Business procurement expense abroad and compensatory statutory refund were both deductible, not disallowable under tax law.

Expenditure incurred abroad to mobilise NRI deposits for an Indian bank's operations was treated as business procurement expense, not head-office expenditure under section 44C, and was therefore allowable. Amounts refunded to the Reserve Bank of India, being a reversal of interest earlier received on excess cash reserve balances under the statutory reserve scheme, were held compensatory rather than penal. Since the payment was not for breach of law but arose from reassessment of reserve position, it remained deductible as business expenditure. The net effect was deletion of both disputed additions and acceptance of the assessee's claim on merits.

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Issues: (i) Whether expenditure incurred abroad for mobilising NRI deposits for the Indian business of the assessee bank was to be treated as head-office expenditure under section 44C of the Income-tax Act, 1961. (ii) Whether the amount refunded to the Reserve Bank of India, earlier received as interest on excess cash reserve balances, was compensatory and deductible, or penal in nature and disallowable.

Issue (i): Whether expenditure incurred abroad for mobilising NRI deposits for the Indian business of the assessee bank was to be treated as head-office expenditure under section 44C of the Income-tax Act, 1961.

Analysis: The expenditure was incurred for procuring business abroad and the funds so mobilised were brought into India for the assessee's Indian banking operations. Such expenditure related to business procurement rather than general head-office administration. The issue was already covered by the Tribunal's earlier decision in the assessee's own case, and the same reasoning was followed.

Conclusion: The expenditure was not head-office expenditure within section 44C and was allowable in favour of the assessee.

Issue (ii): Whether the amount refunded to the Reserve Bank of India, earlier received as interest on excess cash reserve balances, was compensatory and deductible, or penal in nature and disallowable.

Analysis: The scheme of section 42 of the Reserve Bank of India Act, 1934 distinguishes between interest payable or receivable on reserve balances and penalty for default. The amount recovered by the Reserve Bank was found to be only a refund of interest earlier paid under section 42(1B), following a reassessment of the reserve position, and not a penalty for infraction of law. Payment under the statutory scheme was compensatory in character. Such compensatory outgo was held allowable as business expenditure under the Income-tax Act.

Conclusion: The refund was compensatory, not penal, and the deduction was allowable in favour of the assessee.

Final Conclusion: Both disputed additions were deleted, and the assessee's claim succeeded on merits.

Ratio Decidendi: A statutory payment or recovery is deductible if, on construing the relevant enactment, it is compensatory in nature and not a penalty for breach of law; expenditure incurred for procuring business is not converted into head-office expenditure merely because it is incurred outside India.

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