TaxTMI 
TaxTMI 
2011 (4) TMI 920
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.... section 15 of the Securities Contracts (Regulations) 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)....
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....2 in assessee's own case this issue was decided by the ITAT and that decision 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 an....
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....e of Bank of America v. DCIT 124 TTJ 846; wherein such losses were held to be allowable. 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 su....
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....t of set-off of loss in ready forward transactions in securities which were in contravention 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 preva....
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....nd setting off a loss from an illegal speculative business of the earlier year. Law will assume 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 i....
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....y attributable to the Indian operations of your appellants do not attract the restrictive provisions 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....
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....anches. 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 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 acti....
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....ity, 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 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 pur....
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....ces we are of the view that it is not possible to accept the contention on behalf of the revenue that the matter should be remanded to the 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 ....
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....n clauses (i) (ia), (ii) and (iia) are not relevant for the above purpose. Therefore, the only clause under which this deduction could be claimed is clause (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'....
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....other sources' although the ITO seems to have assessed the Government retained the assessee's money and paid interest thereon, the assessee, in the same way, retained 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 rece....
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....dance with the law that was applicable to assessment year 1992-93, under section 37(3) and (2B), there was a ceiling on certain type of expenditure incurred on entertainment [Section 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 allowabl....
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....n.......... In which the PE is situated or elsewhere'. 21. For the above reasons, the Assessing Officer held that the limitations set out by Indian Tax Laws with respect to expenses incurred 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....
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....ure in the guest house. The assessee has raised Ground Nos. 4 to 6 against the order of CIT(A) before Tribunal. The CIT(A) allowed deduction on account of Seminar expenses holding that they do not involve any element of entertainment. The CIT(A) also allowed expenditure 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....
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....wable 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 I.T. Act and Rules made there under should be ignored while computing the business income. Article 7(3) read as follows:- "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 a....
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.... We find that this ground is covered in favour of the assessee by the order of the Tribunal dated 31-7-1996 for the assessment year 1986-87 in assessee's own case in ITA No. 3310/Bom./90 wherein the Tribunal observed as follows :- "The assessee Bank is incorporated in France and is a French resident. The first 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 agr....
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....T Apeal Nos. 2089 to 2091/Bom./1991, dated 9-3-1998] were considered by the Mumbai Bench of the Tribunal in the case of Mashreqbank PSC v. Dy. DIT [2007] 108 TTJ (Mum.) 554/14 SOT 1 and Dresdner Bank AG v. Addl. CIT [2006] 105 TTJ (Mum.) 149/[2007] 108 ITD 375 (Mum.) and by the Delhi Bench of ITAT in the case of Dy. DCIT v. 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 ....
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....curred- will be allowed as deduction, but in accordance with in accordance with the provisions of and subject to the limitations of the taxation laws of India. The proviso grants a relaxation in respect of the deductibility of executive and administrative expenses, where such relaxation is permitted by subsequent double taxation 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 ....
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....w of the State of the permanent establishment. The commentary also refers to a departure in this regard that have been adopted in some of the treaties and in this regard reference has been made to DTC with Kuwait and UAE wherein it has been provided that limitations provided by internal laws would not apply, if according to international 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 a....
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....s, deductions generally are allowed for expenses, wherever incurred, that are incurred for the purposes of the permanent establishment" Pages: 31.099-10: "In computing taxable business profits, deductions generally are allowed for expenses, wherever incurred, that are incurred for the purposes of the permanent establishment" The technical explanation 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 t....
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....ollows: "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the bank did not violate the directives of Reserve Bank of India with respect to Portfolio Management Scheme (PMS) even though the RBI in its Inspection Report dated 30-10-1990, the Janaki Raman Committee, the Joint Parliamentary Committee 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 w....
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....ing Officer that IRFC's portfolio, which commenced on 31-5-1991 had matured on 1-6-1992 and Peerless General's portfolio, which commenced on 4-7-1991 had matured on 6-7-1992. This would confirm the fact that the Portfolios were not placed for period of less than one year. 41. As regard the Assessing Officer's observation that a fee was to be charged for services rendered 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 b....
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....eriod of placement of such funds. While the minimum period is one year the Assessing Officer's contention is that in the case of TISCO, PD Hinduja National Hospital and Indian Vaccines Corporation, etc. the assessee had accepted deposits for a period less than one year. On the ground that there is violation of RBI instructions the disallowance was made. The main contention of the 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 un....
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....nd reconciliation of the amounts collected. By offering a package of services the assessee is in a position to obtain the funds which are placed by the corporate clients in the commercial account with the assessee. The funds deposited in the commercial account by the corporate clients are utilized by the assessee for regular banking business to earn income on which the assessee pay tax. As 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. [....
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.... directly concerned with the issue whether the securities held by a Bank form part of stock-in-trade or capital asset. The Board felt that the question whether investments in securities constitute stock-in-trade or capital asset is a question of fact, to be governed by the instructions and guidelines issued by the Reserve Bank of India from time to time with regard to classification of assets and the accounting 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 r....
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....ical issue has been decided in assessee's own case in the following orders. 1. ITAT order for assessment year 1983-84. Point No. B Para 3, Page 3 ITA No. 77/M/1991 arising out of Gr.2 of Deptt's appeal Point No. 3, Pages 2- 4 ITA No. 1374/M/1987. 2. Bombay HC assessment year 1990-91 (ITA No. 1809 of 2009) 3. ITAT assessment year 1990-91 Gr.3 of Deptt's appeal, Point No. 15.3 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 RB....
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.... of facts before the learned CIT(A) at page 18, that the impugned payment was made for "not adhering to the Statutory Liquidity Ratio requirements". We find that the issue as to whether or not such a payment can be allowed as deduction in computation of business income, is now covered by decisions of the co-ordinate benches of this Tribunal in the cases of DCIT v. Dhanlaxmi Bank Ltd. 76 TTJ 439 and Deutsche Bank AG v. JCIT [ITA No. 4699/M/1999, order dated 4-5-2007], 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." Respec....
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....t and repairs to guest house is concerned, they cannot be allowed as deduction in view of the decision of the Hon'ble Supreme Court in the case of Britannia Industries Ltd. (supra). Thus ground Nos. 5 to 7 are dismissed, while ground No. 8 is allowed. 56. Ground No. 8 raised by the revenue reads as follows: "8. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in treating the payments made to clubs as normal business expenditure whereas 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 H....
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....o as "the auditors") to conduct an audit of assessee's books of account. The terms of reference inter alia required the auditors to determine "profit and loss separately for each transaction in which no physical delivery of securities has taken place and profit and loss separately for such transactions in which physical deliveries have actually taken place". The auditors took the view that "physical delivery" had not taken place in the following class of transactions: (i) BRs issue where SGL 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 del....
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....ssessee also pointed out that since there were no pending BRs as of date, physical deliveries had taken place in respect of all transactions during the year under appeal. The above facts were placed on the record of the Assessing Officer vide assessee's letter dated 27-11-1995. 65. The Assessing Officer however, disallowed the loss of Rs. 802,276,000 in assessee's tax assessment. The assessee further submitted that in cases where SGL forms were either returned or had bounced due to certain technicalities, these were subsequently 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 t....
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....ng BRs, nor, any pending BRs, as on date, physical deliveries have, therefore, taken place in respect of all transactions during the year under appeal. With regard to the observation of the Assessing Officer that loss could not be set off under the provisions of sections 70 and 71 of the Income-tax Act, I have to say that the CBDT instructions in this regard are very clear and cogent and should have been followed by the Assessing Officer. If under identical circumstances, the profits are being brought to tax, under similar circumstances, 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 t....
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....hat heroin was a part of his stock-in-trade and allowed deduction of the estimated value of the heroin seized from the gross income as a business loss. On appeal the High Court held that the rigour of the Explanation to section 37 of the Income-tax Act, 1961, was fully satisfied, that possession of heroin was an offence, that it was disgraceful for a doctor to indulge in activities against humanity, and that hence the question of claiming deduction of the value of the seized article did not arise. On appeal to the Supreme Court it was held, 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....
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....ble Supreme Court said decision and therefore the same has to be followed. Respectfully following the decision of the Tribunal in the case of Bank of America (supra), we direct the Assessing Officer to allow the loss as deduction by adjustment or set off against other business income. The relevant ground No. 4 is allowed." 69. Applying the aforesaid ratio, the loss in question has to be allowed even on the principle that it is incidental to the business. We are of the view that the aforesaid decision of the Tribunal will apply to the loss 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 ....
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....in the special audit report. 73. On appeal by the assessee the CIT(A) directed the Assessing Officer to allow the claim of the assessee. "19. I have considered this issue from various angles. Firstly, I shall deal with the legal angle. The Assessing Officer has disallowed the so called loss on the ground that there are short sales of securities, which are not permitted by RBI. The appellant has submitted that there is no case of short sale, precisely because the appellant was holding sufficient securities in the form of BRs, which according to the Special 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....
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....in law, the learned CIT(A) has erred in directing the Assessing Officer to delete the entire addition of Rs. 197,674,000 made to the total income in respect of transactions under the Portfolio Management Scheme." 76. This ground of appeal is identical to Ground No. 1 in revenue's appeal for assessment year 1992-93 in ITA No. 141/M/96. For the reasons stated therein this ground of appeal of the revenue is dismissed. 77. Ground No. 4 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 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 ....
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....e from that of American Express Bank inasmuch as that bank was not able to place evidence on record that Kotak Mahindra was not a broker whereas the appellants have been able to do so both in respect of Kotak Mahindra and in respect of Pennar Patterson. 45. In this connection, I have perused the confirmation of Kotak Mahindra, who have confirmed that the said Kotak Mahindra is a non-banking finance company and are not a member of any recognized stock exchange. Similarly, the other party, viz. Pennar Patterson had also confirmed that the said Institution is a non-banking finance 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 ....
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....p; Difference Rs. 0.03 Amount paid to the broker. The above payment of Rs. 0.03 to the broker will have no impact on the assessee's Profit & Loss Account. As the sale transaction is accounted at Rs. 100.00, the payment of Rs. 0.03 to the broker is not recorded as an expenditure in the assessee's books of account. Consequently, the amount of Rs. 0.03 paid to the broker is not claimed as a deduction in the assessee's tax return. In the case of sale transaction where the delivery rate is lower than the contract rate, the assessee will account 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  ....
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....lusion that the difference in contract and delivery rate represents the excess amount received from the counterparty to be paid back to the broker. Therefore, the difference cannot be brought to tax in the appellant's hand, and if this is done, it would certainly amount to taxation of the same amount twice. In that case, the learned CIT(A)VII, Mumbai has given a clear finding that the amounts credited to broker's income are paid to them on purchase transactions and could not form a part of the income of the assessee. Respectfully following the same approach, I hold that there is no case for brining this difference to tax in the hands of the appellant as the difference does not represent, 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 assessm....
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..... Thus, the comparison was not obvious, or, the comparison was not like with the like. Ready forward transactions do not conform to the prevailing market rates and this transaction being a spot transaction, and not a ready forward transaction, obviously does conform to the prevailing market rate. I do agree that the comparison of this transaction with a transaction, was not correct. Therefore, the conclusion drawn of excessive payment also was not correct. Therefore, there was no warrant for bringing to tax, the so-called higher amount of Rs. 93,40,000. The same is deleted." 91. 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 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....
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....his Tribunal has upheld similar claim made by the assessee. Respectfully following the aforesaid decision we upheld the order of the CIT(A) and dismiss the ground of appeal of the revenue. 98. Ground Nos. 9 & 10 raised by the revenue is identical to Ground Nos. 5 and 9 raised by the revenue in its appeal in ITA No. 141/M/96 for assessment year 1992-93. For the reasons stated therein ground No. 5 is dismissed while ground No. 9 is allowed. 99. Ground No. 11 raised by the revenue is identical to Ground No. 8 raised by the revenue in assessment year 1992-93 in ITA No. 141/M/96. For the reasons stated therein this ground of appeal of the revenue is dismissed. 100. In the result, the appeal by the revenue is dismissed. 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 learne....
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.... appeal is identical to ground No. 2 in ITA No. 421/M/96 for assessment year 1992-93. For the reasons stated while deciding Ground No. 4 in ITA No. 421/M/96, this ground of appeal of the revenue is dismissed. 111. 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 allow expenses of Rs. 14,86,577 in respect of guest house." 112. 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 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." 1....
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....543 by holding that the same is allowable under section 37(1) of the Act." 124. This ground of appeal is identical to Ground No. 4 of revenues appeal in ITA No. 141/M/96. For the reasons stated therein this ground of appeal of the revenue is dismissed. 125. Ground Nos. 3, 4 & 5 raised by the revenue read as follows: "3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that the 25 per cent of the expenses pertain to staff members hence allowable as staff welfare expenses. 4. 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. 12,45,625 made on account of rent, repair and depreciation for guest house. 5. On the facts and in the circumstances of the case 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. ....
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....e Bombay High Court in the case of Associated Cement Companies Ltd. v. CIT [1983] 141 ITR 318/[1982] 9 Taxman 188 and in the case of CIT v. Pfizer Ltd. [1991] 191 ITR 626 (Bom.) wherein it was held that an assessee is entitled to interest upto the date of receipt of the refund order, there is no merit in this ground raised by the revenue. In view of the above, this ground of appeal is dismissed. 131. In the result, the appeal by the revenue is partly allowed. ITA NO. 4903/M/99 & CO NO. 400/M/99 132. ITA No. 4903/M/99 is an appeal by the revenue against the order dated 23-7-1999 of CIT(A) VII, Mumbai relating to assessment year 1996-97. The assessee has filed the Cross Objection against the very same order of the CIT(A). First we will take up ITA No. 4903/M/99, revenue's appeal. 133. Ground No. 1 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 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 I....