ADIT(INT.TAX) 3(1), Mumbai v. Internationale Nederlanden Bank N.V., Mumbai

ITA 5099/MUM/2004 | 2000-2001
Pronouncement Date: 25-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 509919914 RSA 2004
Bench Mumbai
Appeal Number ITA 5099/MUM/2004
Duration Of Justice 6 year(s) 9 month(s) 1 day(s)
Appellant ADIT(INT.TAX) 3(1), Mumbai
Respondent Internationale Nederlanden Bank N.V., Mumbai
Appeal Type Income Tax Appeal
Pronouncement Date 25-03-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted H
Tribunal Order Date 25-03-2011
Date Of Final Hearing 21-03-2011
Next Hearing Date 21-03-2011
Assessment Year 2000-2001
Appeal Filed On 23-06-2004
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI S.V. MEHROTRA (AM) & SHRI VIJAY PAL RA O (JM) I.T.A.NOS. 5098 & 5099/MUM/2004 (A.YS. 1999-2000 & 2000-01) ASST.DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION)-3(1) R.NO.136 SCINDIA HOUSE NAROTTAM MORARJI ROAD BALLARD ESTATE MUMBAI-400 038. VS. INTERNATIONAL NEDERLANDEN BANK N.V. C/O. RESOURCES GLOBAL PROFESSIONALS INDIA PVT.LTD. 4 BRADY GLADYS PLAZA 2 ND FLOOR 1/144 SENAPATI BAPAT MARG LOWER PAREL (W) MUMBAI-400 013. APPELLANT RESPONDENT APPELLANT BY SHRI SATBIR SINGH RESPONDENT BY SHRI P ORUS F. KAKA. O R D E R PER S.V. MEHROTRA AM : THESE TWO APPEALS BY THE REVENUE ARE AGAINST THE S EPARATE ORDERS OF THE CIT(A)-XXXIII MUMBAI BOTH DATED 01-03-2004 IN RE LATION TO THE ASSTT. YEARS 1999-2000 & 2000-01. SINCE COMMON ISSUES ARE INVOLV ED IN BOTH THESE APPEALS THEY ARE TAKEN TOGETHER AND DISPOSED OF BY THIS CON SOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE A BANK INCORPORATED IN THE RELEVA NT ASSESSMENT YEAR CARRIED ON BANKING ACTIVITIES IN INDIA THROUGH ITS BRANCHES. ITA NO.5098/M/2004 (AY : 1999-2000): 3. THE ASSESSEE FILED ITS RETURN OF INCOME DECLARIN G INCOME OF RS.117 670 060/-. THE ASSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS.151 323 570/- AFTER MAKING THE FOLLOWING ADDITI ONS/DISALLOWANCES : (I) BROKEN PERIOD INTEREST RS. 30 870 084/- (II) SOFTWARE EXPENSES RS. 444 059/- ITA NOS.5098-5099/04 INTERNATIONAL NEDERLANDEN BANK 2 (III) INTEREST COST AND OPERATING EXPENSES TO EARN INCOME ON TAX FREE B ONDS RS.2.450 380/- THE LD. CIT(A) PARTLY ALLOWED THE ASSESSEES APPEAL . 4. BEING AGGRIEVED THE DEPARTMENT IS IN APPEAL BEF ORE US AND HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL : 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN ALLOWING BROKEN PERIOD INTEREST EXP ENDITURE RELATABLE TO INCOME TAX ON ACCRUAL BASIS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ALLOW EXPENDITU RE OF RS.4 44 059/- ON PURCHASE OF SOFTWARE AS REVENUE EX PENDITURE. SHE HAS FAILED TO APPRECIATE THE FACT THAT THE EXPENDIT URE WAS FOR CHANGING THE BASIS SYSTEM WHICH IS CAPITAL IN NATUR E. THIS EXPENSE IS NOT FOR RUNNING THE SYSTEM. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN DELETING PROPORTIONATE DISALLOWANCE S AMOUNTING TO RS.24 50 380/- MADE BY THE AO FROM THE INCOME ON TA X FREE BONDS. 5. BRIEF FACTS APROPOS GROUND NO. 1 ARE THA T THE AO REQUIRED THE ASSESSEE TO INFORM THE QUANTUM OF BROKEN PERIOD INTEREST CLAIME D AND TO EXPLAIN HOW THIS HAS BEEN CLAIMED AS EXPENDITURE. THE ASSESSEE SUBMITTED THAT THE BROKEN PERIOD INTEREST CANNOT BE REGARDED AS PART OF COST OF ACQ UISITION OF THE SECURITIES SINCE IT IS PURELY A MECHANISM APPLIED TO DISCHARGE ING LIAB ILITY TO PAY THE SELLER OF THE SECURITY THE INTEREST ACCRUING AND PAYABLE TO HIM. AFTER CONSIDERING THE METHODOLOGY EMPLOYED BY THE ASSESSEE ACCOUNTING ST ANDARD AND VARIOUS TRIBUNAL DECISIONS THE AO FOLLOWING THE ORDERS F OR ASSTT. YEARS 1997-98 AND 1998-99 ADDED RS.30 870 084/- BEING THE BROKEN PER IOD INTEREST. THE LD. CIT(A) FOLLOWING THE DECISION OF THE HONBLE BOMB AY HIGH COURT IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION (258 ITR 601) ALLOWED THE ASSESSEES CLAIM INTER ALIA OBSERVING THAT SINCE THE INTEREST INCOME OF THE ITA NOS.5098-5099/04 INTERNATIONAL NEDERLANDEN BANK 3 ASSESSEE BANK HAD BEEN TAXED BY THE DEPARTMENT ON A CCRUAL BASIS THE INTEREST RELATABLE TO THE SAID INCOME IS ONLY TO BE ALLOWED. 6. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES. THE FACT THAT INTEREST INCOME OF THE ASSESSEE BANK HAS BEEN TAXED BY THE DEPARTMENT ON ACCRUAL BASIS IS NOT DISPUTED. THE HONBLE BOMBAY H IGH COURT HELD AS UNDER : HELD..ONCE THE DEPARTMENT SOUGHT TO ASSESS TO AX THE INTEREST RECEIVED BY THE ASSESSEE FROM THE TRANSFER EES FOR THE BROKEN PERIOD UNDER THE HEAD BUSINESS THE DEPART MENT COULD NOT HAVE REJECTED THE ADJUSTMENT OF THE AMOUNTS PAID BY THE ASSESSEE TO THE TRANSFERORS FOR THE BROKEN PERIOD UNLESS THE DEPARTMENT PROVED THAT THE METHOD ADOPTED BY THE ASSESSEE DID NOT DISCLOSE THE TRUE AND PROPER INCOME. THE DEPARTMENT WAS NOT ABLE TO SHOW AS TO WHY THE METHOD ADOPTED BY THE ASSESSEE OUGHT TO BE REJECTED; THE DEPARTMENT HAD NOT SHOWN WHY THE BROK EN PERIOD INTEREST RECEIVED OUGHT TO BE TAXED WHEREAS THE INT EREST FOR THE BROKEN PERIOD PAID BY THE ASSESSEE SHOULD BE DISALL OWED. RIGHT FROM THE INCEPTION THE DEPARTMENT HAD BROUGHT TO TAX SUC H AMOUNTS ONLY AS BUSINESS INCOME UNDER SECTION 28. FURTHER THE T RIBUNAL HAD FOUND THAT THE SECURITIES WERE HELD BY THE ASSESSEE AS TRADING ASSETS. THE ASSESSEES METHOD OF ACCOUNTING DID NOT RESULT IN LOSS TO THE REVENUE AND THERE WAS NO NEED TO INTERFERE WITH THE METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. (258 ITR 601) THEREFORE IN VIEW OF THE ABOVE DECISION OF THE HON BLE BOMBAY HIGH COURT WE CONFIRM THE DECISION OF THE CIT(A) ON THIS POINT AN D DISMISS THE GROUND NO.1 OF THE REVENUE. 7. THE FACTS APROPOS GROUND NO. 2 ARE THAT THE ASSE SSEE HAD CLAIMED SOFTWARE EXPENSES AS REVENUE EXPENDITURE AND CLAIMED DEDUCTI ON OF RS.4 44 059/- TOWARDS PURCHASE OF SOFTWARE FROM BISIL. THE AO TRE ATED THIS AS CAPITAL EXPENDITURE AND ALLOWED DEPRECIATION @ 25%. THE LD. CIT(A) FOLLOWING HIS PREDECESSORS DECISION FOR THE ASSTT. YEAR 1997-98 ALLOWED THE ASSESSEES CLAIM. 7.1 THE LD. D.R. SUBMITTED THAT THE MATTER NEEDS TO BE RESTORED BACK TO THE FILE OF AO IN VIEW OF THE DECISION OF THE SPECIAL B ENCH DECISION OF THE TRIBUNAL IN THE CASE OF AMWAY INDIA ENERPRISES (111 ITD 112) (D EL.). ITA NOS.5098-5099/04 INTERNATIONAL NEDERLANDEN BANK 4 7.2 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN ASSTT. YEAR 1997-98 THE DEPARTMENT HAS NOT PREFERRED ANY APPEAL AGAINST THE CIT(A)S ORDER. 8. HAVING HEARD BOTH THE PARTIES WE FIND THAT THIS ISSUE HAS BEEN CONSIDERED THREADBARE BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA) AND HAS LAID DOWN VARIOUS TESTS FOR DECIDING THE ISSUE REGARDING SOFTWARE EXPENSES. WE THEREFORE RESTORE THIS ISSUE TO THE FILE OF AO FOR DECIDING THE SAME IN THE LIGHT OF THE DECISION OF THE SPECIAL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA). THIS GROUND IS PARTLY ALLOWED. 9. BRIEF FACTS APROPOS GROUND NO. 3 ARE THAT THE AS SESSEE EARNED INTEREST ON TAX FREE BONDS AMOUNTING TO RS.40 66 027/-. HE DIS ALLOWED RS.24 50 380/- ON ACCOUNT OF EXPENSES INCURRED FOR EARNING THE INCOME ON TAX FREE BONDS IN VIEW OF THE PROVISIONS OF SEC. 14A INSERTED BY THE FINANCE ACT 2001 WITH RETROSPECTIVE EFFECT FROM APRIL 1 1962. BEFORE THE LD. CIT(A) I T WAS INTER ALIA SUBMITTED THAT THE EXPENDITURE SOUGHT TO BE DISALLOWED FROM THE CO MPUTATION OF ASSESSEES TAXABLE INCOME BY VIRTUE OF SEC. 14A WOULD BE THE A CTUAL EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING THE EXEMPT INCOME AND THE SECTION DOES NOT ENVISAGE ANY ESTIMATE OF EXPENDITURE OR ATTRIBUTION OF ANY N OTIONAL EXPENSES TO EARNING SUCH EXEMPT INCOME. SECTION 14A DOES NOT PERMIT ANY APPORTIONMENT OF EXPENDITURE. WHAT CAN BE DISALLOWED U/S. 14A IS ONL Y THAT EXPENDITURE WHICH HAS A CLEAR NEXUS TO THE EARNING OF THE INCOME. IT WAS FURTHER SUBMITTED THAT JUDICIAL PRECEDENTS HAVE HELD THAT WHERE AN ASSESSEE HAS BO TH OWN FUNDS AND BORROWED FUNDS INVESTMENTS MADE BY THE ASSESSEE CANNOT BE P RESUMED TO BE OUT OF BORROWED FUNDS. THE LD. CIT(A) RESTORED THE MATTER TO THE FILE OF AO OBSERVING IN PARA 6.4 OF HIS ORDER AS UNDER : 6.4 I FIND MERITS IN THE APPELLANTS SUBMISSION TH AT NO DISALLOWANCE OUT OF INTEREST PAID SHOULD BE MADE WH EN IT HAS EQUIVALENT RESERVES AND CAPITAL AVAILABLE. I AM INC LINED TO AGREE WITH THE APPELLANTS CONTENTION THAT IN THE BUSINESS OF BANKING THE FUNDS ITA NOS.5098-5099/04 INTERNATIONAL NEDERLANDEN BANK 5 RECEIVED AS DEPOSITS FROM PUBLIC AT LARGE ARE TO BE MAINLY UTILIZED FOR THE PURPOSE OF MAKING ADVANCES AND THE BANK CANNOT AFFORD TO HAVE MISMATCH OF SHORT TERM BORROWED FUNDS BEING US ED FOR LONG TERM INVESTMENTS. HOWEVER KEEPING IN VIEW THE APPE LLANTS SUBMISSION THAT IT HAS INTEREST FREE FUNDS IN THE F ORM OF RESERVES RELATABLE TO PROFITS AND SHARE CAPITAL THEREFORE BUSINESS PRUDENCE DEMANDS THAT THE INVESTMENT IN TAX FREE SECURITIES OUGHT TO COME OUT OF INTEREST FREE FUNDS WHICH ARE IN THE FORM OF RESERVES AND SHARE CAPITAL I HOLD THAT NO DISALLOWANCE SHOULD B E MADE TO THE EXTENT OF CAPITAL PROFIT RESERVE AND SURPLUS AVAIL ABLE WITH THE BANK. THE A.O. IS THEREFORE DIRECTED TO COMPUTE THE DISAL LOWANCE ACCORDINGLY AND WHILE DOING IT THE A.O. SHOULD TAKE INTO ACCOUNT THE GROSS INVESTMENT IN TAX FREE INSTRUMENTS DURING THE YEAR UNDER CONSIDERATION. THE APPELLANT GETS RELIEF ACCORDINGL Y. APPELLANTS APPEAL ON THIS GROUND IS PARTLY ALLOWED. BEING AGGRIEVED THE DEPARTMENT IS IN APPEAL BEFORE US. 10. THE LD. D.R. SUBMITTED THAT THE MATTER NEEDS TO BE RESTORED BACK TO THE FILE OF AO IN VIEW OF THE DECISION OF THE HONBLE B OMBAY HIGH COURT IN THE GODREJ & BOYCE MFG. P.LTD. VS. ACIT (328 ITR 81) WHEREIN I T HAS BEEN HELD THAT RULE 8D IS PROSPECTIVE IN OPERATION. 10.1 THE LD. COUNSEL FOR THE ASSESSEE HOWEVER SU BMITTED THAT THE DIRECTIONS OF THE LD. CIT(A) DO NOT NEED ANY MODIFICATION AS HIS DIRECTIONS ARE IN CONFORMITY WITH THE VIEW TAKEN BY THE HONBLE BOMBAY HIGH COUR T (SUPRA) FOR MAKING THE DISALLOWANCE ON REASONABLE BASIS AS RULE 8D IS NOT APPLICABLE FOR THE PRESENT ASSESSMENT YEAR. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND FI ND MERIT IN THE ARGUMENT OF THE LD. COUNSEL FOR THE ASSESSEE. THE LD. CIT(A) HAS LAID DOWN THE MODUS FOR COMPUTING THE DISALLOWANCE WHICH IS IN CONFORMITY W ITH THE JUDICIAL PRECEDENTS AND THE MODUS ADOPTED BY HIM WOULD LEAD TO REASONAB LE APPROPRIATION OF DISALLOWABLE INTEREST EXPENDITURE. WE ACCORDINGLY D O NOT FIND ANY REASON TO INTERFERE WITH THE DIRECTIONS OF THE LD. CIT(A). IN THE RESULT THIS GROUND IS DISMISSED. ITA NO.5099/MUM/2004 (AY: 2000-01): ITA NOS.5098-5099/04 INTERNATIONAL NEDERLANDEN BANK 6 12. THE FIRST GROUND RELATING TO ALLOWING OF BROKE N PERIOD INTEREST EXPENDITURE RELATABLE TO INCOME-TAX ON ACCRUAL BASIS HAS BEEN D ISMISSED BY US VIDE PARAS 5 & 6 HEREINABOVE FOR THE ASSTT. YEAR 1999-2000. FOR SI MILAR REASONS WE CONFIRM THE DECISION OF THE CIT(A) ON THIS ISSUE AND DISMISS TH E GROUND NO.1 OF THE REVENUE. 13. THE SECOND GROUND RELATING TO ALLOWING OF EXPEN DITURE OF RS.20 26 051/- ON PURCHASE OF SOFTWARE AS REVENUE EXPENDITURE CAME UP FOR CONSIDERATION FOR THE ASSTT. YEAR 1999-2000. FOR SIMILAR REASONS AS G IVEN IN PARA 8 HEREINABOVE WE RESTORE THIS ISSUE TO THE FILE OF AO FOR DECIDI NG THE SAME IN THE LIGHT OF THE DECISION OF THE SPECIAL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA). THIS GROUND IS THEREFORE PARTLY ALLOWED. 14. IN THE RESULT BOTH THE APPEALS ARE PARTLY ALLO WED. ORDER PRONOUNCED ON THE 25TH DAY OF MARCH 201 1. SD/- SD/- (VIJAY PAL RAO) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 25TH MARCH 2011. NG: COPY TO : 1. DEPARTMENT. 2.ASSESSEE. 3 CIT(A)-XXXIII MUMBAI. 4 DIT(INTL.TAXATION) MUMBAI. 5.DR H BENCH MUMBAI. 6.MASTER FILE. (TRUE COPY) BY ORDER ASST.REGISTRAR ITAT MUMBAI. ITA NOS.5098-5099/04 INTERNATIONAL NEDERLANDEN BANK 7 ITA NOS.5098-5099/04 INTERNATIONAL NEDERLANDEN BANK 8 DETAILS DATE INITIALS DESIGNA TION 1. DRAFT DICTATED ON 21-03-2011 SR.PS/ 2. DRAFT PLACED BEFORE AUTHOR 21-03-2011 SR.PS/ 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/ AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO THE AR 10. DATE OF DISPATCH OF ORDER