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TMI Blog2003 (8) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities and, therefore, this process should be treated as part of normal banking business. In the absence of actual delivery, the Assessing Officer treated the losses in these transactions as speculative loss not to be adjusted against profits of normal banking business in view of section 73. Accordingly, he made an addition of Rs. 4,66,34,835. 3. The matter was carried in appeal before CIT(A) before whom two-fold arguments were made. Firstly, it was contended that assessee had undertaken the transactions only in relation to Government securities and units of UTI which could not be classified either as stocks or shares or as commodity and consequently, such transactions were outside the scope of section 43(5). Secondly, the assessee had earned profits as well as incurred loss in such transactions and, therefore, the Assessing Officer could not tax the profits without setting off the losses. With reference to the first contention, reliance was placed on the decision of Calcutta High Court in the case of CIT v. Nirmal Trading Co. [1971] 82 ITR 782 wherein it was held that letter of renunciation of the right to apply for shares were neither shares nor commodity. 4. The CIT(A) rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment securities traded by assessee did not fall within the ambit of the expression "any commodity including stocks and shares" words commodity or stocks or shares used by the Legislature in section 43(5). According to her, all the three words are mutually exclusive and exhaustive since that is presumption that the Legislature does not use superfluous words. Proceeding further, it was submitted that Legislature has used the words 'commodity including stocks and shares' which only indicate that the word 'commodity' does not include stocks and shares otherwise there was no need to include stocks and shares in the word 'commodity'. Then, it was submitted by her that units and Government securities, not being stock or share, cannot be included in the word 'commodity'. She drew our attention to Explanation 2 to section 2(42A) and also Explanation to section 115AD which define the word 'security' according to which it would carry the same meaning as given in clause (h) of section 2 of Securities Control (Regulation) Act, 1956 (in short SCRA). Then, she referred to clause (h) of section 2 of SRCA according to which 'securities' would include (1) stocks and shares, bonds, debentures, Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be drawn merely on the ground that transactions were effected through BRs. Therefore, such transactions should be considered falling outside the ambit of section 43(5). 9. The next contention of assessee's counsel was that section 73 Explanation excludes specifically the banks/investment companies and, therefore, transactions by banks cannot be considered as speculative one. According to her, deeming provisions are to be construed strictly and one cannot travel outside the ambit of deeming provisions to include what is expressly excluded by the deeming provisions. 10. On the other hand, the learned Sr. DR has strongly opposed the contentions of assessee's counsel and has supported the order of CIT(A). According to him, the word 'commodity' in its natural meaning is a wide word which includes every articles of commerce or trade. Hence, it would include not only stocks and shares but also units and securities since these are freely sold and purchased in the open market. Therefore, the expression 'including stocks and shares' has been used by the Legislature just to avoid confusion. He, in support of his contention, referred to various dictionary meanings according to which t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch meaning. To understand such meaning, it would be appropriate to refer to certain dictionary meanings: As per Black's legal dictionary.--"Those things which are useful or serviceable, particularly articles of merchandise movable in trade. Goods, wares and merchandise of any kind; articles of trade or commerce. Movable articles of value; things that are bought and sold." As perOxford's dictionary.--"An article of trade, especially a product as oPP9sed to a service." As per Websters dictionary.--"An economic good; esp. : a product of agriculture, mining or sometimes manufacture as distinguished from services (commodities such as meat, fats and sugar); an article of commerce; esp. one delivered to a transportation company for shipment; parcel or quantity of goods." The perusal of above dictionary meaning shows that according to a-very dictionary meaning, the word 'commodity' would mean 'Any article of trade or commerce'. This should, therefore, be considered as plain and natural meaning. So, any article which is ordinarily purchased and sold in the market would be within the ambit of the word 'commodity'. There is no dispute that shares, securities and units are freely traded i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion of the word 'sale', the meaning of the word 'transfer' is never enlarged but such inclusion is only by way of clarification or abundant caution. On the other hand, by inclusion of 'compulsory acquisition' natural meaning of the word 'transfer' is enlarged. Let us take another example. The word "Income" has been defined under section 2(24) by way of inclusive definition. On one hand, it includes profits and gains while on the other it also includes voluntary contribution received by trusts. Profits and gains are part of natural and plain meaning of the word 'income' while voluntary contributions are otherwise do not fall within the plain meaning of the word 'income'. This shows that by inclusion of 'profits and gains', meaning of income is not enlarged while meaning of income has been enlarged by including the voluntary contribution by trust. Similarly, article 366 of Constitution of India defined 'goods' as under: "'Goods' includes all materials, commodities and articles." By no stretch of imagination, it can be said that the meaning of the word 'goods' has been enlarged by including alone three items. These items are already covered by the plain and natural meaning of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ossible without dealing through BRs". Such submissions of assessees clearly shows that no delivery of scrips was effected by the assessee. It is also not the case of assessee either before CIT(A) or before us that actual delivery of scrips was ever effected by the assessee. Accordingly, it has to be held that there was no actual delivery of either units or securities traded by assessee throughBR. 18. Before parting with this aspect of the issue, we would like to mention the two decisions relied upon by assessee's counsel. The first decision is in the case of Nirmal Trading Co. delivered by Hon'ble Calcutta High Court. In that case, the High Court was concerned about the renunciation of right of assessee to apply for shares. The High Court, therefore, held that letter of renunciation could not be considered as commodity. Right in an inanimate object cannot be equated with that object and, therefore, that case is distinguishable. The other decision is of Hon'ble Supreme Court in the case of Appollo Tyres Ltd. That case is an authority for holding that units of UTI are not shares but such judgment is not an authority regarding the issue whether such units would fall within the meanin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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. 21. Before parting with this issue, we would like to mention two decisions of Hon'ble Supreme Court. The first decision in the case of Raghunath Prasad Poddar v. CIT [1973] 90 ITR 140 wherein it was held that transactions through Pucca Delivery Orders (PDO) coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after one year assured; (e) Consistent, safe secured income; (f) Simple documentation. Out of the profits earned under the scheme the bank will get commission while the clients were assured to get a consistent percentage of return on the amounts deposited with the bank under the scheme." The Assessing Officer has also referred to the inspection report of RBI which says that such scheme was not being implemented in accordance with the guidelines issued by RBI as well as broad policies laid down by the bank'sLondonhead office. According to Assessing Officer, the clients of bank invested their money in the scheme because of minimum percentage of return on their deposits as was evident from the details furnished by the assessee. According to such details, the return was between 12.5 per cent to 13.5 per cent. The assessee denied that bank promised any likely return under the scheme. However, the Assessing Officer held that it was a fact though could not be substantiated by any written evidence. According to him, the bank not only held such promises but also fulfilled such promises. Hence, investments by clients were like fixed deposits as no client was allowed to withdraw at least ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olations of the directions of RBI based on the reports of Jankiraman Committee & G.P. Kapadia. According to such reports, the show-cause notice states, the assessee bank had conducted securities transactions in utter disregard of the instructions and guidelines of RBI. Accordingly, he upheld the order of Assessing Officer. Aggrieved by the same, the assessee is in appeal before the Tribunal. 27. The learned counsel for assessee has vehemently contended that nature of payments by clients under PMS could not be characterized in the nature of fixed deposits. She drew our attention to the salient features of the scheme. According to her, the entire activity of investment in securities were on behalf of their clients and the assessee was only entitled to management fee. It was further stated that distinct clientwise investment details were maintained. Separate record was maintained for regular banking business and there was no mixing of record inter se. Further, the scheme was being in operation since 1987 and there was no violation till the year under consideration. The probe by Jankiraman Committee was in the financial year 1992-93 and, therefore, its report is not relevant for decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to her, the board has no power to direct that PMS Scheme should be regarded as FOR Scheme. 31. Lastly, it was contended that even assuming that business under PMS was illegal, the profits of such business has to be computed after adjusting all expenditure relating to such business. Reliance was placed on various decisions of Supreme Court, namely--CIT v. S.C. Kothari [1971] 82 ITR 794, CIT v. Kurji Jinabhai Kotecha [1977] 107 ITR 101, CIT v. Piara Singh [1980] 124 ITR 40. She also relied on the judgments of Supreme Court in the cases of CIT v. Sitaldass Tirathdas [1961] 41 ITR 367, CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 and CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 for the proposition that tax is to be levied on real income of the assessee. 32. On the other hand, the learned DR has vehemently supported the order of CIT(A). The gist of the argument was that scheme itself could not be read in isolation. According to him, the scheme of PMS should be considered in the light of actual activity carried on by the assessee. The modus operandi of the scheme had been examined by the Janakiraman Committee and the RBI and the assessee was found to implement such sche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dras High Court in the case of Indian Bank wherein it was observed as under: "A consideration of the aforesaid provisions of the Banking Regulation Act, 1949, clearly points out that a banking company, more particularly, nationalized bank like the petitioner has really no free scope for carrying on the business of banking permitted under the provisions of the Banking Regulation Act in any manner it likes, but every activity is hedged in by and subjected to the control of RBI and its order and directives issued periodically, a contravention of which is also made punishable under the provisions of the Banking Regulation Act. It is, therefore, evident that if a banking company has to carryon the business of banking, it has to carry out the mandate and directions of the RBI issued by it periodically, as enjoyed by the statute." The Hon'ble Supreme Court in the case of Bank of India Finance Ltd. has also held that directions of RBI are binding on the banks. Such violations are punishable under the provisions of Banking Regulation Act. Hence, in our considered view, any payment in violation of RBI directions is not allowable as deduction under section 37. At this stage, it would be use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 35. However, we are in agreement with ld. DR that implementation of the scheme was contrary to what is stated in the scheme. The learned counsel for assessee has fairly admitted that the entire monies received from its clients were pooled together and the same were invested in purchase and sale of securities. No separate accounts of clients were maintained by the assessee. Further, the profits earned by the assessee under this scheme was never credited to the accounts of the clients. As an agent, the bank was required to distribute the profits (after deducting commission) in the same ratio in which individual investments were made. But that was not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lete the addition sustained by him. 37. The next and last issue relates to the disallowance of Rs. 1,32,46,994 claimed as deduction in respect of salaries paid to expatriate en1ployees for services rendered inIndia. 38. Briefly stated, the facts are these: The assessee did not claim such deduction either in the return or in the assessment proceedings since such sum was paid to its expatriate employees outsideIndiaand, therefore, not debited to its profit and loss account in the books of account maintained inIndia. So the assessment was completed without any discussion on this issue vide order dated25-3-1994. However, it came to knowledge of the Government that certain non-resident/foreign companies were paying salaries to its expatriate employees outsideIndiafor services rendered inIndiawithout deducting any tax at source even though such payment was chargeable to income tax under section 9(1)(ii) in the hands of recipients. The Board issued circular No. 685 dated 17/20-6-1994 and circular No. 686 dated 12-8-1994 permitting such companies to pay the amount of TDS along with interest subject to no penalty/prosecution. In pursuance of such circulars, the assessee made the payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ruled out. Hence, such expenses could be treated as head office expenses and allowed out to the extent provided under section 44C. Aggrieved by such order, the assessee is in appeal before the Tribunal. 42. Both the parties have been heard at length. As far as the issue regarding admission of additional ground is concerned, we need not refer to the arguments of the parties since such issue is covered by the latest Supreme Court judgment in the case of National Thermal Power Co. v. CIT [1998] 229 ITR 383 wherein it has been held that purely legal ground can be raised before first appellate authority even if it was not raised before Assessing Officer. Respectfully following the same, we hold that CIT(A) ought to have admitted the additional ground raised by assessee. Normally, we would have restored the matter to the CIT(A) for adjudication of such ground but considering the fact that CIT(A) has already adjudicated such ground on merits also, we treat such ground to have been admitted and proceed to adjudicate the same on merits. 43. Both the parties have been heard at length on merits of this issue. The learned counsel for the assessee has challenged the various observations of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upported by the judgment of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. 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 [2003] 85 ITD 414 (Delhi). 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. 46. 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). Section 40 is 'salaries', if: (i) it is payable outsideIndia; and (ii) the tax has not been paid thereon nor deducted therefro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intended to give similar benefit, it could have easily inserted a similar proviso to clause (iii). Deliberate departure clearly indicates the intention of the Legislature not to provide similar benefits in the case of payments of salaries. If the interpretation put forth by assessee's counsel is accepted, then the proviso to section 40(a)(z) would become redundant. Hence such interpretation cannot be accepted. In our considered opinion, the prohibitive provisions should be construed in the manner which helps the honest and law-abiding assessees and discourage the defaulter assessees. However, the Legislature's intention is very clear and does not allow deduction if tax has not been deducted or paid within prescribed time under Chapter XVII-B. Admittedly, neither the tax was deducted at source nor payment of tax was made as per the provisions of Chapter XVII-B. Tax was only paid after long period of three years from the end of financial year concerned to avoid penalty/prosecution and, therefore, no benefit can be given to assessee on that account for the reasons given by us. Accordingly, we uphold the order of CIT(A) on this account. 48. In the result, the appeal of assessee is par ..... X X X X Extracts X X X X X X X X Extracts X X X X
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