expenditure. The CIT(A) allowed the deduction, referencing the jurisdictional High Court's decision in American Express International Banking Corpn. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's approval in CIT v. Citi Bank N.A., thus allowing broken period interest as a revenue expenditure for both assessment years.7. Attribution of Interest Expenditure and Operating Expenditure to Income Claimed Exempt Under Section 10(15):The AO disallowed a portion of interest and operating expenses related to exempt income under section 10(15). The CIT(A) deleted the disallowance, noting no nexus between interest-bearing funds and exempt income. The Tribunal remanded the issue to the AO for fresh computation of disallowance under section 14A, consistent with judicial precedents, for both assessment years.Conclusion:The Tribunal's decisions comprehensively addressed each issue, often relying on higher judicial precedents to ensure consistency and fairness in tax assessments. The remands to the CIT(A) and AO for specific issues reflect a commitment to thorough review and application of relevant legal principles.
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