Payment to self doctrine and broken period interest deduction in bank taxation: two key principles applied to foreign bank income.

Interest credited by an overseas head office to its Indian permanent establishment was treated as a payment to self under domestic law, so it did not form part of taxable income in India. Broken period interest paid on purchase of securities remained deductible where the securities were held as trading assets and the related income was assessed as business income, because the bank's accounting method was not to be disturbed. The commentary therefore records that both tax issues were resolved in the assessee's favour, with the cross-objection not surviving independently.

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Issues: (i) whether interest received from overseas branches by a foreign bank carrying on business in India through a permanent establishment forms part of taxable income in India; (ii) whether broken period interest paid on purchase of securities is allowable as a deduction.

Issue (i): whether interest received from overseas branches by a foreign bank carrying on business in India through a permanent establishment forms part of taxable income in India

Analysis: The dispute was covered by the Special Bench view that, for domestic law purposes, the head office and its branches constitute one taxable entity and a payment of interest between them is a payment to self. Applying that principle, interest credited from overseas branches to the Indian branch could not be treated as income in India.

Conclusion: The issue was decided in favour of the assessee and the interest was held not to form part of taxable income.

Issue (ii): whether broken period interest paid on purchase of securities is allowable as a deduction

Analysis: The issue was treated as covered by the Supreme Court's approval of the Bombay High Court view that, where securities are treated as trading assets and the income is assessed as business income, the method of accounting adopted by the bank should not be disturbed and broken period interest paid on purchase of securities is allowable.

Conclusion: The issue was decided against the Revenue and the deduction for broken period interest was upheld.

Final Conclusion: The substantive relief granted was confined to the assessee's success on both contested tax issues, while the cross objection did not survive independently.

Ratio Decidendi: Interest between a foreign bank's head office and its permanent establishment is not taxable as income under domestic law as it is a payment to self, and broken period interest is deductible where securities are treated as trading assets and taxed as business income.

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