9911796707
TMI Blog2011 (4) TMI 920X X X X Extracts X X X X X X X X Extracts X X X X ..... ulations) Act, 1956, having failed to appreciate that a careful reading of this provision would clearly indicate that it is the responsibility of the broker, who is a member of a recognized stock exchange, and not that of your appellants, to conform to the provisions of section 15 of the Securities Contracts (Regulations) Act, 1956. 1.2 Without prejudice to the above, and assuming whilst denying that the transactions were illegal, the losses incurred thereon ought to have been set off against your Appellant's total income. 1.3 Without prejudice to the above, and assuming whilst denying that the transactions were illegal, the losses incurred thereon ought to have been set off against profits from similar transactions entered into by your appellants." 3. The assessee is a foreign banking company assessed in the status of non-resident. The assessee carries on the business of banking. For detailed reasons mentioned in the assessment order for assessment year 1991-92, the losses arising in the securities transactions with brokers as counter parties were disallowed by the Assessing Officer. As per the Audit Report under section 142(2A) and as per the details filed by the assessee, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision was explained and followed by the Tribunal in the case of American Express Bank (supra) as follows: "21 Ground No. 4 of the assessee reads as follows :- In not allowing the appellant to adjust or set off the net losses in respect of transactions where the counter party were brokers against other business income of the appellant or against income under any other head. 22.The assessee's accounts were directed to be again audited by the Special Auditor with the previous approval of the Chief Commissioner of Income-tax in accordance with the provisions of section 142(2A) of the Act. This was done because of the Harshad Mehta Security Scam that had broken at the relevant point of time. A copy of the Special Auditors report is filed at pages 145 to 236 of the assessee's paper book. Under section 15 of the Securities Contracts (Regulation) Act, 1956 (SCR Act), no member of a recognized stock exchange shall in respect of any securities enter into any contract as a principal with any person other than a member of a recognized stock exchange, unless he has secured the consent or authority of such person and discloses in the note, Memorandum or agreement of sale or purchase that he i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble. It was further submitted that in coming to the above conclusion, the Tribunal had placed reliance on a recent decision of Hon'ble Supreme Court. In the case of Dr. T.A. Quereshi v. CIT [2006] 287 ITR 547 (SC). It was the plea of the learned counsel for the assessee that the later decision of the Tribunal should be followed. The learned DR relied on the order of the learned CIT(A) and submitted that the Tribunal's decision in assessee's own case in assessment year 1990-91 where the Tribunal refused to allow set-off of loss in ready forward transaction in securities which was in breach of RBI regulations to be a loss arising out of infraction of law and therefore cannot be set off against the regular business income of the assessee. 26. We have considered the rival submissions. In the case of Bank of America (supra), similar issue on identical facts has been elaborately discussed. It was also a case where transaction in securities had been entered into with brokers acting as principal. The Tribunal firstly held that the transactions were in violation of the SCR Act and therefore losses from such transactions are losses from illegal business and are generally not allowable. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Circular issued by RBI, held them to be loss occurred while carrying out transactions which were in infraction of law and therefore illegal and further held that loss from an illegal business cannot be set off against profits of a lawful business carried on by the assessee nor can be allowed to be carried forward. The Tribunal in coming to the above conclusions followed two decisions of the Hon'ble Supreme Court in the cases SC Kothari v. CIT [1971] 82 ITR 794 and Kurji Jinabhai Kotecha [1977] 107 ITR 101. In the case of S.C. Kothari (supra) the facts were the assessee, a member of a recognised association, entered into transactions for the supply of groundnut oil with different people who were not members of the association. The Tribunal found (i) that the contracts were non-transferable, specific delivery contracts, where the intention ab initio was either to give or to take delivery; (ii) that they were entered into either for purchase or for sale; and (iii) that the same quantity was either sold or purchased by the assessee on behalf of the same constituents at the market rates prevailing at the material time, i.e., they were squared up by corresponding sales or purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssume an illegal business to die out of existence with all its losses to the assessee in the year of loss itself. The assessee can derive no benefit on account of the unlawful business in the following year. The matter will be different if a lawful speculative business after incurring loss is discontinued and loss therefrom is carried forward for set off against any other lawful speculative business in the following year." 28. The Hon'ble Supreme Court in the case of Dr. T.A. Quereshi (supra) has however, observed that the Explanation to section 37 would make no difference to losses, which are required to be allowed, irrespective of the fact, that it was consequence of contravention of law. It observed that the assessee was, no doubt, committing a highly immoral act in stocking heroin. But then, moral considerations are not relevant in computation of business income. It was pointed out, that law is different from morality as pointed out by jurists like Bentham and Austin. The Supreme Court also referred to the precedent in CIT v. S. N. A. S. A. Annamalai Chettiar [1972] 86 ITR 607 , where it was pointed out, that business income is to be computed on ordinary principles of commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the section 44C of the Act. Your appellants submit that on the facts and in the circumstances of the case the CIT(A) ought to have held that the entire amount of Rs. 77,054,195 was an allowable deduction." 9. Bank of America NT & SA has its Head Office at San Francisco in the United States, with branches all over the world. Under Indian tax laws, the income of the assessee which is received or deemed to be received in India, or which accrues or is deemed to be accrued in India, is assessed to tax. In computing income assessable to tax, expenses incurred for earning the same are deducted. These expenses are in the nature of direct and indirect expenses, attributable to assessee's business in India. An example of indirect expenses is head office administrative expenses which are deductible within specified limits under the provisions of section 44C of the Act. The assessee's branches at several overseas locations have incurred expenses totalling Rs. 77,054,195 to enable it to earn income in India. These expenses which are directly incurred for its business in India are allowable as a deduction against the said income in India. The expenses claimed as a deduction are those which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian branches. Expenses were incurred by those branches abroad to earn income by Indian Branches in India. These expenses were debited under the head of 'staff related expenses' and pertained to staff manning the NRI Desk at various branches outside India such as Singapore, Hong Kong, Jakarta and London. It was further stated that the expenses are directly for Indian operations and they were not considered or accounted by such overseas branches as deductible under their respective tax laws. Since these are expenses incurred exclusively for Indian branches, the provisions of section 44C and limitations provided therein are in applicable. However Assessing Officer was of the opinion that provisions of section 44C apply to the assessee for the reason that relevant books of account, details of expenditure, as maintained by the overseas branches are not available for him for verify if the said expenditure is exclusively related to the business of the Indian branches of the assessee bank. After considering the above facts as well as legal position, the CIT(A) upheld the action of the Assessing Officer. 14. Aggrieved with the above, the assessee is before the Tribunal. The ld. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed to any employee or other person employed in, or managing the affairs of any office outside India; (c) Travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and (d) Such other matters connected with executive and general administration as may be prescribed." From the above provisions, 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. There is no dispute in this regard. Nevertheless, the case of the assessee is that the said expenses are incurred wholly and exclusively for the business purposes of Indian Business of the Bank. However, the case of the revenue is that the said expenses are incurred also for other Bank bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessing Officer to examine as to whether these expenses were incurred exclusively for the business carried on in India. Respectfully following the decision of the ITAT in assessee's own case for assessment year 1991-92, we direct the Assessing Officer to allow the claim for deduction as made by the assessee. 14. Ground No. 3 raised by the assessee reads as follows: "3.1 The CIT(Appeals) erred in confirming the disallowance of interest paid to the Income-tax Department having failed to appreciate that the expenditure was incurred in the normal course of business and is, therefore, allowable. 3.2 Without prejudice to the above, your appellants submit that in any case, the interest of Rs. 1,026,906 paid to the Income-tax authorities be allowed to be set off against the interest of Rs. 10,757,930 received from the Income-tax authorities during the same financial year, and only the net interest received or paid be taxed or disallowed as the case may be." 15. The assessee received interest on refund of taxes paid. The assessee also paid interest on taxes payable. The assessee sought to set off the interest paid against the interest received and offered the net interest received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (iii) of section 57 the conditions for allowing any expenditure under this clause is that the expenditure should have been incurred wholly and exclusively for the purpose of making or earning such income. The assessee had paid interest to the department either for late payments or for short payments. That means, interest has been levied for one default or the other. Now can it be said that incurring such default was for the purposes of earning interest from the department. The answer is obvious. The law is well settled that once the income falls under a particular head, the taxable income has to be computed with reference to the particular provisions given in the Act with regard to the said head of income. In Nalinikant Mody 61 ITR 420 (SC), this proposition has been clearly laid down. Therefore, the ld. Officer was justified in rejecting the claim of the assessee. The ground is not allowed." 16. At the time of hearing of this appeal it was brought to our notice that identical issue was considered by the Tribunal in assessee's own case in ITA No. 5240/Bom./05 for assessment year 1990-91 and the Tribunal on an identical issue held as follows: "13. Coming to the last ground on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the Government's money and paid interest thereon. Both had the same character and, therefore, if the interest received from the Government exceeded the interest paid by the assessee, then only net amount could be taxed. Similarly, if the interest received was less than the interest paid difference only should be allowed, while computing the income from other sources. The real income from interest has to be determined in this manner and to be considered while making the assessment. If the issue is considered from this angle which seems to us to be the proper approach, neither the Punjab and Haryana High Court decision in Orient Carpets case (supra) would stand in the assessee's way, nor the plea that the interest paid by the assessee is not expenditure contemplated under section 57(iii) could deprive the assessee the benefit of the adjustment of the interest paid against interest received from the Government. We direct that interest paid under section 220(2) amounting to Rs. 18,597 be adjusted against the interest received under section 244 amounting to Rs. 19,490 and the net amount only should be taxed." Respectfully following the co-ordinate bench decisions relied upon by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 37(2B)]. Advertisement expenditure (Rule 6B) and Travelling expenses (Rule 6D), expenditure on maintenance of guest house (Section 37(4)). These expenses are revenue in nature and even if they are incurred wholly and exclusively for the purpose of business of the assessee, they have to be disallowed under the aforesaid provisions. According to the assessee no disallowance can be made under the aforesaid provisions in the case of the assessee. The assessee claimed that as per Article 7(3) of the double taxation agreement with USA all expenses relating to the permanent establishment in India except head office expenses and supervision expenses governed by section 44C are to be allowed as deduction in computing total income. Accordingly, no disallowances under any other provisions of the Income-tax Act have been considered by the assessee. The assessee also submitted that the information given in the Tax Audit Report under section 44AB are not relevant because the expenditure referred to is fully allowable as business expenditure on an interpretation of Article 7(3) of the said DTAA. The assessee submitted that the artificial disallowances required to be made under the Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in India apply to the assessee's case. 22. Thereafter the Assessing Officer held that the following disallowances mentioned in the Tax Audit Report under section 44AB would have to be disallowed: (i) Disallowance under rule 6-D Rs. 21,46,334 (ii) Disallowance under section 40A(12) Rs. 85,675 (iii) Disallowance under section 37(4) Rs. 6,78,627 (iv) Disallowance under section 40A(3) Rs. 7,68,944 (v) Disallowance under rule 6-B Rs. 5,21,761 (vi) Disallowance under section 40-A(9) Rs. 5,15,344 (vii) Entertainment Rs. 34,55,475 The Assessing Officer proceeded to make artificial disallowance of expenses in accordance with the aforesaid provisions as follows: 23. Entertainment Expenses.-As per the tax audit report filed with the original return the expenditure on entertainment amounts to Rs. 34,55,475. In the original return of income the same had been added back by the assessee in its computation of income. Thereafter, the assessee claimed a deduction of Rs. 9,13,869 on account of the following: (i) Rs. 50,000 being the basic deduction with respect to entertainment expenses. &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re on presentation articles disallowed as advertisement expenses under Rule 6-B by the Assessing Officer, on the ground that the articles did not carry the logo of the assessee and therefore they cannot be termed as advertisement expenditure. The CIT(A) also allowed local conveyance and entertainment expenses that were disallowed by the Assessing Officer under rule 6D. The CIT(A) also allowed rent/repairs on guest house under section 37(4) of the Act. Aggrieved by the above reliefs allowed by CIT(A), the revenue has raised ground Nos. 5 to 7 and 9 before the Tribunal in its appeal and these grounds will be dealt with while dealing with the appeal of the revenue. 27. Before us it was pointed that identical issue had come for consideration in the case of American Express Bank (supra) and this Tribunal held as follows: "10. Ground No. 2 raised by the assessee reads as follows :- "In denying tax treaty benefits to the appellant. The learned CIT(A) held that the disallowances as provided for in the Act, have to be considered in computing the taxable income and confirmed the following additions :- Disallowance u/r 6D Rs. 1,182,593 Disallowance u/r 6B Rs. 640,629 Entertainment exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s:- "In the determination of the profits of a PE, there shall be allowed as deductions expenses which are incurred for the purposes of business of the PE. Including a reasonable allocation of executive and general administrative expenses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the PE), whether incurred in the state in which the PE is situated or elsewhere in accordance with the provisions of and subject to the limitations of the taxation laws of that state." According to the assessee, Article 7(3) should be read ignoring the punctuations in accordance with the Maxwell's Interpretations of Statutes. If Article 7(3) of the Tax Treaty is interpreted ignoring the punctuation, then the words of restriction would govern only the executive and general administration expenses and not all expenses of the PE. 13. The Assessing Officer, however, held that the proper way to read Article 7(3) of DTAA was as follows :- "In the determination of the profits of the PE, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the PE, incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st ground of appeal taken by the assessee is that the disallowance under sections 40A(5), 37(3) read with Rule 6D and section 37(2A) should not be made in view of the specific provisions contained in Article III(3) of the DTAA. The learned counsel for the assessee relied on the decision of Jaipur Bench in the case of ITO v. Degremont International 11 ITD 564, which was again a French concerns working in India in which it was held that the provisions of DTAA overrule the provisions of section 44C. the learned counsel for the assessee also drew our attention to the provisions of section 90(2) of the Income-tax Act which was inserted by the Finance (No. 2) Act, 1991 with retrospective effect from 1-4-1972. According to this sub-section, where the Government of India has entered into any agreement for avoidance of double taxation, then in the case of the assessee to whom such agreement applies, the provisions of Income-tax Act shall apply to the extent they are more beneficial to the assessee. He further pointed out that learned Assessing Officer and the learned CIT(A) had interpreted the provisions of DTAA against the assessee inasmuch as according to them the decision of the Jaipur B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mitsubishi Heavy Industries Ltd. [1988] 61 TTJ (Delhi) 656 and it was held that the artificial disallowances of expenses in accordance with the provisions of the Income-tax Act, 1961 have to be made while arriving at the profits attributable to a PE from its operations in India. The learned D.R. has relied on certain judicial pronouncements and commentaries on Double Taxation Convention. We will deal with them in the subsequent paragraphs. 29. We have very carefully considered the rival submissions. The decision of the Tribunal in the case of American Express Bank (supra) was based on the decision of the Tribunal Bank Indosuez (supra). The said decision was rendered in the context of Indo-French DTAA which had a specific Article viz., Article XIX(1) which specifically provided that the laws in force in either of the contracting states will continue to govern the taxation of income in the respective contracting state except where specific provisions to the contrary is made in the treaty. The Mumbai Bench of Tribunal while deciding the case of Mashreqbank PSC (supra) was of the view that in view of the above specific Article XIX (1) in the Indo-French treaty, which was not taken n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avoidance agreements entered into by either of the two countries. This proviso does not cut down the generality of the rule enunciated in the first sentence of the sub-paragraph that the deductibility of all expenses (and not merely the head office administrative expenses referred to in section 44C) shall be in accordance with and subject to the limitations laid down in the Act:" Though the wordings of Article 7(3) of the Indo-French DTAA are not in pari materia as that of Indo-US treaty, yet the principle that restrictions for allowing deductions under the domestic law have to be applied clearly emerges. 31. The Authority for Advance ruling in the case of Ericsson Telephone Corpn. v. CIT [1997] 224 ITR 203/90 Taxman 144 (AAR - New Delhi) had to deal with deductibility of expenses against fee for technical services which is brought to tax as business income under the Indo-Sweden DTAA. The contention on behalf of the tax payer was that fees for technical services should be treated as business profits and applying Article 7(3) of the Indo-Sweden DTAA (which is in pari materia the same as that of Indo-US treaty) the assessee claimed that expenses should be allowed to be deducted an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l practice, such expenses are deductible. The above observations are in the context of Article 7(2) of Model Convention which talks about determining profit of the PE by treating it as a separate entity. Reference was also made to OECD Model Tax Convention on Income and on Capital, condensed version dated 22-7-2010 brought out by Bombay Chartered Accountants Society wherein similar opinion as expressed by Klaus Vogel (supra) has been reiterated. Thus the wordings of the treaty, together with technical explanation of the treaty and protocol have to be read together to come to a conclusion as to what is the object and purpose behind a particular provision in a treaty. 34. The technical explanation of the Indo-US treaty and protocol which serves as an office guide and reflects the policies behind particular convention provisions with respect of the application and interpretation of the treaty, in pages 31.043, 31.044, 31.085 and 31.099-10 provides as follows: "Pages 31.043-44 : Paragraph 3 provides that in determining the business profits of a permanent establishment, deductions shall be allowed for expenses incurred for the purpose of the permanent establishment. Deductions are to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation of the treaty and protocol (emphasised above), makes it clear that the restrictions for allowing expenses incurred by the PE being head office expenses which are covered by section 44C of the Act (domestic law) as well as other expenses incurred in India are sought to be brought within the fold of Article 7(3) of the DTAA. There is nothing in the technical explanation to show that the restrictions in the local law for allowing certain expenses will not apply while determining profits attributable to the PE. As stated in the technical explanation, under the US Model all expenses are to be allowed without any limitation whether incurred in the source country or head office. There is a departure from the US model by virtue of Article 7(3) of the Indo-US treaty. There is nothing to show that this departure is only with reference to the head office expenses. The fact that in the technical explanation there is a reference to only head office expenses does not mean that expenses incurred in the source country have to be allowed without any limitation under the local law of the source country. By implication expenses incurred by the PE in India, have to be allowed subject to the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the Auditors appointed under section 142(2A) of the Income-tax Act had noted various violations, thereby deleting the additions made of Rs. 4,41,04,794. In view of the violations, the PMS deposits were treated by the Assessing Officer as normal deposit of the Bank and only the interest allowable on such normal deposit was allowed, thereby disallowing the amount in excess of such interest rate paid by the bank to its clients under PMS." 38. The Assessing Officer made an addition of Rs. 44,104,794 to total income on account of transactions under the Portfolio Management Scheme (PMS) on the ground that the following violations of RBI guidelines had taken place: (a) PMS services were to be provided at customers' risk without guaranteeing them a predetermined return. (b) The minimum period for which funds were to be placed by clients should be one year. (c) A fee was to be charged for such services independent of the return to the client. The Assessing Officer treated them as normal deposit and allowed payment of returns at the normal deposit terms. The excess amount paid to the investors in the scheme was disallowed by the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to PMS clients, it was submitted that the assessee had explained that the letters from PMS clients clearly stated that on maturity of the portfolio, the Bank would account clients for the proceeds from the pool after deduction of costs, fees, commission, expenses etc. The customer's letters, therefore, specified that the assessee would be entitled to a fee on the portfolio. The fact that fees amounting to Rs. 620,210, Rs. 247,510.98 and Rs. 984,49 were charged to IRFC. Peerless and the UTI respectively as mentioned in the assessment order confirms that RBI's guidelines in this regard had been complied with. The assessee also pointed out that it had explained to the Assessing Officer that the PMS guidelines issued by RBI required that the liability of the assessee in respect of uninvested portfolio funds should be properly reflected in the published accounts. The assessee had accordingly classified such uninvested portfolio funds under 'Deposits' which appears on the liability side of the Balance Sheet. It was argued that the Assessing Officer has misinterpreted the term "reflected in the published accounts" to mean "disclosed in the published accounts" and was, therefore, of the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is that the Assessing Officer erred in holding that the amounts placed under the Portfolio Management Scheme were in the nature of term deposits. He also contended that there is no violation whatsoever of the RBI guidelines. The learned special counsel of the revenue argues otherwise. After going through the material placed before us we find that the first appellate authority was right in observing that a plain reading of the clause referred to by the learned Assessing Officer would clearly show that there was no commitment on the part of the assessee to provide as pre-determiend yield of 14 per cent. He was right in stating that on the other hand the assessee would entitled to appropriate if only when the yield exceeds 14 per cent. The UTI also vide its letter dated 8-9-1989 has stated that it understands clearly that Bank of America makes no warrantee or guarantee as per the performance of the funds and that the investments are being made entirely on account UTI. At page 10 of the assessee's paper book the letter of UTI dated 8-9-1989 is placed. The first appellate authority was also right in holding that there was no guarantee whatsoever given by the assessee to give a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenses incurred by the assessee under the package of services offered to the corporate clients is wholly and exclusively for the purpose of assessee's business, they are deductible in computing the taxable income of the assessee under the provisions of the Act. 47. The CIT(A) following the decision of the CIT(A) in assessment year 1990-91 allowed the claim of the assessee. It is not in dispute before us that in assessment years 1990-91 and 1991-92 in ITA Nos. 5240/Bom./95 & 6133/Bom./95 this Tribunal has already upheld similar order of the CIT(A). In assessment year 1990-91 in ITA No. 5240/Bom./95 the Tribunal has held as follows: "15.2 Coming to ground No. 2 we find that the issue is covered by the decision of the J-Bench of the Tribunal in the case of American Express Bank Ltd. [ITA No. 2770/Mum./1996 and ITA No. 2434/Mum./1996 order dated 20-2-2007]. At paragraph 26 the issue is discussed. At para 27 it is held as follows: "27. After hearing both the parties, we do not find merit in the ground raised by the revenue. Acting as manager or an underwriter is part of the banking activity carried on by the assessee. For rendering such services, the assessee gets remuneration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting standards for investments. CBDT's circular also mentions that "the Assessing Officers should determine on the facts and circumstances of each case as to whether any particular security constitutes stock-in-trade or investment taking into account the guidelines issued by the RBI in this regard from time to time." 50. The RBI, in its accounting standards for investments, states that investment should be classified into "permanent" and "current" investments. Permanent investments are defined as those which Banks intend to hold till maturity, whereas current investments are those which Banks intend to deal in or trade on a day-to-day basis. In other words, securities held under the "Current" category are marketable securities that are acquired and held with the intention of reselling them in the short term. The financial results arising from such transactions generate trading profit or loss from deliberate position taking. Investment securities on the other hand, are "permanent" investments, which are acquired and usually intended to be held till maturity, except when liquidity needs arise. Gains and losses on the sale of investment securities should be recorded at the time of sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on page 15 (ITA No. 5240/M/1995) 4. ITAT assessment year 1991-92 Gr.6 Points 18,19,20 on pages 5,6 (ITA No. 6133/M/1995) In all these decisions it has been held that securities held by the bank has to be treated as stock-in-trade and therefore, loss on account of diminution in the value of security has to be allowed as deduction. Respectfully following the decision of the Tribunal we uphold the order of the Tribunal and dismiss the ground raised by the revenue. 52. Ground No. 4 raised by the revenue reads as follows: "4. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of penalty paid to RBI which was in the nature of penalty for infraction of RBI direction which is the law for banks. The learned CIT(A) has erred in treating it as a minor default incidental to carrying on the business, for if it were so, there would be no penalty for such defaults." 53. It is not in dispute before us that in assessee's own case for assessment year 1991-92 this issue was decided by the Tribunal in ITA No. 6133/Bom./95. The Tribunal on this issue held as follows. "21. In ground No. 2, the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007], in favour of the assessee. In these cases, it is compensatory in nature. Learned Counsel for the assessee has also invited our attention to the fact that the payment in question represents compensation for loss caused to RBI by non-maintenance of Statutory Liquidity Ratio. Learned Departmental Representative has not been able to controvert these submissions or point out any good reasons as to why decisions of the co-ordinate benches should not be followed. In view of the above discussions and respectfully following the decisions of co-ordinate benches, we uphold the conclusion arrived at by the learned CIT(A) on this issue as well and decline to interfere in the matter. 25. Ground No. 7 is thus dismissed." Respectfully following the order of the Tribunal referred to above we uphold the order of the CIT(A). 54. Ground Nos. 5, 6, 7 & 9 of the revenue read as follows: "5.On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance out of entertainment expenses and out of expenses on seminars/meeting etc. The learned CIT(A) has overlooked that entertainment expenses spent on employees who are entertaining guests are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the same should be covered under section 37(2A) of the Income-tax Act." 57. At the time of hearing it was agreed that this issue had been considered by the Tribunal in assessee's own case in assessment year 1990-91 in ITA No. 8057/Bom./95 and the Tribunal held as follows: "2. The issue as to whether the assessee is entitled to deduction on account of annual subscription paid to the clubs, in respect of its employees, is covered in favour of the assessee by the decision of the Tribunal in assessee's own case, for assessment years 1983-84 to 1985-86, in ITA Nos. 1305/Bom./1987, 3914& 8922/Bom./1988 and 1374/Bom./1987, order dated 6th May, 1991. Reliance is also placed on the decision of the Bombay High Court in the case of Otis Elevator Co. (India) Ltd. v. CIT [1992] 195 ITR 682, in support of the admissibility of the claim. 3. We respectfully following the decision of the Tribunal referred to above, in assessee's own case, uphold the order of the Commissioner of Income-tax (Appeals) VII, Mumbai and dismiss the appeal of the revenue." In view of the above we find no merits in Ground No. 8, consequently the same is dismissed. In the result, the appeal by the revenue is dismissed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GL account facility is available. (ii) SGL forms either returned, exchanged or bounced. (iii) BRs discharged after the period of 90 days against physical scrips (iv) BRs/SCRs returned or exchanged. 63. The assessee submitted that the above contention of the auditors does not have any support in the guidelines issued by the RBI from time to time. In the normal course of business, securities transactions are settled either through issuance of SGL transfer form or through issuance of BRs which are in the nature of trust receipts, indicating that ownership has passed to the buyer and the seller is holding the securities in trust, or through delivery of physical scrips. It was pointed out that all entries in assessee's SGL accounts with the RBI had been settled and were not outstanding as of date. Further, all BRs in respect of securities purchased and sold had also been settled and there were no outstanding BRs as of date. The assessee, therefore, submitted that "physical deliveries" had taken place in the case of transactions in securities during the year under appeal. The assessee also pointed out that the RBI's Circular FSC BC-143/24.48.001/91-92, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsequently corrected by issue of fresh SGL forms or by representing the same SGL forms to the RBI at a later date. In the circumstances, it would be incorrect to state that in such cases, physical deliveries were not effected. The assessee, vide their letter dated 13-9-1996, had drawn the attention of the Assessing Officer to the fact that several transactions considered by the auditors in computing the loss of Rs. 802,276,000 were duplicated. The relevant extract from assessee's letter dated 13-9-1996 to the Assessing Officer was as follows: "Schedule 'C' of J.K. Khanna's audit report determines the profit and loss on transactions, where, in the opinion of the auditors, "physical delivery has not taken place". Without prejudice to the submissions made by us earlier, we have to state that several transactions which are listed in Schedule 'C' of J.K.Khanna's audit report, also appear in Schedules 'H', 'I', 'J', 'K' and 'L' of J.K Khanna's audit report. As there has been substantial double report of "losses" by the auditors in the various schedules forming part of their audit report, we request that if disallowances are sought to be made on the basis of the findings in the audit r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances, the losses should also be taken cognizance of. In the instant case, if both profits and losses are considered only so much amount has to be brought to tax, which is already offered to the tax by the appellant, the difference being Rs. 226,160,136. In short, in the appellant's case, the securities are hold as stock-in-trade, secondly, the BRs are valid instruments, and thirdly, as per the instructions of CBDT dated 28-2-1995, only no profit in these transactions have been shown. In view of this, there is no warrant for making a disallowance of Rs. 802,276,000. The disallowance was absolutely uncalled for, and therefore, is to be deleted. 67. At the time of hearing it was submitted by the learned counsel for the assessee that loss incurred on transactions in violation of SCR Act was held by the Assessing Officer as being loss incurred violating a law and not allowed to be set off against business income in the case of American Express Bank (supra) and assessee's own case for assessment year 1991-92 in ITA No. 5241/M/05. The Tribunal allowed such loss In ITA No. 5241/M/05, in assessee's own case. It was his submission that the loss disputed in this ground of appeal should als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld, reversing the decision of the High Court, (i) that the Explanation to section 37 had no relevance as this was not a case of business expenditure but was one of business loss. Business loss was allowable on ordinary commercial principles in computing the profits. Once it was found that the heroin seized formed part of the stock-in-trade of the assessee, it followed that the seizure and confiscation of such stock-in-trade had to be allowed as a business loss. (ii) That even though the assessee was committing a highly immoral act in illegally manufacturing and selling heroin, the case had to be decided on legal principles and not on one's own moral views. Loss of stock-in-trade has to be considered as a trading loss and that such losses are to be allowed as deduction. The Tribunal following the aforesaid decision held that where the assessee executed the security transaction, may be in violation of the provisions of section 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. 27...... 28. The Hon'ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question also. Respectfully, following the principle emerging from the aforesaid decision referred to above we uphold the order of CIT(A). 70. Ground No. 2 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of loss of Rs. 55,459,000 incurred on "Short Sale" of Securities." 71. The auditors appointed to carry out the audit under section 142(2A) of the Act, had inter alia reported that the assessee had incurred a loss of Rs. 55,459,000 in respect of "short sales" of securities. The assessee submitted that the auditors did not discuss this issue with them before submission of the report. The assessee had, vide their letter dated 4-9-1995 addressed to the Assessing Officer, sought his assistance in requesting the auditors to disclose the basis of their conclusion that there had been a short sale of such securities. The auditors, vide their letter dated 11-10-1995 stated that they had made this determination on the basis of RBI circular No. DBOD No. Dir BC 42/C-347-87, dated 15-10-1987. The assessee, vide their letter dated 27-11-1995 had confirmed to the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial Court, in the case of Shri A.K. Menon, Custodian v. Canbank Financial Services Ltd. are valid instruments. As a matter of fact the phenomenon of "short sale" take place when nothing is held in stock and sales are attempted. But, in the instant case, securities were held by the appellant in the form of BRs and such BRs, being valid instruments, the appellants cannot be said to have indulged in "short sale". 20. Secondly I proceed to deal with the factual aspect. Schedule "C" lists purchases and sale transactions in respect of 3 Deal Nos. 4386, 4096 and 4079. In all these transactions numbering three only, a profit of Rs. 2,41,78,000 has been determined by the auditor and offered accordingly to tax. Whereas, on the basis of the same transactions, the auditors have computed a loss details of which are reproduced above in Schedule "G". A study of Schedule "G" clearly indicates that loss has risen on the above transaction based on purchases taking place subsequent to the date of sale. In my opinion, this method of computing, either profit, or, loss, is contrary to the generally accepted method and practices. Profit, or, loss can only result in the event of a sale. Here, subsequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in directing the Assessing Officer to delete the addition of Rs. 13,987,310 made regarding non-allowance of losses incurred on securities transactions with brokers as counter parties." 78. The Assessing Officer disallowed net losses of Rs. 13,987,310 incurred in respect of securities transactions in which brokers were the counter party, maintaining that the provisions of section 15 of the Securities Contract Regulation Act, 1956 had been contravened. The assessee vide their letter dated 27-12-1995, had explained to the Assessing Officer the provisions of section 15 of the Securities Contract Regulation Act, 1956 have been complied with. The assessee vide their letter dated 27-12-1995 had also explained to the Assessing Officer that the counterparties such as Kotak Mahindra, Pennar Finance Ltd. and Pennar Patterson Securities Ltd. were non-banking finance companies involved in the business of hire purchases, leasing, merchant banking and other financial services. The assessee had also obtained letter dated 18-12-1995 and 5-12-1995 from Kotak Mahindra Finance Ltd. and Pennar Securities Ltd. respectively confirming their status and furnished these to the DCIT in the course of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce company and is not involved in any Government securities broking. In view of this matter, it would be an error to place conclusions on the decision in this regard taken in the case of American Express Bank, which is a different assessee. The decision having been taken under different circumstances. As regards the reduction of the loss on the ground that there was violation of section 15 of Securities Contracts (Regulations) Act, 1956, I am to state that a careful reading of the said section indicates that the provisions of this section applies to brokers, who are members of recognized stock exchanges and not to the appellant. Therefore, invocation of this provisions is out place. In view of the foregoing discussions, I direct the Assessing Officer to delete an addition of Rs. 13,987,310." 80. Before us ld. D.R relied on the order of the Assessing Officer. We have considered his submission and are of the view that the order of CIT(A) has to be upheld. The assessee has established before CIT(A) that he had not dealt with parties who were not brokers and the loss incurred in such transactions in securities cannot be disallowed on the basis of violation of the Securities Contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount for the sale at the contracted price, and the difference between the contract rate and the delivery rate will be received from the broker, as illustrated in the example given below: (b) Contract Rate Rs. 100.00 - Sale recorded at this rate Delivery Rate Rs. 99.97 - Amount received by the assessee The counter party. Difference Rs. 0.03 - Amount received from broker In this case the total receipt of Rs. 100.00 (which includes Rs. 0.03 received from the broker) will be accounted as sale proceeds and accordingly offered for tax. (ii) Purchase transaction arranged through a brokers. Contract Rate Rs. 100.03 - Purchase recorded at this rate. Delivery rate Rs. 100.00 - Actual amount paid by the assessee to the Counterparty. Difference Rs. 0.03 - Amount paid to the broker. In case the delivery rate was higher than the contract rate, the assessee will pay the contract rate only. 83. In the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, by any stretch of imagination, the income of the appellant. In view of this, the addition of Rs. 1,05,66,930 is deleted." 86. Before us ld. D.R relied on the order of the Assessing Officer. We have considered his submission and are of the view that the order of CIT(A) has to be upheld. The decision of the CIT(A) was based on the decision of CIT(A) in the case of American Express Bank (supra) for assessment year 1991-92. The order of CIT(A) in the case of American Express Bank (supra) for assessment year 1991-92 has since been decided by the Tribunal in ITA No. 2439/Mum./1996 and that order has been upheld by the Tribunal. The difference in the contract and delivery rates represents the amount to be paid to the broker and is not income of the appellant. This difference was actually paid, that too, through crossed account payee cheques. No material has been brought on record before us or pointed out to show that the conclusions of the CIT(A) are not correct. In the circumstances, we confirm the order of CIT(A) and dismiss ground No. 5 of the revenue. 87. Ground No. 6 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the order of CIT(A) has to be upheld. The assessee has established before CIT(A) that the special auditors of basis of arriving at the market rate was not correct. The rates of ready forward transactions cannot be applied to spot transactions and vice versa. The CIT(A) had therefore rightly held that the basis of this addition was erroneous. No material has been brought on record before us or pointed out to show that the conclusions of the CIT(A) are not correct. In the circumstances, we confirm the order of CIT(A) and dismiss ground No. 6 of the revenue. 92. Ground No. 7 raised by the assessee reads as follows: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the Assessing Officer to treat the expenditure of Rs. 12,92,75,511 under the head "Head Office Administrative Expenses" as allowable expenditure." 93. This ground of appeal is identical to Ground No. 2 raised by the assessee in assessment year1992-93 in ITA No. 421/M/96. For the reasons stated therein this ground of appeal of the revenue is dismissed. 94. Ground of appeal No. 8 raised by the revenue reads as follows: "On the facts and in the circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CO NO. 88/M/99: 101. Ground Nos. 1 & 2 raised in the Cross Objection read as follows: "Ground No. 1 : The learned Commissioner of Income-tax (Appeals)VII, Bombay erred in confirming the decision of the learned Assessing Officer in not allowing interest of Rs. 6,806,929 paid to the Income-tax Authorities to be set off against interest of Rs. 10,757,930 received from the Income-tax Authorities during the assessment year 1993-94. Ground No. 2: The learned Commissioner of Income-tax (Appeals)VII, Bombay erred in confirming the decision of the learned Assessing Officer in disallowing certain expenses incurred for your Appellants' business in India having failed to appreciate that under article 7(3) of the Indo U.S Tax Treat, such expenses incurred for the purpose of your Appellants' business in India are deductible in computing taxable income." 102. Ground Nos. 1 & 2 are identical to Ground Nos. 3 &4 raised by the revenue in ITA No. 421/M/96 for assessment year 1992-93. For the reasons stated therein ground No. 1 is allowed while ground No. 2 is dismissed. 103. In the result, the cross objection is partly allowed. 104. ITA No. 2734/M/98 is an appeal by the revenue while ITA No. 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue in ITA No. 141/M/96 for assessment year 1992-93. For the reasons stated therein ground No. 2 of the revenue is dismissed while ground No. 3 is allowed. 113. Ground No. 4 raised by the revenue reads as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 21,60,851 in respect of membership fees and subscription paid to clubs." 114. This ground of appeal is identical to ground No. 8 raised by the revenue in ITA No. 141/M/96 for assessment year 1992-93. For the reasons stated while deciding the aforesaid ground we dismiss the ground of appeal of the revenue. 115. In the result, the appeal by the revenue is partly allowed. ITA Nos. 5644/M/98 & 4656/M/98: 116. ITA No. 5644/M/98 is an appeal by the revenue and ITA No. 4656/M/98 is an appeal filed by the assessee. Both these appeal are directed against the order dated 17-6-1998 of CIT(A) VII, Mumbai relating to assessment year 1995-96. First we will take up for consideration ITA No. 4656/M/98. 117. Ground No. 1 raised by the assessee reads as follows: "The ld. CIT(A)VII, Bombay erred in confirming the decision of the learned Assessing Officer in not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the learned CIT(A) has erred in deleting addition of Rs. 23,53,208 made on account of membership fee and subscription paid to club." 126. These grounds are identical to Ground Nos. 5, 8 & 9 raised by the revenue in ITA No. 141/M/96 for assessment year 1992-93. For the reasons stated therein ground Nos. 3 and 5 are dismissed while ground No. 4 is allowed. 127. Ground No. 6 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in directing the Assessing Officer to allow interest under section 244(a)(b) of the Act upto date of receipt of refund order by assessee disregarding provisions of section 244(1)(b) of the Act." 128. The Assessing Officer allowed interest at the rate of 1 per cent per month from 1-4-1995 to 31-3-1997 on tax refunds of Rs. 20,012,453. Since the said tax refund was received by the assessee on 26-8-1997, the Assessing Officer ought to have paid interest under section 244A(1)(a) of the Act for the period from 1-4-1995 to 31-8-1997. 129. The findings of the CIT(A) are as under:- "35. Ground No. 9 is regarding interest under section 244A(1)(a) of the Income-tax Act. 36. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: "On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in holding that the provisions of section 44C are not applicable to the expenses of Rs. 6,38,82,911 incurred at overseas branches and has thereby further deleted the additions of Rs. 6,38,82,911." 134. This ground is identical to ground No. 2 in ITA No. 421/M/96. For the reasons stated therein this ground of appeal of the revenue is dismissed. 135. Ground Nos. 2 & 3 raised by the revenue read as follows: "2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the Assessing Officer to allow 25 per cent of the total expenditure out of entertainment being attributable to staff welfare. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the Assessing Officer to delete addition of Rs. 15,61,114 made on account of rent, repairs and depreciation for guest-house." 136. These grounds are identical to Ground Nos. 5 & 9 raised by the revenue in ITA No. 141/M/96 for assessment year 1992-93. For the reasons stated therein ground No. 2 is dismissed while ground No. 3 is allowed. 137. Ground No ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
