TaxTMI 
TaxTMI 
2014 (12) TMI 889
X X X X Extracts X X X X
X X X X Extracts X X X X
....he assessee was determined at Rs. 2,24,70,861 as against returned income of Rs. 77,38,420 in view of the Assessing Officer disallowing interest amounting to Rs. 1,47,32,441. 2.2 Aggrieved by the assessment order of the assessment for Assessment Year 2008-09 dt.31.12.2010, the assessee preferred an appeal before the CIT(Appeals) - III, Bangalore. The learned CIT (Appeals) disposed off the matter by order dt.4.6.2013 allowing the assessee's appeal. 3. Revenue, being aggrieved by the order of the CIT(Appeals) - III, Bangalore for Assessment Year 2008-09 dt.4.6.2013, is in appeal before this Tribunal raising the following grounds :- " 1. The order of the learned CIT (Appeals) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in holding that the factum of currency swap income which has no separate costs does not impact the overall interest claim in any way, without appreciating the fact that the assessee earned income from currency swap arrangement from unutilized funds in the loan account and not from any investment made by the assessee towards which specific cost is incurred. 3. For these and other gr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d on account of currency swap arrangement in respect of the loan taken from the bank. The total thereof, amounting to Rs. 5,84,38,928 was credited to the profit and loss account for the period under consideration; Rs. 4,09,10,163 under the head 'Income from other sources' and Rs. 1,75,28,315 earned on account of currency swap arrangement was offered to tax under the head 'profits and gains of business.' 5.2.3 In the order of assessment dt.31.12.2010, the Assessing Officer quantified a sum of Rs. 3,85,49,961 as the interest cost of funds kept as inter corporate deposit with Prestige Estate Projects Ltd., @ 12.25% (being the rate at which the loan of Rs. 81.30 Crores was borrowed) on the basis of day to day balances. Out of the interest amounting to Rs. 5,32,82,402 debited by the assessee to the profit and loss account, only the above sum of Rs. 3,85,49,961 was allowed as a deduction by the Assessing Officer. The remaining amount of Rs. 1,47,32,441 (i.e. Rs. 5,32,82,402 less Rs. 3,85,49,961) was disallowed by the Assessing Officer. The computation of the above by the Assessing Officer is as per the following table extracted from page 2 of the assessment order :- Interest Income / G....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar day in future and to achieve this, usually an arrangement is entered into with a bank / authorised dealer. In this arrangement, the bank agrees to give the assessee a predetermined sum of Indian rupees on the promise of the assessee paying an equivalent amount in foreign currency at a fixed exchange rate. Foreign exchange fluctuation risks are thus assumed by the assessee company and in this process the assessee company may also enter into a derivative contract. An intermediary currency may also be involved, as in the case on hand, if the country has no arrangement for currency swap. 5.4.2 In respect of the facts of the case on hand, it was submitted that the assessee entered into a currency swap arrangement with ABN Amro Bank wherein the INR Loan was notionally swapped with CHF (Swiss Franc Rate), as per which the assessee was to receive INR from ABN Amro Bank @ 12.25 % and it was to pay CHF @ 10% at the end of the swap arrangement. It was submitted by the learned Authorised Representative, that the above currency swap arrangement resulted in interest savings of 2.25%. The learned Authorised Representative relied on the Notes to Accounts, forming part of the statutory audit re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se Bank on 18.12.2006 for the purpose of construction of 'Forum Value Mall' at Whitefield, Bangalore on which interest was payable on a monthly basis @ 12.25% per annum. The assessee then entered into a currency swap arrangement with ABN Amro Bank to reduce the burden of interest cost and for hedging the interest rate risk. This is evident from para 10 of Notes to the Accounts forming part of the audited financial statements for the year ending 31.3.2008 (placed at page 20 of the assessee's paper book), wherein it is stated as under :- " 10. The company had taken a term loan of Rs. 813,000,000 in the previous year. In order to reduce its interest cost, the company had entered into a currency swap arrangement with its bankers, wherein the INR loan was notionally swapped with CHF. The currency swap arrangement was structured along with USD / CHF embedded options. The company entered into this arrangement with the intention of hedging the interest rate risk and not for speculation or trading purposes. The arrangement was settled during the current year and gain on settlement of the contract amounting to Rs. 17,528,315 has been credited to the profit and loss account. There are no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2,402 related to inter corporate deposits @ 12.25% per annum payable monthly, interest earned from inter corporate deposits @ 13% per annum amounted to Rs. 4,09,10,613. The interest expenditure was more than the interest earned even though the rate of interest on the inter-corporate deposit was higher than the loan of Rs. 81.30 Crores taken by the assessee. This was because the interest payable to the Bank was computed on monthly balance whereas the interest receivable was calculated on day to day balance. Further, as per the material on record and the Auditor's Report, the currency swap arrangement, in respect of the entire loan, was entered into with a view to reduce the interest cost and for hedging the interest rate risk. The learned Departmental Representative did not demonstrate as to how the currency swap arrangement was only in respect of the unutilised funds as concluded by the Assessing Officer. In this view of the matter, we hold that the finding of the Assessing Officer that the currency swap arrangement was only in respect of unutilised funds is factually erroneous. We, therefore, hold that the currency swap arrangement and the resultant income therefrom amounting to R....