2016 (1) TMI 1437 - AT - Income Tax

Tribunal rules in favor of assessee on key issues, partly allows appeals for A.Y. 1995-96 and 1998-99.

Jt. Commissioner of Income-tax, Special Range-15, Mumbai and Others Versus The Hongkong and Shanghai Banking Corporation Ltd.

The Tribunal ruled in favor of the assessee on various issues including disallowance of broken period interest, disallowance of NRI deposit mobilization ... Disallowance of broken period interest Settlement paid to Standard Chartered Bank - HELD THAT:- We find that this ground raised by the assessee is covered in favour of the assessee by the orders and decisions of various courts including those of the co-ordinate benches of the Tribunal in the assessee’s own case [2015 (11) TMI 1792 - ITAT MUMBAI] . Respectfully following the aforesaid decisions, we reverse the order of the CIT(A) in confirming the disallowance on account of broken period interest and allow the assessee’s claim in this regard. Consequently ground no. 1 of the assessee’s appeal is allowed. Interest accrued but not due - HELD THAT:- Tribunal in the assessee’s own case [2015 (11) TMI 1792 - ITAT MUMBAI] issue is covered against the assessee and therefore uphold the order of the ld. CIT(A) on this issue. Disallowance of NRI Deposit Mobilization Expenses - HELD THAT:- Revenue has not been able to bring on record any material evidence to controvert the view taken therein, we, therefore, following the decisions of the co-ordinate benches of this Tribunal in Asst. Year 1999-2000, rendered at paras 59 to 62 thereof, allow the assessee’s claim put forth in ground no. 3 of its appeal. Disallowance of penal interest paid to RBI - HELD THAT:- Penal interest charged by RBI for violation of its guidelines/directives in respect of CRR, SLR etc. is not in the nature of infraction of law and is therefore allowable as deduction while computing the business income of the assessee and therefore allow the assessee’s claim in this regard Settlement paid to Standard Chartered Bank - HELD THAT:- The client ‘SCB’ claimed that the securities delivered to it were not those listed out by it for which an amount of ₹ 70.25 crores was admittedly paid by it, but others purchased from different counter parties. Obviously, ‘SCB’ being a reputed client and keeping in mind, its own market reputation, the matter was settled through mediation agreement and Deed of Release and Indemnity by which the dispute was settled by the assessee making payment of ₹ 34.50 crores to ‘SCB’. On a careful appreciation of the facts and material on record and the judicial decisions cited, we are of the view that the decision of the co-ordinate bench in the assessee’s own case [2015 (11) TMI 1792 - ITAT MUMBAI] for Asst. Year 2000-01 cited by the assessee, where a similar issue of claim of business loss on payment to a client was allowed, we are of the view that the payment of ₹ 34.50 crores to ‘SCB’ by the assessee was also made in the normal course of its business and is to be allowed. Salary paid to expatriate employees – HELD THAT:- In the factual matrix of the case, in this year, i.e. Asst. Year 1995-96, we find that it is similar to those prevailing in the case on hand for Asst. Year 1992-93. As brought out by the co-ordinate bench in its order [2015 (11) TMI 1792 - ITAT MUMBAI] after considering the CBDT’s circular no. 685, the assessee’s admitted position being that the taxes were not deducted or paid as per the requirements of Chapter XVII-B, it is hit by the provisions of section 40(a)(iii) of the Act and therefore the assessee’s claim cannot be entertained Disallowance u/s 37(2A) payment of subscription to Clubs - HELD THAT:- Issue decided in favour of assessee as relying on own case [2015 (11) TMI 1792 - ITAT MUMBAI] following the decision of the Hon’ble Bombay High Court in Otis Elevators [1991 (4) TMI 53 - BOMBAY HIGH COURT] We also find that this issue in question is no longer res integra in view of the decision of the Hon’ble Apex Court in the case of United Glass Manufacturing [2012 (9) TMI 914 - SUPREME COURT] Expenditure on entertainment disallowed - HELD THAT:- As decided in APPAREL EXPORT PROMOTION COUNCIL [2008 (5) TMI 730 - DELHI HIGH COURT] assessee is entitled to deduction for the expenditure incurred for entertainment of staff as well as outsiders for the promotion of business. Exemption of interest on tax free bonds - HELD THAT:- We find that the issue of the assessee’s claim for exemption of interest on investment in purchase of tax free bonds has been considered and adjudicated upon by a co-ordinate bench of this Tribunal in the assessee’s own case [2015 (11) TMI 1792 - ITAT MUMBAI] the co-ordinate bench affirmed the order of the ld. CIT(A) for that year wherein the ld. CIT(A) had relied upon his predecessors order for Asst. Year 1998-99 dt. 4.6.2001; which incidentally is the order and assessment year under consideration in this appeal. Issues Involved:1. Disallowance of broken period interest.2. Taxation of interest accrued but not due.3. Disallowance of NRI deposit mobilization expenses.4. Disallowance of penal interest paid to RBI.5. Disallowance of settlement paid to Standard Chartered Bank.6. Deduction of salaries paid to expatriate officers.7. Disallowance of fees charged by Master Card and Visa.8. Disallowance of guest house expenses.9. Disallowance of entertainment expenses.10. Exemption of interest on tax-free bonds.Issue-wise Detailed Analysis:1. Disallowance of Broken Period Interest:The assessee contended that the CIT(A) erred in confirming the AO's disallowance of broken period interest paid on securities purchased but not sold during the year. The Tribunal found this issue covered in favor of the assessee by various judicial pronouncements, including the assessee's own case, and reversed the CIT(A)'s order, allowing the assessee's claim.2. Taxation of Interest Accrued but Not Due:The assessee challenged the CIT(A)'s decision to uphold the AO's action of taxing interest on securities for which the due date for payment had not arisen within the accounting year. The Tribunal noted that this issue was covered against the assessee by previous decisions, including the retrospective amendment to section 145 of the Act. The Tribunal upheld the CIT(A)'s order and dismissed the assessee's ground.3. Disallowance of NRI Deposit Mobilization Expenses:The assessee argued that the CIT(A) erred in upholding the AO's disallowance of expenses incurred for NRI deposit mobilization, considering them as Head Office expenses. The Tribunal found the issue covered in favor of the assessee by previous decisions in the assessee's own case and allowed the claim.4. Disallowance of Penal Interest Paid to RBI:The assessee contended that the CIT(A) erred in sustaining the disallowance of penal interest paid to RBI, arguing it was compensatory and not penal. The Tribunal found that judicial pronouncements, including those in the assessee's own case, supported the assessee's claim. The Tribunal allowed the deduction of penal interest as a business expenditure.5. Disallowance of Settlement Paid to Standard Chartered Bank:The assessee argued that the CIT(A) erred in sustaining the disallowance of the settlement amount paid to Standard Chartered Bank, claiming it was a business loss. The Tribunal, considering the facts and judicial precedents, held that the payment was made in the normal course of business and allowed the assessee's claim.6. Deduction of Salaries Paid to Expatriate Officers:The assessee raised an additional ground for the deduction of salaries paid to expatriate officers, arguing that the tax thereon was paid during the year under appeal as per CBDT circular no. 685. The Tribunal, following the decision in the assessee's own case for a previous year, dismissed the additional ground, holding that the claim was hit by the provisions of section 40(a)(iii) of the Act.7. Disallowance of Fees Charged by Master Card and Visa:The assessee challenged the disallowance of fees charged by Master Card and Visa. The Tribunal restored the issue to the AO for verification of facts and fresh adjudication, following the decision in the assessee's own case.8. Disallowance of Guest House Expenses:The revenue contended that the CIT(A) erred in deleting the disallowance of guest house expenses. The Tribunal upheld the CIT(A)'s order, following the decision in the assessee's own case and the Hon'ble Apex Court's decision in United Glass Manufacturing Co. Ltd.9. Disallowance of Entertainment Expenses:The revenue challenged the CIT(A)'s restriction of disallowance of entertainment expenses. The Tribunal, following the decision in the assessee's own case and considering the deletion of section 37(2A) of the Act, upheld the CIT(A)'s order.10. Exemption of Interest on Tax-Free Bonds:The revenue contended that the CIT(A) erred in deleting the disallowance of exemption of interest on tax-free bonds. The Tribunal found the issue covered in favor of the assessee by the decision in the assessee's own case for the subsequent year and upheld the CIT(A)'s order.Conclusion:- The assessee's appeals for A.Y. 1995-96 and 1998-99 were partly allowed.- The revenue's cross appeals for both assessment years were dismissed.