2005 (6) TMI 218 - AT - Income Tax

Deduction of tax component and salary of expatriate employees - Assessee-in-default - Deduction of interest levied u/s 201(1A) - Operational loss - claimed deduction on account of sum refunded to the Punjab Housing Board (PHB) on account of the investment - difference of opinion between ld members - Third Member Oder - Whether the assessee is entitled to deduction of tax component of salary of expatriate employees relating to assessment years 1990-91 and 1991-92 in assessment year 1995-96 in which the tax has been paid by the assessee not claimed in the respective assessment years before any authority. Assessee is a bank incorporated in Netherlands with limited liabilities having its original office at Singapore -branches in India at Mumbai Kolkata and New Delhi and is registered as a Scheduled Bank in terms of Schedule II of the Reserve Bank of India (RBI) Act 1934 - agreement for Avoidance of Double Taxation between India and Netherlands (DTA) Tax component in respect of expatriate employees for assessment years 1990-91 and 1991-92 - HELD THAT - Vice President in his proposed order has held that in principle the assessee is entitled to deduction of tax component of salary relating to expatriate employees in assessment years 1992-93 to 1994-95 but for the operation of the provisions of section 40(a)(i) the deduction is not permissible in such year the tax not having been paid by the assessee. However since the payment of tax has been made in assessment year 1995-96 the Vice President has accordingly allowed the deduction of the entire claim pertaining to assessment years 1992-93 to 1995-96 in assessment year 1995-96. In assessment year 1995-96 the assessee had also claimed deduction in respect of tax component of salary of the expatriate employees pertaining to assessments for 1990-91 and 1991-92. The said assessment years were not in appeal before the Tribunal. The Vice President in para 27 of the order has held that the assessee not having claimed any deduction in respect of the tax component of salary in the assessment years 1990-91 and 1991-92 either before the Assessing Officer or before any other authority the mere fact that the tax has been paid in assessment year 1995-96 does not entitle the assessee to claim deduction in the year of payment i.e. in assessment year 1995-96 when the assessee is following the mercantile system of accounting. On the other hand the AM in the dissenting order has held that the assessee would be entitled to deduction in respect of tax component of the salary for assessment years 1990-91 and 1991-92 paid in assessment year 1995-96 notwithstanding the fact that no claim was either made in assessment year 1990-91 or 1991-92 by the assessee before any authority. According to the AM section 40(a)(i) permits deduction in the year of payment. Therefore the omission of the claim in relevant years i.e. in assessment years 1990-91 and 1991-92 is of no consequence. Hence the point of difference. Business loss - Vice President expressed the view that the assessee is not entitled to deduction on account of refund to PHB as that was not the event of loss. The Vice President has also pointed out that facts relating to the loss are disputed by the parties and the matter is sub judice. The Vice President in his proposed order has given liberty to the assessee to claim the loss as and when it is established to have been incurred. The AM i n his dissenting order has disagreed with the view and on the reasons recorded in the order held that the assessee is entitled to deduction. Third Member Order - It is evident from provisions that such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid if tax has been deducted in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200. No restriction is placed for allowability of deduction of the remuneration paid in the subsequent year that it should have been claimed in the earlier year. As aforesaid it will also not stand to logic that when a deduction is not allowable under a particular provision of the Act in this case section 40 of the Act that the assessee should make a claim and that should be rejected at the first instance in the relevant year. The proviso does not contemplate any such restriction. On the contrary it would be futile rather exposing the assessee to penal consequences if he made a wrong claim which is not allowable due to specific prohibition. Such a restriction therefore cannot be read in the language of section 40(a)(i) of the Act nor could it be inferred so. The deduction for assessment years 1990-91 and 1991-92 has also to be allowed similarly as an admissible deduction with similar direction as were given for allowing the claim for assessment years 1992-93 to 1994-95. Allowability of interest paid under section 201(1A) - Vice President (JM) held that the assessee had committed a default in discharge of its obligation of deduction of tax and payment to the Government in respect of salary paid to expatriate employees as a result of which it had to pay interest under section 201(1A) of the Act. No deduction according to him would be permissible to the assessee in respect of interest payable as an assessee-in-default for its failure to discharge its statutory obligation of non-deduction of tax and nonpayment thereof to the Government in contrast to the obligation of the assessee as an employer. The AM on the other hand expressed an opinion that interest charged u/s 201(1A) is part of the cost of employment to the assessee and accordingly on the same parity of reasoning of allowability of the remuneration and taxes the interest would also be permissible deduction. On a combined reading of the definition of tax in article 3(d) of the DTA in conjunction with the provisions of sections 192 and 195 of the Act the interest in my opinion would not be an allowable deduction. It has nothing to do with carrying on the business of the assessee. It may be that the tax was deducted for and on behalf of the employees but it was an obligation of the assessee itself under the Income-tax Act 1961 to deduct the tax within the prescribed time and therefore it was a personal liability of the assessee-bank. In the decision of Jubilee Investments Industries Ltd. v. Asstt. CIT 1999 (5) TMI 574 - CALCUTTA HIGH COURT the Calcutta High Court dealt with the scope of levy of penalty u/s 221 of the Act for failure to deposit the tax deducted at source in time and in that connection the Calcutta High Court observed that when the assessee is found to be in default in depositing the amount of TDS within the time prescribed he is liable to pay interest as well as he is liable to pay penalty and the fact that he has suffered loss or financial stringency and therefore could not deposit the amount in time has nothing to do with the liability to deposit TDS. It might be true that the payment of salary and the liability for payment of tax thereon are part of the pay package or employment cost of the assessee and that they are in the nature of expenses wholly and exclusively for the purpose of business of the assessee but a part of that liability has partaken a character of a statutory liability. That part is that as an employer the assessee was under an obligation under Sections 192 and 195 of the Act to deduct the tax and deposit the same with the Government of India. This statutory liability was a personal liability of the assessee and on failure to deduct that tax the assessee becomes an assessee-in-default. Interest is paid for the failure of discharging that liability under the Act. The interest therefore was levied upon the assessee for the failure in discharging a personal liability and therefore cannot be allowed as a deduction. The fact that such tax deducted at source would ultimately be adjusted against the liability of the payee in computing its income-tax liabilities does not in my opinion convert the liability of the assessee and consequently in my opinion the payment of interest u/s 201(1A) cannot be allowed as a deduction. Allowability of an amount being the operational loss claimed to have arisen on account of transaction in securities - In my opinion therefore the loss was incurred by the assessee as such on its own account and not on account of its client PHB on whose behalf and specifically in whose name the assessee was trying to acquire securities. The assessee stated to have agreed to bear this loss because of commercial expediency and one important factor contributing to this commercial expediency is stated to be that the RBI declined to issue a licence for opening a new branch office at Chennai by its letter dated 16th June 1993. It might be a fact that within three weeks of this communication the assessee-bank entered into settlement with PHB but that does not have any bearing or influencing factor for settling the issue with PHB. RBI s refusal or suspension of decision to issue licence was for the reason that dispute in security investment with Andhra Bank was to be settled first. PHB was not in picture at all. Settlement for payment of Rs. 9.57 crores is with PHB and not Andhra Bank. Nainital Bank s case therefore is of no help to the assessee I therefore hold that the refund of money to PHB was not a loss to the assessee. Loss if any which could be said to have been suffered by the assessee was on account of the decision to invest in NPC Bonds through Shri N.K. Agarwal. Here the broker Shri N.K. Agarwal had played a mischief and consequently taken that upon himself by offering another security in IRFC Bonds Andhra Bank has transferred the money on the instructions of Shri N.K. Agarwal stated to be on behalf of the assessee. That fact is disputed by the assessee. The assessee had not pursued the matter vis-a-vis Andhra Bank. It had carried the matter further accepting the alternative security in the form of IRFC Bonds the registration for which was refused on the ground that they have already been registered in the name of another bank. The matter of registration of alternative security ended in 1998 whereas the matter visa-vis Shri N.K. Agarwal is pending even on date. In these circumstances in my opinion there was no loss which can be said to have arisen to the assessee in the year under consideration. On a reference the High Court held that the loss was suffered by the assessee in the accounting year relevant to the assessment year 1953-54 and if as a result of the litigation it was found entitled to less amount than the amount claimed the difference could be included in the assessable income of the assessee for the year during which the final decision of the litigation was made. Similarly if the assessee had been successful in obtaining the entire amount of the loss from the company the amount could be included in the income of the assessee for the year during which the amount was actually recovered. The pendency of litigation about the loss suffered cannot militate against the fact that the loss was suffered by the assessee during the accounting year relevant to the assessment year 1953-54 when the company did not take delivery and the assessee had sold the goods in the open market for a lesser amount. All these cases could have helped the assessee in the present case if the claim was made in the appeal for assessment year 1993-94 when the assessee got the information that the cheques issued for investment in NPC Bonds were diverted to the account of Shri Hiten Dalal or when the alternative security in IRFC Bonds was found to be registered in some other bank s name. Both these dates were falling in assessment year 1993-94 and consequently the assessee cannot claim the loss in the year under consideration even on the basis of the three decisions referred to above. In view of the above in my opinion the CIT(A) was right in disallowing the claim of the assessee. Majority decision - The Hon ble V.P. Sri R.P. Garg sitting as Third Member vide his opinion dated 17-6-2005 has concurred with the view of Ld. AM with regard to question No. (a) for assessment year 1995-96 i.e. in favour of the assessee and on question No. (b) for assessment year 1995-96 he agreed with the view of Ld. V.P. i.e. against the assessee and in favour of the revenue. With regard to the question No. (c) for the assessment year (sic) by the Ld. V.P. has decided the issue against the assessee is in favour of revenue. According the grounds taken by the assessee are partly allowed. In the result the appeals stand partly allowed.

Summary

Issues Involved:
1. Deduction of remuneration and tax component for expatriate employees.
2. Deduction of interest u/s 201(1A) for delayed payment of TDS.
3. Deduction of operational loss on account of transactions in securities.

Summary:

Issue 1: Deduction of Remuneration and Tax Component for Expatriate Employees
The assessee, a branch of ABN AMRO Bank NV, claimed deductions for remuneration and tax components paid to expatriate employees for services rendered in India but paid outside India. For assessment years 1992-93 to 1994-95, the Tribunal agreed that the remuneration paid to expatriate employees rendering services in India is allowable as a deduction in computing the profits of the PE, provided it is not taken into account under section 44C. The deduction for these years would be permissible in the assessment year 1995-96 as per the proviso to section 40(a)(i) since the tax was paid in that year. For assessment years 1990-91 and 1991-92, the Vice President held that the deduction was not permissible in 1995-96 as it was not claimed in the respective years, while the Accountant Member disagreed, stating the omission to claim in the relevant year is of no consequence. The Third Member concurred with the Accountant Member, allowing the deduction in 1995-96.

Issue 2: Deduction of Interest u/s 201(1A) for Delayed Payment of TDS
The assessee claimed deduction for interest paid u/s 201(1A) for delayed payment of TDS. The Vice President held that the interest was not allowable as it was a personal liability of the assessee for failing to discharge its statutory obligation. The Accountant Member, however, considered the interest as part of the cost of employment and allowable. The Third Member agreed with the Vice President, holding that the interest paid for failure to deduct and pay tax in time is not an allowable deduction.

Issue 3: Deduction of Operational Loss on Account of Transactions in Securities
The assessee claimed a deduction for Rs. 9,57,58,904 refunded to Punjab Housing Board (PHB) due to a failed investment in NPC Bonds. The Vice President held that the refund to PHB was not an event of loss and the loss did not pertain to the year under appeal. The Accountant Member considered the payment to PHB as a business expenditure due to commercial expediency and allowable as a deduction. The Third Member agreed with the Vice President, holding that the refund to PHB was not a loss to the assessee and the loss, if any, did not arise in the year under consideration.

Conclusion:
- Deduction of remuneration and tax component for expatriate employees: Allowed in 1995-96 as per the Accountant Member's view.
- Deduction of interest u/s 201(1A): Not allowed as per the Vice President's view.
- Deduction of operational loss: Not allowed as per the Vice President's view.