2011 (4) TMI 920 - AT - Income Tax

Disallowance of losses incurred in respect of securities transactions in which brokers were counterparties, on the ground that your appellants had not conformed to the provisions of section 15 of the Securities Contracts (Regulations) Act, 1956 - Held that - provisions of this section applies to brokers, who are members of recognized stock exchanges and not to the appellant. Disallowance of expenses incurred by your appellant s overseas branches for its Indian operations, on ground that such expenses come within the ambit of the provisions of section 44C of the Act pertaining to Head Office Expenses - Held that - it is evident from the use of the words and phrases in the above section i.e., in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount that these provisions are inapplicable to the cases, where the alleged expenses are exclusively incurred and accounted in the books. In the instant case, the expenses of Rs. 273.29 lakhs are undoubtedly falling within the definition of head office expenses within the meaning of the clause (iv) of the Explanation to section 44C of the Act. - book entries are not very important for determining the correct assessed income of the assessee. The claim can be made through the Computation of Income route. The provision of section 44C are inapplicable in a case of expenses incurred exclusively by the Bank branches abroad in respect of NRI Desks maintained by those branches. - section 44C is inapplicable to this claim of the assessee - Decided in favor of assessee. Indo-USA treaty - limits of certain deductions of a permanent establishment with respect to head office expenditures. - held that - the limitations for allowing certain expenses under the domestic law i.e., the Act, will apply to the income attributable to the permanent establishment. - as far as expenses incurred in India attributable to the business carried on in India are concerned, they have to be allowed subject to the limitations provided in the Act.

Issues Involved:
1. Disallowance of losses from securities transactions.
2. Deduction of expenses incurred by overseas branches.
3. Set-off of interest paid to the Income-tax Department against interest received.
4. Full deduction of expenses under Article 7(3) of the Indo-US Tax Treaty.
5. Disallowance of entertainment expenses.
6. Disallowance of depreciation on guest house furniture and building.
7. Treatment of securities as stock-in-trade.
8. Penalty paid to RBI.
9. Disallowance of expenses on seminars/meetings.
10. Disallowance of expenses on presentation articles.
11. Disallowance under Rule 6D of the Income-tax Rules.
12. Treatment of payments made to clubs.
13. Losses in respect of sale of securities.
14. Losses incurred on "Short Sale" of Securities.
15. Transactions under the Portfolio Management Scheme.
16. Non-allowance of losses incurred on securities transactions with brokers as counter parties.
17. Difference in contract and delivery rates for purchases and sale of securities.
18. Higher purchase price paid for securities.
19. Diminution in the value of forward securities contract.
20. Interest under section 244A(1)(a) of the Income-tax Act.

Detailed Analysis:

1. Disallowance of losses from securities transactions:
- The Tribunal allowed the assessee's appeal by directing the Assessing Officer to allow the loss as deduction by adjustment or set off against other business income. This decision was based on the precedent set in the case of American Express Bank and the assessee's own case for the assessment year 1991-92.

2. Deduction of expenses incurred by overseas branches:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of expenses incurred by overseas branches for Indian operations, ruling that such expenses do not attract the restrictive provisions of section 44C of the Act. This was consistent with the Tribunal's earlier decisions in similar cases.

3. Set-off of interest paid to the Income-tax Department against interest received:
- The Tribunal allowed the assessee's claim to set off the interest paid against the interest received, following the precedent set in the case of Cyanamidi India and R.M. Agarwal.

4. Full deduction of expenses under Article 7(3) of the Indo-US Tax Treaty:
- The Tribunal ruled that the limitations set out by Indian Tax Laws with respect to expenses incurred by the assessee in India apply to the assessee's case. This decision was based on the interpretation of Article 7(3) of the Indo-US Tax Treaty and the technical explanation of the treaty and protocol.

5. Disallowance of entertainment expenses:
- The Tribunal upheld the disallowance of entertainment expenses incurred on providing tea and coffee to customers, ruling that such expenses fall under the definition of entertainment expenses under Explanation 2 to section 37(2A).

6. Disallowance of depreciation on guest house furniture and building:
- The Tribunal upheld the disallowance of depreciation on guest house furniture and building, following the decision of the Hon'ble Supreme Court in the case of Britannia Industries Ltd. v. CIT.

7. Treatment of securities as stock-in-trade:
- The Tribunal upheld the CIT(A)'s decision treating the securities as stock-in-trade instead of investments, following the precedent set in the assessee's own case for earlier assessment years.

8. Penalty paid to RBI:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of penalty paid to RBI, ruling that the payment was compensatory in nature and not for infraction of law.

9. Disallowance of expenses on seminars/meetings:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of expenses on seminars/meetings, ruling that such expenses do not involve any element of entertainment.

10. Disallowance of expenses on presentation articles:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of expenses on presentation articles, ruling that the articles did not carry the logo of the assessee and therefore cannot be termed as advertisement expenditure.

11. Disallowance under Rule 6D of the Income-tax Rules:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of local conveyance and entertainment expenses disallowed under Rule 6D, ruling that such expenses were incurred wholly and exclusively for the purpose of business.

12. Treatment of payments made to clubs:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of payments made to clubs, ruling that such payments are normal business expenditure and not covered under section 37(2A).

13. Losses in respect of sale of securities:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of losses incurred on the sale of securities, ruling that the securities are stock-in-trade and not capital assets.

14. Losses incurred on "Short Sale" of Securities:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of losses incurred on "short sales" of securities, ruling that there was no short sale as the assessee was holding sufficient securities in the form of BRs.

15. Transactions under the Portfolio Management Scheme:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of losses incurred under the Portfolio Management Scheme, ruling that the transactions were not in violation of RBI guidelines.

16. Non-allowance of losses incurred on securities transactions with brokers as counter parties:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of losses incurred on securities transactions with brokers as counter parties, ruling that the transactions were not in violation of the Securities Contract Regulation Act.

17. Difference in contract and delivery rates for purchases and sale of securities:
- The Tribunal upheld the CIT(A)'s decision deleting the addition made by the Assessing Officer, ruling that the difference in contract and delivery rates represents the amount to be paid to the broker and is not income of the assessee.

18. Higher purchase price paid for securities:
- The Tribunal upheld the CIT(A)'s decision deleting the addition made by the Assessing Officer, ruling that the comparison of the transaction with a ready forward transaction was not correct.

19. Diminution in the value of forward securities contract:
- The Tribunal upheld the CIT(A)'s decision allowing the deduction of the loss on revaluation of forward securities contracts, ruling that the revaluation was done consistently and the loss should be allowed.

20. Interest under section 244A(1)(a) of the Income-tax Act:
- The Tribunal upheld the CIT(A)'s decision directing the Assessing Officer to grant interest on refunds up to the date of receipt of the refund, following the decisions of the Hon'ble Bombay High Court in the cases of Associated Cement Companies Ltd. and Pfizer Ltd.

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