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TMI Blog2008 (11) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... bove, 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. Ground No. 2.-2.1 The CIT(A) erred in upholding the order of the AO disallowing expenses of Rs. 2,73,29,000 incurred by your appellants' overseas branches for its Indian operations on ground that such expenses come within the ambit of the provisions of s. 44C of the Act pertaining to head office expenses, having failed to appreciate that the expenses incurred overseas which are directly attributable to the Indian operations of your appellants do not attract the restrictive provisions of the s. 44C of the Act. Ground No. 3.-3.1 The CIT(A) erred in confirming the disallowance of Rs. 4,99,618 in respect of the payments to the employees' provident fund, having failed to appreciate that the restrictive provisions of s. 2(24)(x) r/w s. 36(1)(va) and s. 43B r/w s. 36(1)(va) were intended to deny tax deduction to chronic provident fund defaulters and were not to be made applicable in cases such as your appellants where there was a technical delay of a few days/weeks only." 2. Briefly stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual investors who deal only with the broker for settlement of the contract, whether the latter is acting in the capacity of an agent or a principal. In these circumstances, where the individual investor is not aware of the identity of the counterparty in the transaction, the law requires the broker to inform and obtain the consent of the client in case the broker is acting as a principal and not as an agent in the transaction. This situation is clearly distinguishable from the one wherein commercial banks like BOA, which regularly trade in securities, enter into contracts with brokers wherein contracts are always settled with the counterparty/principal, and not with the broker. When securities are bought or sold by BOA, the details of the transaction along with the name of the counterparty are recorded by the trader on deal slips. In case the broker is the principal in a transaction, his name is recorded as the counterparty on the deal slip. Thereafter, a cost memorandum giving details of the transaction and the name of the counterparty is prepared and sent to the counterparty. In case the broker is acting as a principal in a transaction, the fact that the cost memorandum men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipals. For your reference, we enclose a statement showing profit/loss on securities transactions with brokers as counterparties during asst. yrs. 1991-92 and 1992-93." 4. AO considered the above reply of the assessee and discussed elaborately the nature and the relevance of the RBI directives and held that said directives as good as law and violation of the said directives amount to infraction of law. 5. Further, the AO also discussed how illegal losses cannot be set off against the illegal gains. Further, the AO distinguished the Supreme Court decision in the case of CIT vs. S.C. Kothari 1974 CTR (SC) 137 : (1971) 82 ITR 794 (SC) relied upon by the assessee for the proposition that the illegal loss should be taken into account for computation of the income. He also discussed the reliance of Andhra Pradesh High Court in the case of CIT vs. Maddi Venkataratnam & Co. (P) Ltd. (1983) 35 CTR (AP) 87 : (1983) 144 ITR 373 (AP). The conclusions of the AO as mentioned in the bottom of p. 14 of the assessment order is as under: "(i) From illegal profits, only expenses incurred on running such business, penalties, fines and illegal expenses can be deducted. (ii) Losses with respect to il ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t these transactions were in violation of the Act of 1956. The learned officer referred to s. 15 of the said Act. As per the said section, no member of a recognised stock exchange shall, in respect of any securities, enter into any contract as a principal with any person other than the member of the stock exchange. However, such a deal can be put through if consent or authority of such person Has been obtained. The learned officer, of course, observed that the brokers can act as a counterparty in very limited circumstances. That, such circumstances did not exist in assessee's case. The appellant's contention was that when the securities are bought or sold by it, the details of transactions along with the names of the counterparty are recorded by the trader on deal slips. That, in case the broker is a principal in a transaction, his name is regarded as counterparty on the deal slip. That, therefore, where the broker is acting as a principal in a transaction, the fact that the cost memo mentions the broker's name as the counterparty, it is evident that the bank is aware of and has consented to the broker acting as a principal in the transaction. That, had the bank not agreed to the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther mentioned that the Special Court had already held that such transactions entered into by the assessee were illegal in nature. He further mentioned that illegal loss is different from the illegal gains. As per the Departmental counsel, the illegal loss is neither allowable nor allowed to be set off against the illegal gains. 8. We have heard the rival parties and perused the orders of the Revenue authorities as well as the paper book filed before us. The case of the assessee is that he consented to the alleged security transactions and, therefore, there is no violation of s. 15 of SCR Act. Further, the said loss is an allowable one and the same must be allowed to be set off against the gains of comparable transactions. The case of the Revenue, as narrated in the para above, is that the assessee failed to prove the 'existence of the consent of the BOA' with the written confirmations. As per the Revenue, it is the case of presuming the consent of BOA, which never existed with the broker both at the time of entering the security transaction or within 3 days from the date of the contract. Thus, the assessee violated the law of the land and such loss should neither be allowed nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Other related issue refers to allowing the set off of the said loss against the profits of the illegal transactions. Factually, this is the case where the BOA is engaged in executing the normal transactions as well as the transactions attracting the provisions of s. 15 of the SCR Act, 1956. The later type yielded both 'loss' as well as 'gains'. Assessee's prayer before us is to allow the set off of such loss against such gains. This issue has to be examined in the light of the entries in the books of account as well as the judgment in force. It is undisputed that the said transaction is recorded transaction and borne out of the books of account of the assessee. Thus, all these transactions, which yielded the losses, form part of the business of the assessee. In such circumstances, the issue for adjudication by us trickles down to whether the loss emanating from the security transactions in violation of s. 15, constitute an allowable business losses. In this regard, we find that the Jaipur Bench of the Tribunal in the case of Ashok Kumar Karola vs. Asstt. CIT (2007) 110 TTJ (Jp) 397 : (2008) 305 ITR 202 (Jp)(AT) held that the loss arising out of the transactions by infraction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of s. 44C. 13. Relevant facts in this regard are that the assessee claimed the above expenses in the computation of income and not in the P&L a/c are incurred by overseas branches to the tune of Rs. 273.29 lakhs in respect of NRI branches. As per the assessee, these are directly connected expenses to the business operations of the bank of the Indian branches. Expenses were incurred by those branches abroad to earn income by Indian branches in India. These expenses were debited under the heads 'Staff related expenses' and pertained to staff manning the NRI desks 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 s. 44C and limitations provided therein are inapplicable. However, AO was of the opinion that provisions of s. 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 hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession; (b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed 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 cl. (iv) of the Explanation to s. 44C of the Act. There is no dispute in this regard. Neverthele ..... X X X X Extracts X X X X X X X X Extracts X X X X
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