ORDER
1. 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 [hereinafter referred to as Ld.CIT(A)], dated 03/05/2004, 05/01/2004 and 29/09/2004, for A.Ys. 1997-98, 2000-01 & 2001-02, respectively.
2. At the outset, both the parties submitted that the issues involved in the present appeals, both by the assessee as well as the Revenue, are identical to those considered by the Co-ordinate Bench of the Tribunal in assessee’s own case for A.Y. 1999-2000 in ITA Nos. 1576/Mum/2004 and 1791/Mum/2004. It was submitted that the facts and circumstances leading to the impugned additions/disallowances in the years under consideration are materially similar to those obtaining in A.Y. 1999-2000. The Ld. AR further drew our attention to the order of the Co-ordinate Bench dated 12/06/2026 passed in the aforesaid appeals and submitted that the issues involved in the present appeals are squarely covered by the said decision. The Ld. AR also furnished a consolidated chart demonstrating that the grounds raised in the present appeals are identical to the grounds adjudicated by the Co-ordinate Bench in A.Y. 1999-2000 and, therefore, pleaded that the issues may be decided in terms of the aforesaid order. The chart is reproduced as under:-
| Assessee’s appeals |
| Issue |
A.Y. 1997-98 |
A.Y. 1999-00 |
A.Y. 2000-01 |
A.Y. 2001-02 |
| Interest received by head office/overseas branches |
— |
Ground 1 |
Ground 1 |
Ground 1 |
| Disallowance of hub expense |
Ground 1 |
Ground 2 |
Ground 2 |
Ground 2 |
| Revenue’s appeals |
| Issue |
A.Y. 1997-98 |
A.Y. 1999-00 |
A.Y. 2000-01 |
A.Y. 2001-02 |
| Disallowance of broken period interest |
– |
Ground 1 |
Ground 1 |
Ground 1 |
| Disallowance of salary paid to expatriate employee |
Ground 1 |
Ground 2 |
Ground 2 |
Ground 2 |
| Loss on revaluation of unmatured foreign exchange contract |
– |
Ground 3 |
Ground 3 |
Ground 3 |
| Loss on revaluation of securities / depreciation in value of investment |
– |
Ground 4 |
– |
Ground 4 |
3. The Ld. Sr. Counsel submitted that the above issues have been decided by Co-ordinate Bench for A.Y. 1999-2000 in the following manner:-
Assessee’s appeals
4. Issue No. 1: – Interest received by head office/overseas branches
This issue has been considered by this Tribunal for AY 1999-2000 as follows:-
“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 situate 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 nonresident 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 of the statutory conditions prescribed therein, namely:
(i) there must be a debt incurred or moneys borrowed by the nonresident 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 the 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 the 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 exactly 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.”
4.1. No distinguishing factors have been brought on record by the revenue. Accordingly, respectfully following the same, we allow Ground No. 1 raised for all the years under consideration.
5. Issue No. 2:- Disallowance of hub expense
This issue has been considered by this Tribunal for AY 19992000 as follows:-
“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 by 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 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, Mumbai 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; (ii) 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 (SC), 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.”
5.1. No distinguishing factors have been brought on record by the revenue. Accordingly, respectfully following the same, we allow Ground No.1 for A.Y. 1997-98 and Ground No. 2 for A.Ys. 2000-01 and 2001-02.
Revenue’s appeals
6. Issue No. 1 :- Disallowance of broken period interest
This issue has been considered by this Tribunal for AY 19992000 as follows:-
“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 Vijaya Bank (supra), the relevant portion of which is reproduced below:
“In that case (Vijaya Bank’s case) the facts were as follows. During the assessment year under consideration, Vijaya 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 Vijaya 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 Vijaya 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 Vijaya 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 Vijaya Bank’s case did not apply to the facts of the present case”
12.4. Hon’ble Bombay High Court held that:
“That the judgement in the case of Vijaya 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 , 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 , 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 stands 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 Vijaya 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 that, 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.”
6.1. No distinguishing factors have been brought on record by the revenue. Accordingly, respectfully following the same, we dismiss Ground No.1 for the impugned A.Ys. under consideration.
7. Issue No. 2:- Disallowance of salary paid to expatriate employee
This issue has been considered by this Tribunal for AY 19992000 as follows:-
“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 executive 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 the 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.”
7.1. No distinguishing factors have been brought on record by the revenue. Accordingly, respectfully following the same, we dismiss Ground No.1 for A.Y. 1997-98 and Ground No. 2 for A.Ys. 2000-01 and 2001-02.
8. Issue No. 3:- Loss on revaluation of unmatured foreign exchange contract
This issue has been considered by this Tribunal for AY 1999 2000 as follows:-
“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 v. 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) stands fortified by the decision of Hon’ble Bombay High Court in CIT v. Citibank N.A. reported in , 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 v. 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.”
8.1. No distinguishing factors have been brought on record by the revenue. Accordingly, respectfully following the same, we dismiss Ground No.3 for the impugned A.Ys. under consideration.
9. Issue No. 4:- Loss on revaluation of securities/depreciation in value of investment
This issue has been considered by this Tribunal for AY 19992000 as follows:-
“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.”
9.1. No distinguishing factors have been brought on record by the revenue. Accordingly, respectfully following the same, we dismiss Ground No. 4 for the impugned A.Y. 2001-02.
10. Accordingly, grounds raised by assessee are allowed and grounds raised by revenue are dismissed.
In the result, appeal filed by assessee for the years under consideration stand allowed and appeal filed by revenue for the years under consideration stand dismissed.
