Case Law Details
Indusind Bank Ltd Vs ACIT (ITAT Mumbai) – Whether interest on government securities will become taxable on the date of coupon date as the assessee receives the right of the interest in the said securities only on the said date and it does not become due on day to day basis. – Assessee’s appeal partly allowed.
The Tribunal held that interest accrues only on the coupon dates and not on day to day basis. In coming to this conclusion, the Tribunal placed reliance on the judgment of the Lahore High court in Haveli Shah Sardarilal v CIT,Punjab, 4 ITR 297, the Full Bench of the Patna High Court in Ranjit Prasad Singh v CIT, Bihar & Orissa (4 ITC 264) and the Karnataka High Court judgment in Addl CIT, Mysore v. The Vijay Bank Ltd., Mangalore (1976) Tax LR 524. It was also noticed by the Tribunal that the contention advanced on behalf of the revenue before Tribunal in that case was totally contradictory to the contention advanced by the revenue before the Karnataka High court in the case of Vijay Bank(supra) before the Tribunal. The department had placed reliance on the judgement of the Hon’ble Bombay High court in the case of American Express International banking Corporation v CIT, 258 ITR 602 and Taparia Tools Ltd v. JCIT, 269 ITR 102. These two judgments have been considered by the Tribunal in paragraphs 14 to 17 of the order cited above and it was held that these judgements are not applicable to the facts of Union Bank’s case. In paragraphs 20 and 21, the Tribunal has also considered the objection of the department that the assessee cannot credit the interest on government securities in the profit & loss account on day to day basis but contended that for purposes of income tax only the interest that accrued on the coupon dates can be assessed. The Tribunal noticed the judgement of the Supreme Court in the case of another bank, namely United Commercial Bank, 240 ITR 355.In this case, the Supreme Court has reversed the judgement of the Calcutta High Court, which held that the assessee cannot prepare the computation of its income for income tax purposes in a manner different from the method under which it keeps accounts. Applying this judgment of the Supreme Court, the Tribunal held that Union Bank of India cannot be prevented from urging in the return that the interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit & loss account for the interest on day to day basis. Thus, the issue has been decided in favor of the view that the interest accrues only on the specified coupon dates and not on day to day basis. Since the facts of the present are identical, following the order of the Tribunal in the case of Union Bank of India (supra), we uphold the action taken by the CIT (Appeals) and dismiss the appeal.” Consistent with the precedents, we dismiss this ground of the revenue.
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES, ‘I’, MUMBAI
ITA No. 2464/Mum/2009
(Assessment year 2004-05)
Indusind Bank Ltd Vs ACIT
O R D E R
PER VIJAY PAL RAO,JM
This appeal by the assessee is directed against the order dated 16.02.2009 of CIT(A) for the assessment year 2004-05.
2. The assessee has raised the following grounds :
“1. On the facts and in the circumstance of the case and in law, the ld. CIT(A) erred in confirming an amount of Rs.44, 16,08, 111 representing interest accrued on securities but not falling due for payment . Such interest, which is in the process of accrual, is at incipient and inchoate stage, maturing into taxable income only when it becomes due and payable in terms of issue of such security.
2. On the facts and in the circumstance of the case and in law, the ld. CIT(A) erred in confirming dis allowance of interest and other expenditure u/s 14A and further erred in directing the AO to recompute dis allowance as per Rule 8D of the IT Rules. The ld CIT(A) further erred in directing the AO to make addition of the same amount in computing book profits u/s 115JB;
3. On the facts and in the circumstance of the case and in law, the ld. CIT(A) erred in confirming dis allowance of loss amounting to Rs. 3,78,40,017/- on unmatured foreign exchange contracts ignoring he fact that the appellant maintains accounts on mercantile system, where liability has already accrued though discharged at a future date having regard to the accepted principles of commercial practice, accountancy and the guidelines issued by RBI.”
3. The grounds of appeal no.1 is regarding the addition on account of interest accrued on securities but not become due for payment. During the course of assessments proceedings, the AO observed that the assessee-bank is following the method of offering the income for taxation on receipt basis. In computation of income attached to the return of income, the assessee has reduced from the total income an amount of Rs.26,03,374,002.86 being interest income on investments, whereas in the balance sheet of the assessee as per schedule XVII-CI, the principle accounting policy in case of revenue recognition has been given interalia interest on government securities, debentures and other fixed income securities has been recognized on accrual basis. The AO accordingly added the interest accrued as on 31.3.2004 but not received of Rs.44,16,08,111.
4. On appeal, the CIT(A) has confirmed the addition made by the AO.
5. Before us the learned AR of the assessee has submitted that the interest on securities is due on coupon date and hence taxable on those date. The learned AR submitted that the interest on securities does not accrue on day-to-day basis and the assessee does not have any right or claim of interest on such securities till it becomes due i.e. coupon date. The ld. AR submitted that if the assessee sells the securities prior to the due date, the holder of the security would be entitled to the interest for the entire period and the issuing authority will make the payment of interest to the holder of the security on presentation on coupon date. Thus, interest income was offered to tax only when the assessee has right to receive such interest. He has submitted that the issue raised in this appeal has already been considered by the Special Bench of this Tribunal in the case of in the case of DCIT v. Bank of Bahrain and Kuwait reported in 41 SOT 29).
6. He has further submitted that the provisions of Section 145 cannot override section 5.. If an income has neither accrued nor received within the meaning of section 5. The said income cannot be charged to tax merely on the basis of book keeping entry. He has relied upon the decision of Special Bench of Hyderabad Tribunal in the case of Nagarjuna Investment Trust Ltd (reported in 65 ITD 17 (Hyd) (SB).
7. On the other hand, the learned DR has submitted that as per the concept of matching principle when the assessee has claimed the expenditure on accrual basis then the income should also be recognized on accrual basis. He has further contended that as per the assessee’s own accounting policy, the revenue is recognized on accrual basis. As per the accounting policy of the assessee, interest on government securities, debentures and other fixed income securities is recognized on accrual basis. Therefore, the assessee can not be permitted to adopt one principle of accounting policy at the time of expenditure and another at the time of income. He has further submitted that a combined reading os section 2(45) 4,5 and 145 would reveal that total income of the assessee is required to be computed in the manner laid down under the Act and that section 5 is subject to the provisions of the Act which would interalia include section 145, As per section 145, income chargeable under the head “profit and gains of business or professions’ or “Income from other sources” shall be computed in accordance with either cash or mercantile system of accounting regularly followed by the assessee as well as the notified accounting standard. There is no scope for adopting a hybrid system of accounting in contravention of section 145, as has been done by the assessee in the instant case. He also relied upon the decisions of this Tribunal, Mumbai in the cases of ACIT V/s Asea Brown Boveri Ltd reported in 11 0TTJ (Mum) 502 and Jt CIT V. India Equipment leasing ltd reported in 111 ITD 37 (Chenai). The learned DR submitted that in the printed accounts of the assessee, the assessee has itself included this amount on accrual basis as per accounting standard employed by the assessee, whereas for the purposes of computing taxable income the assessee followed cash method in regard to such interest income. He further submitted that the concept of real income cannot be so used as to make accrued income non-income. He relied upon the decision of the Hon.Apex Court in the case of State Bank of Travencore V. CIT reported in 158 ITR 102 (SC)
8. The learned DR submitted that the RBI guidelines are only prudential in nature and do not override the provisions of the Act. In this regard, he placed reliance on the decision of the Hon. Supreme Court in the case of Southern Technologies ltd V/s JCIT -320 ITR 577 (SC).
9. We have considered the rival contentions and relevant record. The contentions of the learned DR are that when the assessee is recognizing the expenditure on accrual basis and particularly the payment with regard to the interest accrued on day to day basis on purchase of securities then the same principle has to be followed for recognizing the income. The said issue is not before us and the contention of the learned DR is based on hypothetical circumstances as there is no dispute before us regarding the allow ability of the expenditure of purchase of security. When this issue is not before us then we do not propose to comment or express our view on this issue of allow ability of expenditure on the date of payment made by the assessee on account of interest but not became due at the time of purchase. As far as the issue of the interest accrued but not received after acquiring the securities, we find that the said issue is now squarely covered by the decision of ITAT Mumbai (SB) in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait, 41 SOT 290 (Mum)(SB).
10. The issue before the Special Bench was :
“on the facts and circumstances of the case and in law, the ld. CIT(A) has erred in holding that, income arising from securities and on debenture to the assessee is liable to be taxed on due basis and not on the basis fo the day to day”
11. The Special Bench has adjudication upon the issue in paragraph 12 as under :
“We have carefully perused the order of the Tribunal cited above. In that case also, the issue was identical, namely, whether in the case of Government securities, interest accrues on day to day basis or only on the coupon dates. The Tribunal held that interest accrues only on the coupon dates and not on day to day basis. In coming to this conclusion, the Tribunal placed reliance on the judgment of the Lahore High court in Haveli Shah Sardarilal v CIT,Punjab, 4 ITR 297, the Full Bench of the Patna High Court in Ranjit Prasad Singh v CIT, Bihar & Orissa (4 ITC 264) and the Karnataka High Court judgment in Addl CIT, Mysore v. The Vijay Bank Ltd., Mangalore (1976) Tax LR 524. It was also noticed by the Tribunal that the contention advanced on behalf of the revenue before Tribunal in that case was totally contradictory to the contention advanced by the revenue before the Karnataka High court in the case of Vijay Bank(supra) before the Tribunal. The department had placed reliance on the judgement of the Hon’ble Bombay High court in the case of American Express International banking Corporation v CIT, 258 ITR 602 and Taparia Tools Ltd v. JCIT, 269 ITR 102. These two judgments have been considered by the Tribunal in paragraphs 14 to 17 of the order cited above and it was held that these judgements are not applicable to the facts of Union Bank’s case. In paragraphs 20 and 21, the Tribunal has also considered the objection of the department that the assessee cannot credit the interest on government securities in the profit & loss account on day to day basis but contended that for purposes of income tax only the interest that accrued on the coupon dates can be assessed. The Tribunal noticed the judgement of the Supreme Court in the case of another bank, namely United Commercial Bank, 240 ITR 355.In this case, the Supreme Court has reversed the judgement of the Calcutta High Court, which held that the assessee cannot prepare the computation of its income for income tax purposes in a manner different from the method under which it keeps accounts. Applying this judgment of the Supreme Court, the Tribunal held that Union Bank of India cannot be prevented from urging in the return that the interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit & loss account for the interest on day to day basis. Thus, the issue has been decided in favour of the view that the interest accrues only on the specified coupon dates and not on day to day basis. Since the facts of the present are identical, following the order of the Tribunal in the case of Union Bank of India (supra), we uphold the action taken by the CIT (Appeals) and dismiss the appeal.” Consistent with the precedents, we dismiss this ground of the revenue.”
12. We further note that in assessee’s own case for the assessment year 2000-01 in ITA No.931/Mumbai/2004 this Tribunal decided the identical issue by following the decision of the Special Bench in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait, (supra)
“5. Having heard both the sides, we find that the issue is squarely covered by the decision of the ITAT (SB) in the case of DCIT v. Bank of Bahrain and Kuwait (supra),wherein, it was held as follows:-
“12. We have herd both the sides and perused the record of the case. We find that the issue is covered by the decision of the Tribunal in assessee’s own case for the assessment years 1992-93, 1993-94, 1995-96 and 1996-97. In AY 1996-97, the Tribunal has allowed the assessee’s appeal, inter alia, observing as under :
“We have carefully perused the order of the Tribunal cited above. In that case also, the issue was identical, namely, whether in the case of Government securities, interest accrues on day to day basis or only on the coupon dates. The Tribunal held that interest accrues only on the coupon dates and not on day to day basis. In coming to this conclusion, the Tribunal placed reliance on the judgment of the Lahore High court in Haveli Shah Sardarilal v CIT,Punjab, 4 ITR 297, the Full Bench of the Patna High Court in Ranjit Prasad Singh v CIT, Bihar & Orissa (4 ITC 264) and the Karnataka High Court judgment in Addl CIT, Mysore v. The Vijay Bank Ltd., Mangalore (1976) Tax LR 524. It was also noticed by the Tribunal that the contention advanced on behalf of the revenue before Tribunal in that case was totally contradictory to the contention advanced by the revenue before the Karnataka High court in the case of Vijay Bank(supra) before the Tribunal. The department had placed reliance on the judgement of the Hon’ble Bombay High court in the case of American Express International banking Corporation v CIT, 258 ITR 602 and Taparia Tools Ltd v. JCIT, 269 ITR 102. These two judgments have been considered by the Tribunal in paragraphs 14 to 17 of the order cited above and it was held that these judgements are not applicable to the facts of Union Bank’s case. In paragraphs 20 and 21, the Tribunal has also considered the objection of the department that the assessee cannot credit the interest on government securities in the profit & loss account on day to day basis but contended that for purposes of income tax only the interest that accrued on the coupon dates can be assessed. The Tribunal noticed the judgement of the Supreme Court in the case of another bank, namely United Commercial Bank, 240 ITR 355.In this case, the Supreme Court has reversed the judgement of the Calcutta High Court, which held that the assessee cannot prepare the computation of its income for income tax purposes in a manner different from the method under which it keeps accounts. Applying this judgment of the Supreme Court, the Tribunal held that Union Bank of India cannot be prevented from urging in the return that the interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit & loss account for the interest on day to day basis. Thus, the issue has been decided in favour of the view that the interest accrues only on the specified coupon dates and not on day to day basis. Since the facts of the present are identical, following the order of the Tribunal in the case of Union Bank of India (supra), we uphold the action taken by the CIT (Appeals) and dismiss the appeal.” Consistent with the precedents, we dismiss this ground of the revenue.”
“11.Ld Counsel for the assessee submitted that this issue is covered in assessee’s own case for the assessment years 1992-93, 1993-94, 1995-96 and 1996-97. ld Counsel submitted that interest on Government Securities does not accrue on day to day basis but on fixed dates and the entry made in the books are not relevant for income tax purposes.
12. We have heard both the sides and perused the records of the case. We find that the issue is covered by the decision of the Tribunal in assessee’s own case for the assessment years 1992-93, 1993-94, 1995-96 and 1996-97. In A.Y. 1996-97, the Tribunal has allowed the assessee’s appeal, inter alia, observing as under:-
We have carefully perused the order of the Tribunal cited above. In that case also, the issue was identical, namely, whether in the case of Government securities, interest accrues on day to day basis or only on the coupon dates. The Tribunal held that interest accrues only on the coupon dates and not on day to day basis. In coming to this conclusion, the Tribunal placed reliance on the judgment of the Lahore High court in Haveli Shah Sardarilal v CIT,Punjab, 4 ITR 297, the Full Bench of the Patna High Court in Ranjit Prasad Singh v CIT, Bihar & Orissa (4 ITC 264) and the Karnataka High Court judgment in Addl CIT, Mysore v. The Vijay Bank Ltd., Mangalore (1976) Tax LR 524. It was also noticed by the Tribunal that the contention advanced on behalf of the revenue before Tribunal in that case was totally contradictory to the contention advanced by the revenue before the Karnataka High court in the case of Vijay Bank(supra) before the Tribunal. The department had placed reliance on the judgement of the Hon’ble Bombay High court in the case of American Express International banking Corporation v CIT, 258 ITR 602 and Taparia Tools Ltd v. JCIT, 269 ITR 102. These two judgments have been considered by the Tribunal in paragraphs 14 to 17 of the order cited above and it was held that these judgements are not applicable to the facts of Union Bank’s case. In paragraphs 20 and 21, the Tribunal has also considered the objection of the department that the assessee cannot credit the interest on government securities in the profit & loss account on day to day basis but contended that for purposes of income tax only the interest that accrued on the coupon dates can be assessed. The Tribunal noticed the judgement of the Supreme Court in the case of another bank, namely United Commercial Bank, 240 ITR 355.In this case, the Supreme Court has reversed the judgement of the Calcutta High Court, which held that the assessee cannot prepare the computation of its income for income tax purposes in a manner different from the method under which it keeps accounts. Applying this judgment of the Supreme Court, the Tribunal held that Union Bank of India cannot be prevented from urging in the return that the interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit & loss account for the interest on day to day basis. Thus, the issue has been decided in favor of the view that the interest accrues only on the specified coupon dates and not on day to day basis. Since the facts of the present are identical, following the order of the Tribunal in the case of Union Bank of India (supra), we uphold the action taken by the CIT (Appeals) and dismiss the appeal.” Consistent with the precedents, we dismiss this ground of the revenue.”
We see no reasons to take any other view of the matter than the view so approved by the Special Bench. As regards, Hon’ble Supreme court’s judgement in the case of Ramabai (supra), the ratio of this judgement would not apply on interest on securities, since, as noted by the Tribunal in the above case, in the case of Government securities, interest does not accrue on day to day basis but only on the fixed dates. That situation is materially different from interest on compensation awards which were deal with by Hon’ble Supreme Court. Respectfully following the decision of the Special bench (supra), we decide the issue in favor of the assessee. This ground is allowed.”
13. In view of the decision of the Special Bench as well as the order of this Tribunal in assessee’s own case for the assessment year 2000-01 we decide the issue in favor of the assessee and against the revenue. Accordingly, we set aside the order of the lower authorities qua this issue, and delete the addition made on this account.
14. The grounds of appeal no.1 is allowed.
15. The grounds of appeal no.2 is regarding dis allowance of interest income u/s 14A by applying the Rule 8D of the Income Tax Rules, 1962 while computing the book profit u/s 115JB. The ground no.2 is consequential to that of grounds of appeal no.1. As the AO has disallowed the expenditure u/s 14A in respect of the addition made under the interest income on securities on the basis of accrual. The AO has disallowed the interest and other expenses by applying the provisions of section 14A. The CIT(A) has confirmed the same by following the decision of Special Bench of the Tribunal in Daga Capital Management and therefore apply Rule 8D and direct the AO to work out the dis allowance in accordance of Rule 8D.
16. We have considered the rival contentions and relevant record. In view of the decision taken in grounds of appeal no.1 in favor of the assessee, the dis allowance to that extent is not sustainable. The dis allowance on other income has to be computed as per the decision of Hon. Jurisdictional High Court in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai.Vs.Dy. Commissioner of Income Tax, reported in 234 CTR (Bom)-1, if any. Accordingly, we set aside this issue to the record of the AO.
17. Grounds of appeal no.2 is allowed for statistical purposes.
18. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 29th April 2011
