ITAT Deletes Disallowances on Foreign Currency Loan Interest and Forex Loss in American Express Bank Case:

American Express Bank Ltd. is a banking company incorporated in the United States that carried on banking business in India through its Indian branches, which constituted its PE in India. During the assessment proceedings under Section 143(3) of the Income Tax Act, 1961, the AO made various additions and disallowances concerning interest income from foreign currency loans, transactions with the Head Office and overseas branches, expenditure relating to exempt income, foreign exchange contract losses, global system charges, Head Office expenditure, broken-period interest and VRS expenditure.

The CIT(A) granted partial relief to the Bank. Aggrieved by the appellate order dated March 30, 2004, both the assessee and the Revenue filed appeals before the Tribunal. 

The Tribunal held that Section 14A applies to expenditure relating to income that does not form part of the total income, and not merely to income chargeable to tax at a lower rate. Following the Tribunal’s decisions in the Bank’s own case for earlier assessment years, the Tribunal directed the AO to delete the disallowance of Rs. 2,65,54,550.

The Tribunal held that interest arising from transactions between the Indian PE and its Head Office or overseas branches did not constitute taxable income under domestic law. Since such receipts were not income at all, they could not be treated as exempt income to attract Section 14A. The Revenue’s ground was dismissed, and the disallowance of Rs. 32,71,23,532 was directed to be deleted.

The Tribunal observed that the Bank consistently revalued outstanding contracts at year-end and recognised both gains and losses on the same basis in accordance with the applicable accounting principles. The Tribunal held that a loss arising from an existing obligation, reasonably estimable at the balance-sheet date, could not be rejected merely because its actual settlement would occur later. The disallowance of Rs. 6,98,14,406 was deleted.

The Tribunal partly allowed the cross-appeals filed by American Express Bank Ltd. and the Revenue. It directed deletion of the disallowances relating to Section 115A expenditure, interest transactions with the Head Office and overseas branches under Section 14A, and foreign exchange forward contract losses. It also upheld the relief granted for Section 14A disallowance relating to exempt income, broken-period interest and VRS expenditure. However, the dispute concerning global system charges and other Head Office expenditure was restored to the AO for fresh examination in accordance with Section 44C and the applicable legal principles.