TaxTMI 
TaxTMI 
2016 (1) TMI 1437
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.... of Rs. 1,03,69,27,186/-. The case was taken up for scrutiny and the assessment was completed u/s 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dt. 23.2.1998; wherein after making certain disallowances and additions, the assessing officer ('AO') determined the assessee's income at Rs. 156,15,95,590/-. Aggrieved by the order of assessment for A.Y 1995-96 dt. 23.2.1998, the assessee preferred an appeal before the CIT(A)-XVI, Mumbai who disposed off the appeal vide order dt. 31.3.1999 allowing the assessee partial relief. Both the assessee and revenue are aggrieved by the aforesaid order of the ld. CIT(A) for A.Y 1995-96 and have preferred cross appeals. We will take up the assessee's appeal first. 3.1 The assessee's original grounds of appeal being elaborate and argumentative, it subsequently filed concise grounds of appeal which are as under : "Ground no. 1 The Commissioner of Income Tax (Appeals) - XVI [CIT(A)] erred in upholding the action of the Deputy Commissioner of Income Tax, Special Range 15 (AO) of disallowing interest of Rs. 4,37,76,815 paid for broken period on securities purchased but not sold during the year. Ground no.....
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....7,76,815/- paid for broken period on securities purchased but not sold during the year. At the time of hearing, the ld. AR for the assessee submitted that this issue stands covered in favour of the assessee and against the revenue by various judicial pronouncements and orders rendered in the assessee's own case. In support of this contention, the ld. AR placed reliance, inter alia, on the following decisions: (i) The Hongkong & Shanghai Banking Corporation Ltd. v DCIT in ITA Nos. 9587/Mum/92 and 9588/Mum/92 vide orders dt. 22.2.2006 for Asst. Years 1989-90 and 1990-91 at para 3 of the order; (ii) The Hongkong & Shanghai Banking Corporation Ltd. v DCIT in ITA No. 4802/Mum/97 dt. 29.11.2006 for Asst. Year 1991-92 at paras 5 to 10 thereof; (iii) The Hongkong & Shanghai Banking Corporation Ltd. v JCIT in ITA Nos. 709, 2604, 2605, 4709/Mum/99 dt. 15.2.2007 for Asst. Years 1992-93 to 1994-95, 1996-99 and 1997-98 at paras 24 to 37 thereof; (iv) Mercantile Bank Ltd. v. ACIT in I.T Reference No. 153 of 1996 and RA Nos. 865 and 866 of Bombay/1992 order (A.Y's 1980-81 and 1992-92) dt. 9.10.2002; (v) ADIT (International Taxation) v. Hongkong and Sha....
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....rt the views taken by the authorities below. Rather, the ld. AR fairly conceded that this issue stands covered in favour of the Revenue by the decisions of the co-ordinate benches of this Tribunal in the assessee's own case in ITA No. 9587/Bom/1992 and 9588/Bom/1992 for Asst. Years 1989-90 and 1990-91 vide order dt. 22.2.2006; wherein at para 2 thereof, this issue was decided against the assessee by holding that the retrospective amendment has been brought into section 145 of the Act w.e.f. Asst. Year 1989-90, interpreting that any interest on securities not charged to tax in an earlier year shall be charged to tax on receipt basis in a subsequent year. It was submitted that similar views were taken by the co-ordinate benches of ITAT in the assessee's own case in ITA No. 709/Mum/1999 for Asst. Year 1992-93 vide order dt. 15.2.2007 at paras 22 and 38 thereof and in ITA No. 2679/Mum/2004 dt. 20.11.2015 for Asst. Year 1999-2000 at paras 55 to 58 thereof. 5.2.3 Taking into account the facts and circumstances of the case and the judicial pronouncements placed before us in the matter, and following, inter alia, the decisions of the co-ordinate bench of the Tribunal in the assessee'....
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....wance of penal interest paid to RBI - Rs. 5,70,38,075 7.1 In this ground, the assessee contends that the ld. CIT(A) erred in sustaining the disallowance of Rs. 5,70,38,075/- towards penal interest paid to RBI, without appreciating the fact that the interest was compensatory and not penal in nature and was thus allowable as deduction in arriving at the business income of the assessee. Before us, the ld. AR for the assessee contended that this issue was considered and held in favour of the assessee, as an allowable deduction, in a number of judicial pronouncements. In support of this contention, the ld. AR for the assessee placed reliance on the following decisions : i) Dhanalakshmi Bank Ltd. [SLP(C) No. 2252 of 2004] 277 ITR (St) 3 wherein the SLP filed by the Department against the decision of the Hon'ble Kerala High Court, inter alia, on the question of whether penal interest charged by RBI for contravention of the provisions of the Banking Regulation Act, 1949 in relation to non-maintenance of SLR was in the nature of penalty and not allowable as deduction, was dismissed; ii) State Bank of India in ITA No. 3403/Mum/99 dt. 17.9.2009 for Asst. Year 1995-96; ....
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.... wherein the Tribunal held as under : "Payment of penal interest to RBI, the assessee paid penal interest to RBI for non-maintenance of Cash Reserve Ratio (CRR) and/or Statutory Liquidity Ratio (SLR). The Assessing Officer disallowed such expenditure on the ground that the payment represented penal interest, which is not justified. The word 'penalty' used in section 24(6)(a) of the Banking Regulation Act, 1949, would not lead to the conclusion that interest paid by the assessee is not interest but penalty for infraction of law. Penal interest is automatic in nature and without any further action on the part of the assessee. Penal interest could not be considered as having been incurred for any infraction of law. The CIT(A) was, therefore, justified in deleting the disallowance." 3.1 Nothing contrary was brought to our knowledge by the Revenue in this regard. In view of the above, we hold that the alleged penal interest is not of the nature of penalty for infraction of law and as such is allowable as business expenditure." 7.3.2 Respectfully following the decision of the co-ordinate bench of the ITAT, Mumbai in the case of Deutsche Bank A.G in ITA No. 4699/Mum/1....
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....mediation agreement. 8.2.2 On examination of the assessee's claim and submissions made in this regard, the AO noted that the dispute was in regard to the sale of the assessee and purchase by 'SCB' of the following securities in the years 1991 and 1992, the details of which are as under : S.No. Face value/Description Purchase date Purchase price paid (Rs.) 1 13.5 crores 13% CIL (11/2) 16/03/1992 13.54 crores 2 16.5 crores 13% NPC (23/2) 16/12/1991 18.75 crores 3 27.5 crores 9% IRFC (1/1) 10/02/1992 25.45 crores 4 5 crores 9% PFC (13/2) 03/03/1992 4.63 crores 5 10 crores 9% IRFC (1/1) 24/04/1992 7.88 crores Total 70.25 crores 8.2.3 According to the AO, as per RBI guidelines dt. 2.5.1989 for client investment scheme, it is clear that the risks of loss on such investments were to be borne by the clients, in this case 'SCB', and not by the assessee bank, and in these circumstances it was not the business loss of the assessee. The AO also referred to the adverse comments on the functioning of the assessee bank in the Janki Raman Committee's report to buttress his point t....
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....crores which was claimed as a business loss. In support of this contention, the ld. AR placed reliance on the decision of the co-ordinate bench in the assessee's own case in ITA No. 2680/Mum/2004 dt. 20.11.2015 for A.Y 2000-01, wherein the bench following the ratio of the decision of the Apex court in the case of Nainital Bank Ltd. (1966) 62 ITR 638 (SC) allowed the assessee's claim of business loss in respect of payments made to make good the loss suffered by the assessee's client in share transactions. The ld. AR submits that in view of the factual matrix of the case and the judicial precedent in the assessee's own case (supra), the assessee's payment of Rs. 34.50 crores to its client 'SCB' be allowed as business loss. 8.4 Per contra, the ld. DR supported the orders of the authorities below on this issue. 8.5 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. In the case on hand, the facts that emerge from the record are that the assessee in the course of its business acts as a mediatory to hold securities, collect dividends, obtain deliveries, ensures transfer in the name of its clients a....
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....685. 10.2.1 We have heard both the ld. AR for the assessee and the ld. DR for Revenue and perused and carefully considered the material on record; including the judicial pronouncements cited in this regard. In the assessee's own case for Asst. Year 1992-93 in ITA No. 628/Mum/99 dt. 15.2.2007, the co-ordinate bench considering the facts of the matter in respect of the issue of the claim of payment of salaries to expatriate employees in the light of CBDT's circular no. 685 dt. 12.8.1994 held as under at paras 27 to 29 : "27. We have considered the rival submissions and have carefully gone through the decisions cited before us. Admittedly the payment of salaries was made by the head office without deduction of tax at source as required under section 40(a)(iii) of the Income-tax Act. As per this provision any payment of salaries outside India is not allowable if the tax on such salaries has not been paid or deducted under Chapter XVII-B of the Income-tax Act. The admitted position is that in the present case tax was not deducted/paid as per the requirements of Chapter XVII-B. The Board issued Circular N. 685 dated 12th August 1994 which permitted the defaulting companies to....
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....by the assessee after the completion of assessment. In our opinion, the answer is in negative. If we read the entire section as a whole, we find that intention of the Legislature is to allow the deduction only if the tax has been paid strictly in accordance with the provisions of Chapter XVII-B i.e., within the prescribed time. Section 40(a)(i) disallows payments on account of interest, royalty, fees for technical services or other sum chargeable to tax which is payable outside India on similar terms but the proviso to clause (i) specifically allows such payments as deduction in the year in which the assessee pays or deducts the tax under Chapter XVII-B. It clearly provides that deduction is to be allowed in the year in which obligations arising to the assessee are complied with. 47. However, there is no such proviso to clause (iii) of section 40(a). That clearly shows the intentions of the Legislature to the effect that disallowance is not to be made only where the tax has been deducted or paid within the prescribed time under Chapter XV11-B. If the Legislature had intended to give similar benefit, it could have easily inserted a similar proviso to clause (iii). Deliberat....
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....ard. This issue was never raised before the Tribunal. In the present case, the claim of the assessee rested on the Board's circular No. 685 on the ground that tax on salaries was paid in consonance with the Board's circular. In our view, the Tribunal's order in the case of ANZ Grindlays Bank (supra) squarely applies to the present case." 10.2.2 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 in ITA No. 628/Mum/1999 dt. 15.2.2007 (supra), 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. In this view of the matter, we dismiss the additional ground no. 7 raised by the assessee. 11. In the result, the assessee's appeal for Asst. Year 1995-96 is partly allowed. ITA NO. 3138/Mum/1999 - Revenue's appeal for A.Y 1995-96 12. The grounds raised by revenue in this appeal....
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....nd no. 2 : Disallowance u/s 37(2A) of the Act - Rs. 14,58,735/- - payment of subscription to Clubs 14.1 In this ground, revenue contends that the ld. CIT(A) erred in deleting the disallowance made by the AO u/s 37(2A) of the Act, in respect of subscriptions to clubs, treating the same in the nature of entertainment expenditure. The ld. DR was heard in support of the grounds raised. 14.2 The ld. AR for the assessee submitted that the issue in question is covered in favour of the assessee by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Asst. Year 1992-1993 in ITA No. 628/Mum/1999 vide order dt. 15.2.2007, at para 32 thereof, following the decision of the Hon'ble Bombay High Court in Otis Elevators (195 ITR 682). In this regard, the ld. AR for the assessee also placed reliance on the decision of the Hon'ble Apex Court in the case of United Glass Manufacturing Co. Ltd. (Civil Appeal No. 6447 of 2012) (SC). 14.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that this issue is covered in favour of the assessee by the decisions of the....
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....d in upholding the action of the AO of disallowing the expenses amounting to Rs. 4,31,98,998 in respect of NRI deposit mobilization by considering the same to be Head office expenses under section 44C of the Act notwithstanding the fact that the expenses were incurred by the appellant wholly and exclusively for its Indian operation. Ground no. 4 The CIT(A) erred in upholding the action of the AO of disallowing the expenses of Rs. 2,10,29,000 in respect of fees charged by VISA and Master Card towards service rendered by them. Ground no. 5 Your appellant craves leave to add to alter or modify the above grounds of appeal as they may be advised from time to time." 18. Ground no. 1 : Disallowance of broken period interest 18.1 In this ground, the assessee contends that the ld. CIT(A) erred in confirming the AO's disallowance of broken period interest of Rs. 18,78,80,785/- paid for broken period on securities purchased but not sold during the year. At the time of hearing, the ld. AR for the assessee submitted that this issue stands covered in favour of the assessee and against the revenue by various judicial pronouncements and orders....
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....f the AO in bringing to tax in the assessee's hands the interest in respect of securities for which the due date for payment (coupon date) had not arisen in the accounting year ended 31.3.1998. 19.2.1 We have heard both the ld. AR for the assessee and the ld. DR for Revenue in the matter. The interest accrues on securities on the day after which it falls due for payment. As per the material on record it is seen that the assessee had not offered this interest income for tax in its declared total income. The AO was of the view that since the interest in respect of securities for which the due date of payment arises after the end of the previous year i.e. 31.3.1998, is the income of the assessee and proceeded to bring the same to tax in the assessee's hands. On appeal, the ld. CIT(A) upheld and confirmed the action of the AO. 19.2.2 Before us, the ld. AR could not bring on record any material to controvert the views taken by the authorities below. Rather, the ld. AR fairly conceded that this issue stands covered in favour of the Revenue by the decisions of the co-ordinate benches of this Tribunal in the assessee's own case in ITA No. 9587/Bom/1992 and 9588/Bom/1992 for Asst. Yea....
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....ding the judicial pronouncements cited and placed reliance on. We find that the issue in question, i.e. of the allowability of the expenses incurred on NRI deposit mobilization, has been considered and held in favour of the assessee by the decision of the co-ordinate benches of this Tribunal in ITA No. 9587 & 9588/Mum/1992 for Asst. Years 1989-90 and 1990-91 dt. 22.2.2006 and in ITA No. 2679/Mum/2004 for Asst. Year 1999-2000 vide order dt. 20.11.2015 at paras 59 to 62 thereof. As in the cited decisions (supra) in this year also, 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 ITA No. 2679/Mum/2004 dt. 20.11.2015 for 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. 21. Ground no. 4 : Disallowance of fees charged by Master Card & Visa towards services rendered by them - Rs. 2,10,29,000 21.1 In this ground, the assessee contends that the ld. CIT(A) erred in upholding the action of the AO of disallowing the expenses of Rs. 2,10,29,000/- in respect of fees charged ....
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....ment was not established by the assessing officer whereas the burden of proving otherwise was on the assessee, which was not discharged by it." 25. Ground no. 1 : Salary of Rs. 10,35,52,164/- paid to expatriate employees - 25.1 In this ground revenue contends that the ld. CIT(A) erred in holding that salary paid to expatriate staff employed in India cannot be regarded as head office expenses and thereby deleting the said addition. The ld. DR was heard in support of the grounds raised. It was submitted that in the course of assessment proceedings, the AO observed that the assessee had paid an amount of Rs. 10,35,52,164/- towards the salaries of expatriate officers employed in India and called for the assessee's explanation in this regard. In response thereto, the assessee submitted that these employees rendered service in India and the salaries were paid to them by the Head office; that the tax thereon was paid in India and were therefore eligible for deduction while computing taxable income. The AO rejected the assessee's claim with liberty to claim benefit u/s 44C of the Act. It was prayed that the order of the ld. CIT(A) be reversed and that of the AO restored on this is....
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....he Hon'ble Apex Court in the case of United Glass Manufacturing Co. Ltd. (Civil Appeal No. 6447 of 2012) (SC). We, therefore, uphold the order of the ld. CIT(A) on this issue and consequently dismiss this ground raised by Revenue. 27.1 Ground no. 3 : In this ground, revenue contends that the ld. CIT(A) erred in restricting the disallowance of Rs. 1,34,83,078/- made by the AO out of entertainment expenses to Rs. 1,00,000/- even though the assessee had not furnished any details in respect of these expenses. The ld. DR was heard and placed strong reliance on the order of the AO. 27.2 In the course of assessment proceedings, the AO observed that the assessee had incurred the following expenses : (i) Entertainment expenses paid to Club Rs. 7,97,187/- (ii) Expenditure nomenclatured as Entertainment expenditure Rs. 59,31,029/- (iii) Entertainment expenditure included in staff welfare, training, advertisement, sales promotion, local travel and other expenses Rs. 67,54,862/- Total Rs. 1,34,83,078/- The AO, being of the view that the above expenditure had not been ....
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....unal in the assessee's own case in ITA No. 2519/Mum/2004 dt. 20.11.2015. Following this order of the co-ordinate bench (supra), we dismiss ground no. 3 raised by revenue. 28. Ground no. 4 : Exemption of interest on tax free bonds - Rs. 14,65,78,209 28.1 In this ground, revenue contends that the ld. CIT(A) erred in deleting the disallowance of exemption of Rs. 14,65,78,209/- of interest on tax free bonds and in directing the AO to allow exemption on gross basis u/s 10 of the Act, on the ground that the AO had failed to establish the nexus between the borrowings and investments. The ld. DR was heard in support of the grounds raised and, placing strong reliance on the order of the AO, submitted that the assessee had failed to discharge the onus of proving the claim put forth by it. 28.2 The facts of the matter, as emanate from the record, is that the assessee earned interest of Rs. 19,68,96,102/- on investment made in purchase of tax free bonds and claimed the same as entirely exempt from tax. The AO sought the assessee's explanation in respect of its claim for exemption of the aforesaid interest. The AO did not accept the assessee's explanation in the matter and proceeded to....
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....e. Therefore, the assessing officer has erred in deducting a sum of Rs. 14,65,78,209/- as the cost of the funds for earning the interest on tax-free bonds. The assessing officer is therefore directed to allow a relief of Rs. 14,65,78,209/- from the total income of the appellant." 28.3 Before us, the ld. AR for the assessee submitted that an identical issue was considered by the co-ordinate bench of this Tribunal in the assessee's own case in ITA No. 2519/Mum/2004 dt. 20.11.2015 for Asst. Year 1999-2000 at paras 35 to 40. It is submitted that this issue was held in favour of the assessee after considering the factual and legal matrix of the matter, following the decision of the ld. CIT(A), who in turn had followed the decision of the ld. CIT(A) for Asst. Year 1998-99 dt. 4.6.2001; which is the year under consideration in this appeal. The ld. AR submitted that in view of the above, this issue is covered in favour of the assessee by the aforesaid decision of the co-ordinate bench for Asst. Year 1999-2000 (supra) and consequently, revenue's ground is liable to be dismissed. 28.4 We have heard the rival contentions and perused and carefully considered the material on record; inclu....