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From the Courts »
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Dy.Commissioner of Income-tax Special Range 27 Mumbai. VS. M/s.Banque Indosuez (known as Credit Agricole Indosuez) Ramon House 169 Backbay Reclamation Mumbai 400 020
September, 25th 2012
                      ,   `', 
                      ,         
         IN THE INCOME TAX APPELLATE TRIBUNAL
               MUMBAI BENCHES "L", MUMBAI
       ..                ,                  ,             ,                
         Before Shri R.S.Syal, AM and Shri Amit Shukla, JM
                       ./ITA            No.3098/Mum/2000
                (          /    Assessment Year : 1994-95)
The Dy.Commissioner of Income-tax          M/s.Banque Indosuez
Special Range 27                       /
                                           (known as Credit Agricole Indosuez)
Mumbai.                                    Ramon House
                                       Vs. 169 Backbay Reclamation
                                           Mumbai ­ 400 020.
                                           PAN : AAACB3537A.
         ( /Appellant)                            (  /Respondent)
                            ./CO     No.156/Mum/2000
                     (     /     Assessment Year :1994-95)
M/s.Banque Indosuez                        The Dy.Commissioner of Income-tax
(known as Credit Agricole Indosuez)    /
                                           Special Range 27
Mumbai ­ 400 020.                          Mumbai.
     (         / Cross Objector)       Vs.         (  /Respondent)
                       ./ITA            No.5040/Mum/2004
                     (     /      Assessment Year :1998-99)
The Dy.Director of Income-tax              M/s.Credit Agricole Indosuez
(International Taxation) 1(2)          /
                                           Ramon House
Mumbai.                                    Mumbai ­ 400 020.
                                       Vs.
          ( /Appellant)                           (  /Respondent)

                       ./ITA           No.4520/Mum/2004
                     (     /     Assessment Year : 1998-99)
M/s.Credit Agricole Indosuez ( Now         The Dy.Director of Income-tax
Calyon Bank)                           /
                                           (International Taxation) 1(2)
Mumbai ­ 400 020.                          Mumbai.
                                       Vs.
        ( /Appellant)                              (  /Respondent)

                       ./ITA           No.7919/Mum/2004
                 (     /        Assessment Year :1999-2000)
The Dy.Director of Income-tax              M/s.Calyon Bank (formerly known as
(International Taxation) 1(2)          /
                                           Agricole Indosuez)
Mumbai.                                    Ramon House
                                       Vs. 169 Backbay Reclamation
                                           Mumbai ­ 400 020.
         ( /Appellant)                             (  /Respondent)
                                        2             ITA No.3098/Mum/2000 & Ors.
                                                        M/s.Credit Agricole Indosuez.

                   ./ITA              No.7993/Mum/2004
                 (     /        Assessment Year : 1999-2000)
M/s.Calyon Bank (formerly known as         The Dy.Director of Income-tax
Agricole Indosuez)                     /
                                           (International Taxation) 1(2)
Mumbai ­ 400 020.                          Mumbai.
         ( /Appellant)                 Vs.         (  /Respondent)
                   ./ITA              No.2270/Mum/2005
                 (     /        Assessment Year :2000-2001)
The Dy.Director of Income-tax            M/s.Credit Agricole Indosuez
(International Taxation) 1(2)          /
                                         Mumbai ­ 400 021.
Mumbai.
          ( /Appellant)                Vs.            (  /Respondent)
                   ./ITA              No.2464/Mum/2005
                 (     /        Assessment Year : 2000-2001)
M/s.Credit Agricole Indosuez               The Dy.Director of Income-tax
Mumbai ­ 400 021.                      /
                                           (International Taxation) 1(2)
                                           Mumbai.
                                       Vs.
         ( /Appellant)                             (  /Respondent)
                     /Revenue        by : Shri Mahesh Kumar
                            /Assessee by : Shri P.J.Pardiwalla

    /                                            /
Date of Hearing : 05.09.2012                 Date of Pronouncement : 21.09.2012




                                  / O R D E R
Per Bench :
       This batch of eight appeals involves assessment years 1994-95,
1998-99, 1999-2000 and 2000-2001. Since some of the issues raised
in these appeals are common we are, therefore, disposing them off by
this consolidated order for the sake of convenience.
2.     At the very outset we will like to mention that cross appeals of
this assessee for the assessment year 1997-1998 along with one cross
objection by the assessee for the same year came up for hearing on
03.09.2012. Such appeals have been disposed off vide our separate
order dated 12.09.2012 . The issues similar to those involved in the
appeals for A.Y. 1997-98 were not separately argued by the rival
                                  3           ITA No.3098/Mum/2000 & Ors.
                                                M/s.Credit Agricole Indosuez.

parties in the course of the arguments for the appeals under
consideration by accepting that the facts and circumstances are
similar, unless otherwise separately submitted, which we will advert
to distinctly.

Assessment Year : 1994-1995
3.   First ground of the Revenue's appeal is against the deletion of
addition of `15,57,491 being the net interest and commission
received by the assessee from head office. Briefly stated the facts of
this ground are that the assessee received certain interest /
commission from its HO / overseas branches and also simultaneously
paid interest / commission to its HO / overseas branches. Such
income / expenditure was credited / debited to the profit and loss
account of the assessee. However, while computing the total income
the assessee excluded the interest / commission income and also
added back the interest / commission expenditure. The Assessing
Officer held that the interest / commission income was chargeable to
tax. This resulted into an addition of `15,57,491. The learned CIT(A)
overturned the assessment order on this point. It is observed that
similar issue was raised in the appeals for assessment year 1997-98.
Relying on the Special Bench order in the case of Sumitomo Mitsui
Banking Corpn. V. DDIT [(2012) 19 Taxmann.com 364 (Mum.)
(SB)], the Tribunal has held that neither any interest / commission
received by the Indian PE from HO / other overseas branches can be
charged to tax, nor there can be any deduction towards interest /
commission expenditure incurred by the assessee towards HO /
                                    4          ITA No.3098/Mum/2000 & Ors.
                                                 M/s.Credit Agricole Indosuez.

overseas branches. We have restored the matter to the file of
Assessing Officer with a direction to exclude the amount of interest /
commission received by the Indian PE from its HO / overseas
branches and also not to grant deduction in respect of interest /
commission received from the overseas HO / branches. Following the
precedent, we set aside the impugned order and restore the matter to
the file of A.O. for deciding this issue accordingly.

4.   Ground no.2 is against the disallowance of `64,76,781 being
broken period interest on PSU bonds. The facts apropos this ground
are that up to assessment year 1993-94 the assessee was following the
practice of including broken period interest paid on the purchase of
all securities and bonds in the cost of the security and computing its
gain / loss on sale of securities accordingly. In the previous year
relevant to the assessment year under consideration, the assessee
modified its accounting policy in relation to valuation of public sector
bonds by directly charging broken period interest to the profit and
loss account, thereby deviating from its earlier position of including
such interest in the purchase price of PSU bonds. The auditor
reported that due to change in the accounting policy, the interest
income was declared lower by a sum of `64.76 lakh. On being called
upon to justify its stand on this issue, the assessee submitted that it
has switched over from one accepted method to another accepted
method insofar as valuation of PSU bonds is concerned and this
changed method has been consistently followed in the later year as
well. The Assessing Officer rejected this contention by observing
                                    5           ITA No.3098/Mum/2000 & Ors.
                                                  M/s.Credit Agricole Indosuez.

that the assessee had valued all other government securities etc. as
per the unchanged method and such change in the method of
valuation was only in respect of PSU bonds. He, therefore,
disallowed broken period interest of `64.77 lakh on purchase of PSU
bonds which was debited to the profit and loss account. The learned
CIT(A) overturned the assessment order on this point.


5.   After considering the rival submissions and perusing the
relevant material on record it is observed from the order passed by
the Tribunal in assessee's own case for assessment year 1996-1997 in
ITA No.3121/Mum/2000, a copy of which has been placed on record,
that similar issue was raised in that year as well. After considering the
earlier order passed by the Tribunal in assessee's own case for
assessment year 1991-92, the Tribunal decided it in favour of the
assessee by holding that interest paid on broken period was liable to
be allowed as deduction against the interest received in respect of the
broken period. From para no.25 of the Tribunal order for assessment
year 1996-97 it can be seen that the Tribunal, while following the
order for assessment year 1991-92, also took into consideration the
view taken by the Tribunal for assessment years 1987-88 and 1988-
89. Be that as it may it is palpable that the assessee switched over
from one recognized method of valuation of bonds and securities to
another recognized method in the previous year relevant to the
assessment year under consideration in respect of PSU bonds. Broken
period interest which was hither to capitalized came to be considered
                                   6          ITA No.3098/Mum/2000 & Ors.
                                                M/s.Credit Agricole Indosuez.

as deduction in the year of purchase. This changed method has been
undisputedly followed by the assessee consistently in subsequent
years. In view of these facts we find no reason to disturb the view
canvassed by the learned CIT(A) on this issue. Rather such view is
supported by the Tribunal order passed for the earlier years in
assessee's own case. This ground is not allowed.


6.   Cross objection of the assessee for the year is only in support of
the order passed by the learned CIT(A).


7.   In the result, the appeal of the Revenue is partly allowed for
statistical purposes and the cross objection of the assessee is
dismissed as infructuous.

Assessment Year 1998-99

8.   Ground no.1 of the Revenue's appeal is against the direction of
the learned CIT(A) to delete the charging of interest on NOSTRO
account amounting to `3.98 crore. Ground nos.1 to 4 of the
assessee's appeal are against the enhancement by the learned CIT(A)
to the tune of `27,31,95,602 u/s 14A in respect of the interest income
of `3.98 crore which was held by him to be not chargeable to tax.
Both the sides are in agreement that the facts and circumstances of
these grounds are mutatis mutandis similar to those for assessment
year 1997-98. This issue has been discussed by the Tribunal for
assessment year 1997-98 in paras 2 to 5. It has been held that interest
                                   7           ITA No.3098/Mum/2000 & Ors.
                                                 M/s.Credit Agricole Indosuez.




on NOSTRO account is chargeable to tax and consequently no
disallowance u/s 14A is called for. In view of the fact that there is no
difference in the facts and circumstances of these grounds for the year
under consideration vis--vis those for assessment year 1997-98 as
discussed above, following the precedent, we hold that interest of
`3.98 crore is chargeable to tax and resultantly the disallowance u/s
14A made to the tune of `27.31 crore is deleted. Accordingly grounds
raised by the assessee as well as Revenue in this regard are allowed.


9.    Ground no.5 of the assessee's appeal is against taxability of
income of the assessee at the rate of 48% as applicable to non-
resident company. The learned Counsel for the assessee fairly
admitted that this issue has been decided against the assessee in
earlier years. We find that similar ground was also there in the year
relevant to the assessment year 1997-98. Relevant discussion has
been made in para 13 of the said order. After considering the decision
taken in earlier years, the Tribunal has not allowed this ground. In
view of the foregoing discussion we uphold the impugned order on
this issue for the current year as well and dismiss this ground.


10.   Ground no.6 of the assessee's appeal is against the direction of
the learned CIT(A) that interest / commission received from HO /
branches should not be charged to tax.
                                    8           ITA No.3098/Mum/2000 & Ors.
                                                  M/s.Credit Agricole Indosuez.

11.   After considering the rival submissions, we find that similar
issue was there in appeal for the assessment year 1997-98. After
considering the decision of the Special Bench of the Tribunal in the
case of Sumitomo Mitsui Banking Corpn.(supra),             the bench has
directed the Assessing Officer to exclude the amount of interest /
commission received by Indian PE from its HO / overseas branches
and also not to grant deduction in respect of interest / commission
incurred towards HO / overseas branches. We follow the same view
for this year as well and direct the Assessing Officer accordingly.


12.   Ground no.7 of the assessee's appeal is to the effect that interest
amounting to `11,02,79,210 received from branches on placement of
overseas deposits should not be charged to tax. The learned Counsel
for the assessee contended that though this issue does not arise out of
the impugned order but the facts are available on record inasmuch as
the assessee credited such amount of interest to its Profit and loss
account. It was, therefore, prayed that the assessee be allowed to
argue this ground even though it does not arise out of the impugned
order. The learned Departmental Representative opposed the taking
up of this ground.


13.   Having regard to the facts and circumstances of the case it is
found that the issue of non-taxability of interest / commission
received by Indian PE from its overseas branches / HO is consistently
arising in all the earlier years which has been decided in assessee's
                                   9          ITA No.3098/Mum/2000 & Ors.
                                                M/s.Credit Agricole Indosuez.

favour. Since the adjudication of this ground does not require any
fresh investigation of facts, we admit this ground for disposal on
merits. The case of the assessee is that the interest of `11.02 crore
received from branches should not be charged to tax as it is a
transaction with self. In principle, we agree with this contention,
which view has consistently been taken in earlier years. Since the
exact amount of interest received by the assessee from its HO /
overseas branches is not emanating from record, we direct the
Assessing Officer to find out such amount of interest received from
HO / overseas branches and exclude it from the computation of total
income. In the same breath, it is also directed that the interest /
commission paid by the assessee to its HO / overseas branches should
also not be allowed as deduction. This ground is, therefore, allowed
for statistical purposes.


14.   Ground no.8 is against the disallowance of loss on revaluation
of unmatured forward foreign exchange (Forex) Contracts as on
31.03.1998 amounting to `7,14,63,831. The assessee claimed
deduction amounting to `7.14 crore towards loss on revaluation of
Forex contracts as at the year ending on 31.03.1998. In support of the
deduction it was stated that the foreign exchange transactions were
required to be valued at the market price of foreign exchange as at the
end of the year as per the rules of FEDAI and the loss on such
revaluation was deductible. The Assessing Officer held such loss to
be contingent and did not allow any deduction by holding that the
                                   10          ITA No.3098/Mum/2000 & Ors.
                                                 M/s.Credit Agricole Indosuez.

liability on such issue will arise only on the date of maturity of the
contract. The learned CIT(A) upheld the assessment order on this
point.


15.   After considering the rival submissions and perusing the
relevant material on record we find that the assessee entered into
forward foreign exchange contract during the year. In respect of the
unmatured contracts as at the year end, the assessee valued such
unmatured forward foreign exchange contracts at the rate of exchange
prevailing as at the end of the year which resulted into loss of `7.14
crore. It can be considered by way of simple example. If the assessee
undertakes a forward foreign exchange contract as on 18th January,
1998, on which the rate of dollar is `42. Further suppose that the
contract is to mature on 30th April at the price of `46 per dollar.
Suppose at the end of the year 31st March, the rate of dollar has gone
up to `43, the assessee's claim is that the difference of `1 (`43 ­ 42)
as on 31st March, 1998 should be taken as loss and allowed deduction
accordingly. The Special Bench of the Tribunal in the case of DCIT
v. Bank of Bahrain & Kuwait [(2010) 41 SOT 290 (Mum.) ((SB)] has
held that the loss incurred by the assessee on account of evaluation of
the contract on the last day of the accounting year i.e. before the date
of maturity of the forward contract, is allowable as deduction. In that
view of the matter this loss of `7.14 crore representing difference of
`1 (`43 ­ 42) is liable to be allowed as deduction.
                                   11          ITA No.3098/Mum/2000 & Ors.
                                                 M/s.Credit Agricole Indosuez.

16.   At this juncture,    the learned Departmental Representative
argued that if this loss of `1 in the hypothetical example is to be
allowed in this year, then in the subsequent year when the contract
actually matured, the loss should be computed at `3 (`46 ­ 43) and
not at `4 (`46 ­ 42). The learned Departmental Representative raised
an oral ground in this regard for suitable direction to be given for the
subsequent year that the loss allowed in the current year amounting to
`7.14 crore should be taken into consideration while computing the
loss. The learned Counsel for the assessee was fair enough to admit
that if the loss of `7.14 crore is allowed in this year then suitable
amendment be made in the assessment order for the subsequent year
so that the assessee does not get deduction of `7.14 crore twice.


17.   In the light of the afore-noted Special Bench order in the case of
Bank of Bahrain & Kuwait (supra) it is apparent that the assessee is
entitled to deduction of `7.14 crore towards loss on revaluation of
unmatured forward foreign exchange contract for the year under
consideration. It is observed from the order passed by the learned
CIT(A) for assessment year 1999-2000 that vide para 10 page 12 of
his order it has been directed that : "income / loss in respect of such
forex contracts as have matured during the year should be computed
without considering the revaluation effected in the books of account
in assessment year 1998-99 is acceptable and the A.O. is directed to
calculate accordingly". With the allowing of ground no.8 of the
assessee's appeal for assessment year 1998-99, this direction given
                                   12          ITA No.3098/Mum/2000 & Ors.
                                                 M/s.Credit Agricole Indosuez.

by the learned CIT(A) in his order for assessment year 1999-2000
shall automatically stand vacated. The Assessing Officer is, therefore,
directed to allow loss of `7.14 crore in this year and compute loss /
profit on Forox contract maturing in the previous year relevant to the
assessment year 1999-2000 by considering the impact of allowing of
loss of `7.14 crore. In other words, the Assessing Officer should
ensure that the loss of `7.14 crore is not once again allowed in the
previous year relevant to the assessment year 1999-2000. This ground
raised by the assessee for the current year is allowed.


18.   Ground no.2 of the Revenue's appeal is against the direction of
the learned CIT(A) to allow the broken period interest paid of
`4,35,90,306 as an expense. This issue has been discussed by us in
our order for assessment year 1997-1998 and the decision has been
taken for allowing broken period interest as an expense. This ground
is accordingly not allowed.


19.   Ground no.3 is against the allowing of exemption in respect of
gross interest earned from tax free securities u/s 10(15) of the Act.
The learned Departmental Representative fairly submitted that this is
also a recurring issue. He however argued that the expenditure in
connection with the earning of such tax free interest income should
be disallowed u/s 14A.
                                   13           ITA No.3098/Mum/2000 & Ors.
                                                  M/s.Credit Agricole Indosuez.

20.   Having heard the rival submissions and perused the relevant
material on record we find that the facts and circumstances of the
ground as well as the arguments raised by the learned Departmental
Representative in respect of disallowance u/s 14A are similar to those
for assessment year 1997-98. While disposing off this ground for
assessment year 1997-98 we have held that exemption u/s 10(15) is to
be allowed on gross interest and not on the net interest. Further, it has
been held by the ld. CIT(A) that investment in tax free securities was
made by the assessee out of interest free funds available at its
disposal.   Such contention has remained oncontroverted by the
learned Departmental Representative. Following the precedent we
sustain the impugned order on this issue by holding that exemption
u/s 10(15) is to be allowed on gross interest. The further contention
raised by the learned Departmental Representative about the
disallowance u/s 14A is not acceptable in view of the detailed reasons
given in our order for assessment year 1997-98.


21.   Ground no.4 of the Revenue's appeal is against the direction of
the learned CIT(A) to disregard the refund while calculating the
interest u/s 234B of the Act. The learned CIT(A) vide para 9.3 of the
impugned order held that section 234D was brought into the statute
by the Finance Act, 2003 with effect from 01.06.2003 and as such the
Assessing Officer was not justified in charging interest u/s 234B with
reference to the fund issued u/s 143(1)(a) earlier.
                                     14         ITA No.3098/Mum/2000 & Ors.
                                                  M/s.Credit Agricole Indosuez.

22.   Having heard the rival submissions and perused the relevant
material on record it is observed that the learned CIT(A) has rightly
considered the mandate of sections 234B and 234D. Obviously, the
interest u/s 234B is required to be calculated on the basis of total
income computed without considering the refund determined u/s
143(1) of the Act. We, therefore, uphold the impugned order on this
issue. This ground is not allowed.


23.   Ground no.5 is against the direction of the learned CIT(A) for
giving deduction of `24,11,100 independent of the provisions of
section 44C.


24.   After considering the rival submissions and perusing the
relevant material on record we find that it is an undisputed position
that the facts and circumstances of this ground are similar to those
prevailing in the earlier years in which it has been held that the
deduction has to be allowed independent of the provisions of section
44C. The learned Departmental Representative could not point out
any distinguishing feature in the facts of the current year vis--vis the
earlier year. Following the precedents we uphold the impugned order
on this issue. This ground is not allowed.


25.   Ground no.6 is against the deletion of disallowance of
`1,05,18,450. The Assessing Officer noted that the assessee had
borrowed funds by way of FCNR-B Deposit and these funds were
                                   15           ITA No.3098/Mum/2000 & Ors.
                                                  M/s.Credit Agricole Indosuez.

kept by the HO in US$ account. The balance to the credit of this
account was available as US$ Float to the HO to be drawn as and
when required. The A.O. observed that the interest earned from HO
was lower as compared to interest paid for FCNR-B Deposit. Such
excess interest of `1,05,18,450 was held by the Assessing Officer to
be not deductible. The learned CIT(A) deleted this addition.

26.   Having heard the rival submissions and perused the relevant
material on record it is seen that the assessee kept certain deposits
received from clients abroad in NOSTRO account maintained with
the BTC by the HO to be used as Dollar Float Fund for its global
operations. Whether and at what point of time such deposits were to
be brought into India was a decision to be taken by the assessee
taking into consideration various factors such as the foreign exchange
rate prevailing at the time of receipt of deposits. Such deposits were
not with the HO of the bank but were in NOSTRO account. Simply
because the assessee paid interest on domestic deposits at a little
higher rate than that it received on FCNR-B Deposits, it cannot be
said that the interest paid should be disallowed to that extent. In our
considered opinion there is no force in the submissions advanced by
the learned Departmental Representative in this regard. This ground
is not allowed.


27.   In the result, both the appeals are partly allowed.
                                  16          ITA No.3098/Mum/2000 & Ors.
                                                M/s.Credit Agricole Indosuez.

Assessment Year 1999-2000


28.   First ground of the Revenue's appeal is against the deletion of
charging of interest on NOSTRO account amounting to `92,69,377
and first four grounds raised by the assessee are on account of
enhancement made by the learned CIT(A) amounting to `5.11 crore
u/s 14A in respect of such interest income. Both the sides are in
agreement that the facts and circumstances of these grounds are
similar to those for the earlier years. Following the view consistently
taken by us from the assessment years 1997-98 onwards, we hold
that the interest of `92.69 lakh is chargeable to tax and at the same
time no disallowance u/s 14A amounting to `5.11 crore is warranted.
The grounds raised by the assessee as well as Revenue in this regard
are allowed.


29.   Ground no.5 of the assessee's appeal is about taxability of its
income at the rate of 48% as applicable to non-resident company. The
facts and circumstances of this ground are also similar to those
disposed off earlier. Following the view taken hereinabove,              we
dismiss this ground of appeal.


30.   Ground nos.6 and 7 are against the direction of the learned
CIT(A) to tax interest / commission received from HO / branches and
also considering the interest / commission paid to the HO / branches.
The facts and circumstances of these two grounds are similar to those
                                  17          ITA No.3098/Mum/2000 & Ors.
                                                M/s.Credit Agricole Indosuez.

discussed above. We have held in relation to earlier years that the
interest / commission received by the PE from its HO / overseas
branches is not chargeable to tax and simultaneously the assessee is
not entitled to deduction in respect of interest paid to HO / overseas
branches. The AO is directed to give effect to this direction. These
grounds are disposed off accordingly.


31.   Last ground of the assessee's appeal is against the direction of
the learned CIT(A) in allowing write off of premium paid on
purchase of securities amortised over the life of investments. The
Assessing Officer disallowed a sum of `3,27,85,891 being
amortization of premium on investment. The learned CIT(A) upheld
the disallowance of premium paid on investments. He however
agreed with the alternative plea of the assessee that : "as and when
these securities are sold, income from them should be computed with
reference to the cost of purchase of securities by ignoring adjustment
made in books of account in this respect by the appellant. The A.O. is
directed accordingly". The facts of this ground are that the assessee
wrote off premium paid on purchase of securities which was
amortized over the life of investment. The learned CIT(A) held that
when securities are purchased from market at market value, there can
be no question of carrying the stock at a lower price by writing off
the premium paid on purchase of securities, as done by the assessee.
We are in agreement with the view canvassed by the learned CIT(A)
for the obvious reason that when the assessee is purchasing securities
                                   18           ITA No.3098/Mum/2000 & Ors.
                                                  M/s.Credit Agricole Indosuez.

as stock-in-trade, there can be no question of amortizing the premium
paid for the purchase of securities over the life of such securities. The
purchase price so paid has to be taken as such by disregarding the
assessee's view point that the premium on purchase of securities
should be amortized over the life of investment. To this extent we
approve the view taken by the learned CIT(A). The learned AR
argued that if this was to be upheld then the direction of the learned
CIT(A) be modified in the sense that not only when the securities are
not only sold but also even when these get matured, income from
then should be computed with reference to the cost of purchase of
securities. We are agreeable with this contention. The obvious reason
is that the securities can be sold or mature over the period. Once the
amortization is not allowed, purchase price is to be taken as such
irrespective of the fact whether the securities are sold or get matured.
The direction given by the learned CIT(A) to the alternative plea of
the assessee, is accordingly modified.


32.   Second ground of the Revenue's appeal is against the direction
of the learned CIT(A) to allow broken period interest paid of
`2,77,10,645 as an expense.

33.   We find that the issue raised in this ground has been dealt with
by us in earlier year as well. We have held that such interest is
allowable as deduction. In the absence of any distinguishing feature
having been brought to our notice, we approve the view taken by the
learned CIT(A) on this issue. This ground is not allowed.
                                  19          ITA No.3098/Mum/2000 & Ors.
                                                M/s.Credit Agricole Indosuez.



34.   Ground no.3 of the Revenue's appeal is against the granting of
exemption on gross interest u/s 10(15). The learned Departmental
Representative fairly conceded that the facts and circumstances of
this ground are similar to those of earlier years with the exception
that the assessee did not furnish any evidence about the investment in
such tax free securities as is borne out from page 12 of the assessment
order.


35.   After considering the rival submissions and perusing the
relevant material on record we find that insofar as the question of
granting exemption u/s 10(15) is concerned, it has been decided by
us in earlier years by holding that exemption is to be allowed on gross
interest. As regards the contention of the learned Departmental
Representative that the assessee did not furnish any evidence before
the A.O. towards the purchase of tax free securities, we find from the
statement of facts filed before the learned CIT(A) that the assessee
filed such details before the A.O. vide its letter dated 24th January,
2002. It is on the basis of these details that the learned CIT(A) has
recorded a categorical finding in para 6 of his impugned order that
the aggregate investment in tax free securities has remained
unchanged though there is switch over from one tax free securities to
another tax free securities. We are unable to see as to how this
contention advances the case of the Revenue. Once the source of tax
free securities is interest free funds, it makes no difference when
                                   20          ITA No.3098/Mum/2000 & Ors.
                                                 M/s.Credit Agricole Indosuez.

there is change in tax free securities from one to another. The relevant
criteria is to see the source of investment. We, therefore, find no
reason to disturb the finding given by the learned CIT(A) in this
regard. This ground is not allowed.


36.   Ground no.4 is against the direction of the learned CIT(A) to
allow deduction of `3.50 crore independent of the provisions of
section 44C. The A.O. discussed this issue on page 13 of his order.
He noted that these expenses were claimed to have been incurred by
the HO, "which are again claimed to be specific to the Indian
operations, the correctness of which cannot be verified". The learned
CIT(A) accepted the assessee's stand.


37.   After considering the rival submissions and perusing the
relevant material on record it is observed that the assessee did furnish
its explanation to the A.O. vide its letter dated 6th March, 2002 about
the details of expenses incurred and the reason as to why these
expenses were allowable independent of section 44C. This fact is
borne out from the statement of facts filed before the learned CIT(A).
The learned Departmental Representative has not brought any
material on record to indicate that the expenses claimed by the
assessee as allowed by the learned CIT(A) independent of section
44C were specific to Indian operations. In view of these facts we are
of the considered opinion that the learned CIT(A) was justified in
                                   21           ITA No.3098/Mum/2000 & Ors.
                                                  M/s.Credit Agricole Indosuez.

directing to allow the deduction of `3.50 crore independent of the
provisions of section 44C.


38.   Ground no.5 of the Revenue's appeal is against the direction of
the learned CIT(A) to reduce the taxable income by `13,37,157 being
the amount of gain on Forex Contract. This issue has been discussed
by us in an earlier para of the order. In the said earlier year, there
was loss on the Forex unmatured contract. We have held that such
loss is to be allowed as deduction as the assessee is consistently
following this practice of valuing unmatured foreign exchange
contracts at the prevailing rate of exchange at the year end. Though
in the earlier year there was a loss which has been held to be
allowable, in the current year there is a profit on the unmatired Forex
contract. Following the view and by adopting the principle of
consistency, the impugned order is reversed and it is directed to
include `13.37 lakh in the total income of the assessee. This ground
is allowed.


39.   In the result, both the appeals are partly allowed.

Assessment Year 2000-2001

40.   Ground no.2 of the Revenue's appeal is against the direction of
the learned CIT(A) to delete the charging of interest on NOSTRO
account amounting to `44,80,914. Ground nos. 1 to 4 of the
assessee's appeal are against the enhancement of the assessment by
                                 22          ITA No.3098/Mum/2000 & Ors.
                                               M/s.Credit Agricole Indosuez.

the learned CIT(A) to the tune of `1,85,43,259 u/s 14A in respect of
interest on NOSTRO account held by him to be not chargeable to tax.
This issue is consistently coming in all the years. We have held that
interest on NOSTRO account is chargeable to tax and resultantly no
disallowance u/s 14A is warranted. Following the same view we
allow ground no.2 of the Revenue's appeal and ground nos.1 to 4 of
the assessee's appeal.


41.   Ground nos. 5 and 6 of the assessee's appeal are against taxing
interest / commission from HO / branches and also justifying the
A.O.'s stand in considering interest / commission paid to HO /
branches in computing income.


42.   While disposing off the appeals for earlier years we have held
that the interest / commission received by the assessee from HO /
overseas branches is not chargeable to tax and in the same manner the
interest / commission paid to HO / overseas branch is not allowable
as deduction. The same view is reiterated here. The AO is directed to
give effect to this direction. These grounds are, therefore, disposed
off accordingly.


43.   Ground nos. 7 and 8 of the assessee's appeal are against making
of disallowance u/s 40(a)(i) in respect of deduction u/s 55,82,037
being interest paid to HO and `42,539 being the interest paid to
overseas branches. While disposing off ground nos.5 and 6, we have
                                      23          ITA No.3098/Mum/2000 & Ors.
                                                    M/s.Credit Agricole Indosuez.

held that the assessee is not entitled to deduction in respect of interest
/ commission paid to Ho / overseas branches. Once the assessee is not
entitled to deduction, there can be no question of making any
disallowance u/s 40(a)(i) as the deduction is denied at the very outset
itself.


44.       Ground no.9 of the assessee's appeal is against the direction of
the learned CIT(A) not to allow loss on revaluation of unmatured
forward foreign exchange contracts as on 31st March, 2000
amounting to `1,56,70,296. The facts and circumstances of this
ground are similar to those discussed in the earlier part of this order.
Following the view taken hereinabove we hold that the assessee is
entitled to deduction of loss of `1.56 crore against the income for the
current year. At the same time, the A.O. is directed not to allow such
loss of `1.56 crore in the succeeding year when the Forex contract get
matured. As the learned AR has agreed to forego its claim of
deduction of `1.56 crore in the succeeding year subject to the
condition of allowability of such loss in the current year, we direct
the Assessing Officer to allow deduction for this Forex loss in the
current year and make corresponding addition in the subsequent year.

45.       Ground no.10 about the application of rate of 48% is not
allowed in view of similar stand taken in earlier part of this order.
The impugned order is upheld on this issue.
                                  24          ITA No.3098/Mum/2000 & Ors.
                                                M/s.Credit Agricole Indosuez.

46.   Ground no.1 of the Revenue's appeal is against the direction of
the learned CIT(A) to allow exemption u/s 10(15) on gross interest.
Both the sides are in agreement that the facts and circumstances of
this ground are similar to those for earlier years. Following the view
taken hereinabove, we hold that the gross interest is eligible for
exemption u/s 10(15). Further no disallowance u/s 14A can be made
in respect of such exempt income.


47.   Ground no.3 of the Revenue's appeal is against the deletion of
broken period interest claimed as exempt from the total taxable
income. The learned Departmental Representative fairly accepted that
the facts and circumstances of this ground are mutatis mutandis
similar to those for the earlier years. Following the view taken
hereinabove we uphold the impugned order on this issue. This ground
is not allowed.


48.   Last ground of the Revenue's appeal is against the direction of
the learned CIT(A) to delete the expenses claimed by the assessee on
account of HO expenses independent of the provisions of section
44C. The assessee claimed deduction for HO expenses at
`1,06,49,590. The entire expenditure was claimed by way of
deduction on the ground that it was directly attributable to the Indian
branch. It was claimed that the ceiling provided u/s 44C shall not
apply. The A.O. observed from invoices submitted by the assessee
that these expenses were "allocated" to the assessee. It was further
                                  25          ITA No.3098/Mum/2000 & Ors.
                                                M/s.Credit Agricole Indosuez.

observed that in some cases even the basis of allocation was not
given. In the light of these facts the A.O. held such amount to be
covered within the ceiling prescribed u/s 44C. The learned CIT(A)
directed to allow independent deduction distinct from section 44C.


49.   After considering the rival submissions and perusing the
relevant material on record it is observed that the A.O. has made out a
case that the expenses to the tune of `1.06 crore were allocated to the
assessee and are not incurred exclusively by the HO for the assessee.
The A.O. observed these features from the invoices submitted by the
assessee. The learned AR has invited our attention towards the
statement of facts filed before the learned CIT(A) in which it has
been submitted that the details of expenses and reason as to why such
expenses were allowable independent of section 44C were made
available to the A.O. vide its letter dated 19th March, 2003. The
learned AR submitted that as per the terms of Article 7 of the DTAA,
all the expenses incurred by the assessee for business purposes were
to be allowed as deduction.


50.   We are not convinced with the submission made by the learned
AR in this regard for the reason that as per the mandate of Article 7,
the deduction is to be allowed in conformity with the provisions of
the Income-tax Act, 1961. Once section 44C is there, there can be no
escape unless it is proved that the expenses incurred are not covered
within the mandate of section 44C of the Act. The term "head office
                                   26           ITA No.3098/Mum/2000 & Ors.
                                                  M/s.Credit Agricole Indosuez.

expenses" has been defined in Explanation to section 44C to mean
"executive and general administration expenditure incurred by the
assessee outside India". It is axiomatic that where HO incurs
expenses exclusively for its Indian PE, those are to be allowed as
deduction independent of section 44C. Where, however the expenses
of the nature defined in Explanation to section 44C are allocated or
apportioned to the assessee, then such apportioned expenses would
fall within the ambit of section 44C. Unless it is proved that the
expenses incurred by the HO were exclusively for the assessee and
thus apportioned, these will be covered by section 44C. Since the
assessee could not adduce any detail in this regard nor produce a
copy of its letter dated 19th March, 2003 claimed to be containing
details of expenses, we are of the considered opinion that the
impugned order on this issue cannot be upheld. We, therefore, set
aside the impugned order and restore the matter to the file of A.O. for
deciding this issue as per law after allowing a reasonable opportunity
of being heard to the assessee. It is made clear that if during the fresh
examination, the Assessing Officer finds that the expenses of `1.06
crore or any part thereof represent apportionment of HO expenses as
per Explanation to section 44C, such allocated expenses will not be
allowed as deduction independent of section 44C. To the extent the
expenses are found to be exclusively incurred by HO for the assessee,
they will not fall within the definition of HO expenses and
accordingly allowed as deduction independent of section 44C. This
ground is, therefore, allowed for statistical purposes.
                                              27       ITA No.3098/Mum/2000 & Ors.
                                                         M/s.Credit Agricole Indosuez.



51.    In the result, both the appeals are partly allowed.

Order pronounced on this 21st day of September, 2012.
                                      




                Sd/-                                     Sd/-
         (Amit Shukla)                                (R.S.Syal)
         / JUDICIAL MEMBER                        / ACCOUNTANT MEMBER


 Mumbai;                  Dated : 21st September, 2012.
Devdas*


                 Copy of the Order forwarded to :
                /
1.     / The Appellant
2.       / The Respondent.
3.      () / The CIT(A)-XXXI, Mumbai.
4.                / CIT
5.             ,     ,  / DR, ITAT, Mumbai

6.      / Guard file.
                                                                      / BY ORDER,

                              //True Copy//
                                                    /  (Dy./Asstt.
                                                    /                      Registrar)
                                                        ,  / ITAT, Mumbai
                                                        ,
 
 
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