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2008 (11) TMI 279 - AT - Income TaxDisallowance of loss incurred in transactions involving SGL securities - violation of s.15 of Security Contracts (Regulation) Act 1956 (SCR Act) - Whether the loss emanating from the security transactions in violation of s. 15 constitute an allowable business losses? - Revenue contended that assessee failed to prove the existence of the consent of the BOA with the written confirmations. it is the case of presuming the consent of BOA which never existed with the broker both at the time of entering the security transaction or within 3 days from the date of the contract - loss should neither be allowed nor allowed to be set off against the profits earned out of comparable transactions. HELD THAT - We find that Tribunal in the case of Ashok Kumar Karola vs. Asstt. CIT 2006 (11) TMI 261 - ITAT JAIPUR-B held that the loss arising out of the transactions by infraction of law is not an allowable business loss and in these circumstances the judgment of the apex Court in the case of CIT vs. Piara Singh 1980 (5) TMI 2 - SUPREME COURT should have no application. However the Supreme Court held in another case of Dr. T.A. Quereshi vs. CIT 2006 (12) TMI 91 - SUPREME COURT held that illegal losses are allowable losses. In that case where the assessee reflected the banned substances in the stock-in-trade when such stock is seized the loss on account of such stock is held as an allowable business loss despite the infraction of law. Thus the Apex Court distinguished the relevance of the principles of the morality from the principles of the legality as pointed out by the Bentham and Austin. Therefore we have examined the case where the assessee executed the security transaction may be in violation of the provisions of s. 15 of the SCR Act. and the loss generated out of the said transaction when undisputedly borne out of the books of the assessee is an allowable loss. Therefore the said loss is eligible for set off as claimed by the assessee. Accordingly the ground No. 1 of the assessee is allowed. Disallowance of the expenditure - incurred by the overseas branches for its Indian operations - Head office expenses - HELD THAT - We have perused the decisions in the case of Emirates Commercial Bank Ltd. 2003 (4) TMI 2 - BOMBAY HIGH COURT and British Bank of Middle East 2005 (6) TMI 476 - ITAT MUMBAI and Hong Kong Shanghai Banking Corpn. Ltd. We find that 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 provisions of s. 44C are inapplicable in a case of expenses incurred exclusively by the bank branches abroad in respect of NRI desk maintained by those branches. Therefore we are of the considered opinion that the provision of s. 44C is inapplicable to this claim of the assessee. Accordingly ground No. 2 is allowed. Disallowance u/s.43B - HELD THAT - We find that the contribution made by both the employer as well as the employees before the extended due date by way of the grace period should be allowed as allowable claim and not the payments subsequent to the grace period allowed in the relevant statute. In our opinion we have to follow the judgment in the case of Pamwi Tissues Ltd. 2008 (2) TMI 400 - BOMBAY HIGH COURT as their Lordship have held that the Supreme Court has merely dismissed the SLP in the case of Vinay Cement Ltd. 2007 (3) TMI 346 - SC ORDER and it could not be said that the said amounts to law declared by the Hon ble Supreme Court. Therefore we set aside this issue to the file of the AO only for giving effect to our finding and recompute the disallowance accordingly. AO shall comply with the principles of natural justice while determining the exact disallowance. Accordingly ground No. 3 is set aside. In the result appeal of the assessee is allowed for statistical purposes.
Issues Involved:
1. Disallowance of losses incurred on securities transactions. 2. Disallowance of expenses incurred by overseas branches for Indian operations under Section 44C. 3. Disallowance of payments to the employees' provident fund under Section 43B. Detailed Analysis: Issue 1: Disallowance of Losses Incurred on Securities Transactions The CIT(A) confirmed the disallowance of Rs. 12,64,816 incurred by the assessee on securities transactions. The AO observed that these transactions violated Section 15 of the Securities Contracts (Regulation) Act, 1956 (SCR Act, 1956). The assessee argued that the responsibility to comply with Section 15 lies with the broker, not the assessee. The AO, however, held that the violation of RBI directives, which are as good as law, amounts to an infraction of law and thus disallowed the losses. The CIT(A) upheld this decision, stating that the losses were incurred in transactions prohibited by law and thus not allowable. The Tribunal, however, concluded that the assessee had violated Section 15 of the SCR Act but allowed the set-off of losses against profits from similar transactions, citing the Supreme Court judgment in Dr. T.A. Quereshi vs. CIT, which held that illegal losses are allowable if they form part of the business. Issue 2: Disallowance of Expenses Incurred by Overseas Branches for Indian Operations Under Section 44C The CIT(A) upheld the AO's decision to disallow Rs. 2,73,29,000 incurred by the assessee's overseas branches for its Indian operations, categorizing them under Section 44C. The assessee contended that these expenses, related to staff manning NRI desks abroad, were directly attributable to Indian operations and should not fall under the restrictive provisions of Section 44C. The Tribunal agreed with the assessee, citing the jurisdictional High Court judgment in CIT vs. Emirates Commercial Bank Ltd., which held that expenses incurred exclusively for Indian branches are not subject to Section 44C. Thus, the Tribunal allowed the assessee's claim. Issue 3: Disallowance of Payments to the Employees' Provident Fund Under Section 43B The CIT(A) confirmed the disallowance of Rs. 4,99,618 related to payments to the employees' provident fund, citing Sections 2(24)(x), 36(1)(va), and 43B. The assessee argued that these provisions were intended to deny tax deductions to chronic defaulters and not for minor delays. The Tribunal referred to the jurisdictional High Court's decision in CIT vs. Pamwi Tissues Ltd., which held that contributions not paid within the due date allowed in the respective statutes should be disallowed. Consequently, the Tribunal set aside this issue to the AO for recomputation, emphasizing adherence to the principles of natural justice. Conclusion The Tribunal allowed the appeal of the assessee for statistical purposes, providing relief on the first and second issues while setting aside the third issue for recomputation by the AO.
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