Bank of Nova Scotia Vs ACIT (ITAT Mumbai)
Conclusion: Interest income earned by a foreign bank from foreign currency loans extended to Indian corporates was taxable on a gross basis. Such income could not be reduced by attributing expenditure before the concessional rate of tax was applied.
Held: In the instant case, the dispute arose from assessments of The Bank of Nova Scotia for the assessment years 1999-2000 to 2001-02. For the assessment year 2001-02, AO attributed interest costs of about ₹86 lakh to foreign currency loans advanced to Indian corporates. After attributing those costs, AO computed the net interest income at about ₹1.78 crore and applied the concessional rate only to that amount. CIT (Appeals) reversed that approach by following earlier orders in the bank’s own case. Revenue challenged that decision before the Tribunal. Revenue argued that the concessional rate should apply only to the net interest income after deducting expenditure incurred to earn it. Assessee-bank contended that the statutory framework, CBDT Circular No. 684 and the India-Canada Double Taxation Avoidance Agreement contemplated taxation of such interest on a gross basis. It also relied on earlier tribunal decisions in its own case, which had consistently held that interest covered by Section 115A was taxable without deducting related expenditure. Accepting the bank’s contention, Tribunal held that the legislature intended to tax such interest on a gross basis and that there was no scope for reducing the interest receipts by expenditure before applying the concessional rate. It observed, “The Coordinate Benches have consistently held that the legislature has intended to tax interest income on gross basis and there cannot be any dispute in this regard.” Tribunal further ruled, “Therefore, in the instant case, the gross interest receipts of Rs. 2,69,89,233/- is eligible for concessional tax rate of 20% under the provisions of Section 115A of the Act and the findings of the CIT(A) are confirmed.” Tribunal also dismissed the Revenue’s challenge to the deletion of the disallowance relating to expenditure incurred for earning tax-free interest. It found that the bank had sufficient interest-free funds to make the investments and upheld the CIT (Appeals)’ order. It held that interest received by the Indian branch from its head office and overseas branches was not chargeable to tax because the transactions were with itself. It also upheld the allowability of broken-period interest on securities held as stock-in-trade by following the Supreme Court’s decision in Bank of Rajasthan Ltd. Tribunal also considered the Revenue’s challenge relating to the computation of book profits under Section 115JA. It held that, in view of the retrospective amendment introducing Explanation (g), provision for standard assets would ordinarily require adjustment while computing book profits. However, it accepted the bank’s alternate legal contention that Section 115JA itself did not apply to a banking company governed by the Banking Regulation Act because such entities were not required to prepare their profit and loss accounts under the Companies Act. Tribunal, therefore, held that the Revenue’s ground had become academic and dismissed it as infructuous.
