IN THE ITAT, MUMBAI BENCH, ‘J’

Deputy Commissioner of Income-tax, Spl. Range 27, Mumbai

v.

British Bank of Middle East

D.K. SRIVASTAVA, ACCOUNTANT MEMBER

AND T.K. SHARMA, JUDICIAL MEMBER

IT APPEAL NOS. 815 AND 1453 (MUM) OF 96

C.O. NO. 198 / MUM OF 1996

[Assessment year 1990-91]

November 30, 2007

(I) Section 5 of the Income-tax Act 1961 – Income – Chargeable as – Assessment year 1990-91 – Whether interest income received by an Indian branch of a foreign banking company would be taxable in India – Held, yes

(II) Section 37(1) of the Income-tax Act, 1961 – Business expenditure – Allowability of – Assessment year 1990-91 – Assessee-bank had taken certain sum from two parties allegedly under Portfolio Management Scheme (PMS) for a period of one year – It paid interest on said fund and claimed same as expenditure – Assessing Officer found that assessee had offered a fix rate of return on said funds which was in excess of nine per cent fixed by RBI – Accordingly excess interest over nine per cent was disallowed on ground that same was in violation of RBI’s guideline – Whether since assessee had paid excess amount which was in violation of direction of RBI, Assessing Officer was correct in disallowing sum in question – Held, yes

FACTS – I

In the computation of income, the assessee had claimed deduction on account of interest received from Overseas Branches. The assessee had not taken this interest as income, as according to it, the same was received from self. The Assessing Officer rejected the claim of deduction and made the addition to the income of the assessee. Before the Commissioner (Appeals), the assessee contended that the impugned amount of interest could not be taxed as its income as it had been received from self, i.e., overseas branch and there cannot not be any income from self. The Commissioner (Appeals) accepted claim of the assessee and accordingly deleted the addition.

HELD – I

The ITAT Calcutta Special Bench in the case of ABN Amro Bank NV v. Addl. CIT [2005] 97 ITD 89 after analyzing the various old decisions on the issue of transaction with self held that Indian branch and the head office were one and the same legal entity and could not enter into commercial transactions with each other. According to this judgment, one cannot consider trade with himself or earn profit from self. However, a Co-ordinate Bench of ITAT in the case of Dresdner Bank AG v. Asstt. CIT [2007] 108 ITD 375 (Mum.) after duly considering the ratio of the judgment of the ITAT Special Bench in the case of ABN Amro Bank NV (supra) as well as various other decisions relied by the Special Bench (supra) took the view that the interest income received by an Indian branch of a foreign banking company would be taxable in India. One of the reasons given was that it was necessary to treat the permanent establishment as a separate independent unit in order to compute the profits of a permanent establishment. [Para 18]

It was true that subsequently, ITAT Mumbai in the case of American Express International Banking Corpn. v. CIT [1992] 195 ITR 682/60 Taxman 215 held that in case of conflict between the decisions of the Special Bench and Division Bench, it was the decision of Special Bench, which would prevail. Accordingly, in the case of American Express Banking Corpn. (supra) the view taken by the Special Bench in the case of ABN Amro Bank NV (supra) was followed and it was held that income received/receivable by the India branch from head office was not chargeable to tax. [Para 19]

It is pertinent to note that the principles of ‘permanent establishment’ (PE) in order to determine the income accruing or arising in India to foreign enterprise (GE) applied by ITAT in the case of Dresdner Bank AG (supra) was virtually approved by the Supreme Court in the case of CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 291 ITR 482.

From the comparison of the observations of the Tribunal in the case of Dresdner Bank AG (supra) and Supreme Court in the case of Hyundai Heavy Industries Co. Ltd. (supra), it was evident that on the basis of which, the ITAT in the case of Dresdner Bank AG (supra) took the view that interest income received by an Indian Branch of a foreign banking company would be taxable in India was approved by the Supreme Court in the case of Hyundai Heavy Industries Co. Ltd. (supra). Hence, following the decision of the Co-ordinate Bench in the case of Dresdner Bank AG (supra) the addition which was deleted by the Commissioner (Appeals) in the impugned order was to be restored. [Para 20]

FACTS – II

The assessee-bank had taken various amounts from two parties under the Portfolio Management Scheme (PMS). The funds were accepted for a period of one year for deployment in 9 per cent IRFC Bonds maturing 1999 and 10 per cent NTPC Binds maturing 1997. These Bonds were sold from Bank’s Investment portfolio and purchased back at the end of one year from the clients into Bank’s Investment portfolio. The interest paid to the said parties were claimed as deduction. The Assessing Officer found that the assessee had paid interest on said fund in excess of the RBI’s guidelines. Accordingly he disallowed excess interest. The Commissioner (Appeals) upheld the disallowance.

On appeal:

HELD – II

In order to verify whether the assessee had accepted deposit under Port Folio Management Scheme, the assessee could not produce the copy of accounts. The assessee had claimed interest on tax-free bonds was exempt, which was evident from computation of taxable income, wherein, interest was claimed as exempt. The Commissioner (Appeals) also called various details for this claim and came to the conclusion that securities were never transferred by the assessee in the name of both the parties. In view of this, the plea of the assessee that deposit from both the parties were accepted under PMS could not be accepted. [Para 32]

Admittedly, the assessee had paid excess amount which was in violation of direction of RBI, the Assessing Officer was legally and factually correct in disallowing the sum. In the impugned order, the Commissioner (Appeals) had given cogent reason for upholding the disallowance made by the Assessing Officer. No interference was called for. [Para 33]

Editor’s note;

(i) Following decision in American Express International Banking Corp. v. CIT [2002] 258 ITR 601/125 Taxman 488 (Bom.) the Commissioner rightly deleted broken period interest.

(ii) The Commissioner (Appeals) was not correct in directing to exclude interest accrued to the assessee without appreciating the fact that the assessee was showing the interest on accrual basis.

(iii) Following the decision of the High Court in Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682/60 Taxman 215 (Bom.) the assessee was entitled to deduction on account of enterance fee and annual subscription of club.

(iv) Following decision of the Tribunal in the assessee’s own case for the assessment year 1989-90, the Commissioner (Appeals) rightly deleted the addition made under section 37(2A) in respect of expenses incurred on staff get together.

(v) In view of the decision of the Supreme Court in State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 the assessee was not entitled to deduction of the amount being interest credit to suspense account.