TMI Blog1984 (12) TMI 92X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the payment of tax liability of the individual employees as an employer and it was not the bank's business to guarantee tax payments of its employees. The Commissioner (Appeals) further observed that the assessee did not charge any guarantee commission and in issuing guarantee bonds to 10 of its employees, the bank did not obtain any security. The Commissioner (Appeals) also mentioned in his order that in respect of the assessment year 1974-75, the bank's claim for deduction of Rs. 56,261 ' representing payment of tax borne on behalf of some of its employees ' was disallowed and the bank accepted the disallowance of the ITO. In the first two grounds, the assessee has taken objection in regard to the aforesaid finding of the Commissioner (Appeals). It has been stated that the bank issued guarantee bonds for payment of taxes in respect of persons who were the constituents of the bank. The bank also issued such guarantee bonds to the assessee's employees. It has been urged that the Commissioner (Appeals) erred in confirming the disallowance by ignoring the fact that the bank issued bank guarantees in course of its normal banking business and any liability arising out of such activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to the assessee's learned counsel, between the assessee's furnishing of a bank guarantee and the work carried on by it as a bank, inasmuch as the services rendered by the Japanese officers working on deputation were essential for the smooth running of the assessee's bank business. Reference in this connection was made to a Madhya Pradesh High Court decision in the case of CIT v. Shriram Prayagdas and Mahadeo Prasad [1983] 144 ITR 883, wherein the High Court in laying down the test for determining whether an expenditure falls under section 37(1) of the Act, held that a payment voluntarily made, in order to facilitate the carrying on of the business of the assessee on the ground of commercial expediency, was an allowable business expenditure under section 37(1). The learned counsel for the assessee further stated that the tax payable by the bank constituted ' perquisite ' in the hands of the Japanese officials in terms of section 17(2)(iv). The mere fact that in the hands of the employees, the tax borne by the bank was not treated as a perquisite, was of no consequence inasmuch as the amount paid to the employees was in the nature of remuneration and the same was deductible in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghtly claimed as a business expenditure in terms of section 37(1). It has been further stated that since the departmental representative did not dispute the fact that the tax payment constituted perquisite in the hands of the employees within the meaning of section 17(2)(iv), the amount claimed was deductible in computing the business income of the assessee. 5. We have considered the submissions of both the parties and have carefully gone through the records of the case. A specimen copy of the guarantee issued by the bank has been placed at pages 37 to 39 of the paper book 1 filed at the time of hearing before us. The learned counsel for the assessee did not dispute that the bank guarantee is in the usual proforma that is generally submitted before the income-tax authorities under section 230. We fail to understand as to how such a guarantee furnished under section 230 can be equated with the guarantee bonds issued by a bank in course of its ordinary banking business. To our mind, the reliance placed on the Madhya Pradesh High Court decision in the case of Shriram Prayagdas and Mahadeo Prasad is misplaced inasmuch as the facts in that case are clearly distinguishable from the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite must be paid before it can be treated as a part of salary. In the instant case, the agreement only provides that the corporation would help the assessee to claim total exemption of all taxes and if such attempt fails then the tax payable would be on the account of the corporation. This liability of the corporation for the tax levied would normally arise at a future date and, therefore, any amount paid or to be paid in future on such account cannot be treated as a perquisite paid in the relevant assessment year." The learned counsel's reliance on the Gujarat High Court decision in the case of S.G. Pgnatale, in our opinion, cannot help the assessee as it is not known what was the disputed income assessed in the hands of the non-resident employees, which resulted in the creation of an extra demand to the tune of Rs. 2,25,376. The assessment orders passed by the ITO in the case of 10 Japanese employees have not been made available before us. We, accordingly, are of the opinion that the Commissioner (Appeals) was justified in upholding the IAC's addition in this regard. The addition is upheld. 6. In ground No. 3, the point raised is that the Commissioner (Appeals) has erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts is settled on the date when the actual payment is made. Now if a foreign exchange contract remains outstanding on the last date of the accounting year, the same is valued at the ruling market rate and necessary entries to that effect are recorded in the books of the bank. It has been the normal practice of the bank, according to the learned counsel, to value the outstanding foreign exchange contracts at the end of the year and such a practice has been followed consistently by the bank. It has been pointed out that the assessee takes into consideration the exchange loss/gain on outstanding forward contracts provided in the accounts of the earlier year and, thereafter, the actual loss or gain arising on valuation of the outstanding forward contracts at the prevailing market rate as at the end of the accounting year relevant for the assessment year is provided and taken to the balance sheet under the head ' Acceptances endorsement other obligations '. The foreign exchange contracts, according to the assessee's learned counsel, are entered into in the normal course of the assessee's business and the profit arising from such contracts constitutes the trading receipts of the bank. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the question whether the assessee has earned any profit or suffered any loss. The assessee may by making entries, which are not in conformity with the proper principles of accountancy, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive. Reference in this connection was made to a Supreme Court decision in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. It has been argued that even though the assessee maintained its accounts on the mercantile system, the assessee was not bound to show all anticipated loss inasmuch as the loss could be claimed only where it was ascertained in the year when the foreign exchange contracts were to be settled. Reference in this connection was made to a Calcutta High Court decision in the case of CIT v. Shewbux Jahurilal [1962] 46 ITR 688. Reference was also made to the Supreme Court decision in the case of Karam Chand Thapar Bros. (P.) Ltd. v. CIT [1969] 74 ITR 26. The departmental representative also referred to another Calcutta High Court decision in the case of CIT v. Soorajmull Nagarmull [1981] 129 ITR 169. 10. In his counter reply, the assessee's learned counsel stated that the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the accounting system followed by the assessee was defective and that correct profits from the foreign exchange transactions could not be deduced from the books of the assessee. It has been pointed out that the facts in the case of Soorajmull Nagarmull were different inasmuch as the point at issue in that case was whether loss arising due to difference in foreign exchange valuation of jute was to be allowed in the year when the contract was made or in the year when a settlement was reached between the parties in a subsequent year. It has been stated that in that case there was a dispute which was settled between the parties in a subsequent year. Accordingly, it has been urged that the ratio of the said decision cannot be applied in the assessee's case. Similarly, it has been pointed out that the departmental representative's reliance on the Supreme Court decision in the case of Karam Chand Thapar Bros. (P.) Ltd. was wholly misplaced inasmuch as the point at issue in the said case was different in that case, it has been pointed out that the assessee sold its dry ice factory at Lahore in September 1948 and the purchaser took over the factory on 1-10-1948, but the price was f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the assessee's case that the outstanding liabilities in respect of its forward exchange contracts constituted stock-in-trade along with the negotiable instruments held by the bank. It is not in dispute that the bank's major earnings are from foreign exchange dealings. In fact, the profit shown on foreign exchange transactions for the year ending 31-3-1976, as per details furnished on page 24 of the paper book 1, amounts to Rs. 53.24 lakhs. The assessee in disclosing a net profit from foreign exchange transactions at Rs. 46.60 lakhs made adjustments in respect of the provision made in the assessment year 1975-76 and the provision made in respect of the outstanding liabilities for the year ending 31-3-1976. Such adjustments have been made in the earlier years as also in the subsequent years as per the details furnished at pages 13 and 50 in paper book 1, pertaining to the assessment years 1975-76 and 1977-78, respectively, and on page 18 of the paper book 2 for the assessment year 1978-79. It is also not in dispute that the department accepted till the assessment year 1975-76 the method of accounting consistently followed in this regard by the assessee-bank. The Madras High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... systematically followed by the assessee is such that the true profits of the assessee-bank cannot properly be deduced so as to entitle the IAC to make an addition in computing the assessee's income from its banking business. The IAC disallowed the assessee's claim for deduction of the loss of Rs. 6,74,325, on the ground that the same represented provision made for probable loss on the outstanding contracts. The Commissioner (Appeals), in upholding the IAC's order, was of the opinion that the loss provided in the accounts was a notional loss as the actual profit or loss arising in the forward exchange contracts would arise only on the date of the settlement. The authorities below did not consider the method of accounting followed by the assessee as also the submissions made by the bank that the outstanding foreign exchange contracts were to be valued at the ruling market rate as they formed part of the bank's closing stocks. Since it is not in dispute that the assessee in the course of its foreign exchange dealings entertained forward contracts from its constituents, the outstanding contracts as at the end of the year had to be valued in accordance with the practice followed consis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one-twelfth of 1 per cent per month with a minimum of one-fourth per cent for the validity period of the guarantee (including extensions) plus an additional three months '. Our attention was drawn to the following stipulations made in rule 16 : " (a) If the guarantee be redeemed (i.e., returned duly cancelled) before the expiry of the extra six months, the proportionate overcharge may be refunded. (b) The commission for the full specified period of liability shall be collected at the time of signing a guarantee, except in respect of guarantees covered by rule 15 III(E), and rule 16 II(6)." Our attention was also drawn to the specimen copies of some of the contracts entered into by the assessee for providing bank guarantees for varying periods-vide pages 6 to 11 of the paper book 1. It has been stated that the bank guarantees are generally issued for periods exceeding 12 months and according to the accounting practice systematically followed by the bank, the commission relatable to each year is accounted for in the books or in other words, the commission relatable to the unexpired period of guarantee is deferred and shown separately in the balance sheet under the head ' Accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the learned counsel in connection with ground No. 3. 15. The departmental representative stated that in the instant case, the income was deferred after it had accrued. It has been argued that the entire guarantee contract was irrevocable as would be evident from the specimen copies submitted at pages 6 to 11 of the paper book 1. Our attention was drawn to page 11 of the paper book containing a copy of the guarantee contract entered into by the bank with the Andhra Pradesh State Electricity Board, wherein it was clearly mentioned that ' the Bank of Tokyo Ltd., lastly undertakes not to revoke this guarantee during its currency except with the previous consent of the Board in writing '. According to the departmental representative, there was no provision for refunding any amount to the client in the contract form. It has been pointed out that the Tribunal in the case of State Bank of India [IT Appeal No. 745 (Cal.) of 1983] on this very issue, decided the matter in favour of the department mentioning, inter alia, vide para 12.3 of their order ' (i) that the guarantee agreement is an indivisible one lasting over the entire period of repayment ; (ii) that it is irrevocable an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o accept a balance sheet and a profit and loss account showing adjustments made on wrong basis. Reliance in this connection was made to the Supreme Court decision in the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122. In regard to the point that under the mercantile system of accounting, the assessee was liable to be taxed on the entire guarantee commission on accrual basis, reliance was placed on the Calcutta High Court decision in the case of James Finlay Co. v. CIT [1982] 137 ITR 698. 16. In his counter reply, the assessee's learned counsel stated that the Tribunal's decision in the case of State Bank of India, on which reliance was placed by the departmental representative, did not apply to the facts of the assessee's case. In this connection, our attention was drawn to para 12.4 of the Tribunal's order, where it has been held " that the statutory auditors had advised the assessee-bank to spread over the commission of guarantee over the years for which the guarantee lasted will not alter the legal accrual of the commission. Its accrual depends on the agreements referred to above and not on the advice of the statutory auditors ". It has been pointed out that in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial practice of the assessee-bank to account for only the income arising from guarantee commission relatable to the year of account. According to the assessee's learned counsel, the provisions of section 145 being mandatory, it imposes a statutory duty on the ITO to examine whether the accounts submitted by the assessee are correct and complete and the assessee followed a system of regular method of accounting from which income could be deduced property. Reference in this connection was made to the Bombay High Court decision in the case of In re. B.M. Kamdar [1946] 14 ITR 10 and the observations of the Supreme Court in the case of A. Krishnaswami Mudaliar. Reliance was placed on the following observations of their Lordships of the Madras High Court in the case of E.A.E.T. Sundararaj : "...An assessee may employ one method of accounting for one part of his business or one class of customers, and a different method for another part of his business or another class of customers. He may also keep accounts in respect of different parts of the same business on different basis. If such different methods are employed regularly and consistently the profits have to be computed in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 145(1). 17. We have considered the submissions of both the representatives of the assessee and the department. We have also gone through the two paper books submitted by the assessee's learned counsel containing pages 1 to 39 and pages 1 to 30. respectively, as also the paper book submitted by the departmental representative (pages 1 to 32) at the time of hearing before us. We have also gone through the Tribunal's order in the case of State Bank of India, a copy of which has been placed at page 6 of the paper book submitted by the departmental representative. A perusal of the Tribunal's order reveals that on the advice of the statutory auditors, the State Bank of India spread over the commission of guarantee over the years for which the guarantee lasted. It has not been discussed in State Bank of India's case, whether the bank in accordance with the normal practice followed by it accounted for the guarantee commission relatable to the year for which the accounts of a particular period pertained. It is also not known when the auditors advised for spreading over the commission over the years for which the guarantee remained in force. Accordingly, there is force in the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1976-77. The assessee cannot have any grievance as the addition made of Rs. 1,54,963 has now been deleted by us. 20. Ground No. 2, pertaining to the disallowance of entertainment expenditure of Rs. 20,831 since sustained by the Commissioner (Appeals) has not been pressed by the assessee's learned counsel at the time of hearing before us. The addition is upheld. 21. In ground No. 3, the point raised is that the Commissioner (Appeals) erred in disallowing Rs. 1,18,561 being provision of loss on foreign exchange forward contracts. This point being similar to the one raised in ground No. 3 for the assessment year 1976-77, we hold by following our order for that year that the Commissioner (Appeals) was not justified in upholding the IAC's disallowance of Rs. 1,18,561. The addition sustained by the Commissioner (Appeals) is accordingly, deleted. 22. The alternative submission made by the learned counsel for the assessee that the IAC having disallowed in the assessment year 1976-77 of Rs. 6,74,325, the assessee was entitled to the set off of a loss amounting to Rs. 5,55,764 being the difference between the last year's provision disallowed to the tune of Rs. 6,74, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised are that the Commissioner (Appeals) erred in confirming the IAC's disallowance of Rs. 25,000 under section 40A(5) on account of estimated depreciation of furniture and fixtures provided to the Japanese officers at their residences and that the Commissioner (Appeals) erred in confirming the disallowance of Rs. 6,000 being the perquisite value of the cars used by the general managers of the bank. The IAC, in para 8 of his order, determined on estimated basis Rs. 35,000 on account of depreciation on furnitures and fixtures used in the assessee's guest house. Before the Commissioner (Appeals), the assessee stated that one-third of the guest house was used as residence by the officers of the bank and two-third portion of the building was used as a guest house. The Commissioner (Appeals) upheld the IAC's estimate of Rs. 25,000 being the depreciation of the furnitures used in the residential portion of the building occupied by the officers. It has been pointed out that the IAC having determined the depreciation on furnitures for the entire building at Rs. 35,000, the IAC's estimate of depreciation on furnitures used in the residential premises of the officers at Rs. 25,000 was incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner (Appeals)'s disallowance of Rs. 2,240 out of dues and membership fees has not been pressed. The Commissioner (Appeals)'s order in this regard is, accordingly, upheld. 32. Ground No. 5 relates to the disallowance of Rs. 7,64,798 being the bank guarantee for deferred periods upheld by the Commissioner (Appeals). In view of our order for the assessment year 1976-77, we hold that the Commissioner (Appeals) was not justified in upholding the addition of Rs. 7,64,798. The addition is deleted. 33. The alternative submission made by the learned counsel for the assessee is that the IAC was wrong in making the disallowance of Rs. 7,64,798 inasmuch as the net disallowance after adjusting the last year's provision of Rs. 10,19,167 from the current year's provision of Rs. 16,29,002 becomes academic in nature since the entire addition made of Rs. 7,64,798 has been deleted by us. 34. Ground No. 6 raised by the assessee reads as follows : " For that the learned Commissioner (Appeals) has erred in adjudicating the ground of allowing deduction of Rs. 2,56,972 in respect of disallowance of loss on forward contract of foreign exchange taken before him at the time of hearing." It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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