2009 (6) TMI 693 - AT - Income Tax

Deduction on account of salaries paid to expatriates - payment of salaries was made to them by the Head office outside India - AO was of opinion that provisions of section 44C were applicable as the said expenditure was incurred by the Head office situated outside India. He therefore disallowed this amount and allowed deduction u/s 44C - CIT(A) relying on his own order passed in assessee s own case for AY 1998-99 concurred with the submissions advanced on behalf of the assessee and deleted the remaining amount of addition. HELD THAT - The expenditure covered in this section is that of a common nature the benefit from which is derived both by the Head office and branch. If a particular expenditure is incurred by the head office exclusively for branch in India that cannot be covered within the purview of section 44C. The Hon ble jurisdictional High Court in the case of CIT v. Emirates Commercial Bank Ltd. 2003 (4) TMI 2 - BOMBAY HIGH COURT has laid down to this extent. The Tribunal in assessee s own case for assessment year 1998-99 has upheld the order of the CIT(A) and deleted the partial disallowance made by the AO. The copy of the said Tribunal order is placed on record. Respectfully following the precedent we uphold the impugned order on this issue. Similar grounds raised by the revenue in its appeals for assessment years 1999-2000 2000-01 2001-02 2002-03 and 2003-04 are dismissed the facts of which are mutatis mutandis alike. Loss on sale of securities - Business loss or Capital loss - payment of salaries was made to them by the Head office outside India and buying and selling of securities was a normal business activity of a banking company and the current investments were nothing but stock-in-trade - AO noted that since the assessee had itself shown the securities as current investments then any income/loss from investment was to be dealt with under the head Capital gains . Thus he treated the said sum as capital loss and did not grant deduction as claimed by the assessee as business loss. The ld. CIT(A) allowed deduction. HELD THAT - A certificate from Chartered Accountant certifying that the securities sold by the assessee were under current investment category has been given to the lower authorities. When it is so the securities in the nature of current investments automatically become the stock-in-trade of the assessee and not investment. It is a settled legal position that the nomenclature given by the parties to a particular transaction is not material to decide its character. Rather it is the true nature of the transaction which matters. Whereas any profit or loss from the sale of Investment is taxed under the head Capital gain such profit or loss from the sale of stock-in-trade is considered under the head Profits and gains of business or profession . The instant loss arising from the sale of stock-in-trade referred to as current investments in our considered opinion has been rightly held by the ld. CIT(A) to be a business loss. Accordingly this ground is not accepted. Broken period interest - purchase of two Government securities - whether the broken period interest should be allowed as revenue expenditure in the year of purchase of securities or be considered as part of the purchase price - AO as relying on VIJAYA BANK 1990 (9) TMI 5 - SUPREME COURT held that such broken period interest was not deductible. CIT(A) ordered for the deletion of addition. HELD THAT - The Hon ble Supreme Court noted the judgment of the Hon ble Bombay High Court in the case of American Express International Banking Corpn. 2002 (9) TMI 96 - BOMBAY HIGH COURT and thereafter held that view taken by the Hon ble Bombay High Court was correct inasmuch as the judgment in the case of Vijaya Bank Ltd. 1990 (9) TMI 5 - SUPREME COURT was distinguishable and hence not applicable. In the ultimate analysis the decision has been given in assessee s favour. In view of the foregoing discussion it is patent that the judgment of the Hon ble Bombay High Court relied on by the learned CIT(A) for granting relief to the assessee stands affirmed by the Hon ble Supreme Court in the case of Citi Bank N.A. 2008 (8) TMI 766 - SUPREME COURT . We therefore approve the view taken by the learned CIT(A) and dismiss this ground of appeal. Revaluation of one part of the closing stock i.e. securities of the assessee assessee debited a sum to its Profit Loss Account on account of loss arising to it on the revaluation of current investments i.e. securities - CIT(A) deleted the addition by noting that the assessee was following cost or market price whichever is less method for valuing its stock-in-trade. He further considered certain norms issued by the Reserve Bank of India on valuation and classification of investments vide Circular No. BP.BC.129/21-04-043-92. HELD THAT - The method of cost or market price whichever is less is one of the recognized methods for the valuation of the closing stock as having got the seal of approval from case of Chainrup Sampatram 1953 (10) TMI 2 - SUPREME COURT - Under this method if the market price is higher than the cost price then the cost price is to be considered for valuing the closing stock. But if the cost is more than the market price then that item of stock has to be valued at the market price. We find that the assessee has valued its closing stock scrip-wise by following this method as per which the appreciation in the value due to the higher market value has been ignored but the depreciation in the value of the other items of stock has been reflected. As the amount represents the excess of market price over the cost price in respect of certain scrips and further going by the method of valuation adopted by the assessee as cost or market price whichever is less the same in our considered opinion cannot be added to the total income. We therefore uphold the impugned order on this count. This ground fails. Similar grounds raised by the revenue in assessment years 2001-02 2002-03 and 2003-04 are also liable to be and are hereby dismissed. Addition in respect of guarantee commission - principle of accrual of income - reason in support of not declaring such income was stated to be the assessee following mercantile system of accounting and hence the recognizing the guarantee commission as income on accrual basis - As per AO amount of commission was received as income which accrued at the time the bank issued guarantee and the period for which the guarantee was given had nothing to do with the assessee s right to receive the income in this year. HELD THAT - When the bank gives guarantee for period extending the close of the year and there is no obligation to refund the amount in case such guarantee is revoked prior to the prescribed period the entire commission accrues to it at the time of giving guarantee and no part of such commission can be said to be deferred to next year. However if there is some clause in the agreement between the bank and the customer that in case the guarantee is revoked prior to the prescribed period then the bank shall be liable to refund the proportionate commission for the unexpired period then the situation will be different. In such a case the right to income will accrue only proportionately for the period covered in the year. It is for the clear reason that even if the amount of commission is received in advance but the receipt cannot be said to have assumed the character of income because the accrual is dependent on the period for which the guarantee continues. The accrual of the amount of commission relatable to the period beyond the close of the year in such a situation will be solely dependent on the fact that whether the guarantee continues or not. Thus in the contingency of the customer revoking the guarantee the amount earlier received will require refund. Thus we find that no material has been placed before us to demonstrate that there was any clause in the agreement or there was some other material obliging the bank to refund the part of the guarantee commission in case it is earlier revoked. There is no reference to any facts of the case as to whether or not there was any obligation of the bank to refund the money in case the guarantee was revoked prior to the guarantee period. Further the Bench did not touch on the aspect of that assessee having made any refund as was the position in the case of Bank of Tokyo Ltd. 1993 (5) TMI 172 - CALCUTTA HIGH COURT We have already noted that the facts of the instant case are distinguishable from those before the Hon ble Supreme Court in Madras Industrial Investment Corpn. Ltd. s case 1997 (4) TMI 5 - SUPREME COURT and in Bank of Tokyo Ltd. s case (supra). Thus no assistance can be taken by the assessee from the case of State Bank of India Banking Operations Department (supra). To sum up we hold that CIT(A) was not justified in deleting this addition in assessment year 2002-03. We restore the addition made by the AO on this score and for the assessment year 2003-04 the view taken by the ld. CIT(A) is upheld. Thus ground raised by the revenue in assessment year 2002-03 is allowed and that of the assessee in assessment year 2003-04 is dismissed. Addition of upfront guarantee commission - HELD THAT - In principle we are agreeable with the contention raised on behalf of the assessee for the reason that the appeals for both the years are open before us. When we are holding that Rs. 40.80 lakhs is taxable in assessment year 2002 03 on account of guarantee commission then naturally the same amount will require exclusion if already included in the income for assessment year 2003-04. Since the necessary details are not available on record we direct the AO to verify this fact from the assessment records. If it is found that the amount of Rs. 40, 80, 147 added by the AO in the total income for assessment year 2002-03 has also been reflected by the assessee in its income for assessment year 2003-04 in full or in part then such portion may be excluded from the income for assessment year 2003-04. Needless to say the assessee will be allowed a reasonable opportunity of being heard.

Summary

Issues Involved:
1. Applicability of Section 44C for expatriate salaries.
2. Classification of loss on sale of securities as business loss.
3. Deduction of broken period interest.
4. Addition on account of revaluation of securities.
5. Treatment of upfront guarantee commission.
6. Applicable tax rate for the assessee.

Issue-wise Detailed Analysis:

1. Applicability of Section 44C for Expatriate Salaries:
The revenue contested the allowance of Rs. 58,71,199 under Section 37(1) instead of restricting it under Section 44C for the assessment year 1997-98. The assessee, a non-resident, paid salaries to expatriates working in India, with the payment made by the head office outside India. The Assessing Officer applied Section 44C, allowing only Rs. 11,78,096. However, the CIT(A) and the Tribunal upheld that Section 44C did not apply as the expenditure was exclusively for the Indian branch. This precedent was followed for subsequent years, dismissing the revenue's appeals.

2. Classification of Loss on Sale of Securities as Business Loss:
For the assessment year 1999-2000, the assessee incurred a loss of Rs. 77,000 on the sale of Government securities, which the Assessing Officer treated as a capital loss. The CIT(A) accepted the assessee's contention that these securities were "current investments" as per RBI norms, thus considered as stock-in-trade. The Tribunal upheld this view, confirming the loss as a business loss, dismissing the revenue's appeal.

3. Deduction of Broken Period Interest:
The assessee claimed a deduction of Rs. 5,61,333 for broken period interest paid on purchasing Government securities for the assessment year 1999-2000. The Assessing Officer disallowed it based on the Supreme Court's judgment in Vijaya Bank Ltd. However, the CIT(A) and the Tribunal relied on the Bombay High Court's judgment in American Express International Banking Corpn., distinguishing the Vijaya Bank case, and upheld the deduction. This position was affirmed by the Supreme Court in Citi Bank N.A., leading to the dismissal of the revenue's appeal.

4. Addition on Account of Revaluation of Securities:
For the assessment year 2000-01, the assessee debited Rs. 45,000 due to revaluation loss on current investments but did not account for a revaluation gain of Rs. 15,43,400. The Assessing Officer added this gain to the income, but the CIT(A) deleted the addition, citing RBI norms and Supreme Court judgments in Chainrup Sampatram and ALA Farm. The Tribunal upheld the CIT(A)'s decision, confirming that unrealized gains on revaluation are not taxable. Similar grounds for subsequent years were also dismissed.

5. Treatment of Upfront Guarantee Commission:
The revenue challenged the deletion of Rs. 40,80,147 for the assessment year 2002-03, arguing that the guarantee commission accrued at the time of issuing the guarantee. The CIT(A) deleted the addition, relying on Supreme Court and Calcutta High Court judgments. The Tribunal, however, restored the addition, holding that the commission accrues entirely at the time of issuing the guarantee unless there is an obligation to refund for the unexpired period. The Tribunal directed the Assessing Officer to ensure no double taxation for the amount in subsequent years.

6. Applicable Tax Rate for the Assessee:
The assessee argued for a tax rate of 35% instead of 40% plus surcharge for the assessment year 2003-04. The CIT(A) and the Tribunal, following precedent, upheld the higher rate, dismissing the assessee's appeal.

Conclusion:
The appeals of the revenue for the assessment years 1997-98, 1999-2000, 2000-01, 2001-02, and 2003-04 were dismissed. The appeal for the assessment year 2002-03 was partly allowed, and the appeal of the assessee for the assessment year 2003-04 was dismissed.