Income Tax Appellate Tribunal - Mumbai
Indus Ind Bank Ltd., Mumbai vs Assessee on 24 March, 2005
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "H",
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA (A.M)
ITA NO.4343/MUM/2005(A.Y. 2001-02)
Indusind Bank Limited, The Addl. CIT, Range 2(3),
8th Floor, Tower One, One Indiabulls Aaykar Bhavan, MK Road,
Centre, 841, Senapati Bapat Marg, Vs. Mumbai - 20.
Elphinston Road, (W),
Mumbai - 13
PAN: AAACI 1314G
(Appellant) (Respondent)
ITA NO.4535/MUM/2005(A.Y. 2001-02)
The DCIT, Range 2(3), Indusind Bank Limited,
Aaykar Bhavan, MK Road, 8th Floor, Tower One, One
Mumbai - 20. Vs. Indiabulls Centre, 841,
(Appellant) Senapati Bapat Marg,
Elphinston Road, (W),
Mumbai - 13
PAN: AAACI 1314G
(Respondent)
Assessee by : Shri B.P.Bapat
Revenue by : Shri Goli Srinivas Rao
ORDER
PER BENCH, ITA No.4343/M/05 is an appeal by the assessee while ITA No.4535/M/05 is an appeal by the revenue. Both these appeals are directed against the order dated 24/3/2005 of CIT(A) XXXIII, Mumbai relating to the assessment year 2001-02.
ITA No.4343/M/05-Assessee's Appeal:2. Ground No.1 raised by the assessee reads as follows:
2 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02)"On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming an amount of Rs. 84,71,62,630/- representing accrued interest on securities but not falling due for payment. Such interest, which is in the process of accrual, is at the incipient and inchoate stage, maturing into taxable income only when it becomes due and payable in terms of issue of such security."
3. The assessee is a company engaged in the business of banking. The assessee did not offer to tax interest income of Rs. 84,71,62,630/- on the ground that interest income received on investments was alone added to the total income. Income accrued on the investment on the balance sheet date which was not due nor received was not offered to tax. The printed balance sheet of the assessee, as per schedule XVII-6 the principle accounting policies in case of revenue recognition was given as under:
"Income Recognition:
Income by way of interest and discount on performing assets has been recognized on accrual basis and on non-performing assets the same is accrued on the basis of realization. Income on Govt. securities, debentures and other fixed income securities has been recognized as accrual basis."
As per the tax audit report, method of accounting followed was given in Annexure III which was as follows:
"Method of Accounting:
Method of accounting employed by the bank is generally Mercantile except item No.6.1 and 6.3 mentioned in Schedule XVII to Final Accounts for which the method of accounting is on cash basis."
4. The Assessing Officer for the reasons discussed on an identical issue in A.Y 2000-01 held that interest accrued but not due should also be added to the total income.
5. On appeal the CIT(A) confirmed the order of the Assessing Officer giving rise to Ground No.1 by the assessee before the Tribunal. In doing so 3 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) the CIT(A) followed his predecessors order in assessee's own case for A.Y 2000-01.
6. Aggrieved by the order of the CIT(A), the Assessee has raised ground No.1 before the Tribunal. Before us it is not dispute that this Tribunal had already considered identical issue in A.Y 2000-01 in ITA No.931/M/04and held as follows:
2. Apropos Ground No.2, material facts are like this. In the course of assessment proceedings, the Assessing Officer noticed that the assessee had excluded `. 91,99,67,252/- on the ground that this amount though accrued but not received during the year being not due, hence not eligible to tax. The AO rejected the contention of the assessee and after excluding `. 62,63,63,964 being the amount already taxed in the assessment year 1999-2000, added the balance amount of `. 29,36,03,288 to the total income of the assessee. Aggrieved, the assessee carried the matter in appeal but without any success.
4. At the time of hearing, learned counsel for the assessee contended that this issue is covered by the decision of the ITAT Mumbai (SB) in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait, 41 SOT 290 (Mum)(SB). On the other hand, learned Departmental Representative relied upon the Hon'ble Supreme Court judgement in the case of Ramabai v.CIT, 181 ITR 400(SC) and contended that income has to be taken on accrual basis.
5. Having heard both the sides, we find that the issue is squarely covered by the decision of the ITAT (SB) in the case of DCIT v. Bank of Bahrain and Kuwait (supra), wherein, it was held as follows:-
"11.Ld Counsel for the assessee submitted that this issue is covered in assessee's own case for the assessment years 1992- 93, 1993-94, 1995-96 and 1996-97. ld Counsel submitted that interest on Government Securities does not accrue on day to day basis but on fixed dates and the entry made in the books are not relevant for income tax purposes.
12. We have heard both the sides and perused the records of the case. We find that the issue is covered by the decision of the Tribunal in assessee's own case for the assessment years 1992- 93, 1993-94, 1995-96 and 1996-97. In A.Y. 1996-97, the 4 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) Tribunal has allowed the assessee's appeal, inter alia, observing as under:-
"We have carefully perused the order of the Tribunal cited above. In that case also, the issue was identical, namely, whether in the case of Government securities, interest accrues on day to day basis or only on the coupon dates. The Tribunal held that interest accrues only on the coupon dates and not on day to day basis. In coming to this conclusion, the Tribunal placed reliance on the judgment of the Lahore High court in Haveli Shah Sardarilal v CIT,Punjab, 4 ITR 297, the Full Bench of the Patna High Court in Ranjit Prasad Singh v CIT, Bihar & Orissa (4 ITC
264) and the Karnataka High Court judgment in Addl CIT, Mysore v. The Vijay Bank Ltd., Mangalore (1976) Tax LR
524. It was also noticed by the Tribunal that the contention advanced on behalf of the revenue before Tribunal in that case was totally contradictory to the contention advanced by the revenue before the Karnataka High court in the case of Vijay Bank(supra) before the Tribunal. The department had placed reliance on the judgement of the Hon'ble Bombay High court in the case of American Express International banking Corporation v CIT, 258 ITR 602 and Taparia Tools Ltd v. JCIT, 269 ITR 102. These two judgments have been considered by the Tribunal in paragraphs 14 to 17 of the order cited above and it was held that these judgements are not applicable to the facts of Union Bank's case. In paragraphs 20 and 21, the Tribunal has also considered the objection of the department that the assessee cannot credit the interest on government securities in the profit & loss account on day to day basis but contended that for purposes of income tax only the interest that accrued on the coupon dates can be assessed. The Tribunal noticed the judgement of the Supreme Court in the case of another bank, namely United Commercial Bank, 240 ITR 355. In this case, the Supreme Court has reversed the judgement of the Calcutta High Court, which held that the assessee cannot prepare the computation of its income for income tax purposes in a manner different from the method under which it keeps accounts. Applying this judgment of the Supreme Court, the Tribunal held that Union Bank of India cannot be prevented from urging in the return that the interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit & loss account for the interest on 5 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) day to day basis. Thus, the issue has been decided in favour of the view that the interest accrues only on the specified coupon dates and not on day to day basis. Since the facts of the present are identical, following the order of the Tribunal in the case of Union Bank of India (supra), we uphold the action taken by the CIT (Appeals) and dismiss the appeal."
Consistent with the precedents, we dismiss this ground of the revenue."
We see no reasons to take any other view of the matter than the view so approved by the Special Bench. As regards, Hon'ble Supreme court's judgement in the case of Ramabai (supra), the ratio of this judgement would not apply on interest on securities, since, as noted by the Tribunal in the above case, in the case of Government securities, interest does not accrue on day to day basis but only on the fixed dates. That situation is materially different from interest on compensation awards which were deal with by Hon'ble Supreme Court. Respectfully following the decision of the Special bench (supra), we decide the issue in favour of the assessee. This ground is allowed."
7. Respectfully following the aforesaid decision of the Tribunal we direct that the addition made be deleted. Ground No.1 is accordingly allowed.
8. Ground No.2 was not pressed and the same is dismissed as not pressed.
9. Ground No.3 raised by the assessee reads as follows:
"On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the disallowance of loss amounting to Rs.8,74,029/- on unmatured foreign exchange contracts and ignoring the fact that the appellant maintains the accounts on mercantile system, where liability already accrued though discharged at a future date is a proper deduction regard being had to the accepted principle of commercial practice and accountancy.
Without prejudice, the CIT(A) further erred in not accepting the assessee's contention that Rs.1,70,90,159 being the profit on unmatured forward contracts be reduced from the taxable income by 6 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) the same principle on which loss on forward exchange contract is disallowed."
10. The assessee had booked a net profit of Rs. 1,70,90,159/- as forward profit as per the chart filed alongwith letter dated 11.10.2003. From the details the AO noticed that the assessee has incurred loss on forward foreign exchange contracts which were unmatured on the date of balance sheet amounting to Rs.8,74,029/-. The details in this regard were as follows:
CAD (-) 1,50,677.00
DEM (-) 23,634.00
FRF (-) 9,000.00
HKD (-) 10,212.00
SGD (-) 6,80,506.00
(-) 8,74,029.00
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The assessee enters into forward contracts with clients to buy or sell foreign exchange at an agreed price on a future date, which may be beyond the last date of the financial year i.e., the balance sheet date. This future price is estimated according to certain norms such as forward premium rates for certain currencies. When such a contract is entered into the bank may normally book loss or profit depending upon the difference between prevailing exchange rate on the date of balance sheet and rate prevailing on the date of contract viz., contract rate. On the maturity of contract, the same profit or loss booked earlier is reversed and the actual profit or loss incurred based on the difference between the exchange rate on that date and delivery rate of the contract rate is booked. In the case of unmatured forward contracts, the profit or loss is booked as on the balance sheet date based on the exchange rate on that date. The exchange as on the date of contract is substituted by the exchange rate prevailing as on the date of the balance sheet and loss is booked. The Assessing Officer as well as the CIT(A) were however of the view that the loss was notional and cannot be allowed as a deduction.
7 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02)9. Before us it is not in dispute that identical issue had come up for consideration in assessee's own case in A.Y. 2000-01 in ITA No.931/M/04 and this Tribunal held as follows:
7. Apropos Ground No.3, learned counsel contended that this issue is also squarely covered by the decision of the ITAT (SB) in the case of Bank of Bahrain & Kuwait (supra). However, learned D.R. relied upon the order of the authorities below.
8. Having heard both the sides, we find that this issue is also squarely covered by the Special Bench decision in the case of Bank of Bahrain & Kuwait(supra) in assessee's favour, wherein, it was, inter alia, held as follows:
"There is no dispute that if the date of maturity of the contract falls within the same financial year then the difference between the exchange rate as prevailing on the balance sheet date and contracted rate is an allowable deduction. The moot point for consideration is whether keeping in view the nature of contract, can it be said that a liability accrued on 31st March in respect of unmatured forward foreign exchange contract on account of fluctuation in rate of foreign currency or not. Therefore, it is necessary to first examine the nature of contract entered into by the assessee. Forward Foreign exchange contract means an agreement to exchange different currencies at a forward rate. Forward rate is a specified rate for exchange of currency at a specified date. The assessee enters into forward contract with clients to buy or sell foreign exchange at an agreed price at a future date in order to hedge against the possible future financial loss on account of wide fluctuation in the rate of foreign currency. Thus, firstly, forward foreign exchange contract creates a continuing binding obligation on the date of contract against the assessee to fulfill the same on the date of maturity and secondly, it is in the nature of hedging contract because it is a contract entered into against possible financial losses ....
In view of the above discussion, we allow the assessee's appeal for the following reasons:-8 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02)
i) A binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts.
ii) A consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted.
iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31.
iv) A liability is said to have crystalised when a pending obligation on the balance sheet date is determinable with reasonable certainity. The considerations for accounting the income are entirely on different footing.
v) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period.
vi) The forward foreign exchange contracts have all the trappings of stock-in-trade.
vii) In view of the decision of Hon'ble Supreme Court in the case of Woodward Governor India (I) P.Ltd., the assessee's claim is allowable.
viii) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit.
We, accordingly, hold that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract."
9 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02)Respectfully following the decision of the Special Bench (supra) we allow this ground of appeal of the assessee."
10. Respectfully following the aforesaid decision of the Tribunal we hold that loss on unmatured foreign exchange contract have to be allowed as deduction. Ground No.3 is accordingly allowed.
11. Ground No.4 raised by the assessee reads as follows:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in giving direction to revalue the securities in the beginning of the year on the same basis of valuation at the year end which had changed during the year pursuant to the mandatory Reserve Bank of India (RBI) guidelines issued in October 2000. She ought to have appreciating the fact that the change in categorization and valuation of securities was bonafide, the valuation policy cannot be applied retrospectively as it is not mandated by the guidelines as well as by the accepted accounting principles."
11. As per the Tax Audit Report in point 11 it was mentioned by the Auditor that Reserve Bank of India vide their statement on Mid-term Review of Monetary and Credit policy dated 10th October, 2001 advised certain modifications in classification and valuation of investment portfolio of the Bank. The Bank has accordingly complied with these guidelines (Refer Para 3.2 of Schedule XVII to Final Accounts). Pursuant to this change, the profit for the year was lower by Rs. 82,90,204/-. Vide order sheet entry dated 26.12.2004 the AO called upon the Assessee to explain and justify the change method of valuation of investment portfolio which has lead to declaration of profits lower by Rs.82,90,204/-. Vide letter dated 06.01.2004 the assessee submitted as under:
"Note on change in accounting policy:
During the year, due to the change in categorization and valuation of securities pursuant to the RBI guidelines issued in October 2000, the company had to change its valuation policy for certain class of government securities. The Tax Auditor had inserted a note to clarify 10 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) the position stating the impact of the change. We are submitting the valuation by both the methods. Depreciation without categorization is Rs. 59,251,160 while depreciation with categorization is Rs. 67,541,364. Pursuant to this, the profit for the year is lower by Rs. 82,90,204/-"
12. The Assessing Officer however held that for income tax purposes the assessee have consistant basis for valuation followed in the previous year. The Assessing Officer held that in the previous year, the assessee valued the investment as current investment as a whole, therefore, the changed method of valuation cannot be accepted. The Assessing Officer accordingly made addition of Rs.82,90,204/- to the total income of the assessee.
13. On appeal by the assessee the CIT(A) held as follows:
"15.3 The appellant has submitted that being a bank, it is governed by the RBI guidelines and so had to make a bona fide change in its valuation policy. It is following this new method of valuation consistently ever since this financial year 2000-2001. And that it is well settled by the Court that a bona fide change in method of valuation of stock cannot be disregarded. So, the adjustment on change in valuation policy is deductible. In this regard, the appellant has relied on the following decisions:
CIT v. Atul Products [2002] 125 Taxman 727 (Guj) CIT v. Mopeds India Ltd. [1988] 173 ITR 347 (AP) Harinagar Sugar v. CIT 207 ITR 901 Garden Reach v. CIT 132 ITR 814 CIT v. Carborundum Universal 149 ITR 759 Indo-Comm Bank v. CIT 44 ITR 22 (34-35)
16. I have considered the rival submission and above facts of the case. The Hon'ble Supreme Court in the case of United Commercial Bank Vs. CIT 240 ITR 355 reversing the decision of the High Court held that Nationalised bank governed by Banking Regulation Act.
Bank is following mercantile system of accounting both for book keeping as well as tax purposes. Bank is valuing stock in trade (investments) 'at cost' in balance sheet in accordance with Banking Regulation Act and valuing very same investments 'at cost' or 'market value' whichever was lower for income-tax purposes. Method followed consistently was valid and could not be rejected. In the present case 11 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) the change in accounting policy is a bona fide change necessitated due to change in the RBI guidelines that the appellant has to mandatorily follow and also which the Appellant has continued to follow in the subsequent year. The AO is, therefore, directed to allow the revaluation of securities. However, for the computation of depreciation allowable, the AO is also directed to revalue the securities in the same manner in the beginning of the year also. In the result, the appeal is partly allowed."
14. Aggrieved by the direction given by the CIT(A) to revalue the securities in the beginning of the year also, the assessee has raised ground No.4 before the Tribunal. Aggrieved by the order of the CIT(A) upholding changed method of valuation of investment the revenue has raised Ground No.5.1 to 5.3 in its appeal and these grounds read as follows:
"5.1 The CIT(A) erred in holding that the sum of Rs. 82,90,204/- being the depreciation on revaluation of securities due to the change in their categorization, should be allowed as deduction in its entirety.
5.2 The CIT(A) ought to have appreciated that if any security, held as long term capital asset in the nature of 'Held to maturity.........' is reclassified as stock-in-trade then, notwithstanding the RBI guidelines, the provisions of section 45(2) of the Income tax Act would come into play, and any loss on revaluation, being loss under the head 'Capital gains' cannot be set off against the other income in view of the express provisions of section 74 of the Income tax Act.
5.3 The CIT(A) ought to have, in any case, appreciated that any loss due to any revaluation done during the accounting year is only notional and therefore, cannot be set off against the taxable income."
15. We have heard the rival submissions. The ld. Counsel for the assessee relied on the decision of the Hon'ble Bombay High Court in the case of Melmould Corporation vs. CIT 202 ITR 789 (Bom), wherein it was held as follows:
"The two principles applicable with regard to the valuation of stock are that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and that the closing stock must be the value of the opening stock in the succeeding year. It is, thus clear that irrespective of the basis adopted for valuation in the 12 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) earlier years, the assessee has the option to change the method of valuation of the closing stock at cost or market price, whichever is lower, provided the change in bona fide and followed regularly thereafter. Thus, the value of the closing stock of the preceding year must be the value of the opening stock of the next year. The change, therefore, has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year. If, instead, a procedure is adoped for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change and correspondingly the value of the opening stock of that year and so on.- CIT v. Carborandum Universal Ltd. [1984] 149 ITR 759 (Mad); CIT vs. Mopeds India Ltd. [1988] 173 ITR 347 (AP) & Triveni Engineering Works Ltd. vs. CIT (1987] 167 ITR 742 (All) followed.
Conclusion.
Opening stock is not required to be valued when the assessee has been permitted to change the method of valuation of closing stock as the value of closing stock will become the value of opening stock of next year."
16. Thus according to the ld. Counsel for the assessee the method of accounting followed by the assessee has to be accepted. The change in the method of accounting became necessary because of the RBI guidelines and therefore it cannot be said that the change in the method of valuation was not bonafide. The direction to change the value of opening stock will result in distortion of profits and no real effect being given to the changed method of valuation. With regard to the provisions of section 145A on which the ld. D.R placed his reliance, the ld. Counsel for the assessee submitted that section 145A is a statutory compulsion with regard to valuation of inventory which would necessarily include the opening stock also. According to the ld. Counsel for the assessee as far as the case of the assessee is concerned it falls within the ambit of section 145. In terms of section 145A the method of accounting and the change in the method of accounting regularly followed can be allowed, provided the changed method of accounting is bona fide and 13 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) followed regularly thereafter. It was contended by him that if securities as on the beginning of the year is also revalued the then changed method of accounting will become meaningless. The learned D.R. reiterated the stand of the revenue as reflected in the order of the AO.
17. We have considered the rival contentions. We find that the change in the method of accounting became necessary because of the RBI guidelines and therefore it cannot be said that the change in the method of valuation was not bonafide. The direction to change the value of opening stock will result in distortion of profits and no real effect being given to the changed method of valuation. We agree with the contention of the learned counsel for the Assessee that provisions of section 145A of the Act, is a statutory compulsion with regard to valuation of inventory, which would necessarily include the opening stock also. As far as the case of the assessee is concerned, the change in method of accounting falls within the ambit of section 145 of the Act. In terms of section 145 of the Act, the method of accounting and the change in the method of accounting, if it is bonafide, and if it is regularly followed thereafter has to be accepted as it is. The revenue in such circumstances cannot place any condition that the opening value of securities should also be changed. If securities as on the beginning of the year is also revalued the then changed method of accounting will become meaningless. We, therefore, hold that in a case of voluntary change in the method of accounting followed by the assesse, all that has to be seen is as to whether the change is bona fide and regularly followed thereafter. If the above condition is satisfied, then the changed method of accounting has to be accepted. In such an even there is no need to revalue the securities as on the beginning of the year. The ld. D.R sought to place reliance on the decision of the Privy Counsel in the case of CIT vs. Ahmedabad New Cotton Mill Company Ltd.,AAR 1930 PC 56. In that case there was a mistake in valuation of stock and, therefore, it was held that the mistake has to be 14 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) rectified both in the opening value as well as closing value. As rightly contended by the ld. Counsel for the assessee that decision would not be applicable to a case where there is a change in the method of accounting followed by an Assesse, especially when such change is necessitated by reason of the policy decision of the Regulator, Reserve Bank of India. We are therefore, of the view that the direction of the CIT(A) to revalue the security as at the beginning of the year should be deleted and we direct accordingly.
18. As far as grievance projected by the revenue in its grounds of appeal is concerned we are of the view that the changed method of accounting is baona fide and is necessitated by the Banks Regulator, Reserve Bank of India. We, therefore, confirm the order of the CIT(A) in so far as it relates to accepting the change in the valuation of securities by different method( valuation on the balance sheet date). Thus Ground No.5.1 to 5.3 of the revenue is dismissed while Ground No.4 of the assessee is allowed.
19. In the result, the appeal by the assessee is partly allowed.
ITA NO.4535/MUM/05:REVENUE'S APPEAL:
20. Ground No.1 to 3.2 of the revenue's grounds of appeal read as follows:
"1. The CIT(A)'s order is opposed to law and facts of the case in relation to the grounds hereunder.
2.1 The CIT(A) erred in holding that no disallowance u/s. 14A should be made in respect of interest on the borrowed funds.
2.2 The CIT(A) ought to have appreciated that the assessee has not established direct nexus between own funds and their application for purchases of the tax free bonds etc. the income from which is exempted u/s. 10.
3.1 The CIT(A) erred in holding that the disallowance under section 14A of the administrative expenses attributable to the earning of the exempted income should be restricted to only 1% of such expenses as against 2% thereof disallowed by the AO.15 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02)
3.2 The CIT(A) erred in allowing relief on this account without citing any reasonable basis or materials."
21. The above grounds relates to disallowance made under section 14A of the Act. It is not in dispute before us that in respect of identical issue this Tribunal in assessment year 1998-99 and 1999-00 in ITA No.2462&2463/M/09 remanded the issue to the Assessing Officer for fresh consideration in the light of the decision of the Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Company Ltd. ITA 626 of 2010 dated 12/8/2010. We accordingly set aside the order of the CIT(A) on this issue and remand the same to the Assessing Officer for fresh consideration in the light of the direction of the Tribunal given in the earlier year referred to above.
22. Ground No.4.1 to 4.3 raised by the revenue read as follows:
"4.1 The CIT(A) erred in deleting the disallowance of the claim for payment of broken period interest on Rs. 11,67,04,653/-.
4.2 The CIT(A) ought to have appreciated that the broken period interest forming part of the cost of the securities that were held not as stock in trade but as investments, could not be considered for deduction under the head "Profits and gains of business or profession", but can be deducted only as part of purchase consideration of such securities under the head "Capital Gains" when such securities are actually disposed of.
4.3 The CIT(A) ought to have further appreciated that the cases relied upon by her are not applicable to the facts of this case whereas the ratio of the decision of the Supreme Court in the case of Vijaya Bank (187 ITR 541) squarely applies on facts."
23. The AO in the course of assessment proceedings called upon the Assessee to explain why the interest for the broken period should not be disallowed. The Assessee vide letter dated 19.12.2003 submitted that-
16 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02)"The bank has in the previous accounting year changed its method of accounting for broken period interest in that the same was included in the acquisition of cost of securities the broken period interest was debited to the P&L A/c. in accordance with the directions from the Reserve Bank of India addressed to the Bank in this behalf. However, the AO in the previous year has disallowed the change in the method of accounting and added back a sum of Rs. 14.92 crores to the income of our clients in the previous year which needs to be deducted from current year's income as the same as already formed a part of taxable income of the current year. In the current year broken period interest on the securities outstanding as at the end of previous year amount of Rs.11,67,04,653/-. It is our client's contention that the same cannot be considered as capital cost as the entire portfolios of securities owned by our client is in the current category and the change in the method of accounting of broken period interest was a bona fide change manded by RBI."
24. The AO however did not agree with the submissions of the Assessee. He held that the claim for exclusion of broken period interest for Rs. 11,67,04,653/- in respect of various purchases of securities during the year represented interest accrued upto the date of purchase of securities is part of the purchase consideration and the broken period interest cannot be allowed as deduction. In doing so the Assessing Officer followed the decision of the Hon'ble Supreme Court in the case of CIT vs. Vijaya Bank, 187 ITR 541 (SC)
25. On appeal by the assessee the CIT(A) held that the broken period interest has to be allowed as a deduction. In doing so the CIT(A) followed his predecessors order in Assessment Year 2000-01 and the decision of Hon'ble Bombay High Court in the case of American Express International Banking Corporation vs. CIT, 258 ITR 601 (Bom).
26. Before us it was submitted that the issue has been considered by the Hon'ble Bombay High Court in the case of American Express International Banking Corporation (supra), wherein it was held that purchase price of the securities should be bifurcated into (1) interest accrued upto the date of 17 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02) purchase and (2) balance of the price and interest should be allowed as revenue expenditure in the year of purchase provided the bank follow such a practice . In view of the above we do not find any infirmity in the order of the CIT(A). Consequently Ground No.4.1 to 4.3 raised by the revenue are dismissed.
27. In the result, the appeal by the revenue is dismissed.
28. In the result, the appeal of the assessee is partly allowed while appeal of the revenue is dismissed.
Order pronounced in the open court on the 17th day of June, 2011.
Sd/- Sd/- (R.K.PANDA ) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated. 17th June.2011
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"H" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
18 ITA NO.4343& 4535/MUM/2005(A.Y. 2001-02)
Details Date Initials Designation
1 Draft dictated on 7/6/11 Sr.PS/PS
2 Draft Placed before author 8/6/11 Sr.PS/PS
3 Draft proposed & placed JM/AM
before the Second Member
4 Draft discussed/approved by JM/AM
Second Member
5. Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6. Kept for pronouncement on Sr.PS/PS
7. File sent to the Bench Clerk Sr.PS/PS
8 Date on which the file goes to
the Head clerk
9 Date of Dispatch of order