2003 (8) TMI 174 - AT - Income Tax

Speculative Transactions - addition on account of disallowance of speculation loss - foreign company engaged in banking business and related activities such as purchase and sale of securities in India - addition under the head Portfolio Management Scheme (PMS) - HELD THAT - Since the Legislature intended to discourage companies in dealing in shares of other companies, it inserted deeming provision in the form of Explanation to section 73 and made such dealings as part of speculative business so as to deprive such assessee from setting off losses in such business against other incomes of such assessee. It is only in such case, the Legislature has provided exception by way of exclusion of certain companies including banking companies. Therefore, the result is that if banking company is engaged in business of shares by actual delivery then such business shall not be regarded as speculative business and consequently, such banking company would be entitled to set off losses in such business against its normal profits. However, if the business of such banking company consists of purchase and sale of shares without actual delivery, then such business would itself fall within the scope of section 43(5) read with Explanation 2 to section 28 and consequently, the losses incurred in such business would not be allowed to set off against other income in view of main provisions of section 73 itself and there would be no occasion to apply the Explanation to such section. In the present case, the case of assessee falls within the scope of section 43(5) and therefore, losses in transactions of purchase and sale of units and securities without actual delivery cannot be set off against normal income from banking in view of the main provisions of section 73. Thus, it is held that the transactions of purchase and sale of units and Government securities by assessee through BR, without actual delivery would fall within the scope of speculative transaction as defined in section 43(5). Consequently, the loss arising from such transactions can be set off only against speculative profits and cannot be set off against normal banking profits in view of the main provisions of section 73. The order of CIT(A) is, therefore, upheld on this issue. Addition under the head Portfolio Management Scheme (PMS) - Reading the entire scheme as a whole, we are of the view that scheme by itself is not a fixed deposit scheme. According to it, the bank has to act as an agent of its clients inasmuch as the bank is required to purchase and sell the securities and units etc. only on behalf of the clients and the income arising in such trading has to be credited to their accounts. The assessee bank cannot appropriate any part of it to itself. It is entitled only to a commission for managing the portfolio of its clients. Further, there is no assurance to pay any fixed return. It clearly provides that there is a risk to investor clients. Further, such scheme as launched in 1987 was approved by RBI and it is also not the case of revenue that such scheme by itself is in contravention of RBI guidelines/instructions, Therefore, acceptance of money under the scheme was not in violation of any RBI norms and consequently, it cannot be said that money received was in the nature of fixed deposits. We are unable to accept the contention of assessee's counsel that no adverse inference could not be drawn from the findings of such committee since such committee gave its report for subsequent year and not for the year under consideration inasmuch as the scheme and implementation throughout was in the similar manner. It is further noted that bank was also penalized for such violations by RBI. Therefore, we are of the view that any loss arising from scheme was disallowable under section 37 read with Explanation thereto. Thus, we are unable to uphold the order of CIT(A) on this issue. The question of disallowance would arise only where either such loss or expenditure is claimed in profit loss account or in the computation of income and not otherwise. We fail to understand as to how any addition could be made where the assessee neither debited such amount in the profit and loss account nor claimed such deduction while computing the income. Admittedly, the books of account in respect of banking business other than the PMS activity were maintained separately and also got audited as per law. Commission income earned from PMS activity is duly credited to profit and loss account and offered for taxation. Nowhere the loss arising from PMS activity was claimed as deduction either in profit and loss account or in computation of income. The learned DR has not been able to show that regular income of assessee has been reduced by such amount of loss/expenditure. The excess payment to its clients was made out of PMS corpus itself and this fact is also not in dispute. The separate accounting kept by assessee for PMS has also been accepted by CIT(A). In view of such factual position, we are of the considered view that no addition could have been made by Assessing Officer or sustained by CIT(A). It is also not the case of revenue that any surplus was earned by the assessee under this scheme. Hence, question of making any addition on this account did not arise. Accordingly, we set aside the order of CIT(A) on this issue and delete the addition sustained by him. Salaries paid to expatriate employees for services rendered in India - We are in agreement with the legal proposition that entries in the books of account are not relevant if the claim is otherwise allowable. This is well supported by the judgment of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 1971 (8) TMI 10 - SUPREME COURT We also agree that claim of assessee cannot be disallowed on the ground that salaries paid were not grossed up under section 195A for the purpose of computing tax liability of assessee inasmuch as there is no material on the record that there was any agreement or arrangement to bear the burden of tax on salaries chargeable to tax. The burden to prove the existence of such agreement is on the revenue which has not been discharged. Similar view has also been taken by us in the case of Mitsubishi Corpn. v. Dy. CIT 2002 (11) TMI 262 - ITAT DELHI-C . There is also no dispute that salaries to expatriate employees were paid outsideIndiaand the tax deductible on such income along with interest has been paid by the assessee in accordance with circulars of the Board. Such payments have been accepted by the department. Despite the above findings, we are unable to uphold the claim of assessee. In our opinion, the claim of assessee is hit by the provisions of section 40(a)(iii). In the result, the appeal of assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of speculation loss.
2. Addition under the head "Portfolio Management Scheme" (PMS).
3. Disallowance of salaries paid to expatriate employees for services rendered in India.

Summary:

1. Disallowance of Speculation Loss:
The first issue pertains to the addition of Rs. 1,20,86,352 due to the disallowance of speculation loss as sustained by CIT(A). The assessee, a foreign banking company, engaged in transactions of Government securities through Banker's Receipts (BRs) without actual delivery, resulting in a loss of Rs. 4,66,34,835. The Assessing Officer (AO) treated these losses as speculative under section 73, disallowing them against normal banking profits. The CIT(A) upheld this view, stating that the word 'commodity' in section 43(5) includes Government securities and units of UTI. The Tribunal agreed, emphasizing that the transactions through BRs without actual delivery fall within the scope of speculative transactions as defined in section 43(5). Consequently, the loss can only be set off against speculative profits and not against normal banking profits.

2. Addition under the Head "Portfolio Management Scheme" (PMS):
The second issue involves the addition of Rs. 8,74,23,058 under the head "Portfolio Management Scheme" (PMS). The AO treated the investments by clients under PMS as fixed deposits, disallowing any payment over the permitted interest rate by RBI. The CIT(A) upheld this view, citing violations of RBI guidelines. However, the Tribunal found that the scheme itself was not a fixed deposit scheme but was implemented contrary to its stated terms. Despite the violations, the Tribunal noted that the excess payments to clients were made out of the PMS corpus fund and not debited to the profit and loss account. Therefore, no addition could be made as the assessee did not claim such deductions in its regular income. The Tribunal set aside the CIT(A)'s order on this issue and deleted the addition.

3. Disallowance of Salaries Paid to Expatriate Employees:
The third issue concerns the disallowance of Rs. 1,32,46,994 claimed as deduction for salaries paid to expatriate employees for services rendered in India. The assessee did not claim this deduction in the original assessment as the salaries were paid outside India. The claim was made later under section 37 read with section 40(a)(iii) after paying the TDS along with interest. The CIT(A) rejected the claim, stating that the tax was not deducted at source as required under Chapter XVII-B. The Tribunal upheld this view, emphasizing that the deduction is only allowable if the tax is paid or deducted within the prescribed time under Chapter XVII-B. Since the tax was paid after a significant delay, the claim was disallowed.

Conclusion:
The appeal of the assessee is partly allowed, with the Tribunal upholding the disallowance of speculation loss and salaries paid to expatriate employees while deleting the addition under the PMS scheme.