Hub Expenses and Broken Period Interest Allowed: ITAT Mumbai

JP Morgan Chase Bank Vs ACIT (ITAT Mumbai)

The Income Tax Appellate Tribunal (ITAT), Mumbai, decided cross appeals filed by the assessee and the Revenue for Assessment Year 1999-2000. The assessee challenged the taxation of interest received from its Head Office/overseas branches and the disallowance of hub expenses, while the Revenue challenged relief granted on broken period interest, expatriate salary, loss on revaluation of unmatured foreign exchange contracts, depreciation in value of investments, and raised an additional ground under Section 14A.

On the issue of interest received from the Head Office and overseas branches, the Tribunal held that the Indian branch and the Head Office constituted the same legal entity during the relevant year. It observed that the interest arose from internal dealings between different establishments of the same entity and that the fiction of treating a permanent establishment as a separate enterprise under Article 7 of the India-USA DTAA was limited to profit attribution. The Tribunal further held that the taxability of interest had to be examined under the specific provisions of Section 9(1)(v) of the Income-tax Act and not under the general provisions of Section 9(1)(i). It found that the statutory conditions under Section 9(1)(v)(c) were not satisfied and directed deletion of the addition sustained by the CIT(A).

Regarding hub expenses of Rs. 5,17,69,989, the Tribunal examined the expenditure relating to centralized banking support services rendered by overseas hubs at Hong Kong and Bournemouth. It noted the assessee’s submissions that the services comprised data processing, transaction monitoring, risk management, technology support and other operational functions, supported by RBI approvals, agreements and allocation workings. The Tribunal held that these were identifiable operational services directly used by the Indian branch and not general head office administrative overheads. It concluded that Section 44C did not apply and directed deletion of the disallowance, allowing the expenditure under Section 37(1).

On the Revenue’s appeal concerning broken period interest of Rs. 1,40,63,711 paid on purchase of securities, the Tribunal upheld the CIT(A)’s order allowing the deduction. It observed that the payment represented reimbursement of accrued interest to the seller and not part of the acquisition cost of securities. Referring to the decisions in American Express International Banking Corporation and Bank of Rajasthan Ltd., the Tribunal held that where broken period interest received is assessed as business income, the corresponding broken period interest paid is allowable as deduction. The Revenue’s ground was dismissed.

The Tribunal also upheld deletion of the disallowance of expatriate salary of Rs. 1,62,95,395. It found that the employee worked for the Indian branch, the salary represented reimbursement of identifiable personnel cost attributable to Indian operations, and the expenditure did not constitute head office expenditure within Section 44C. It therefore remained allowable under Section 37(1).

On the Revenue’s challenge to allowance of loss on revaluation of unmatured foreign exchange forward contracts amounting to Rs. 39,97,207, the Tribunal noted that the assessee consistently followed the mercantile system of accounting and valued outstanding contracts in accordance with recognised accounting principles and RBI guidelines. Following the Special Bench decision in DCIT v. Bank of Bahrain & Kuwait and the Bombay High Court decision in CIT v. Citibank N.A., it upheld the allowability of the loss and dismissed the Revenue’s ground.

The Tribunal also upheld the CIT(A)’s order allowing deduction for diminution in the value of current investments amounting to Rs. 9,25,033. It held that the securities formed part of the bank’s trading portfolio, constituted stock-in-trade, and were correctly valued at cost or market value, whichever was lower, in accordance with recognised accounting principles and RBI guidelines. The Revenue’s ground was dismissed.

The Tribunal admitted the Revenue’s additional ground relating to Section 14A as a question of law arising from the facts on record. Ultimately, the assessee’s appeal was allowed, the Revenue’s appeal was dismissed, and the order was pronounced on 12 June 2026.

Cases Discussed:

• Director of Income Tax (IT)-I, Mumbai v. American Express Bank Ltd., [2025] 181 taxmann.com 433
• Bank of Rajasthan Ltd. v. CIT, (2024) 469 ITR 280
• Bank of Rajasthan Ltd. v. CIT, (2024) 167 taxmann.com 430
• CIT v. Citibank N.A., (2016) 66 taxmann.com 373
• Credit Agricole Indosuez, (2010) 377 ITR 102
• DCIT v. Bank of Bahrain and Kuwait, (2010) 41 SOT 290
• Sumitomo Mitsui Banking Corporation v. DCIT, (2012) 19 taxmann.com 364
• American Express International Banking Corporation v. CIT, (2002) 258 ITR 601
• CIT v. Emirates Commercial Bank Ltd., 262 ITR 55
• CIT v. Bank of Baroda, (2003) 262 ITR 334
• CIT v. Bank of Baroda, 262 ITR 334
• Indian Overseas Bank v. CIT, 183 ITR 200
• United Commercial Bank v. CIT, (1999) 240 ITR 355
• CIT v. Woodward Governor India (P.) Ltd., 312 ITR 254
• State Bank of India v. DCIT, ITA Nos. 3860 & 3882/Mum/2017, order dated 21.04.2026
• CIT v. Citi Bank N.A., Civil Appeal No. 1549 of 2006, order dated 12.08.2008
• National Thermal Power Co. Ltd. v. CIT, 229 ITR 383 (SC)
• Vijaya Bank Ltd. v. CIT, 187 ITR 541

FULL TEXT OF THE ORDER OF ITAT MUMBAI

These cross appeals have been filed by the assessee as well as the Revenue against the order passed by the Ld. CIT(A)-XXXIII, Mumbai dated 31/12/2003 [hereinafter referred to as Ld.CIT(A)] for A.Y. 1999-2000.

2. The assessee has raised the following grounds of appeal:-

“Aggrieved by the order passed by the Commissioner of Income-tax (Appeals)-XXXIII, Mumbai [hereinafter referred to as ‘the learned CIT(A)], under section 250 of the Income-tax Act, 1961 (`ile) and based on the facts and circumstances of the case, JPMorgan Chase Bank [hereinafter referred to as the ‘Appellant] respectfully submits that the learned CIT(A) erred in partly upholding the order of Assistant Commissioner of Income-tax, Circle 1(2), Mumbai, thereby disposing the appeal of the Appellant on the following grounds.

1. In taxing the interest received from overseas branches amounting to Rs 48,878,457.

2. In disallowing a deduction for hub expenses to Rs. 51,769, 989/ -“

The Revenue has raised the following grounds of appeal:-

“1. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in directing the AO to allow broken period interest paid on securities purchased amounting to Rs. 1,40,63,711/ -.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the salary paid to expatriate employee amounting to Rs. 1,62,95,395/ -.

3. On the facts and in the circumstances of the case the Id. CIT(A) erred in directing the AO to allow loss on revaluation of unmatured foreign exchange contracts amounting to Rs. 39,97,207/ -.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to allow the loss incurred on depreciation in value of investments amounting to Rs. 9,25,033/ –

The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the AO restored

The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

The revenue has also raised the following additional grounds of appeal:-

“Whether provision of section 14A of the I.T. Act will be applicable in the event it is held that the interest received by the assessee from its Head Office is not taxable in the hands of Indian branch office?”

3. Brief facts of the case are as under:-

Assessee is a banking company incorporated in the United States of America and is carrying on banking operations in India through its branch office at Mumbai. For the assessment year under consideration, the assessee filed its return of income declaring total income of Rs. 6,82,57,957/-. The assessment was framed by Ld. AO u/s 143(3) of the Act, wherein various additions and disallowances were made in computing the total income of the assessee.

3.1. During the course of assessment proceedings, the Ld. AO disallowed broken period interest paid on purchase of securities amounting to Rs. 1,40,63,711/- by treating the same as part of cost of acquisition of securities. The Ld.AO further disallowed salary paid to expatriate employee amounting to Rs. 1,62,95,395/-by invoking provisions of section 44C of the Act on the ground that the same constituted head office expenditure. The Ld.AO also brought to tax interest received by the Indian branch from its Head Office/overseas branches amounting to Rs.4,88,78,457/- by holding that such income had accrued in India and was taxable. Further, the Ld.AO disallowed hub expenses amounting to Rs.5,17,69,989/- on the ground that the assessee failed to establish that such expenses were incurred wholly and exclusively for the purposes of business in India and also failed to furnis a proper basis of allocation. In addition, the Ld.AO disallowed loss on revaluation of unmatured foreign exchange forward contracts amounting to Rs.39,97,207/- and also disallowed depreciation in value of investments amounting to Rs.9,25,033/-.

Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A), who partly allowed the appeal.

3.2. The Ld. CIT(A) confirmed the disallowance of broken period interest by relying on the decision of the Hon’ble Supreme Court in the case of Vyaya Bank Ltd. Vs. CIT (187 ITR 541). The Ld. CIT(A) further upheld the action of the Ld.AO in taxing the interest received from Head Office/overseas branches by holding that for the purpose of taxation, the Indian branch and the Head Office are to be treated as distinct entities and such interest income had nexus with the Indian operations. The Ld.CIT(A) confirmed the disallowance of hub expenses on the ground that the assessee failed to substantiate that such expenses were incurred wholly and exclusively for the purposes of its business in India.

3.3. However, the Ld.CIT(A) granted relief to the assessee on certain issues. The disallowance of salary paid to expatriate employee was deleted by holding that the expenditure was incurred wholly and exclusively for the purposes of the Indian branch and was allowable u/s 37(1) of the Act, and could not be treated as head office expenditure u/s 44C. The Ld. CIT(A) allowed the loss on revaluation of unmatured foreign exchange contracts by following judicial precedents and accepted accounting principles. Similarly, the claim of depreciation in value of investments was allowed by holding that valuation of stock-in-trade at cost or market value, whichever is lower, is a recognized method and resultant loss is allowable.

Aggrieved by the findings of the Ld. CIT(A), both the assessee as well as the Revenue are in appeal before this Tribunal.

We first take up the appeal filed by the assessee.

4. Ground No.1: Taxability of interest received from overseas branches amounting to Rs.4,88,78,457/-

Elaborating on the factual matrix, the Ld. Sr. Counsel submitted that the assessee is engaged in the business of banking and, in the ordinary course of such business, the Indian branches are required to maintain liquidity and deploy temporary surplus funds in a prudent manner. In accordance with the regulatory framework prescribed by the Reserve Bank of India, such surplus funds may be placed with the Head Office, overseas branches or other banking institutions in the overnight call-money market pending their deployment in the Indian banking operations. It was submitted that the placement of funds with the Head Office and overseas branches is thus a treasury function undertaken as an integral part of the banking business and does not constitute an independent lending transaction between two distinct legal persons.

4.1. The Ld.Sr.Counsel submitted that the Ld.AO erred in proceeding on the premise that the Indian branch and the Head Office are separate taxable entities. It was argued that, under general principles of law, a branch has no separate legal existence independent of the Head Office. The branch and the Head Office are merely different establishments of the same juridical person and, therefore, any payment of interest by one to the other is nothing but a payment to self. Such internal dealings may be recognized for accounting or profit attribution purposes, but they cannot result in generation of taxable income.

4.2. Before us, the Ld.Sr.Counsel assailed the findings of the lower authorities and submitted that the interest received by the Indian branch from its Head Office and overseas branches cannot be subjected to tax in India, as the same represents a transaction with self. It was contended that the Head Office and its branches constitute one single legal entity and, therefore, any payment of interest between them is merely an internal accounting adjustment which does not give rise to any real income capable of being taxed.

4.3. Referring to the provisions of the India-USA DTAA, the Ld. Sr. Counsel submitted that Article 7 incorporates the principle that the profits attributable to a Permanent Establishment are to be computed as if the Permanent Establishment were a distinct and separate enterprise dealing wholly independently with the enterprise of which it forms a part. However, it was argued that this is only a legal fiction created for the limited purpose of determining the profits attributable to the Permanent Establishment. Such fiction cannot be extended beyond its legitimate field to create a charge of tax on notional income arising from internal transactions between different parts of the same entity.

4.4. The Ld.Sr.Counsel further submitted that the Ld.AO/CIT(A) incorrectly relied on the concept of separate entity under the DTAA to hold that the interest has accrued to the Indian branch. According to him, while the fiction may permit attribution of profits to a Permanent Establishment, it does not alter the fundamen al legal character of the transaction. He submitted that a branch cannot lend money to itself and cannot earn income from itself. Consequently, the so-called interest credited by the Head Office or overseas branches does not represent real income but merely a notional allocation of profits within the same entity.

4.5. It was submitted by the Ld.Sr.Counsel that, even under the domestic law provisions, the impugned amount cannot be brought to tax. He submitted that the Ld.AO proceeded on the footing that the interest accrued or arose in India by virtue of section 9 of the Act. However, he submitted that interest income is specifically governed by section 9(1)(v), which is a special provision dealing with the deemed accrual of interest income. The taxability of the impugned amount must therefore be tested only with reference to the requirements prescribed in section 9(1)(v), and not under the general provisions relating to business connection contained in section 9(1)(i).

4.6. The Ld.Sr.Counsel submitted that section 9 (1)(v)(c) contemplates a situation where interest is payable by a non­resident in respect of moneys borrowed and used for the purposes of a business or profession carried on in India. The said provision presupposes the existence of a payer and a payee as separate persons and a borrowing transaction resulting in a debt obligation. In the present case, neither condition is satisfied. The placement of funds by the Indian branch with its Head Office or overseas branches does not result in any borrowing by an independent person, nor does it create a debtor-creditor relationship between distinct legal entities. Therefore, the deeming fiction containe in section 9(1)(v)(c) has no application to the present facts of the case.

4.7. It was further submitted that once the specific provision governing interest income does not apply, the Revenue cannot seek to tax the same amount under the general provisions of section 9(1)(i). It is a settled rule of interpretation that a specific statutory provision prevails over a general provision. Accordingly, where Parliament has enacted a specific deeming provision governing interest income, its taxability cannot be determined by invoking the broader concept of business connection under section 9(1)(i).

4.8. The Ld.Sr.Counsel further submitted that, the source of the funds and the location where such funds originated are wholly irrelevant for determining the taxability of the impugned interest. The mere fact that the surplus funds were generated by the Indian branch does not convert an internal treasury deployment into a taxable lending transaction. The test is whether any real income has arisen to the assessee from a source external to itself. Since the entire transaction is confined within the same legal entity, no real income can be said to have accrued.

4.9. In support the Ld.Sr.Counsel placed reliance the decision of the Hon’ble Bombay High Court in the case of Credit Agricole Indosuez reported in (2010) 377 ITR 102 and the decision of the Hon’ble Special Bench of Mumbai Tribunal in the case of Sumitomo Mitsui Banking Corporation vs.DCIT reported in (2012) 19 taxmann. com 364, wherein it has been consistently held that interest arising on transactions between a foreign bank and its branches constitutes a payment to self and does not give rise to taxable income. The Ld.Sr.Counsel accordingly submitted that the addition sustained by the Ld. CIT(A deserves to be deleted in its entirety.

4.10. Per contra, the Ld. DR strongly relied upon the orders of the Assessing Officer and the learned CIT(A). It was submitted that the interest income in question has arisen out of funds generated by the Indian branch in the course of its banking operations in India and, therefore, bears a direct nexus with the business activities carried on in India. According to the Ld. DR, merely because the funds were temporarily deployed with the Head Office or overseas branches would not alter the character of the income or dilute its connection with the Indian operations from which such funds originated.

4.11. The Ld.DR further submitted that under Article 7 of the India-USA DTAA, a Permanent Establishment is required to be treated as a distinct and separate enterprise dealing independently with the enterprise of which it forms a part. It was contended that once such a fiction is adopted for the purpose of attribution of profits, the dealings between the Indian branch and the Head Office/overseas branches must be recognized and given effect to while determining the profits attributable to the Indian Permanent Establishment. Accordingly, the interest credited by the Head Office and overseas branches to the Indian branch represents income attributable to the Indian Permanent Establishment and is liable to be taxed in India.

4.12. The Ld.DR submitted that the assessee itself had recognized the placement of funds and the corresponding interest in its books of account. Therefore, having treated the transaction as an income-generating activity for accounting purposes, the assessee could not subsequently contend that no income had accrued for ax purposes. It was argued that the interest earned on deployment of surplus funds constitutes a real accretion to the profits of the Indian branch and cannot be ignored merely on the ground that the transaction is between different establishments of the same entity.

4.13. The Ld.DR also contended that the decisions relied upon by the assessee are distinguishable on facts and that the principle of “payment to self’ cannot be applied in a manner that defeats the scheme of profit attribution envisaged under the DTAA. According to the Revenue, once the Indian branch is treated as a separate profit centre for tax purposes, the income arising from deployment of its funds with the Head Office and overseas branches has to be recognized and brought to tax in India.

4.14. It was thus submitted that the Ld.AO was justified in bringing the impugned interest to tax and that the Ld.CIT(A) rightly upheld the addition. The Ld.DR thus prayed to uphold the view of the Ld.CIT(A).

We have perused the submissions advanced by both sides in light of the records placed before this Tribunal.

5. The issue for consideration is whether the interest received by the Indian branches from assessee (Head Office) and/or overseas branches is liable to tax in India.

5.1. It is an undisputed position that the Head Office and the Indian branch constitute the same legal entity during the year under consideration. It is also an admitted position that the Indian branch had placed surplus funds with its Head Office and/or overseas branches in the ordinary course of its banking operations and earned interest thereon. The Revenue has not disputed that the transactions are purely inter se between different establishments of the same legal entity. The mere fact that, for the limited purpose of attribution of profits under the DTAA, a Permanent Establishment is treated as a distinct and separate enterprise does not alter the fundamental legal position that the Head Office and the branch continue to constitute one and the same juridical person.

5.2. We also find considerable merit in the contention of the assessee that the impugned interest cannot be brought to tax by resorting to the general provisions contained in Explanation 1 to section 9(1)(i) of the Act. The income under consideration is admittedly in the nature of interest and, therefore, its taxability is specifically governed by the provisions of section 9(1)(v) of the Act, which is a special provision dealing with the deemed accrual or arising of interest income in India.

It is a well-settled principle of statutory interpretation that where a particular subject matter is specifically dealt with by a special provision, recourse cannot ordinarily be taken to a more general provision for taxing the same income. Accordingly, the taxability of the impugned interest has necessarily to be examined with reference to the conditions prescribed under section 9(1)(v) and not under the broader provisions relating to business connection contained in section 9(1)(i). For sake of convenience relevant section is reproduced as under:

“9(1). The following incomes shall be deemed to accrue or arise in India:—

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset st ate in India.”

Explanation 1.—For the purposes of this clause—

a. in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India;

b. in the case of a non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to the purchase of goods in India for the purpose of export;

c. in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India through or from activities which are confined to the collection of news and views in India for transmission out of India;

d. in the case of a non-resident, being—

1. an individual who is not a citizen of India; or

2. a firm which does not have any partner who is a citizen of India or who is resident in India; or

3. a company which does not have any shareholder who is a citizen of India or who is resident in India,

no income shall be deemed to accrue or arise in India through or from operations which are confined to the shooting of any cinematograph film in India.””

5.3. It is a settled principle of statutory interpretation that where a specific provision deals with a particular category of income, the taxability thereof has to be examined with reference to such specific provision and not under a more general provision. Interest income is specifically governed by section 9(1)(v) of the Act, which lays down the circumstances in which interest shall be deemed to accrue or arise in India. Therefore, the taxability of the impugned interest has necessarily to be tested on the touchstone of section 9(1)(v), and recourse cannot be taken to the more general provisions of section 9(1)(i) dealing with business connection.

Section 9(1)(v)(c) – Income-tax Act, 1961:-

“(c) by a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India.”

5.4. A perusal of the above section shows that, interest payable by a non-resident is deemed to accrue or arise in India only where such interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India. Thus, for invocation of section 9(1)(v)(c), the Revenue is required to establish the existence o statutory conditions prescribed therein, namely:

i. there must be a debt incurred or moneys borrowed by the non-resident payer; and

ii. such borrowed funds must have been utilized for the purposes of a business or profession carried on in India.

5.5. In the present case, neither of the aforesaid conditions stands satisfied. The impugned transaction does not involve any borrowing by the Head Office from an independent person. The placement of funds by the Indian branch with its Head Office and overseas branches merely represents an internal allocation or deployment of funds within the same legal entity. Further, the Revenue has not brought any material on record to establish that the funds in question were borrowed and utilized for the purposes of a business carried on in India so as to attract the deeming fiction contained in section 9(1)(v)(c). In the absence of such express statutory requirements, the provisions of section 9(1)(v)(c) cannot be invoked.

5.6. More fundamentally, the deeming provisions of section 9(1)(v) proceed on the assumption that there exists a payer and a payee as distinct taxable persons. In the present case, the Indian branch, the Head Office and the overseas branches constitute different establishments of the same legal entity. Therefore, the so-called interest represents nothing more than a notional allocation arising from internal dealings. Since no real income can arise from a transaction with oneself, the foundational requirement for taxation itself is absent. Consequently, the impugned amount cannot be brought to tax either under section 9(1)(v)(c) or by invoking general provisions of section 9(1)(i) of the Act.

5.7. Therefore, viewed from any angle, the impugned interest cannot be brought within the ambit of section 9(1)(i). Once the specific provision dealing with interest income is found to be inapplicable, recourse to the general provision is impermissible.

6. We are also unable to subscribe to the view taken by the lower authorities that the impugned interest constitutes taxable income in the hands of the Indian branch. The foundation of the Revenue’s case is that, by virtue of Article 7 of the India-USA DTAA, the Permanent Establishment is required to be treated as a distinct and separate enterprise and, therefore, the interest credited by the Head Office and overseas branches must be regarded as taxable income of the Indian branch. In our considered opinion, such an interpretation overlooks the limited purpose for which the legal fiction has been enacted.

6.1. The fiction of treating a Permanent Establishment as a distinct and separate enterprise is incorporated in the DTAA solely for the purpose of determining the quantum of profits attributable to the Permanent Establishment. The object of the fiction is to facilitate a fair allocation of business profits between different taxing jurisdictions by assuming that the Permanent Establishment deals independently with the enterprise of which it forms a part. However, it is a settled principle that a legal fiction must be confined strictly to the purpose for which it is created and cannot be extended beyond its legitimate field.

6.2. The deeming provision contained in Article 7 does not alter fundamental legal character of the relationship between the Head Office and its branches. Notwithstanding the fiction, the Head Office and the branch continue to constitute one and the same juridical entity. The DTAA does not create a separate legal personality in favour of the Permanent Establishment; it merely provides a mechanism for attributing profits. Therefore, while notional dealings between the Head Office and the branch may be recognized for the limited purpose of computing profits attributable to the Permanent Establishment, such recognition does not result in the creation of taxable income where none exists in reality.

6.3. Acceptance of the Revenue’s contention would lead to an anomalous situation whereby the fiction enacted for attribution of profits would itself become a charging provision. Such an approach is impermissible in law. A charging provision and a computation provision operate in different fields. Article 7 merely prescribes the manner in which profits attributable to a Permanent Establishment are to be determined; it does not create a charge to tax in respect of hypothetical income arising from transactions with oneself.

6.4. It is trite law that no person can earn income from himself. Interest necessarily postulates the existence of two distinct persons—a borrower and a lender. In the case of a transaction between a Head Office and its branch, this fundamental requirement is absent since both establishments are inseparable parts of the same legal entity. Consequently, the so-called interest credited by one part of the enterprise to another remains a matter of internal accounting and does not assume the character of real income.

6.5. In support reliance is placed on the decision of Hon’ble Bombay High Court in the case of Credit Agricole Indosuez(supra) and the Special Bench of the Tribunal in the case of Sumitomo Mitsui Banking Corporation(supra) wherein it is held that interest paid by a head Office to its branch or vice versa does not result in taxable income as it is a payment to self.

Accordingly, we hold that the separate entity fiction embodied in the DTAA cannot be invoked to treat the impugned interest as taxable income in the hands of the Indian branch. The transaction remains one between different establishments of the same enterprise and, in the absence of any real income, no tax liability can arise therefrom.

7. There is yet another significant aspect of the matter. A careful reading of Explanation 1(a) to section 9(1)(v), inserted with effect from 01.04.2016, shows that the deeming fiction is confined to a specific category of transactions, namely, interest payable by a Permanent Establishment in India to its Head Office or any other branch or Permanent Establishment outside India. The Legislature has consciously brought within the tax net only the outbound payment of interest by the Indian Permanent Establishment to the foreign Head Office or overseas branches and has provided that such interest shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to the profits attributable to the Permanent Establishment.

7.1. In the present case, however, the factual situation is exac y the converse. The impugned amount represents interest payable by the Head Office and/or overseas branches to the Indian Permanent Establishment on temporary placement of surplus funds by the Indian branch. Thus, the transaction under consideration is not one where the Indian Permanent Establishment is the payer of interest; rather, it is the recipient of interest from the Head Office and overseas branches. Significantly, this category of transaction has not been brought within the ambit of the deeming fiction enacted by Parliament.

7.2. The omission assumes importance because the Legislature, while introducing a specific provision dealing with interest arising from internal dealings between a Permanent Establishment and its Head Office, chose to cover only one limb of such transactions, namely, interest payable by the Indian Permanent Establishment to the foreign Head Office or overseas branches. No corresponding provision was enacted to deem interest receivable by the Indian Permanent Establishment from the Head Office or overseas branches as income accruing or arising in India. It is a settled principle that a taxing provision must be construed strictly and nothing can be read into the statute by implication. The Court cannot supply a casus omissus where the Legislature has consciously chosen not to provide for a particular situation.

7.3. Therefore, even assuming that the Explanations inserted by the Finance Act, 2015 are taken into consideration, the same do not advance the Revenue’s case. On the contrary, they indicate that Parliament was fully aware of the nature of internal interest transactions between a Permanent Establishment and its Head Office and yet restricted the deeming fiction only to interest payable by the Indian Permanent Establishment. Since the present case concerns interest receivable by the Indian Permanent Establishment from the Head Office/overseas branches, it falls completely outside the scope of the statutory amendment.

Viewed from this perspective also, the impugned interest cannot be brought to tax either under the specific provisions of section 9(1)(v) or by invoking the general provisions of section 9(1)(i). Acceptance of the Revenue’s contention would amount to enlarging the scope of the deeming fiction beyond the language employed by Parliament, which is impermissible in law.

Based on the above discussion and placing reliance on the relevant provisions of the Act, and respectfully following the decisions relied herein above, we hold that the Ld.CIT(A) was not justified in confirming the addition made by the Ld.AO. The addition is directed to be deleted and this ground raised by the assessee is allowed.

Accordingly, Ground no.1 raised by the assessee stands allowed.

8. Ground No. 2: Disallowance of deduction of Hub Expenses – Rs. 5,17,69,989/-

8.1. Brief facts apropos this issue is that during the year under consideration, the assessee claimed deduction of hub expenses amounting to Rs.5,17,69,989/-. These expenses pertained to centralized banking support services rendered by the assessee’s overseas offices, primarily located at Hong Kong and Bournemouth. The said services included data processing, transaction monitoring, and other essential operational and control functions necessary for the day-to-day functioning of the Indian branch of the assessee.

8.1.1. The Ld.AO disallowed the claim of hub expenses on the ground that the assessee failed to establish that the expenditure was incurred wholly and exclusively for the purposes of business in India. The Ld.AO further observed that the assessee did not furnish proper and reasonable basis for allocation of such centralized costs to the Indian branch, and therefore, the claim was not substantiated with adequate supporting evidence.

8.1.2. The Ld.CIT(A) confirmed the disallowance made by the Ld.AO. The Ld.CIT(A) held that the assessee had not provided sufficient justification or supporting material to demonstrate the correctness of the allocation of hub expenses to the Indian branch. Accordingly, the appellate authority upheld the view that the claim lacked proper substantiation and thus did not merit allowance.

8.2. Before us, the Ld. Sr. Counsel submitted that the hub expenses constitute a genuine and integral part of the assessee’s global banking operations, which are carried out through centralized service centers established for operational efficiency, standardization, and regulatory compliance. It was explained that the overseas hub centers provide critical backend and support functions, including data processing, transaction monitoring, financial management, risk management, technology support, communication services, loan and deposit operations, and other operational services for various branches of the bank worldwide, including the Indian branches.

8.3. The Ld. Sr. Counsel further submitted that the hub centres located at Hong Kong and Bournemouth function as specialized operational units within the regulatory framework and pursuant to approvals granted by the Reserve Bank of India for offshore processing and centralized support services. The existence and functioning of these centers, as well as the services rendered by them, are not in dispute and are indispensable for the smooth conduct of the Indian branch’s banking operations.

8.4. It was further submitted that the allocation of hub expenses to the Indian branch is based on a scientific, consistent, and well-defined methodology having regard to relevant usage parameters such as transaction volumes, operational dependency, and system utilization, thereby ensuring that only the proportionate and attributable cost relating to the Indian operations is charged.

8.5. He submitted that in support of the claim, the assessee had furnished comprehensive documentary evidence before the lower authorities, including RBI approvals, inter-branch/service level agreements, detailed workings of cost allocation, supporting invoices, internal records, and detailed submissions made before the Ld.AO and the Ld.CIT(A) in various assessment years. According to the Ld. Sr. Counsel, these documents clearly demonstrated the nature of services rendered, the basis of allocation, and the business necessity of the expenditure. However, the lower authorities failed to properly appreciate the evidentiary material and the role of such services in the assessee’s banking operations.

8.6. The Ld.Sr.Counsel contended that the hub expenses are intrinsically and inextricably linked to the carrying on of banking operations by the Indian branch and constitute an integral part of the cost of doing business. Without such centralized support functions, it would not be possible for the Indian branch to operate in a regulated and compliant banking environment. Accordingly, the expenditure satisfies the test of being laid out wholly and exclusively for the purposes of business.

8.7. It was therefore submitted that the disallowance made by the Ld.AO and confirmed by the Ld.CIT(A) proceeds on an erroneous appreciation of facts and law, ignoring the commercial reality of global banking operations and the documentary evidence placed on record. The Ld.Sr.Counsel accordingly prayed that the expenditure be allowed as a deduction under section 37(1) of the Act.

8.8. Per contra, the Ld.DR strongly relied upon the orders of the Ld.AO and the Ld.CIT(A). It was submitted that the assessee has failed to discharge the onus cast upon it to establish that the impugned hub expenses were incurred wholly and exclusively for the purposes of the Indian operations. According to the Ld.DR, the assessee has not brought on record any conclusive material to demonstrate that the services allegedly rendered by the overseas hubs at Hong Kong and Bournemouth had any direct, exclusive or identifiable nexus with the business activities carried on by the Indian branch.

8.9. It was further submitted that the assessee has also failed to substantiate the basis of allocation of such centralized costs with credible and verifiable working. The Ld. DR contended that in the absence of a clear and transparent allocation methodology supported by contemporaneous evidence, the apportionment of global hub expenses to the Indian branch remains unverified and arbitrary in nature.

8.10. The Ld. DR therefore submitted that both the Ld.AO as well as the Ld.CIT(A) rightly disallowed the claim, as the assessee failed to establish the genuineness, necessity and quantification of the expenditure relatable to the Indian operations. Accordingly, it was prayed that the findings of the lower authorities be upheld.

We have perused the submissions advanced by both sides in light of the records placed before this Tribunal.

9. The issue relates to disallowance of hub expenses incurred by the assessee towards centralized banking support services rendered by its overseas hubs located at Hong Kong and Bournemouth. The assessee is engaged in the business of banking and operates through a globally integrated structure wherein certain critical operational functions such as data processing, transaction monitoring, risk management support, system control and related banking support services are centralized at designated hub centers.

9.1. It is the case of the assessee that such centralized functions constitute an integral part of modern banking operations and are indispensable for the efficient, secure and regulatory compliant functioning of the Indian branch. The expenditure is stated to have been allocated on a scientific and consistent basis supported by documentary evidence, including RBI approvals and allocation workings.

9.2. On the other hand, the Revenue has disallowed the claim on the ground that the assessee failed to demonstrate that the expenditure was incurred wholly and exclusively for the Indian operations and also failed to substantiate the allocation methodology with sufficient reliability.

9.3. From the material placed on record, including the nature of services rendered and regulatory framework governing banking operations, it is evident that the hub functions are not in the nature of general administrative overheads but constitute operational support services directly linked to the core banking activities of the Indian branch. In modern banking structures, such centralization of critical functions is a business necessity to ensure uniformity of processes, risk control, and real-time transaction monitoring across jurisdictions.

9.4. The assessee has also placed on record RBI approvals and supporting documentation to demonstrate that such outsourcing/centralization of functions is an accepted feature of banking operations. The allocation mechanism, as demonstrated from the record, is based on identifiable business parameters and is not shown to be arbitrary or ad hoc.

9.5. It is also not disputed that similar expenditure under identical arrangements has been allowed in earlier assessment years. No material has been brought on record by the Revenue to show any change in facts or to demonstrate that the services were not actually rendered or that the expenditure lacked commercial necessity. The objection of the Revenue primarily rests on the alleged imperfection in allocation methodology, which by itself cannot be a ground to disallow otherwise genuine business expenditure where nexus with business operations stands established.

9.6. It is a settled principle that once the commercial expediency and business necessity of expenditure is demonstrated, the Revenue cannot sit in the armchair of the businessman and question the manner or quantum of allocation in absence of any material showing that the expenditure is bogus, excessive or unrelated to business. The assessee has discharged its burden y furnishing relevant agreements, supporting documents and allocation workings.

9.7. Before proceeding further, it is noted that the Revenue has placed reliance on the decision of the Hon’ble Supreme Court in Director of Income Tax (IT)-I, Mumbai v. American Express Bank Ltd., reported in [2025] 181 taxmann.com 433 to contend that the impugned expenditure is in the nature of head office expenditure and therefore its allowability must be examined within the framework of section 44C of the Act. It was submitted that the said judgment lays down that section 44C provides a specific statutory mechanism for determination of deduction in respect of head office expenses attributable to Indian operations and that computation thereof must strictly conform to the statutory prescription. On this basis, it was argued that the assessee’s claim of hub expenses, in the absence of a satisfactory allocation basis, deserves to be disallowed.

9.8. We further find that the issue requires examination in the context of section 44C of the Act, which provides a specific mechanism for computation of allowable deduction in respect of head office expenditure attributable to the business carried on in India by a non-resident. The said provision was introduced to address the practical difficulties in allocation of common head office expenses incurred for global operations and to ensure a fair and uniform method of apportionment of such expenditure.

Section 44C is confined to “head office expenditure” in the nature of executive and general administration expenses incurred for the overall management of the assessee’s business. It contemplates allocation of indivisible and common overheads which are incapable of precise identification with any specific branch.

9.9. Hon’ble Supreme Court in Director of Income Tax (IT)-I, Mum• ai v. American Express Bank Ltd. (supra), considered the submission of the assessee and analysed the same in the light of the section 44C. Hon’ble Court explained that section 44C is a special provision intended to deal with the difficulty of apportionment of such common head office expenditure and to substitute subjective allocation with a statutory formula ensuring a reasonable restriction on deduction of such overheads attributable to Indian operations. The ratio of the said decision makes it clear that section 44C operates in a limited field of allocation of general and indivisible head office expenses.

9.9.1. The ratio laid down by Hon’ble Supreme Court in Director of Income Tax (IT)-I, Mumbai v. American Express Bank Ltd. (supra). on the scope and applicability of section 44C, as well as the principles governing allocation of head office expenditure to Indian operations, has been succinctly summarized in paragraphs 83 to 85 of the judgment, which read as under:

“83. The pivotal question involved in these appeals has been answered in favour of the Revenue. However, it remains to be seen whether, on merits, the entire expenditure that the respondents claim as deductible under Section 37 would fall within the ambit of Section 44C. There is no dispute that the respondents are non-residents and the expenditure was incurred outside India. However, there seems to be disagreement with regard to the fact whether or not certain expenditures could be of an `executive and general’ nature as specifically enumerated in the Explanation. In fact, the respondents have contended that a part of the expenditure incurred by them would not be in the nature of head office expenditure as described under Section 44C.

84. From a bare perusal of the orders of the lower authorities, it is not clear whether the nature of these expenditures was subjected to the rigorous scrutiny required to conclusively place them within the definition of ‘head office expenditure’ under the Explanation. Even when the nature of the expenditure was being discussed, the authorities proceeded on the notion that the definition was inclusive and its scope was broad. We have held above that such a reading of the Explanation is incorrect.

85. As established, for an expense to be categorized as ‘head office expenditure, the Assessing Officer must be satisfied on three distinct fronts: (i) the expenditure must have been incurred outside India; a it must be in the nature of ‘executive and general administration’ expenditure; and (iii) the said executive and general administration expenditure must fall within the specific categories enumerated in clauses (a), (b), or (c) respectively of the Explanation, or prescribed under clause (d). This Court, while exercising appellate jurisdiction, is not the appropriate forum to undertake this granular factual verification. Accordingly, we deem it appropriate to remand these matters to the Income Tax Appellate Tribunal, Mumbai, on this limited issue. The Tribunal is directed to examine the expenses afresh in light of the legal principles enunciated herein, more particularly to verify whether the disputed expenditures satisfy the tripartite test necessary to qualify as `head office expenditure’ under the Explanation to Section 44C. With respect to the expenditure which the respondents do not wish to dispute, the same would fall under the ambit of Section 44C, and thereby their deduction will be governed by the limits set out therein.”

Thus, the provision governs only common administrative and executive expenditure which is incapable of direct attribution to specific services or functions.

9.10. In the present case, however, the hub expenses pertain to identifiable and specific operational services such as data processing, transaction monitoring, risk management support, system control functions and other banking support services rendered by designated hubs at Hong Kong and Bournemouth are at pages 53 to 82 of the paper book filed. These services rendered by Honkong and Bournemoth as per the agreement between Chase Manhattan Bank Honkong and The Chase Manhattan bank Mumbai placed at pages 47 to 52 of the paper book. On perusal of the same it is noted that the services are function-specific, operational in nature, and directly utilized for carrying on banking activities of the Indian branch. They are not in the nature of general head office administrative overheads contemplated under section 44C.

9.10.1. Accordingly, while section 44C deals with allocation of common and indivisible head office expenditure as explained by the Hon’ble Supreme Court in Director of Income Tax (IT)-I, Mumbai v. American Express Bank Ltd., reported in 2025 INSC 1431 the present expenditure represents direct charges for specific services actually rendered to the Indian branch. Such expenditure falls outside the scope of section 44C and cannot be subjected to the computational restriction prescribed therein.

9.11. We therefore hold that the hub expenses incurred by the assessee are wholly and exclusively for the purposes of its business and are allowable under section 37(1) of the Act. The disallowance made by the Ld.AO and sustained by the Ld.CIT(A) is accordingly directed to be deleted.

Accordingly Ground No. 2 raised by the assessee stands allowed.

Now, we take up revenue’s appeal for adjudication.

10. Ground No.1: Disallowance of broken period interest paid on purchase of securities – Rs.1,40,63,711/-

During the year under consideration, the assessee claimed deduction of broken period interest paid on purchase of securities amounting to Rs. 1,40,63,711/ -. The said amount represents interest paid by the assessee at the time of purchase of securities for the period from the last interest payment date up to the date of acquisition.

10.1. The Ld.AO disallowed the claim of broken period interest by holding that such payment forms part of the cost of acquisition of securities. According to the Ld.AO, the amount cannot be treated as a revenue expenditure allowable as deduction, as it is intrinsically linked to the acquisition cost of the securities and hence assumes the character of capital expenditure.

10.2. The Ld.CIT(A), however, did not agree with the view of Ld.AO. By placing reliance on judicial precedents, the Ld.CIT(A) held that broken period interest paid on purchase of securities is allowable as a revenue deduction. Accordingly, the disallowance made by the Ld.AO was deleted and the assessee’s claim was allowed.

11. The Ld.DR relied upon the order of the Ld. AO and submitted that the broken period interest paid at the time of purchase of securities is part of the purchase consideration and cannot be allowed as a separate deduction. It was contended that the Ld.CIT(A) erred in allowing the claim of the assessee.

11.1. Per contra, the Ld. Sr. Counsel submitted that, in the course of banking business, the assessee invests in Government and other approved securities which carry a fixed stipulation for payment of interest at periodic intervals, generally six months. It was explained that where such securities are acquired during the interregnum between two interest payment dates, the purchase consideration is bifurcated into (i) the cost of the security and (ii) the interest accrued from the last interest payment date up to the date of acquisition, commonly referred to as “broken period interest”.

11.2. It was further submitted that upon receipt of the next interest payment, the purchaser bank receives interest for the entire coupon period, which necessarily includes the component relatable to the period prior to acquisition. In substance, therefore, the assessee, being the purchaser, effectively earns interest from a date anterior to the date of purchase up to the date on which the first post-acquisition interest becomes due. Accordingly, the broken period interest paid at the time of acquisition, amounting to Rs.1,40,63,711/-, having been debited to the Profit and Loss Account, represents a revenue expenditure incurred in the ordinary course of banking operations and is not in the nature of capital cost of securities.

11.3. It was thus contended that the said expenditure is allowable as deduction under the Act, as it merely represents the interest component relatable to the pre-acquisition period and does not form part of the investment cost. The Ld. Sr. Counsel submitted that the issue now stands conclusively settled by the judgment of the Hon’ble Supreme Court in Bank of Rajasthan Ltd. v. CIT reported in (2024) 469 ITR 280, which, in turn, has followed the earlier decision in CIT v. Citi Bank N.A. (Civil Appeal No. 1549 of 2006, order dated 12.08.2008).

11.4. He further submitted that the Ld. CIT(A), in paragraphs 3 to 3.2 of the appellate order, has rightly allowed the claim by placing reliance upon the judgment of the Hon’ble jurisdictional High Court in American Express International Banking Corporation v. CIT reported in (2002) 258 ITR 601, and therefore, the issue is squarely covered in favour of the assessee by binding judicial precedents.

We have perused the submissions advanced by both sides in light of the records placed before this Tribunal.

12. The issue relates to disallowance of broken period interest of Rs. 1,40,63,711/- paid on purchase of securities, which has been treated by the Assessing Officer as part of the cost of acquisition, whereas the CIT(A) has allowed the claim.

12.1. It is an undisputed position that the assessee is a banking entity and holds securities as part of its treasury/investment operations in the course of its banking business. In such transactions, securities are acquired on a cum-interest basis, and the price paid inherently includes the interest accrued for the broken period from the last interest payment date up to the date of purchase. The amount paid as broken period interest, therefore, represents reimbursement of accrued interest to the seller and is in substance referable to revenue accretion and not to acquisition of the security itself.

12.2. Broken Period Interest relating to Government and other approved securities refers to interest relatable to the period from last due date (upto which interest was paid) till the date of purchase or sale. Thus, when a bank purchases securities, it pays the market price of security plus Broken Period Interest to the seller, because seller is entitled to interest till the date of sale. This is an age-old practice in the Government securities market. The purchasing banker treats the Broken Period Interest paid as expenditure and the selling banker treats the Broken Period Interest received as income. The purchasing bank becomes the owner of security from the date of purchase only and therefore it is natural that interest relatable to the period before purchase is treated as income of the selling bank. These securities are fixed income earning assets, where earnings accrue in direct proportion with time.

12.3. The issue regarding allowability of Broken Period Interest was considered in great detail by Hon’ble Bombay High Court in the case of American Express(supra). Hon’ble Court inter alia factually distinguished the decision of Hon’ble Supreme Court in the case of Vyaya Bank (supra), the relevant portion of which is reproduced below:

“In that case (Vyaya Bank’s case) the facts were as follows. During the assessment year under consideration, Vyaya Bank entered into an agreement with Jayalakshmi Bank Limited, whereby Vijaya Bank took over the liabilities of Jayalakshmi Bank. They also took over assets belonging to Jayalakshmi Bank. These assets consisted of two items viz. Rs.58,568 and Rs.11,630. The said amount of Rs.58,568 represented Interest, which accrued on securities taken over by Vyaya Bank from Jayalakshmi Bank and Rs. 11,630 was the interest which accrued upto the date of purchase of securities by the assessee-Bank from the open market. These two amounts were brought to tax by the A.O. under section 18 of the Income-tax Act. The assessee-Bank claimed that these amounts were deductible under sections 19 and 20. This was on the footing that the department had bought to tax, the aforesaid two amounts as interest on securities under section 18. It is in the light of these facts that one has to read the judgement in Vyaya Bank’s case. In the light of the above facts, it was held that outlay on purchase of income bearing asset was in the nature of capital outlay and no part of the capital outlay can be set-off as expenditure against income accruing from the asset in question. In our case, the amount which the assessee received has been brought to tax under the head “Business” under section 28. The amount is not brought to tax under section 18 of the Income-tax Act. After bringing the amount to tax under the head “Business”, the department taxed the Broken Period Interest Received on sale, but at the same time, disallowed Broken Period Interest Payment at the time of purchase and this led to the dispute. Having assessed the amount received by the assessee under section 28, the only limited dispute was whether the impugned adjustments in the method of accounting adopted by the assessee-Bank should be discarded. Therefore, the judgement in Vyaya Bank’s case has no application to the facts of the present case. If the department had brought to tax, the amounts received by the assessee-Bank under section 18, then Vijaya Bank’s case was applicable. But, in the present case, the department brought to tax such amounts under section 28 right from inception. Therefore, the Tribunal was right in coming to the conclusion that the judgement in Vyaya Bank’s case did not apply to facts of the present case”

12.4. Hon’ble Bombay High Court held that:

“That the judgement in the case of Ilijaya Bank had no application to the facts of the case. That, having assessed the income under section 28, the department ought to have taxed interest for Broken Period Interest Received and the department ought to have allowed deduction for Broken Period Interest Paid.”

12.5. Reliance is placed on the judgment of the Hon’ble Bombay High Court in American Express International Banking Corporation (258 ITR 601), which has been approved by the Hon’ble Supreme Court. Further, reliance was placed on the decision of the Hon’ble Supreme Court in the case of Bank of Rajasthan reported in (2024) 167 taxmann.com 430, wherein, erstwhile State Bank of Mysore now merged with State Bank of India is a party, where it has been clarified that where securities are held as stock-in-trade, broken period interest is to be allowed.

12.6. Hon’ble Supreme Court in Bank of Rajasthan Ltd. v. CIT reported in (2024) 167 taxmann.com 430, has clarified that the characterization of securities in the hands of a banking company is a fact-dependent exercise and that RBI classification is not determinative for tax purposes. However, for the limited purpose of allowability of Broken Period Interest, such distinction is not decisive.

12.7. In the present case, the Revenue has admittedly brought to tax the Broken Period Interest received as business income. In such circumstances, the corresponding Broken Period Interest paid cannot be disallowed, as doing so would result in taxing notional income and would be contrary to the settled principle that only real income can be brought to tax. This position stan s fortified by the judgment of the Hon’ble Bombay High Court in American Express International Banking Corporation (supra), wherein it has been held that, once Broken Period Interest received is taxed as business income, the Broken Period Interest paid is allowable as deduction so as to arrive at the correct taxable income. Hon’ble Bombay High Court has factually distinguished the decision of Hon’ble Supreme Court in Vyaya Bank(supra) on the ground that the same was rendered in the context of the erstwhile provisions relating to “interest on securities”, which no longer govern the field.

12.8. Therefore, reliance placed by the Revenue on the decision of Hon’ble Supreme Court in Vijaya Bank v. CIT(supra) is misplaced. The said decision was rendered in the context of the erstwhile scheme of taxation under the head “Interest on securities”, where the income was assessed under specific statutory provisions then in force. The facts and statutory framework in the present case are materially different, inasmuch as the income from securities, including Broken Period Interest, is assessed as business income under section 28. This distinction has been clearly recognized by Hon’ble Bombay High Court in American Express International Banking Corporation v. CIT, (supra), wherein it has been held that once Broken Period Interest received is taxed as business income, the corresponding payment cannot be disallowed. We therefore hold that, the decision in Vijaya Bank does not apply to the facts of the present case.

12.9. This consistent view has been taken in various judicial precedents, including in decision of coordinate bench of this Tribunal in case of State Bank of India v. DCIT, in ITA no.3860 & 3882/ Mum/ 2017 vide order dated 21/04/2026 wherein it is t at, securities held by banks form part of their business assets and income therefrom is assessable as business income; consequently, the corresponding expenditure in the nature of broken period interest cannot be treated as capital in nature further fortifies the view.

Thus Hon’ble jurisdictional High Court as well as various benches of the Tribunal consistently have held that, such interest is allowable as deduction and does not form part of cost of acquisition of securities. In the present case, the Ld.CIT(A) allowed the claim of the assessee by following binding judicial precedents. The Revenue has not brought any material on record to controvert the findings of the Ld. CIT(A) or to demonstrate that the issue is covered in its favour.

12.10. In view of the above settled legal position, particularly in the case of banking entities, we find no infirmity in the order of the Ld.CIT(A) in allowing the claim. The disallowance made by the Ld.AO is accordingly directed to be deleted.

Accordingly, ground no.1 raised by the Revenue is dismissed.

13. Ground No.2: Disallowance of salary paid to expatriate employee – Rs.1,62,95,395/-

During the year under consideration, the assessee claimed deduction of salary paid to an expatriate employee amounting to Rs. 1,62,95,395/ -. The said employee was an expatriate engaged in rendering services in connection with the assessee’s operations in India, and the salary expenditure was claimed as deduction in the computation of income.

13.1. The Ld.AO disallowed the claim by invoking the provisions of section 44C of the Act. The Ld.AO treated the expenditure as “head office expenditure” on the reasoning that the salary was paid outside India and was debited in the books of the Head Office. Accordingly, the Ld.AO held that the expenditure fell within the ambit of section 44C and was subject to the statutory restriction prescribed therein.

13.2. The Ld.CIT(A) deleted the disallowance. The Ld.CIT(A) held that the expatriate employee was in fact working for the Indian branch and the salary expenditure was incurred wholly and exclusively for the purposes of the business carried on in India. It was further held that merely because the payment was routed through or recorded in the Head Office books would not change the character of the expenditure, which was allowable under section 37(1) of the Act.

14. The Ld. DR relied upon the assessment order and submitted that the salary paid to the expatriate employee is in the nature of head office expenditure and, therefore, falls within the ambit of section 44C of the Act. It was contended that since the payment was made outside India and not directly incurred by the Indian branch, the Ld. AO was justified in invoking section 44C and restricting the deduction.

14.1. In support of the said proposition, reliance was also placed on the decision of Hon’ble Supreme Court in American Express International Banking Corporation v. CIT,(supra) wherein the scope and intent of section 44C has been explained to be a specific provision governing deduction of head office expenditure attributable to the Indian operations of a non-resident, and that such computation is required to be strictly in accordance with statutory formula prescribed therein.

14.2. The Ld.Sr.Counsel supported the order of the Ld.CIT(A) and submitted that the expatriate employee was working exclusively for the Indian branch and was managing its operations. It was further submitted that the entire salary expenditure had a direct and proximate nexus with the business carried on by the Indian branch and was incurred wholly and exclusively for the purposes of such business, and therefore allowable u/s 37(1) of the Act.

14.3. It was contended that section 44C is a specific provision applicable only to “head office expenditure” in the nature of general administrative and executive expenses incurred for the overall management of the non-resident entity and does not extend to identifiable and specifically incurred expenditure attributable to Indian operations.

14.3. Reliance was placed on the decision of the Hon’ble jurisdictional High Court in case of CIT v. Emirates Commercial Bank Ltd. reported in 262 ITR 55, and also on the decision of the Hon’ble Bombay High Court in case of CIT v. American Express Bank Ltd. reported in 258 ITR 601, wherein it has been held that section 44C does not apply to specific expenditure incurred for the purposes of Indian operations and that such expenditure is allowable as business expenditure under section 37(1) of the Act.

We have perused the submissions advanced by both sides in light of the records placed before this Tribunal.

15. Section 44C of the Act is a specific computational provision intended to place a restriction on deduction of “head office expenditure” in the nature of general administrative and execu we expenses incurred outside India. The applicability of the said provision presupposes that the expenditure in question is in the nature of common head office overheads which are not directly identifiable with the operations of the Indian branch.

15.1 In the present case, however, the factual position emerging from the record clearly indicates that the impugned expenditure does not represent any independent head office cost sought to be allocated to the Indian branch. The salary of the expatriate employee was admittedly paid in the first instance by the head office in the respective overseas jurisdiction in accordance with global employment arrangements. The Indian branch has merely reimbursed the proportionate portion of such salary relatable to services rendered for Indian operations.

15.2. It is also an undisputed position that the entire salary income of the expatriate employee is subjected to tax in India in his individual capacity, the Indian tax liability being discharged on the full remuneration earned for services rendered in India. The reimbursement made by the assessee to the head office therefore does not represent any separate or additional expenditure in the nature of head office overhead, but only reflects internal cost-sharing of salary already subjected to tax in India.

15.3. In such a scenario, the essential character of the payment assumes significance. What is reimbursed by the Indian branch is only that portion of salary initially borne by the head office which is attributable to services rendered for the Indian operations. The transaction, thus, does not partake the character of “head office expenditure” within the meaning of section 44C, which is intended to cover general administrative and executive overheads of global organisation.

15.4. Once it is found that the expenditure is in the nature of direct reimbursement of identifiable personnel cost attributable to Indian operations, the preconditions for invoking section 44C fail. The provision cannot be extended to cover reimbursement of specific operational salary costs merely because the initial disbursement was routed through the head office.

15.5. We accordingly hold that the impugned expenditure is not in the nature of head office expenditure contemplated under section 44C, but is in substance a reimbursement of salary cost relatable to Indian operations, which is allowable under section 37(1) of the Act.

15.6. We further find that the aforesaid view does not result in any loss to the Revenue or double deduction, as the corresponding salary income of the expatriate employee has already been subjected to tax in India, and the impugned reimbursement merely represents a pass-through of cost without any element of additional claim or tax advantage. We, therefore, do not find any infirmity in the view taken by Ld.CIT(A) and the same is upheld.

Accordingly, this Ground No. 2 raised by the Revenue is dismissed.

16. Ground No.3: Allowance of loss on revaluation of unmatured foreign exchange forward contracts – Rs.39,97,207/-

During the year under consideration, the assessee had entered into forward contracts in foreign exchange which was mark to market as on 31/03/ 1999. This resulted in a loss of Rs.39,97,207/- on account of revaluation of unmatured foreign exchange forward contracts as on the balance sheet date. Such loss was debited to the profit and loss account of the Indian PE and consequently claimed as deduction while computing the total income.

16.1. The Ld.AO disallowed the said loss on the ground that the same was notional in nature and had not crystallized during the year.

16.2. The Ld. CIT(A), however, allowed the claim of the assessee by holding that such loss is allowable in accordance with the mercantile system of accounting and consistent accounting practices followed by banking institutions. Reliance was placed by the Ld.CIT(A) on the decision of Hon’ble Mumbai Special Bench in case of DCIT vs. Bank of Bahrain and Kuwait reported in (2010) 41 SOT 290.

16.3. The Ld. DR relied upon the assessment order and submitted that the loss claimed by the assessee is merely notional and contingent in nature, as the contracts had not been settled during the year. It was contended that such loss cannot be allowed as deduction under the Act.

16.4. The Ld.Sr.Counsel supported the order of the Ld.CIT(A) and submitted that the assessee is consistently following mercantile system of accounting and is required to account for such forward contracts on mark-to-market basis as per RBI guidelines. It was further submitted that such loss is not notional but represents a real business loss arising from valuation of outstanding contracts at the year-end. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT vs Woodward Governor India ) Ltd. (312 ITR 254) (SC), and also on the decision of the Hon’ble Bombay High Court in the case of CIT vs Bank of Baroda (262 ITR 334) (Bom), as well as the decision of the Hon’ble Madras High Court in the case of Indian Overseas Bank vs CIT (183 ITR 200) (Mad).

We have perused the submissions advanced by both sides in light of the records placed before this Tribunal.

17. The issue for consideration is whether the loss arising on account of revaluation of unmatured foreign exchange forward contracts is allowable as deduction. It is an admitted fact that the assessee is consistently following mercantile system of accounting and is valuing its outstanding forward contracts at the year-end in accordance with recognized accounting principles and RBI guidelines.

17.1. Having considered the rival submissions and the material placed on record, we find that the Ld.CIT(A) has allowed the claim primarily by following the settled position of law laid down by the Hon’ble Mumbai Special Bench in DCIT vs. Bank of Bahrain & Kuwait (supra), wherein it has been categorically held that loss arising on valuation of outstanding foreign exchange forward contracts as on the balance sheet date is an allowable business loss under the mercantile system of accounting. Hon’ble Special Bench decision has further clarified that where the assessee consistently follows such accounting method and the same is in consonance with the accounting standards prescribed, the resultant loss cannot be characterized as contingent or notional so as to deny deduction.

17.2. We further find that the view taken by the Ld.CIT(A) stan s fortified by the decision of Hon’ble Bombay High Court in CIT vs. Citibank N.A. reported in (2016) 66 taxmann.com 373, wherein Hon’ble Court, dealing with a similar issue of valuation of outstanding derivative/foreign exchange contracts on mark-to-market basis, upheld the allowability of such loss as a permissible deduction under the mercantile system of accounting.

17.3. In the said decision, the Hon’ble High Court, inter alia, approved the principle that where the assessee is consistently following a recognised accounting method and values its outstanding foreign exchange contracts in accordance with prescribed accounting standards / RBI guidelines, the resultant loss arising on revaluation as at the balance sheet date cannot be characterised as merely notional or contingent. It was further held that such valuation reflects a real and present obligation which has accrued as on the closing date and therefore is allowable as a business loss.

17.3. We note that the ratio laid down by the Hon’ble High Court in Citibank N.A. (supra) is in consonance with the Special Bench decision in DCIT vs. Bank of Bahrain & Kuwait (supra), which has been relied upon by the Ld. CIT(A). The jurisdictional High Court having affirmed the underlying principle, the controversy now stands settled to the effect that MTM loss on outstanding foreign exchange derivative contracts, when computed on a consistent and recognised accounting basis, is an ascertained liability allowable in computing business income.

17.4. We also find that the Revenue has not demonstrated any distinguishing feature in the facts of the present case so as to deviate from the ratio laid down in the aforesaid Special Bench decision. The principle laid down therein has been subsequently followed in various judicial pronouncements, reinforcing the position that MTM losses on foreign exchange derivatives arising at year-end are allowable when computed on a scientific and recognized basis.

17.5. The Ld. CIT(A) has correctly appreciated that such valuation is not a case of mere anticipation of loss, but represents a recognized accounting practice of “mark-to-market” wherein the existing obligation under an outstanding contract is restated to reflect its realizable liability as on the balance sheet date. We therefore do not find any infirmity in the view taken by the Ld.CIT(A). Accordingly, we find no infirmity in the order of the Ld. CIT(A) in allowing the claim of the assessee.

Accordingly, Ground No. 3 raised by the Revenue is dismissed.

18. Ground No.4: Allowance of loss on depreciation in value of investments – Rs.9,25,033/-

It is noted that during the year under consideration, the assessee had traded in securities categorised as “current investments” in accordance with the guidelines issued by the RBI. In line with the well-settled principle of valuation of stock-in-trade, the same was valued at cost or market value, whichever is lower, as at the end of the year. On such valuation, a diminution in the value of securities amounting to 29,25,033/- was recorded and claimed as deduction. 18.1. The Ld.AO disallowed the claim by treating the said securities as capital assets and holding that any diminution in their value does not give rise to an allowable deduction.

18.2. The Ld.CIT(A) deleted the disallowance by holding that, in the case of a banking company, securities held as part of the trading portfolio constitute stock-in-trade and are, therefore, required to be valued in accordance with the well-settled principle of commercial accounting, i.e., “cost or market value, whichever is lower”. It was further held that any diminution in the value of such stock-in-trade, determined on a scientific and consistently followed valuation method, results in a real and ascertained business loss, which cannot be brushed aside merely on the basis of a change in characterisation sought to be made by the Assessing Officer.

18.3. The Ld.CIT(A) placed reliance on the judgment of the Hon’ble Supreme Court in case of United Commercial Bank v. CIT reported in (1999) 240 ITR 355, wherein it has been unequivocally held that an assessee is entitled to value its stock-in-trade in accordance with recognised accounting principles and that the Revenue cannot disregard such consistent method of accounting if it reflects true and correct profits. The said principle has been upheld by Hon’ble Bombay High Court in case of CIT v. Bank of Baroda reported in (2003) 262 ITR 334 , wherein it has been affirmed that securities held by banks as trading assets form part of stock-in-trade and the valuation thereof on a prudential basis, even if resulting in a loss, is allowable in computing business income.

18.4. The Ld.DR has strongly supported the assessment order and reiterated that the securities held by the assessee were in the nature of capital investments and not trading assets. It was thus contended that any diminution in their value, being merely notional and arising from valuation as on the balance sheet date, cannot be allowed as a deduction under the Act. According to the Ld.DR, the Ld.CIT(A) erred in law and on facts in re-characterizing such investments as stock-in-trade and in granting relief to assessee on the basis of year-end valuation.

18.5. The Ld.AR supported the order of the Ld.CIT(A) and submitted that in the case of banking companies, securities constitute stock-in-trade and are required to be valued in accordance with RBI guidelines at cost or market value, whichever is lower. It was further submitted that the resultant depreciation represents a real business loss. Reliance was placed on the decision of the Hon’ble Supreme Court in the case of United Commercial Bank vs CIT (240 ITR 355) (SC) and the decision of the Hon’ble jurisdictional High Court in the case of CIT vs Bank of Baroda (262 ITR 334) (Bom).

We have perused the submissions advanced by both sides in light of the records placed before this Tribunal.

19.1. The sole controversy relates to the allowability of diminution in the value of securities held by the assessee bank, which have been classified as “current investments” in accordance with the RBI guidelines.

19.2. The Ld.DR has reiterated the stand of the Ld.AO that the said securities are in the nature of capital investments and, therefore, any diminution in their value does not give rise to an allowable deduction. However, we find that this contention proceeds on a narrow appreciation of facts and disregards the settled legal position governing banking entities and valuation of trading portfolios.

19.3. It is an undisputed position that the assessee is a banking company and the securities in question form part of its investment/trading portfolio, which is maintained in accordance with RBI regulatory norms. Once such securities are held as part of the trading book, the same assume the character of stock-in-trade and cannot be equated with capital assets simpliciter. The classification adopted under RBI guidelines also carries considerable evidentiary value in determining the true nature of the holding.

19.4. We further find that the Ld.CIT(A) rightly applied the settled principle of valuation of stock-in-trade at “cost or market value, whichever is lower”. Hon’ble Supreme Court in United Commercial Bank v. CIT (supra) clearly held that assessee is entitled to value its stock-in-trade in accordance with recognised commercial accounting principles and that the Revenue cannot disregard such consistent method if it reflects true profits. The said principle has been affirmed by Hon’ble jurisdictional High Court in CIT v. Bank of Baroda (supra), wherein it has been held that securities held by banks as trading assets constitute stock-in-trade and the resultant loss on valuation is allowable.

19.5. In view of the above binding judicial precedents, we find no merit in the stand of the Revenue that the diminution in value is merely notional or that the securities partake the character of capital investments. The finding recorded by the Ld.CIT(A) that the loss is real, ascertained and allowable in accordance with the mercantile system of accounting is well-reasoned and calls for no interference. We therefore find no infirmity in the order of the Ld. CIT(A) in allowing the claim of the assessee.

Accordingly, ground no.4 raised by the Revenue stands dismissed.

20. Additional Ground: Applicability of section 14A of the c

The revenue has raised the following additional ground of appeal:-

“Whether provision of section 14A of the I.T. Act will be applicable in the event it is held that the interest received by the assessee from its Head Office is not taxable in the hands of Indian branch office?”

20.1. The Ld. DR submitted that the additional ground raised by the Revenue is a pure question of law arising from the facts already available on record and does not require any fresh investigation into facts. It was, therefore, prayed that the same may be admitted for adjudication.

20.2. We have considered the submissions and perused the material placed on record. We find that the issue raised in the additional ground is a legal issue arising from the assessment proceedings and all the relevant facts necessary for its adjudication are already available on record. No further enquiry or investigation of facts is required for deciding the same.

20.3. The Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT reported in 229 ITR 383 (SC) has held that where the facts necessary to examine a question of law are available on record, such a question can be raised at any stage of the proceedings. Similar view has been taken by the Hon’ble Supreme Court in Jute Corporation of India Ltd. v. CIT reported in 187 ITR 688 (SC), wherein it was held that an additional ground involving a question of law can be entertained if the relevant facts are already on record.

Respectfully following the ratio laid down by the Hon’ble Supreme Court in the aforesaid decisions, we admit the additional ground raised by the Revenue for adjudication.

Accordingly the additional ground raised by the revenue stands admitted.

21. The Revenue raised this additional ground contending that in the event the interest received by the assessee from its Head Office/overseas branches is held to be non-taxable, the provisions of section 14A of the Act should be invoked to disallow expenditure relatable to such income.

21.2. At the outset, the Ld.Sr.Counsel submitted that this issue is settled by the decision of Hon’ble Mumbai Special Bench in assessee’s own case for assessment year 1998-99 in ITA No.9189/Mum/ 04 and CO no.139/Mum/2013 vide order dated 10/ 10/2025.

21.3. It was submitted that the Special Bench, while adjudicating the said issue, has laid down the principles governing the applicability of section 14A and the manner of computation of expenditure relatable to exempt income in the assessee’s own case. The said decision, being in the assessee’s own case, has attained finality and constitutes a binding precedent in the absence of any distinguishing facts brought on record by the Revenue for the year under consideration.

23.4. Accordingly, it was contended that the issue now raised by the Revenue stands concluded against it by the decision of Hon’ble Special Bench (supra) in assessee’s own case on identical controversy, and therefore no interference is warranted with stand taken in accordance with the settled position of law. Accordingly, the additional ground raised by the Revenue is dismissed.

In the result, the appeal filed by the assessee stands allowed and the appeal filed by the Revenue is dismissed.

Order pronounced in the open Court on 12th, June, 2026.