Interest Received By Foreign Banks On Foreign Currency Loans To Indian Concerns Taxable On Gross Basis: ITAT Mumbai

The Income Tax Appellate Tribunal (ITAT), Mumbai, has recently held that interest income earned by a foreign bank from foreign currency loans extended to Indian corporates is taxable on a gross basis. It ruled that such income cannot be reduced by attributing expenditure before the concessional rate of tax is applied.

The bench of President Justice C.V. Bhadang and Accountant Member Vikram Singh Yadav held that the provisions of Section 115A of the Income Tax Act require interest income earned by a foreign company from foreign currency loans to be taxed on a gross basis, without allowing any deduction for related expenditure.

It observed, "The provisions thus provides for gross basis of taxation without deduction in respect of any expenditure or allowance in relation to such income. In other words, the gross interest receipts are brought to tax and neither the assessee can claim nor the Assessing officer can determine and allow any expenditure or allowance in relation to such interest receipts."

The dispute arose from assessments of The Bank of Nova Scotia for the assessment years 1999-2000 to 2001-02. For the assessment year 2001-02, the Assessing Officer attributed interest costs of about ₹86 lakh to foreign currency loans advanced to Indian corporates.

After attributing those costs, the Assessing Officer computed the net interest income at about ₹1.78 crore and applied the concessional rate only to that amount. The Commissioner of Income Tax (Appeals) reversed that approach by following earlier orders in the bank's own case. The Revenue challenged that decision before the tribunal.

The Revenue argued that the concessional rate should apply only to the net interest income after deducting expenditure incurred to earn it.

The bank contended that the statutory framework, CBDT Circular No. 684 and the India-Canada Double Taxation Avoidance Agreement contemplated taxation of such interest on a gross basis. It also relied on earlier tribunal decisions in its own case, which had consistently held that interest covered by Section 115A is taxable without deducting related expenditure.

Accepting the bank's contention, the tribunal held that the legislature intended to tax such interest on a gross basis and that there was no scope for reducing the interest receipts by expenditure before applying the concessional rate.

It observed, "The Coordinate Benches have consistently held that the legislature has intended to tax interest income on gross basis and there cannot be any dispute in this regard."

The tribunal further ruled, "Therefore, in the instant case, the gross interest receipts of Rs. 2,69,89,233/- is eligible for concessional tax rate of 20% under the provisions of Section 115A of the Act and the findings of the ld CIT(A) are confirmed."

The tribunal also dismissed the Revenue's challenge to the deletion of the disallowance relating to expenditure incurred for earning tax-free interest.

It found that the bank had sufficient interest-free funds to make the investments and upheld the Commissioner of Income Tax (Appeals)' order. It held that interest received by the Indian branch from its head office and overseas branches was not chargeable to tax because the transactions were with itself.

It also upheld the allowability of broken-period interest on securities held as stock-in-trade by following the Supreme Court's decision in Bank of Rajasthan Ltd.

The tribunal also considered the Revenue's challenge relating to the computation of book profits under Section 115JA. It held that, in view of the retrospective amendment introducing Explanation (g), provision for standard assets would ordinarily require adjustment while computing book profits.

However, it accepted the bank's alternate legal contention that Section 115JA itself did not apply to a banking company governed by the Banking Regulation Act because such entities are not required to prepare their profit and loss accounts under the Companies Act.

The tribunal, therefore, held that the Revenue's ground had become academic and dismissed it as infructuous. 

For Assessee: Nishant Thakkar along with Jasmin Amalasadvala

For Revenue: SKrishna Kumar, Senior Departmental Representative