M/s. THE SIAM COMMERCIAL BANK PCL., MUMBAI v. DDIT (I.T) 2(1), MUMBAI

ITA 3643/MUM/2005 | 2000-2001
Pronouncement Date: 23-11-2011 | Result: Partly Allowed

Appeal Details

RSA Number 364319914 RSA 2005
Assessee PAN NKPCL1703D
Bench Mumbai
Appeal Number ITA 3643/MUM/2005
Duration Of Justice 6 year(s) 6 month(s) 10 day(s)
Appellant M/s. THE SIAM COMMERCIAL BANK PCL., MUMBAI
Respondent DDIT (I.T) 2(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 23-11-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted L
Tribunal Order Date 23-11-2011
Date Of Final Hearing 06-07-2011
Next Hearing Date 06-07-2011
Assessment Year 2000-2001
Appeal Filed On 13-05-2005
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES L MUMBAI BEFORE SHRI R.S.SYAL AM AND SHRI N.V.VASUDEVAN JM ITA NO.3643/MUM/2005 : ASST.YEAR 2000-2001 THE SIAM COMMERCIAL BANK PCL 1703 DHEERAJ GAURAV HEIGHTS-I ADARSH NAGAR ANDHERI (WEST) MUMBAI 400 053. PAN : AAACS6041A. THE DY.DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 2(1) MUMBAI. (APPELLANT) VS. (RESPONDENT) ITA NO.4032/MUM/2005 : ASST.YEAR 2000-2001 THE DY.DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) 2(1) MUMBAI. THE SIAM COMMERCIAL BANK PCL 1703 DHEERAJ GAURAV HEIGHTS-I ADARSH NAGAR ANDHERI (WEST) MUMBAI 400 053. (APPELLANT) VS. (RESPONDENT) REVENUE BY : SHRI JITENDRA YADAV ASSESSEE BY : SHRI VIJAY KOTHARI DATE OF HEARING : 09.11.2011 DATE OF PRONOUNCEMENT :23.11.2011 O R D E R PER R.S.SYAL AM : THESE TWO CROSS APPEALS ONE BY THE ASSESSEE AND T HE OTHER BY THE REVENUE ARISE OUT OF THE ORDER PASSED BY THE COMMISSIONER O F INCOME-TAX (APPEALS) ON 11.03.2005 IN RELATION TO THE ASSESSMENT YEAR 2000- 2001. 2. FIRST GROUND OF THE REVENUES APPEAL IS AGAINST THE DELETION OF ADDITION OF RS.72 15 025 MADE BY THE ASSESSING OFFICER TOWARDS DISCOUNTING CHARGES IN RELATION TO THE SUBSEQUENT YEAR. BRIEFLY STATED THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE HAD SHOWN UNEARNED INCOME RECEIVED DURING THE YEAR AMOUNTING TO RS.72.15 LAKH AS MISCELLANEOUS LIABILITY IN ITS BALANCE SHEET. ON BE ING CALLED UPON TO EXPLAIN AS TO WHY SUCH INCOME BE NOT CHARGED TO TAX AS INCOME OF THE CURRENT YEAR THE ASSESSEE SUBMITTED THAT THIS AMOUNT REPRESENTED FUTURE DISCO UNT PERTAINING TO THE PERIOD AFTER 31 ST MARCH 2000 COLLECTED ON BILLS PURCHASED DURING T HE YEAR. IT WAS THEREFORE ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 2 CLAIMED THAT THIS AMOUNT DID NOT PERTAIN TO ASSESSM ENT YEAR 2000-2001. THE ASSESSING OFFICER DID NOT ACCEPT THIS CONTENTION BY OBSERVING THAT THE TRANSACTIONS INVOLVING DISCOUNTING OF BILLS TOOK PLACE IN THE YE AR WHEN THE BILLS WERE DISCOUNTED AND SINCE THE ASSESSEE ACQUIRED THE RIGHT TO RECEIV E SUCH DISCOUNT DURING THE YEAR THE SAME WAS CHARGEABLE TO TAX IN THE YEAR IN QUEST ION. HE THEREFORE MADE ADDITION FOR THE SAID SUM. THE LEARNED CIT(A) DIFFERED WITH THE VIEW EXPRESSED BY THE ASSESSING OFFICER AND ORDERED FOR THE DELETION OF T HIS ADDITION. 3. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IN SO FAR AS THE DISCOUNT RELATING TO THE P ERIOD UP TO THE CLOSE OF THE FINANCIAL YEAR IS CONCERNED THE ASSESSEE OFFERED SUCH AMOUNT AS INCOME WHICH HAS BEEN ACCEPTED BY THE AO. THE CONTROVERSY HAS ARISEN IN R ESPECT OF THE DISCOUNT COLLECTED BY THE ASSESSEE WHICH RELATED TO THE PERIOD BEYOND THE CLOSE OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION . THERE IS NO DISPUTE ON THE FACT THAT THE SAID AMOUNT OF RS.72.15 LAKH REPRESENTS FU TURE DISCOUNT COLLECTED BY THE ASSESSEE ON BILLS PURCHASED BY IT DURING THE YEAR. NOW THE QUESTION ARISES AS TO WHETHER SUCH INTEREST PERTAINING TO THE SUBSEQUENT YEAR CAN BE CHARGED TO TAX IN THE CURRENT YEAR SIMPLY FOR THE REASON THAT THE BILLS W ERE DISCOUNTED IN THE CURRENT YEAR. 4. THE LD. DR CONTENDED THAT THE DISCOUNTING CHARGES ACCRUED TO THE ASSESSEE AT THE TIME OF DISCOUNTING THE BILL AND HENCE THE ENTI RE AMOUNT OF DISCOUNT WAS CHARGEABLE TO TAX IN THIS YEAR. IT WAS VEHEMENTLY A RGUED THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN EXCLUDING THE AMOUNT OF DISCOUNT RELAT ING TO THE SUBSEQUENT YEAR FROM THE INCOME WHICH HAD ACCRUED TO THE ASSESSEE IN THI S YEAR ITSELF. 5. THE ASSESSEE BANK IS ADMITTEDLY FOLLOWING ME RCANTILE SYSTEM OF ACCOUNTING. UNDER SUCH A METHOD DEDUCTION FOR EXPENSES IS ALLO WED WHEN THE LIABILITY TO PAY ARISES IRRESPECTIVE OF THE FACT WHETHER SUCH AN AMO UNT HAS BEEN PAID OR REMAINED UNPAID AT THE END OF THE YEAR. IN THE LIKE MANNER INCOME UNDER SUCH A METHOD OF ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 3 ACCOUNTING IS RECOGNIZED ON ACCRUAL BASIS. IN OTHE R WORDS WHEN THE ASSESSEE FINALLY ACQUIRES THE RIGHT TO RECEIVE SUCH INCOME IT IS CH ARGED TO TAX. ACTUAL RECEIPT OF SUCH AMOUNT WHETHER BEFORE OR AFTER ACCRUAL IS OF NO C ONSEQUENCE. THE MATERIAL THING IS THE TIME OF ITS ACCRUAL. ONCE AN INCOME HAS ACCRUED IT IS LIABLE TO TAXED NOTWITHSTANDING THE FACT THAT IT WAS NOT RECEIVED D URING THE YEAR. IN THE SAME MANNER IF SOME AMOUNT HAS BEEN RECEIVED WHICH DOE S NOT REPRESENT THE INCOME ACCRUED FOR THE YEAR IT SHALL NOT BE CHARGED TO TA X AND WILL ASSUME THE CHARACTER OF LIABILITY TILL THE TIME OF ITS ACCRUAL. ONLY WHEN S UCH AMOUNT ACCRUES AS INCOME THE HITHERTO LIABILITY WILL GET CONVERTED INTO INCOME. TILL THAT TIME IT WILL CONTINUE AS LIABILITY DESPITE THE FACT THAT IT WAS RECEIVED. T HUS WHAT IS RELEVANT TO MAGNETIZE TAX UNDER THE MERCANTILE SYSTEM OF ACCOUNTING IS THE FA CT OF ACCRUAL OF INCOME DURING THE YEAR AND NOT THE RECEIPT OF ANY AMOUNT OR NON-RECEI PT OF INCOME. IT SHOWS THAT RECEIPT OR NON-RECEIPT OF AN AMOUNT DURING THE YEAR IS AN IRRELEVANT CONSIDERATION IN DETERMINING WHETHER THE INCOME HAS ACCRUED OR NOT. 6. THE NEW SHORTER OXFORD ENGLISH DICTIONAR Y THUMB INDEX EDITION GIVES THE MEANING OF THE WORD `ACCRUE AS : `COME AS A N ATURAL GROWTH OR INCREMENT OR AS AN ACCESSION OR ADVANTAGE ; `ARISE OR SPRING AS A NATURAL GROWTH OR RESULT. THUS IT IS PALPABLE THAT THE ACCRUAL OF INCOME MEANS THE GROWT H OF INCOME IRRESPECTIVE OF ITS RECEIPT OR BECOMING DUE. THE WORD `DUE IS SOMETIME S CONFUSED WITH THE WORD `ACCRUE AND IT IS ARGUED THAT SINCE INCOME IS NOT DUE IT CANNOT BE CHARGED TO TAX OR VICE VERSA . THE CONNOTATION OF THESE TWO WORDS NEEDS TO BE PR OPERLY APPRECIATED. WHEREAS THE WORD `ACCRUE REFERS TO THE GROWTH OF I NCOME OR ACQUIRING DOMINION OVER THE INCOME THE WORD `DUE REFERS TO THE STAGE OF ACQUIRING THE RIGHT TO RECEIVE. IT CAN BE ILLUSTRATED BY A SIMPLE ILLUSTRATION. IF A DEPOSITOR GOES TO THE BANK AND PURCHASES FDR OF RS. 100 FOR ONE YEAR ON 1.1.2011 WITH INTEREST @ 10% THE TOTAL INTEREST INCOME ON SUCH FDR WILL BE RS. 10 AND THE DEPOSITOR WILL GET BACK RS.110 ON 1.1.2012. SUPPOSE THE DEPOSITOR IS CLOSING ITS A CCOUNTS ON FINANCIAL YEAR BASIS. THE YEAR ENDING WILL COME ON 31.3.2011. ALBEIT THE INTEREST INCOME OF RS. 3 FOR THE ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 4 PERIOD 1.1.2011 TO 31.3.2011 SHALL ACCRUE TO THE DE POSITOR IN THE YEAR ENDING 31.3.2011 BUT IT SHALL NOT BE DUE AS ON THAT DATE . THE DUE DATE OF THE ENTIRE INCOME OF RS.10 WILL BE ON 1.1.2012 BEING THE MATURITY DA TE OF THE FDR. THUS IT CAN BE SEEN THAT ALTHOUGH INTEREST INCOME OF RS.3 ACCRUED TO THE ASSESSEE IN THE YEAR ENDING 31.3.2011 BUT IT SHALL NOT BE DUE ON THAT DATE. T HE TAXABLE EVENT UNDER THE MERCANTILE SYSTEM OF ACCOUNTING IS THE DATE OF ACCR UAL AND NOT WHEN IT BECOMES DUE. THUS IN THE FINANCIAL YEAR ENDING 31.3.2011 T HE ASSESSEE WILL BE LIABLE TO PAY TAX ON THE INTEREST INCOME OF RS. 3. 7. AT THIS JUNCTURE IT IS RELEVANT TO NOTE THAT THE `MATCHING CONCEPT GOES HAND IN HAND WITH THE `MERCANTILE SYSTEM OF ACCOUNTING. MATCHING CONCEPT UNDERLINES THE IDEA OF MATCHING REVENUES WITH THE CORRESPONDIN G COSTS. IT RECOGNIZES INCOME WITH THE INCURRING OF SIMULTANEOUS EXPENDITURE. WHE N A LENDER IN THE MONEY LENDING BUSINESS ADVANCES MONEY ON INTEREST IT R ECEIVES INCOME AND IT ALSO PAYS INTEREST ON THE MONIES BORROWED BY IT FOR THE PURPO SE OF HIS BUSINESS. IT IS THE DIFFERENCE BETWEEN THE INTEREST INCURRED AND INTERE ST EARNED WHICH CONSTITUTES HIS INCOME. GOING WITH THE ABOVE EXAMPLE WHEN THE LEND ER WHO HAD BORROWED RS.100 IN HIS NORMAL COURSE OF BUSINESS ON INTEREST AT THE RATE OF 8% ADVANCES IT ON INTEREST AT THE RATE OF 10% HE WILL EARN INCOME OF THE DIFF ERENTIAL INTEREST. HIS LIABILITY TO PAY INTEREST (EXPENDITURE IN HIS HANDS) SHALL ARISE FOR THAT PART OF THE YEAR FOR WHICH HE USED THE BORROWED FUNDS OR REMAINED DEPRIVED OF SUC H FUNDS. WHEN HE BORROWED RS.100 ON 1.1.2011 AND ADVANCED IT ON THE SAME DATE HIS INTEREST EXPENDITURE FOR THE YEAR ENDING 31.3.2011 SHALL BE TO THE TUNE OF R S. 2 (8% INTEREST ON RS. 100 FOR A PERIOD OF THREE MONTHS FROM 1.1.2011 TO 31.3.2011). WHEN THE INTEREST EXPENDITURE FOR A PERIOD OF THREE MONTHS IS DEDUCTIBLE NATURA LLY GOING BY THE MATCHING CONCEPT THE INTEREST OF ONLY RS. 3 ( 10% INTEREST INCOME ON RS.100 FOR A PERIOD OF THREE MONTHS FROM 1.1.2011 TO 31.3.2011) CAN BE REC OGNIZED AS INCOME. ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 5 8. NORMALLY IN A CASE OF ADVANCING LOAN I NTEREST INCOME BECOMES DUE AT THE END OF THE YEAR OR THE GIVEN PERIOD OF MATURITY AND NOT AT THE TIME OF ADVANCING OF THE LOAN. CONTINUING WITH THE ABOVE EXAMPLE OF A S IMPLE LOAN IF THE BORROWER AGREES TO PAY INTEREST AT THE TIME OF REPAYMENT OF LOAN HE SHALL PAY RS.110 ON 1.1.2012 BEING THE PRINCIPAL AMOUNT OF LOAN OF RS. 100 PLUS INTEREST OF RS.10. IN SUCH A CASE THE INTEREST SHALL ACCRUE AS INCOME AS ON 31.3.2011 TO THE TUNE OF RS.3 THOUGH IT SHALL BECOME DUE FOR PAYMENT ON 1.1.2012. IT MAY ALSO BE POSSIBLE THAT BOTH THE BORROWER AND LENDER AGREE THAT THE INTERES T SHALL BE PAID AT THE TIME OF ADVANCING LOAN. IN THAT CASE THE BORROWER WILL EFFE CTIVELY RECEIVE RS.90 NET AFTER INTEREST (RS. 100 PRINCIPAL MINUS RS. 10 INTEREST). IN SUCH A CASE THOUGH THE INTEREST OF RS.10 BECAME DUE AND WAS ALSO RECEIVED BY THE LE NDER ON 1.1.2011 BUT INTEREST WHICH SHALL ACCRUE AS INCOME AT THE END OF THE FINA NCIAL YEAR ENDING 31.3.2011 SHALL BE RS.3. IN BOTH THE ABOVE CASES THE LENDER FOLL OWING THE MERCANTILE SYSTEM OF ACCOUNTING SHALL BECOME LIABLE TO OFFER INTEREST I NCOME OF RS. 3 IN THE YEAR ENDING 31.3.2011 EVEN IF HE RECEIVED INTEREST OF RS.10 IN ADVANCE AT THE TIME OF ADVANCING LOAN ITSELF OR NO AMOUNT IS RECEIVED DURING THE YEA R BECAUSE OF IT BECOMING DUE AT THE MATURITY PERIOD FALLING AFTER THE CLOSE OF THE YEAR. 9. DISCOUNTING OF BILLS IS ONE OF THE MODES OF FINANCING. IT BEARS CLOSE RESEMBLANCE TO THE BORROWER AND LENDER AGREEING THA T THE INTEREST SHALL BE PAID AT THE TIME OF ACCEPTING LOAN. IN A CASE OF DISCOUNTING OF BILL BY A FINANCER THE DRAWER OF THE BILL GETS THE AMOUNT OF BILL NET OF DISCOUNTING CHARGES AT THE VERY THRESHOLD WHEN HE GOES FOR GETTING IT DISCOUNTED. THE AMOUNT OF DI SCOUNTING CHARGES DEPENDS UPON THE PERIOD OF THE BILL. THE FINANCER APPLIES THE PR E-DETERMINED RATE OF DISCOUNTING AND THEN COMPUTES THE DISCOUNTING CHARGES WITH REFE RENCE TO THE DUE DATE OF BILL. SUPPOSE A BILL IS DISCOUNTED ON 1.1.2011 WITH THE D UE DATE AT A DISTANCE OF ONE MONTH THE FINANCER WILL APPLY THE DISCOUNTING RATE (SAY 12% P.A. OR 1 % P.M.) ON THE AMOUNT OF BILL (SAY RS. 100) AND WILL GIVE RS.99 TO THE DRAWER. THE ENTIRE AMOUNT OF DISCOUNTING CHARGES SHALL BE TREATED AS INCOME I N THE YEAR ENDING 31.3.2011 ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 6 INASMUCH AS THE INTEREST OF RE.1 NOT ONLY GOT ACCR UED BUT ALSO BECAME DUE AND WAS RECEIVED WITHIN THE YEAR. IF THE DUE DATE OF BILL I S ONE YEAR LATER I.E ON 1.1.2012 THE FINANCER WILL PAY RS.88 (RS. 100 RS. 12) AFTER RE TAINING DISCOUNTING CHARGES OF RS.12. IN SUCH A SITUATION THE INTEREST WHICH SHA LL ACCRUE AT THE END OF THE FINANCIAL YEAR 31.1.2011 SHALL BE RS.3 NOTWITHSTANDING THE FA CT THAT A SUM OF RS.12 BECAME DUE AND WAS ALSO RECEIVED ON 1.1.2011 ITSELF. IN THE LIKE MANNER IF THE DUE DATE IS AFTER SAY TWO YEARS THE LENDER WILL DISCOUNT THE BILL FOR RS. 76 (RS.100 RS.24). HERE ALSO DISCOUNTING CHARGES OF RS.3 SHALL ACCRUE TO THE FINANCER AT THE END OF THE YEAR 31.3.2011 DESPITE THE FACT THAT A SUM OF RS.24 BECAME DUE AND WAS RECEIVED. THUS IT IS MANIFEST THAT DISCOUNTING CHARGES ARE NO THING BUT THE COST OF DEPRIVATION OF FUNDS BY THE FINANCER. REVERTING TO THE MATCHING CONCEPT THE FINANCER SHALL BEAR THE INTEREST COST ON THE AMOUNT OF BILL DISCOUNTED DURING THE YEAR ENDING 31.3.2011 FOR A PERIOD OF THREE MONTHS AND RESULTANTLY THE IN TEREST INCOME ACCRUING TO HIM WILL ALSO MATCH WITH DISCOUNTING CHARGES FOR THE SIMILAR PERIOD. AS THE INTEREST COST FOR WHICH THE FINANCER REMAINED DEPRIVED OF HIS FUNDS F OR THE PERIOD BEYOND 31.3.2011 SHALL BECOME LIABLE FOR DEDUCTION IN THE SUBSEQUENT PERIOD NATURALLY THE DISCOUNTING CHARGES AS RELATABLE TO SUCH PERIOD SHA LL FALL AS INCOME IN SUCH LATER PERIOD ONLY SATISFYING NOT ONLY THE TEST OF ACCR UAL OF INCOME BUT ALSO THE MATCHING PRINCIPLE. 10. THE LD. DR HAS PLACED STRONG RELIANCE O N THE SPECIAL BENCH ORDER IN DCIT (INTERNATIONAL TAXATION) VS. BANK OF BAHRAIN & KUW AIT [(2010) 132 TTJ (MUMBAI) (SB) 505] TO CONTEND THAT THE ENTIRE DISCOUNTING CHARGES EVE N COVERING THE PERIOD FALLING IN SUBSEQUENT YEAR SHALL ACCRUE AS INCOME IN THIS YEAR ALONE. HE ACCENTUATED ON THE FINDING GIVEN BY THE SPECIAL BENCH ON THE AM OUNT OF GUARANTY COMMISSION ACCRUING AS INCOME IN THE YEAR OF GUARANTY IRRESP ECTIVE OF THE PERIOD FOR WHICH GUARANTY WAS FURNISHED. DRAWING STRENGTH FROM THIS ORDER IT WAS ARGUED THAT THE SAME RATIO SHALL APPLY TO THE DISCOUNTING CHARGES AS WELL AND HENCE THE ENTIRE ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 7 AMOUNT OF DISCOUNTING CHARGES INCLUDING THAT RELATI NG TO THE PERIOD FALLING IN THE SUBSEQUENT YEAR SHALL ACCRUE IN THIS YEAR. 11. THERE IS NO DOUBT THAT THE SPECIAL BENCH IN THE AFORENOTED ORDER HAS HELD THAT THE GUARANTEE COMMISSION IS TO BE TAXED IN THE YEAR IN WHICH THE GUARANTEE IS ACTUALLY BEEN GIVEN IRRESPECTIVE OF THE PERIOD OF G UARANTEE UNLESS SUCH COMMISSION IS REFUNDABLE ON THE REVOCATION OF GUARANTEE. LET U S TRY TO UNDERSTAND THE LOGIC BEHIND THE ACCRUAL OF GUARANTEE COMMISSION AT THE V ERY THRESHOLD. WHEN A PROMISOR UNDERTAKES TO PERFORM SOME PROMISE AND THE PROMISE IN ORDER TO ENSURE THAT NO DEFAULT IS COMMITTED MAY REQUIRE THE PROMISOR TO A RRANGE FOR GUARANTEE. IN SUCH A CASE THE GUARANTOR UNDERTAKES TO FULFILL THE OBLIG ATION UNDERTAKEN BY THE PROMISOR IN CASE THERE IS ANY DEFAULT BY THE LATER. SUPPOSE THERE IS A FAILURE BY THE PROMISOR THE PROMISEE SHALL INVOKE THE GUARANTEE AND THE GUA RANTOR WILL HAVE TO STEP INTO THE SHOES OF THE PROMISOR AND FULFILL SUCH OBLIGATION F OR WHICH HE STOOD AS GUARANTOR. IN ORDER TO ENSURE THAT PROMSIOR DOES NOT COMMIT ANY D EFAULT THE GUARANTOR TAKES ADEQUATE SECURITY. IN THE CASE OF BANK-GUARANTEE THE BANK GENERALLY GETS FIXED DEPOSIT FROM THE PROMISOR BEFORE EXTENDING GUARANTE E SO THAT IF DEFAULT IS COMMITTED IT MAY ENCASH THE FIXED DEPOSIT AND DIS CHARGE THE OBLIGATION UNDERTAKEN. IF THERE IS NO DEFAULT THEN THE FIXED DEPOSIT IS REFUNDED BY THE BANK TO THE PROMISOR AT THE END OF THE GUARANTEE PERIOD. A T THE TIME OF FURNISHING GUARANTEE THE BANK CHARGES GUARANTEE COMMISSION. THE PERIOD O F GUARANTEE MAY CLOSE WITHIN THE SAME YEAR OR EXTEND BEYOND THAT ALSO. THUS IT IS EVIDENT THAT THE BANK BY FURNISHING GUARANTEE DOES NOT INCUR ANY FINANCIAL OBLIGATION OF ITS OWN. ITS FUNDS ARE NOT DEPLOYED IN THE TRANSACTION OF GIVING GUARANTEE OR ITS INVOCATION. THE BANK DOES NOT INCUR ANY EXPENDITURE IN STANDING AS GUARANTEE. IRRESPECTIVE OF THE PERIOD OF GUARANTEE THE BANK CHARGES ONE TIME GUARANTEE COMM ISSION. IT THEREFORE TRANSPIRES THAT THE ENTIRE GUARANTEE COMMISSION ACCRUES AT THE TIME OF THE BANK FURNISHING GUARANTEE REGARDLESS OF THE PERIOD FOR WHICH SUCH GUARANTEE IS GIVEN. AS THERE ARE ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 8 NO MATCHING COSTS OVER THE PERIOD OF GUARANTEE THE ENTIRE AMOUNT OF GUARANTEE COMMISSION ACCRUES AND IS CHARGEABLE TO TAX IN THE YEAR OF FURNISHING GUARANTEE. 12. HAVING NOTED THE NATURE OF DISCOUNTING CHARGES AND GUARANTEE COMMISSION IT BECOMES CRYSTAL CLEAR THAT THE DECISION GIVEN IN THE CONTEXT OF GUARANTEE COMMISSION ON THE ACCRUAL OF INCOME CANNOT DE FACTO OR DE JURE APPLY TO THE DISCOUNTING CHARGES. THE PERIOD FOR WHICH GUARANTEE IS GIVEN IS IRRELEVANT IN SO FAR AS THE QUESTION OF ACCRUAL OF GUARANTEE COMMISSION IS CONCERNED. BUT WHEN IT COMES TO THE DISCOUNTING CHARGES THE PERIOD OF THE BILL IS RELEVANT AS IT REQUIRES THE DIVESTING OF FUNDS BY THE LENDER FOR SUCH PERIOD EN TAILING THE INCURRING OF THE INTEREST EXPENDITURE FOR SUCH PERIOD. THE QUANTUM OF DISCOUN TING CHARGES HAS DIRECT NEXUS WITH THE DUE DATE OF THE BILL WHICH IN TURN DETE RMINES THE PERIOD FOR WHICH THE BANK IS DEPRIVED OF ITS FUNDS IN DISCOUNTING THE BI LL. IF THE DUE DATE OF BILL CROSSES THE DATE OF CLOSURE OF THE FINANCIAL YEAR THE BANK DISCOUNTING THE BILL WILL INCUR MATCHING INTEREST COST ON ITS FUNDS IN THE CURRENT YEAR AND ALSO THE LATER YEAR. AS THE INTEREST COST FOR THE SUBSEQUENT YEAR SHALL NOT BEC OME DEDUCTIBLE IN THE CURRENT YEAR NATURALLY THE CORRESPONDING INCOME IN THE FORM OF DISCOUNTING CHARGES FOR THE NEXT YEAR SHALL ALSO NOT ACCRUE AS INCOME IN THE CURRENT YEAR. WE ARE OF THE CONSIDERED OPINION THAT THE LD. CIT(A) HAS TAKEN AN UNEXCEPTIO NABLE VIEW IN HOLDING THAT THE THE FUTURE DISCOUNT I.E. THE AMOUNT OF DISCOUNT PER TAINING TO THE PERIOD AFTER 31 ST MARCH 2000 CANNOT BE CHARGED TO TAX IN THIS YEAR. THIS GROUND IS NOT ALLOWED. 13. SECOND GROUND IS AGAINST THE DELETION OF DISAL LOWANCE OF RS.13 66 667 MADE BY THE ASSESSING OFFICER U/S 14A OF THE ACT. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTED THAT THE QUESTION OF MAKING DIS ALLOWANCE U/S 14A IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HONBLE BOMBAY HI GH COURT IN GODREJ & BOYCE LTD. MFG. CO. VS. DCIT (2010) 328 ITR 81 (BOM ) HOLDING THAT THE ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 9 PROVISIONS OF SECTION 14A ARE APPLICABLE IN CIRCUMS TANCES AS ARE PREVAILING PRESENTLY AND THE DISALLOWANCE HAS TO BE WORKED OUT BY THE AO ON SOME `REASONABLE BASIS AND NOT RULE 8D. UNDER SUCH CIRCUMSTANCES WE SET A SIDE THE IMPUGNED ORDER AND RESTORE THE MATTER TO THE FILE OF THE AO FOR DECIDI NG THE QUANTUM OF DISALLOWANCE AS PER THE AFORE-NOTED JUDGMENT AFTER ALLOWING A REAS ONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THIS GROUND IS ALLOWED FOR STATIST ICAL PURPOSES. 15. LAST GROUND IS AGAINST THE GRANTING OF DEDUCTIO N IN RESPECT OF BAD DEBT U/S 36(1)(VII). THE FACTS APROPOS THIS GROUND ARE THAT THE ASSESSEE CLAIMED DEDUCTION FOR BAD DEBTS AMOUNTING TO RS.1 57 46 917 U/S 36(1)(VII ) AS UNDER:- BAD DEBTS WRITTEN OFF THIS YEAR RS.1 88 87 553 LESS : PROVISION ALLOWED U/S 36(1)(VIIA) FOR A.Y. 1999-00. RS. 31 40 636 ------------------ RS.1 57 46 917 =========== 16. APART FROM THE ABOVE AMOUNT THE ASSESSEE ALSO CLAIMED SEPARATE DEDUCTION IN RESPECT OF PROVISION FOR BAD DEBT AMOUNTING TO RS. 35 02 564 MADE DURING THE CURRENT YEAR. THE ASSESSING OFFICER OBSERVED THAT S ECTION 36(1)(VII) PROVIDES THAT THE DEDUCTION FOR BAD DEBT ACTUALLY WRITTEN OFF SHO ULD BE ALLOWED WHICH IS IN EXCESS OF THE PROVISION CREATED U/S 36(1)(VIIA). IT WAS NO TICED THAT IN THE PRESENT CASE THE ASSESSEE CONSIDERED ONLY THE BALANCE OF PROVISION C REATED LAST YEAR AND THE PROVISION FOR THE CURRENT YEAR WAS NOT CONSIDERED. HE HELD TH AT THE BAD DEBTS DEDUCTION SHOULD BE ALLOWED ONLY IN EXCESS OF THE BALANCE AT THE END OF THE YEAR AND NOT AT THE BEGINNING OF THE YEAR. HE THEREFORE GRANTED DEDUC TION OF RS.1 54 12 252 U/S 36(1)(VII) AS WELL AS SECTION 36(1)(VIIA) THEREBY M AKING DISALLOWANCE OF RS.3 34 665. THE LEARNED CIT(A) OVERTURNED THE ASSE SSMENT ORDER ON THIS ASPECT AND ORDERED FOR THE DELETION OF ADDITION. ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 10 17. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IN ORDER TO DECIDE THIS ISSUE IT WILL BE A PT TO TAKE NOTE OF THE SECTION 36(1)(VII) AND THE RELEVANT PART OF CLAUSE (VIIA) WHICH READS AS UNDER :- 36. OTHER DEDUCTIONS.--(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN IN COMPUTING THE INCOME REFERRED TO IN SECTION 28-- (I) TO (VI) (VII) SUBJECT TO THE PROVISIONS OF SUB-SECTION (2) THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRITTEN OFF AS IRRECOVERAB LE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR: PROVIDED THAT IN THE CASE OF A BANK TO WHICH CLAUSE (VIIA) APPLIES THE AMOUNT OF THE DEDUCTION RELATING TO ANY SUCH DEBT O R PART THEREOF SHALL BE LIMITED TO THE AMOUNT BY WHICH SUCH DEBT OR PART TH EREOF EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE ; EXPLANATION.FOR THE PURPOSES OF THIS CLAUSE ANY B AD DEBT OR PART THEREOF WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE SHALL NOT INCLUDE ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN TH E ACCOUNTS OF THE ASSESSEE (VIIA) IN RESPECT OF ANY PROVISION FOR BAD AND DOU BTFUL DEBTS MADE BY-- (A) A SCHEDULED BANK NOT BEING A BANK INCORPORATE D BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA OR A NON-SCHEDULED BANK . (B) A BANK BEING A BANK INCORPORATED BY OR UNDER THE LAWS OF A COUNTRY OUTSIDE INDIA AN AMOUNT NOT EXCEEDING FIVE PER CEN T. OF THE TOTAL INCOME (COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CL AUSE AND CHAPTER VI- A); 18. SECTION 36(1)(VII) PROVIDES THAT SUBJECT TO THE PROVISIONS OF SUB-SECTION (2) THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHICH IS WRI TTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR SHA LL BE ALLOWED AS DEDUCTION. SECTION 36(1)(VIIA) DEALS WITH THE GRANTING OF DEDUCTION IN RESPECT OF ANY PROVISION FOR BAD OR DOUBTFUL DEBTS. IT IS OBSERVED THAT THE ASSESSEE IS A FOREIGN BANK. AS SUCH THE PROVISIONS OF SUB-CLAUSE (B) OF SECTION 36(1)(VIIA) SHALL APPLY AND NOT SUB-CLAUSE (A). ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 11 THUS IT BECOMES EVIDENT THAT WHEREAS CLAUSE (VII) O F SECTION 36(1) PROVIDES DEDUCTION IN RESPECT OF BAD DEBTS ACTUALLY WRITTEN OFF CLAUSE (VIIA) GRANTS DEDUCTION IN RESPECT OF PROVISION FOR BAD AND DOUBTFUL DEBTS. IN ORDER TO PREVENT DOUBLE DEDUCTION FIRSTLY AT THE TIME OF CREATING PROVISIO N UNDER CLAUSE (VIIA) AND THEN ON ACTUAL WRITE OFF UNDER CLAUSE (VIIA) TWO SAFEGUARDS HAVE BEEN ENSHRINED IN CLAUSE (VII). FIRSTLY THE EXPLANATION STIPULATES THAT ANY BAD DEBT OR PAR T THEREOF WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE SHALL NOT INCLUDE ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN THE ACCOUNTS OF THE ASSESSEE AND SECONDLY P ROVISO EXPLICITLY MANDATES THAT WHERE IN THE CASE OF A BANK TO WHICH CLAUSE (VIIA) APPLIE S THE AMOUNT OF THE DEDUCTION RELATING TO ANY SUCH DEBT OR PART THEREOF SHALL BE LIMITED TO T HE AMOUNT BY WHICH SUCH DEBT OR PART THEREOF EXCEEDS THE CREDIT BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT MADE UNDER THAT CLAUSE. 19. IT IS IMPERATIVE TO NOTE AT THIS STAGE THAT THE QUANTUM ASPECT OF THE PROVISION AS NOT EXCEEDING FIVE PERCENT OF THE SPECIFIED INCOME HAS NOT BEEN DISPUTED BY THE AO. THE DISPUTE HAS ARISEN ONLY ON THE QUESTION OF REDUCING THE OPENING OR THE CLOSING PROVISION FOR BAD AND DOUBTFUL DEBTS. 20. NOW COMING TO THE SEQUENCE OF ALLOWING DEDU CTION UNDER CLAUSES (VII) AND (VIIA) DEDUCTION IS FIRST ALLOWED TOWARDS BAD DEBTS ACTUAL LY WRITTEN OFF UNDER CLAUSE (VII) AS REDUCED BY THE AMOUNT OF PROVISION ALREADY ALLOWED AND THEN TOWARDS PROVISION UNDER CLAUSE (VIIA). IT IS INTERESTING TO OBSERVE THAT IN COMMON PARLANCE WHEN WE TALK OF FIRSTLY CREATING THE PROVISION AND THEN ALLOWING DEDUCTION ON ACCOUNT OF BAD DEBTS IT IS QUA THE SPECIFIC DEBT(S) ON MICRO BASIS TURNING BAD IN THI S YEAR FOR WHICH THE PROVISION WAS MADE EARLIER. BUT WHEN WE TALK OF CREATING PROVISION ON A MACRO BASIS AT THE END OF THE YEAR FOR WHICH DEDUCTION IS PERMISSIBLE UNDER CLAUSE (VIIA) IT IS ON THE DEBTORS AS A WHOLE WHICH ARE NOT PROPERLY OPERATING BUT HAVE ALSO NOT BECOME BAD AS AT THE END OF THE YEAR. THE CONCLUSION OF GRANTING DEDUCTION FIRSTLY UNDER CLAU SE (VII) IS SUPPORTED BY THE LANGUAGE OF CLAUSE (VIIA)(B) WHICH PROVIDES FOR THE QUANTUM OF PROVISION PERMISSIBLE AS DEDUCTION AT `AN AMOUNT NOT EXCEEDING FIVE PER CENT OF THE TOTAL INCOME ( COMPUTED BEFORE MAKING ANY DEDUCTION UNDER THIS CLAUSE AND CHAPTER VIA). `TOTAL INCOME AS REFERRED TO I N CLAUSE ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 12 (VIIA) CAN BE COMPUTED ONLY AT THE END OF THE YEAR. SINCE FOR COMPUTING TOTAL INCOME BEFORE MAKING DEDUCTION UNDER THIS PROVISION IT IS NECESS ARY TO GRANT DEDUCTIONS UNDER ALL OTHER RELEVANT PROVISIONS INCLUDING BAD DEBTS UNDER CLAU SE (VII) NATURALLY THE AMOUNT OF DEDUCTION TOWARDS PROVISION FOR BAD AND DOUBTFUL DE BTS CAN BE COMPUTED ONLY AT A LATER STAGE. BUT WHILE COMPUTING DEDUCTION UNDER CLAUSE (VII) ONE NEEDS TO TAKE NOTE OF THE MANDATE OF THE EXPLANATION TO THIS PROVISION WHICH PROVIDES THAT ANY BAD DEBT OR PART THEREOF WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNT S OF THE ASSESSEE SHALL NOT INCLUDE ANY PROVISION FOR BAD AND DOUBTFUL DEBTS MADE IN THE AC COUNTS OF THE ASSESSEE. IT IS RELEVANT TO NOTE THAT BAD DEBTS ARE CLAIMED AS DEDUCTION AS AND WHEN THE ADVANCE BECOMES IRRECOVERABLE. IT IS NOT MANDATED ANY WHERE IN THE PROVISION THAT DEDUCTION FOR BAD DEBTS HAS TO BE ALLOWED ONLY AT THE END OF THE YEAR. IN C ONTRAST THE PROVISION FOR BAD AND DOUBTFUL DEBTS IS CREATED ONLY AT THE END OF THE YE AR AND FURTHER ITS DEDUCTIBILITY IS COMPUTED W.R.T. THE ADJUSTED TOTAL INCOME FOR THE Y EAR WHICH IS POSSIBLE ONLY AT THE END OF THE YEAR. THE AMOUNT WHICH IS WRITTEN OFF AS BAD DEBT DURING THE YEAR IS NET OF THE PROVISION ALREADY MADE. AS THE PROVISION FOR THE CU RRENT YEAR IS CREATED AT THE END OF THE YEAR AND DEDUCTION FOR BAD DEBTS IS ALLOWED ON ACTU ALLY WRITE OFF WHICH MAY HAPPEN AT ANY TIME DURING THE YEAR NATURALLY IT IS ONLY THE OPE NING BALANCE OF THE PROVISION AGAINST THAT DEBT WHICH HAS NOW BECOME BAD AND HENCE WRITTEN OF F CAN BE ALLOWED AS DEDUCTION. MOREOVER WHEN A DEBT HAS BECOME BAD AND IS WRITTEN OFF THERE CAN BE NO QUESTION OF CREATING PROVISION ON THAT ACCOUNT. FROM HERE IT CL EARLY EMERGES THAT OPENING BALANCE OF THE PROVISION IS REQUIRED TO BE ADJUSTED AGAINST TH E AMOUNT OF BAD DEBTS WRITTEN OFF DURING THE YEAR FOR COMPUTING THE AMOUNT DEDUCTIBLE UNDER CLAUSE (VII) AND IT IS ONLY THEREAFTER THAT THE PROVISION IS MADE UNDER CLAUSE (VIIA) IN R ESPECT OF THE REMAINING DEBTS OUTSTANDING AS AT THE END OF THE YEAR. 21. THIS VIEW IS FORTIFIED FROM THE PRACTICA L ANGLE OF THE POSITION AS WELL. ADVANCES OF THE BANKS ARE BROADLY CLASSIFIED INTO PERFORMING OR NON-PERFORMING ASSETS. IN CASE AN ACCOUNT DOES NOT POSE ANY PROBLEM AS REGARDS THE RE COVERY OF INTEREST OR INSTALLMENTS OF PRINCIPAL LOAN IT IS CATEGORIZED AS PERFORMING. NO PROVISION IS REQUIRED TO BE MADE IN RESPECT OF SUCH ADVANCES. IN CASE AN ACCOUNT IS NOT DOING WELL IT SLIPS INTO NON-PERFORMING ASSET. THE NON-PERFORMING ADVANCES ARE FURTHER CLA SSIFIED INTO SUB-STANDARD OR DOUBTFUL ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 13 DEPENDING UPON THE PERIOD FOR WHICH AN ACCOUNT REMA INS NON-PERFORMING. BUT ONCE THE LOSS IS IDENTIFIED BY THE BANK ON ACCOUNT OF ADVAN CES BUT THE AMOUNT HAS NOT BEEN WRITTEN OFF WHOLLY OR IN PART THESE ARE CONSIDERED AS LOS S ASSETS. PROVISIONING IS REQUIRED TO BE DONE AS PER THE HEALTH OF THE ADVANCES. PROVISION I S DONE AT A LOWER PERCENTAGE IN RESPECT OF SUB-STANDARD ADVANCES (ASSETS) BUT FOR DOUBTF UL DEBTS THE PERCENTAGE OF PROVISION GOES UP. BUT WHEN IT IS A LOSS ASSET THE ENTIRE AMOUNT IS WRITTEN OFF AS UNRECOVERABLE. THUS IT CAN BE SEEN THAT ON DEFAULT FIRSTLY THE ADVANCE IS CLASSIFIED AS SUB-STANDARD THEN DOUBTFUL AND THEN EVENTUALLY LOSS. PROVISION IS MADE ON PRO GRESSIVE BASIS UNTIL THE ADVANCE IS NOT LOSS. ONCE IT BECOMES LOSS THEN THE ENTIRE AMOUNT IS WRITTEN OFF. FROM THE ABOVE DISCUSSION IT CAN BE SEEN THAT THE WRITING OFF OF B AD DEBTS IS THE LAST STEP IN THE ORDER OF TIME. FIRSTLY PROVISION IS MADE AND WHEN THERE REMA INS NO CHANCE OF RECOVERY AFTER ADJUSTING SECURITY AVAILABLE ETC. THE AMOUNT IS WR ITTEN OFF AS BAD. 22. COMING BACK TO THE CONTEXT OF SECTION 36 (1) WHEN THE PROVISION IS MADE TOWARDS NON-PERFORMING ADVANCES DEDUCTION IS ALLOWED AS PE R THE CEILING UNDER CLAUSE (VIIA). ONLY WHEN THE DEFAULT CONTINUES FOR A LONGER PERIOD AND THE ADVANCE GETS CONVERTED FROM SUB- STANDARD OR DOUBTFUL TO BAD THE ENTIRE AMOUNT IS W RITTEN OFF. ON THE BASIS OF THE PERFORMANCE OF THE DEBT GETTING WORSE FROM BAD AND THEN WORST FROM WORSE THE SUB- STANDARD DEBT IS CONVERTED INTO DOUBTFUL AND THEN F ROM DOUBTFUL TO BAD. WHEN THE DEBT BECOMES SUB-STANDARD OR DOUBTFUL A PROVISION IS CR EATED UNDER CLAUSE (VIIA). BUT WHEN THE DEBT BECOMES BAD THE ENTIRE AMOUNT OF BAD DEBT NE T OF THE PROVISION ALREADY ALLOWED IN THE COMPUTATION OF THE EARLIER YEAR HAS TO BE ALLO WED AS DEDUCTION UNDER CLAUSE (VII). SIMULTANEOUS WITH THE THE AMOUNT OF DEBT BECOMING BAD IN THE CURRENT YEAR QUALIFYING FOR DEDUCTION UNDER CLAUSE (VII) THE AMOUNT OF PROVISI ON CREATED IN THE CURRENT YEAR IS ALSO REQUIRED TO BE MADE IN RESPECT OF SUB-STANDARD AND DOUBTFUL DEBTS (EXCLUSIVE OF THE AMOUNT OF BAD DEBTS ALREADY WRITTEN OFF DURING THE YEAR). IN THE NEXT YEAR WHEN SOME PART OF THE CURRENT YEARS SUB-STANDARD OR THE DOUBTFUL DEBTS B ECOMES BAD THE AMOUNT ACTUALLY WRITTEN OFF AS REDUCED BY THE PROVISION ALLOWED IN THE EARL IER YEAR UNDER CLAUSE (VIIA) SHALL QUALIFY FOR DEDUCTION UNDER CLAUSE (VII). THUS IN EACH YE AR ORDINARILY THERE ARE TWO TYPES OF DEDUCTIONS VIZ. FIRSTLY ON ACCOUNT OF PROVISION M ADE AT THE END OF THE CURRENT YEAR BY LIMITING IT TO THE ADJUSTED TOTAL INCOME FOR THE YE AR; AND SECONDLY THE AMOUNT OF BAD DEBTS ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 14 ACTUALLY WRITTEN OFF NET OF THE PROVISION ALLOWED AS DEDUCTION IN THE EARLIER YEAR. HOWEVER IN NO CASE THE AMOUNT OF CUMULATIVE DEDUCTION UND ER BOTH THE CLAUSES THAT IS UNDER CLAUSE (VIIA) IN THE PRECEDING YEAR AND UNDER CLAUSE (VII) IN THE CURRENT YEAR CAN EXCEED THE AMOUNT OF ANY BAD DEBT WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE CURRENT YEAR. IN OUR CONSIDERED OPINION THE LD. CIT(A) WAS JUSTIFIE D IN DIRECTING THE AO TO RESTRICT THE CLAIM OF BAD DEBTS BY THE AMOUNT OF OPENING BALANCE IN THE PROVISION FOR BAD AND DOUBTFUL DEBTS ACCOUNT AS AT THE BEGINNING OF THE YEAR INSTE AD OF THE CLOSING BALANCE AND THEN ALLOWING DEDUCTION U/S 36(1)(VIIA). THIS GROUND OF THE REVENUES APPEAL FAILS. 23. THE ASSESSEE IS AGGRIEVED AGAINST THE CONFIRMAT ION OF DISALLOWANCE OF LOSS ON REVALUATION OF FOREIGN EXCHANGE CONTRACTS AMOUNTING TO RS.26 86 979. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TOWARDS THE ORDERS PASSED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 1998-99 AND 1999-2000. THIS ISSUE AROSE IN BOTH THESE YEARS AND THE TRIBUN AL WAS PLEASED TO SEND THIS MATTER BACK TO THE FILE OF A.O. FOR A FRESH DECISION AS PE R LAW. RESPECTFULLY FOLLOWING THE PRECEDENTS WE SET ASIDE THE IMPUGNED ORDER AND RES TORE THIS ISSUE TO THE FILE OF A.O. FOR TAKING A FRESH DECISION ON THE BASIS OF THE GUI DELINE GIVEN BY THE TRIBUNAL IN ASSESSEES OWN CASE IN THE IMMEDIATELY PRECEDING TW O ASSESSMENT YEARS. 24. ANOTHER GROUND OF THE ASSESSEES APPEAL IS AGAI NST THE APPLICATION OF RATE OF TAX AT 48% AS AGAINST THE APPLICABLE RATE OF 35%. O N THIS ISSUE ALSO BOTH THE SIDES ARE IN AGREEMENT THAT THE TRIBUNAL IN ASSESSMENT YEARS 1998-99 AND 1999-2000 DECIDED THIS ISSUE AGAINST THE ASSESSEE. RESPECTFULLY FOLLO WING THE PRECEDENTS WE UPHOLD THE IMPUGNED ORDER ON THIS ISSUE. THIS GROUND IS NOT AL LOWED. 25. THE ASSESSEE VIDE A SEPARATE GROUND HAS CHALL ENGED THE CONFIRMATION OF DISALLOWANCE OF RS.85 302 BEING SWAP COST. THE FACT UAL MATRIX OF THIS GROUND IS THAT THE ASSESSEE WAS REQUIRED TO SHOW THE NATURE O F SWAP COST FOR WHICH DEDUCTION OF RS.1 55 027 WAS CLAIMED. THE ASSESSEE ELABORATED ITS NATURE AS A COST INCURRED BY IT DUE TO VARIATIONS IN THE EXCHANGE RATE WHEN BUYI NG AND SELLING FOREIGN CURRENCY IN ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 15 THE COURSE OF BUSINESS. IT WAS EXPLAINED THAT IF TH E FOREIGN CURRENCY IS RECEIVED AS LOAN OR DEPOSIT THE SAME IS SOLD IN THE OPEN MARKE T AT THE PREVAILING MARKET EXCHANGE RATE AT THAT TIME IN ORDER TO CONVERT IT I NTO INDIAN RUPEES. IN ORDER TO DISCHARGE SUCH OBLIGATION OF RETURNING THE FOREIGN CURRENCY RECEIVED ON AN EARLIER OCCASION AT A FUTURE DATE IT IS REQUIRED TO BE BOU GHT ON SUCH LATER DATE. THE PRICE OF THE FOREIGN CURRENCY PREVAILING ON THE DATE OF RETU RN MAY NOT BE AT THE SAME RATE AT WHICH IT WAS EARLIER SOLD. THIS DIFFERENCE IN THE R ATES WAS STATED AS SWAP COST. FROM THE DETAILS FILED BY THE ASSESSEE THE A.O. N OTED THAT OUT OF THE TOTAL SWAP COST CLAIMED BY THE ASSESSEE A SUM OF RS.85 302 PE RTAINED TO THE CONTRACTS WHICH HAD NOT MATURED DURING THE PREVIOUS YEAR RELEVANT T O THE ASSESSMENT YEAR UNDER CONSIDERATION. HE THEREFORE DISALLOWED SUCH AMOUN T. THE LD. CIT(A) ECHOED THE ASSESSMENT ORDER ON THIS POINT. 26. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE LEARNED COUNSEL FOR THE ASSESSEE HAS IN VITED OUR ATTENTION TOWARDS PAGE 3 OF THE PAPER BOOK SHOWING THE WORKING OF RS.85 3 02. IT WAS EXPLAINED THAT THE ASSESSEE RECEIVED FCNR DEPOSIT OF $2 50 000 ON 14 TH JANUARY 2000. THIS DEPOSIT WAS CONVERTED INTO INDIAN RUPEES BY SELLING THE SAM E IN THE OPEN MARKET AT THE RATE OF RS.43.565 PER DOLLAR. IT WAS STATED THAT ON THE SAME DAY THE ASSESSEE ENTERED INTO A FORWARD CONTRACT WITH ANOTHER TO BUY EQUAL NUMBE R OF DOLLARS AT THE RATE OF RS. 45.165 ON 29.12.2000. THE DIFFERENCE BETWEEN THE RA TES OF RS.43.565 AND RS.45.165 WHEN MULTIPLIED WITH $2 50 000 WAS STATED TO BE RES ULTING LOSS OF RS.4 00 000 COVERING THE PERIOD 14.01.2000 TO 29.12.2000. IT W AS EXPLAINED THAT OUT OF TOTAL LOSS OF RS.4 LAKH ARISING OUT OF THIS TRANSACTION COVERI NG THE ABOVE REFERRED PERIOD LOSS ON PRO-RATA BASIS FROM JANUARY 14 TO MARCH 31 2000 AMOUNTING TO RS.85 302 WAS CONSIDERED AS SWAP COST IN THIS YEAR. IN SUPPORT O F ITS CLAIM FOR DEDUCTION THE LD. AR RELIED ON THE SPECIAL BENCH ORDER OF THE TRIBUNA L IN THE CASE OF DCIT (INTERNATIONAL TAXATION) VS. BANK OF BAHRAIN & KUW AIT [(2010) 132 TTJ (MUMBAI) (SB) 505] . ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 16 27. AT THIS STAGE IT WILL BE RELEVANT TO N OTE THAT PAGE 4 OF THE ASSESSEES PAPER BOOK IS A COPY OF THE LETTER DATED 13.03.2011 ISSUE D BY THE RBI TO ALL COMMERCIAL BANKS ADVISING THEM TO FOLLOW THE GUIDELINES DATED 5.6.1996 FOR FINALIZING THE ACCOUNTS FOR THE YEAR ENDING 31.3.2000 AND 31.3.200 1 AS THE APPLICABILITY OF THE ACCOUNTING STANDARD 11 TO BANKS WAS UNDER EXAMINATI ON. IT THUS BECOMES EVIDENT THAT ASSESSEE-BANK DID NOT DISCLOSE THE PROFIT OR L OSS ON FORWARD CONTRACTS IN THE LIGHT OF THE AS-11. THE AUTHORITIES BELOW HAVE ALSO NOT EXAMINED THE ISSUE IN LIGHT OF THE AS-11. SINCE NO ARGUMENT HAS BEEN ADVANCED ON BEHAL F OF THE ASSESSEE OR THE REVENUE ON THE RECOGNITION OF INCOME OR LOSS IN THE LIGHT OF AS-11 WE ARE REFRAINING FROM EXAMINING ITS IMPACT ON THE QUESTIO N OF DETERMINATION OF PROFIT OR LOSS ON THE FORWARD EXCHANGE CONTRACTS. 28. AS PER THE SPECIAL BENCH ORDER IN BANK OF BAHRAIN & KUWAIT (SUPRA) WHEN A FORWARD CONTRACT IS ENTERED INTO BY THE ASSESSEE TO BUY OR SELL THE FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF THE ACCOUNTING PERIOD LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF EVALUAT ION OF THE CONTRACT ON THE LAST DATE OF THE RELEVANT ACCOUNTING PERIOD I.E. BEFORE THE DATE OF THE MATURITY OF THE FORWARD CONTRACT IS ALLOWABLE AS DEDUCTION. WE ARE UNABLE TO APPRECIATE AS TO HOW THE RATIO DECIENDI OF THIS SPECIAL BENCH ORDER APPLIES TO THE FACTS O F THE INSTANT CASE. WE ARE CONFRONTED WITH A SITUATION IN WHICH THE ASS ESSEE GOT FCNR DEPOSIT OF $2 50 000 ON 14 TH JANUARY 2000 AND CONVERTED IT INTO INDIAN RUPEES AT THE PREVAILING RATE OF RS.43.656. THIS TRANSACTION WAS OVER. THERE AFTER THE ASSESSEE ENTERED INTO A FORWARD CONTRACT WITH A THIRD PARTY ON THE SAME DAT E FOR PURCHASING EQUIVALENT NUMBER OF DOLLARS ON 29.12.2000. THIS DIFFERENCE BE TWEEN THE BUYING AND SELLING RATE WAS CLAIMED AS LOSS OF RS.4 LAKH SPREAD OVER TWO YEARS I.E. RS.85 302 IN THE CURRENT AND THE REMAINING AMOUNT IN THE SUBSEQUENT YEAR. ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 17 29. THERE IS A BASIC FALLACY IN THE COMPUTATI ON OF LOSS IN SUCH A MANNER. AT THIS JUNCTURE IT WILL BE RELEVANT TO UNDERSTAND THE MODUS OPERANDI OF FORWARD CONTRACT. IF THERE IS AN OBLIGATION TO FULFILL A FUTURE COMMITME NT THE PARTIES MAY ENTER INTO FORWARD CONTRACT SO AS TO PRE-DETERMINE THEIR FUTUR E LIABILITY FOR TAKING BUSINESS DECISIONS. IN THE CONTEXT OF FORWARD CONTRACT FOR DOLLARS THE BUYER UNDERTAKES TO PURCHASE DOLLARS FROM THE SELLER ON A SPECIFIED DAT E AT A PARTICULAR RATE. IF THE PREVAILING RATE OF DOLLAR AS ON THE DATE OF EXECUTI ON OF CONTRACT IS EQUAL TO THE RATE EARLIER CONTRACTED THERE SHALL NOT BE ANY PROFIT O R LOSS. NEITHER THE BUYER WILL BE INTERESTED IN BUYING NOR THE SELLER WILL BE INTERES TED IN SELLING THE DOLLARS AT THE RATE CONTRACTED BECAUSE THIS TRANSACTION WILL BE PROFIT NEUTRAL IN VIEW OF THE AVAILABILITY OF DOLLAR AT THE SAME RATE IN THE OPEN MARKET. BUT IF THE PREVAILING MARKET RATE OF DOLLAR AS ON THE DATE OF EXECUTION OF CONTRACT IS MORE OR LESS THAN THE RATE EARLIER CONTRACTED THERE SHALL ARISE THE QUESTION OF PROF IT OR LOSS DUE TO FORWARD CONTRACT. TO ILLUSTRATE IF A FORWARD CONTRACT IS MADE SAY ON 1 ST JANUARY FOR PURCHASE OF DOLLAR AS ON 31 ST JANUARY AT THE RATE OF RS.45 THE PROFIT OR LOSS F ROM SUCH CONTRACT WILL ARISE BY CONSIDERING THE RATE OF DOLLAR PREVAILING AS ON 31 ST JANUARY. THE RATE OF DOLLAR AS ON THE DATE OF ENTERING INTO FORWARD CONTRACT CANNOT C AUSE PROFIT OR LOSS. IT IS ONLY IF THE RATE OF DOLLAR ON SUCH DATE IS SAY RS.46 THE ASSES SEE WILL BE BENEFITTED WITH RE.1 PER DOLLAR ON 31 ST JANUARY. HAD HE NOT ENTERED INTO FORWARD CONTRACT HE WOULD HAVE TO SPEND RS.46 FOR PURCHASING DOLLAR ON 31 ST JANUARY TO DISCHARGE HIS BUSINESS OBLIGATIONS. NOW BY VIRTUE OF THE EARLIER FORWARD C ONTRACT THE ASSESSEE WILL GET DOLLARS AT CHEAPER RATE OF RS.45 THEREBY CAUSING P ROFIT AT THE RATE OF RE.1 PER DOLLAR. IF HOWEVER THE RATE OF DOLLAR COMES DOWN TO RS.44 AS ON 31 ST JANUARY THE ASSESSEE WILL HAVE TO PURCHASE THE DOLLAR AS ON THAT DATE AS THE SETTLED RATE OF RS.45 RESULTING INTO LOSS OF RE.1 PER DOLLAR. 30. IT IS AXIOMATIC THAT THE QUESTION OF EAR NING PROFIT OR INCURRING LOSS ON A FORWARD CONTRACT CAN ARISE ONLY BY COMPARING THE RA TE AT WHICH THE CONTRACT WAS EARLIER MADE AND THE RATE PREVAILING AT THE DATE OF EXECUTION OF CONTRACT. IT IS BEYOND ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 18 OUR COMPREHENSION AS TO HOW ANYONE CAN LAWFULLY WOR K OUT PROFIT OR LOSS WITH REFERENCE TO THE RATE CONTRACTED VIS--VIS THE ONE PREVAILING AS ON THE DATE OF ENTERING INTO FUTURE CONTRACT. IT CAN BE LOGICALLY POSSIBLY ONLY ON THE DATE OF EXECUTION OF CONTRACT. 31. THE ABOVE RULE IS SUBJECT TO ONE EXCEPTION. WHEN THE DATE OF YEAR ENDING FALLS WITHIN THE DATE ON WHICH FUTURE CONTRACT WAS ENTERE D INTO AND THE DATE OF THE EXECUTION OF SUCH FUTURE CONTRACT. IN SUCH A CASE I T WILL BE INCUMBENT TO CONSIDER THE RATE OF EXCHANGE OF THE CURRENCY WHICH HAPPENS TO BE STOCK IN TRADE OF THE BANKS AS AT THE END OF THE YEAR AND RECOGNIZE INCOME OR EXPE NDITURE W.R.T THE RATE AT WHICH THE FOREIGN EXCHANGE WAS AGREED TO BE PURCHASED SO AS TO PROJECT A TRUE AND FAIR VIEW OF THE AFFAIRS OF THE ASSESSEE AS ON THE BALANCE SHEET DATE. IF THE RATE OF FOREIGN EXCHANGE AT THE CLOSE OF THE YEAR IS MORE OR LESS T HAN THAT AT WHICH THE FORWARD CONTRACT WAS ENTERED INTO THE ASSESSEE WILL BE REQ UIRED TO ACCOUNT FOR PROFIT OR LOSS ON THIS SCORE IN ITS ACCOUNTS AT THE YEAR END. 32. ADVERTING TO THE FACTS OF THE INSTANT CA SE IT IS NOTICED THAT THERE IS NO RELATION WHATSOEVER BETWEEN THE TRANSACTION OF THE ASSESSEE RECEIVING FCNR DEPOSIT OF $2 50 000 AND CONVERTING IT INTO INDIAN RUPEES W ITH THE TRANSACTION BY WHICH IT ENTERED INTO A FORWARD CONTRACT. BOTH THESE TRANSAC TIONS ARE INDEPENDENT OF EACH OTHER. ON A PERTINENT QUERY IT WAS ADMITTED THAT T HERE IS NO TRIPARTITE AGREEMENT BETWEEN THE ASSESSEE BANK ITS DEPOSITOR ABROAD AND THE PARTY WITH WHICH IT ENTERED INTO A FORWARD CONTRACT. IT CANNOT BE SO NATURALLY FOR THE REASON THAT WHEN THE ASSESSEE RECEIVED FCNR DEPOSIT OF $2 50 000 THAT T RANSACTION CAME TO AN END AND WAS COMPLETELY CLOSED. THE ASSESSEE BECAME LIABLE T O REPAY THE DEPOSIT IN THE SUBSEQUENT YEAR IN THE SAME CURRENCY AND IN ORDER T O REPAY IN DOLLARS THE ASSESSEE NEEDED DOLLARS AT THE MATURITY DATE OF DEPOSIT BEI NG 29.12.2000. IN ORDER TO REPAY IN DOLLARS ON SUCH DATE THE ASSESSEE HAD THE OPTION O F EITHER PURCHASING THE DOLLARS FROM MARKET ON THE SAID DATE OR TO ENTER INTO A FOR WARD CONTRACT. ON 29.12.2000 ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 19 BEING THE DATE OF REPAYMENT OF FCNR DEPOSIT IN THE NEXT YEAR THE RATE OF DOLLAR MAY HAVE BEEN HIGHER OR LOWER THAN THE RATE AT WHICH TH E ASSESSEE GET CONVERTED $2 50 000 AT THE RATE OF RS.43.565 DURING THE CURRE NT YEAR. WHETHER SUCH RATE WOULD BE HIGHER OR LOWER AT THE TIME OF MATURITY IN THE S UCCEEDING YEAR IS NOT CAPABLE OF ASCERTAINMENT AS AT THE CLOSE OF THE YEAR ON 31.3.2 000. THE DECISION OF THE SPECIAL BENCH IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA) APPLIES TO A FORWARD TRANSACTIONS AND PERMITS DEDUCTION TOWARDS LOSS ON THE RATE AT WHICH THE CONTRACT WAS ENTERED VIS--VIS THE RATE PREVAILING AS AT THE CLOSE OF THE YEAR. SUPPOSE THE ASSESSEE IN THE INSTANT CASE HAVING ENTERED INTO FO RWARD CONTRACT FOR BUYING DOLLARS ON 29.12.2000 AT RS.45.165 HAD FOUND THAT AS AT THE END OF THE YEAR I.E. 31 ST MARCH 2000 THE RATE OF DOLLAR WAS HIGHER OR LOWER THAN TH E RATE AT WHICH IT HAD ENTERED INTO FORWARD CONTRACT AT RS.45.165 IT COULD HAVE RIGHTL Y CLAIMED DEDUCTION IN RESPECT OF THE RESULTANT LOSS OR OFFERED TO TAX THE RESULTANT GAIN ON THE COMPARISON OF THE RATE AS EVENTUALLY ENTERED VIS--VIS THAT PREVAILING AS ON 31 ST MARCH 2000. THERE IS ABSOLUTELY NO BASIS FOR DETERMINING THE LOSS BY CON SIDERING THE RATE AT WHICH THE ASSESSEE CONVERTED US$ ON THE RECEIPT OF DEPOSIT WI TH THAT FOR WHICH IT ENTERED INTO AN AGREEMENT AT A FUTURE DATE. WHAT IS RELEVANT IS THE QUESTION OF DETERMINING PROFIT OR LOSS ON ACCOUNT OF EXCHANGE RATE AS ON THE BALAN CE SHEET DATE. IT IS IMPERMISSIBLE TO RECOGNIZE LOSS SOLELY ON THE BASIS OF THE FORWAR D RATE OF EXCHANGE AND THE RATE PREVAILING AS ON THE DATE OF ENTERING INTO CONTRACT DE HORS THE RATE OF EXCHANGE AT THE CLOSE OF THE YEAR FALLING BETWEEN THE DATE OF ENTER ING INTO AND EXECUTION OF FORWARD CONTRACT. IT HAS NEITHER BEEN SHOWN THAT THE ASSESS EE RECOGNIZED ANY INCOME OR LOSS ON SUCH FORWARD CONTRACT W.R.T. THE RATE PREVAILING AS ON 31.3.2000 NOR THERE IS ANY MATERIAL TO QUANTIFY SUCH INCOME OR LOSS. 33. AS ALREADY NOTED THAT BOTH THE TRANSACTIO NS OF SALE AND PURCHASE OF DOLLARS ARE TOTALLY INDEPENDENT OF EACH OTHER IN OUR CONSIDERE D OPINION THERE IS NO QUESTION OF ESTIMATING ANY PROFIT OR LOSS ON SUCH TRANSACTION I N THE MANNER IN WHICH THE ASSESSEE HAS DONE SO MORE SPECIFICALLY WITHOUT DIVULGING TH E IMPACT OF DIFFERENCE IN THE RATE ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 20 OF DOLLAR AS AT THE END OF THE YEAR VIS-A-VIS THAT AGREED AS PER THE FORWARD CONTRACT. IN VIEW OF THE FOREGOING REASONS WE UPHOLD THE IMPU GNED ORDER BY NOT ALLOWING THIS GROUND. 34. THE ASSESSEE HAS RAISED AN ADDITIONAL GROUND RE ADING AS UNDER:- THE LEARNED ASSESSING OFFICER AND THE LEARNED COMM ISSIONER OF INCOME TAX (APPEALS) ERRED IN CHARGING INTEREST U/S.234B WITHO UT APPRECIATING THAT THE ENTIRE INTEREST LIABILITY IS ARISING ON ACCOUNT OF THE RETROSPECTIVE AMENDMENT BY WAY OF INSERTION OF EXPLANATION TO S.90(2). 35. AS THE CHARGEABILITY OF INTEREST U/SS 234B A ND 234C IS PURELY A QUESTION OF LAW NOT INVOLVING ANY FRESH INVESTIGATION OF FACTS WE ADMIT THIS ADDITIONAL GROUND AND TAKE IT UP FOR DISPOSAL ON MERITS. 36. THE LEARNED COUNSEL FOR THE ASSESSEE CONTE NDED THAT THE INTEREST LIABILITY HAS ARISEN U/SS 234B AND 234C BECAUSE OF RETROSPECTIVE AMENDMENT TO SECTION 90 BY WAY OF INSERTION OF EXPLANATION (1) BY THE FINANCE ACT 2001. WHILE INVITING OUR ATTENTION TOWARDS THE AFORE-NOTED ORDERS PASSED BY THE TRIBUNAL FOR ASSESSMENT YEARS 1998-99 AND 1999-2000 IT WAS CONTENDED THAT THIS ISSUE HAS BEEN DECIDED IN ASSESSEES FAVOUR BY HOLDING THAT THE INTEREST BE C HARGED ONLY FROM THE DATE OF INSERTION OF THE AMENDMENT BY WHICH THE LIABILITY H AS ARISEN IN THE HANDS OF THE ASSESSEE. SINCE NO DISTINGUISHING FEATURE IN THE FA CTS OF THE INSTANT YEAR VIS--VIS THOSE ALREADY DECIDED BY THE TRIBUNAL WAS BROUGHT T O OUR NOTICE BY THE LD. DR AND THE FURTHER FACT THAT THE AMENDMENT HAS TAKEN PLACE BY THE FINANCE ACT 2001 WHICH WOULD OTHERWISE HAVE NOT BEEN APPLICABLE FOR ASSESS MENT YEAR 2000-2001 RESPECTFULLY FOLLOWING THE PRECEDENTS WE ALLOW THE ADDITIONAL GROUND RAISED BY THE ASSESSEE. ITA NOS.3643 & 4032/MUM/2005 THE SIAM COMMERCIAL BANK PCL. 21 37. IN THE RESULT THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES AND THAT OF THE ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED ON THIS 23 RD DAY OF NOVEMBER 2011. SD/- SD/- (N.V.VASUDEVAN) (R.S.SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 23 RD NOVEMBER 2011. DEVDAS* COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - XXXI MUMBAI. 5. THE DR/ITAT MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR ITAT MUMBAI.