TMI Blog2003 (8) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... rding to the Assessing Officer, the assessee suffered loss of Rs. 4,66,34,835. The assessee was asked to explain as why such loss be not disallowed being speculative loss. The explanation of assessee was that transaction through BRs were squared up through BRs only without actual delivery as actual delivery was not possible because of the volume of business involved. It was further stated that assessee was in actual possession of securities and, therefore, this process should be treated as part of normal banking business. In the absence of actual delivery, the Assessing Officer treated the losses in these transactions as speculative loss not to be adjusted against profits of normal banking business in view of section 73. Accordingly, he made an addition of Rs. 4,66,34,835. 3. The matter was carried in appeal before CIT(A) before whom two-fold arguments were made. Firstly, it was contended that assessee had undertaken the transactions only in relation to Government securities and units of UTI which could not be classified either as stocks or shares or as commodity and consequently, such transactions were outside the scope of section 43(5). Secondly, the assessee had earned profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led to set off speculation losses against speculation profits and only net loss on this account can be disallowed. The addition has, therefore, been reduced to Rs. 1,20,85,352. Still aggrieved, the assessee has preferred this appeal before the Tribunal. 7. The learned counsel for assessee has vehemently challenged the findings of CIT(A) by making various submissions. The first contention raised by her was that units of UTI and Government securities traded by assessee did not fall within the ambit of the expression "any commodity including stocks and shares" words commodity or stocks or shares used by the Legislature in section 43(5). According to her, all the three words are mutually exclusive and exhaustive since that is presumption that the Legislature does not use superfluous words. Proceeding further, it was submitted that Legislature has used the words 'commodity including stocks and shares' which only indicate that the word 'commodity' does not include stocks and shares otherwise there was no need to include stocks and shares in the word 'commodity'. Then, it was submitted by her that units and Government securities, not being stock or share, cannot be included in the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions through BRs is as good as transaction through physical delivery. It was submitted by her that earlier such transactions used to be effected by physical delivery but due to great inconveniences caused, a new methodology was adopted and approved by the banking sector by which securities could be dealt with through BR without giving immediate delivery and ultimate delivery could be effected within 90 days. Hence, no adverse inference could be drawn merely on the ground that transactions were effected through BRs. Therefore, such transactions should be considered falling outside the ambit of section 43(5). 9. The next contention of assessee's counsel was that section 73 Explanation excludes specifically the banks/investment companies and, therefore, transactions by banks cannot be considered as speculative one. According to her, deeming provisions are to be construed strictly and one cannot travel outside the ambit of deeming provisions to include what is expressly excluded by the deeming provisions. 10. On the other hand, the learned Sr. DR has strongly opposed the contentions of assessee's counsel and has supported the order of CIT(A). According to him, the word 'commodity' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f UTI and Government securities would fall within the ambit of the word 'commodity' appearing in section 43(5) of Income-tax Act. This word has neither been defined in the Income-tax Act or any other enactment. In the absence of any definition clause, the cardinal rule of interpretation is that any word or expression used by the Legislature should carry its plain and natural meaning and nothing should either be added to or taken away from such meaning. To understand such meaning, it would be appropriate to refer to certain dictionary meanings: As per Black's legal dictionary.--"Those things which are useful or serviceable, particularly articles of merchandise movable in trade. Goods, wares and merchandise of any kind; articles of trade or commerce. Movable articles of value; things that are bought and sold." As perOxford's dictionary.--"An article of trade, especially a product as oPP9sed to a service." As per Websters dictionary.--"An economic good; esp. : a product of agriculture, mining or sometimes manufacture as distinguished from services (commodities such as meat, fats and sugar); an article of commerce; esp. one delivered to a transportation company for shipment; pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 of Income-tax Act. On one hand, it includes 'sale' and on the other hand, it includes compulsory acquisition. There is no doubt that the natural and plain meaning of word 'transfer' would always include 'sale' but still the same is also included by the Legislature. On the other hand, natural meaning of the word 'transfer' docs not include compulsory acquisition but is included in 'transfer' by adding in the list given in section 2(47). So, by inclusion of the word 'sale', the meaning of the word 'transfer' is never enlarged but such inclusion is only by way of clarification or abundant caution. On the other hand, by inclusion of 'compulsory acquisition' natural meaning of the word 'transfer' is enlarged. Let us take another example. The word "Income" has been defined under section 2(24) by way of inclusive definition. On one hand, it includes profits and gains while on the other it also includes voluntary contribution received by trusts. Profits and gains are part of natural and plain meaning of the word 'income' while voluntary contributions are otherwise do not fall within the plain meaning of the word 'income'. This shows that by inclusion of 'profits and gains', meaning of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties is concerned, there is no evidence on record. Para 6 of assessment order refer' to the submissions of assessee's representative to the effect "the assessee has squared up these transactions without actual delivery and by issue of BRs only because (a) delivery of securities is not possible because of the volume of business involved in these transactions (b) sometimes even the instruments transacted were not available and (c) bank business is rather impossible without dealing through BRs". Such submissions of assessees clearly shows that no delivery of scrips was effected by the assessee. It is also not the case of assessee either before CIT(A) or before us that actual delivery of scrips was ever effected by the assessee. Accordingly, it has to be held that there was no actual delivery of either units or securities traded by assessee throughBR. 18. Before parting with this aspect of the issue, we would like to mention the two decisions relied upon by assessee's counsel. The first decision is in the case of Nirmal Trading Co. delivered by Hon'ble Calcutta High Court. In that case, the High Court was concerned about the renunciation of right of assessee to apply for shares. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it inserted deeming provision in the form of Explanation to section 73 and made such dealings as part of speculative business so as to deprive such assessee from setting off losses in such business against other incomes of such assessee. It is only in such case, the Legislature has provided exception by way of exclusion of certain companies including banking companies. Therefore, the result is that if banking company is engaged in business of shares by actual delivery then such business shall not be regarded as speculative business and consequently, such banking company would be entitled to set off losses in such business against its normal profits. However, if the business of such banking company consists of purchase and sale of shares without actual delivery, then such business would itself fall within the scope of section 43(5) read with Explanation 2 to section 28 and consequently, the losses incurred in such business would not be allowed to set off against other income in view of main provisions of section 73 itself and there would be no occasion to apply the Explanation to such section. In the present case, the case of assessee falls within the scope of section 43(5) and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me aims at investment of funds of clients in a portfolio of high grade debt and liquidity securities and obtain a safe, secure and consistent appreciation of the funds over a period of time". The bank also mentioned the benefits of the scheme: (a) Investments backed by ANZ Grindlays funds management expertise; (b) No worry to you in respect of volatility, registration formalities. etc. of securities; (c) Investments in safe high grade securities; (d) Liquidity after one year assured; (e) Consistent, safe secured income; (f) Simple documentation. Out of the profits earned under the scheme the bank will get commission while the clients were assured to get a consistent percentage of return on the amounts deposited with the bank under the scheme." The Assessing Officer has also referred to the inspection report of RBI which says that such scheme was not being implemented in accordance with the guidelines issued by RBI as well as broad policies laid down by the bank'sLondonhead office. According to Assessing Officer, the clients of bank invested their money in the scheme because of minimum percentage of return on their deposits as was evident from the details furnished b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse of such activity could only be treated as fixed deposits on which no return could be made beyond special percentage fixed by RBI. To strengthen his view, he also referred to the board's letter dated28-2-1995communicated to all Chief Commissioners which stated that the returns paid to the clients under PMS in excess of normal rate of interest should be disallowed. Further, he referred to the show-cause notice issued by RBI on25-7-1994which refers to irregularities and violations of the directions of RBI based on the reports of Jankiraman Committee G.P. Kapadia. According to such reports, the show-cause notice states, the assessee bank had conducted securities transactions in utter disregard of the instructions and guidelines of RBI. Accordingly, he upheld the order of Assessing Officer. Aggrieved by the same, the assessee is in appeal before the Tribunal. 27. The learned counsel for assessee has vehemently contended that nature of payments by clients under PMS could not be characterized in the nature of fixed deposits. She drew our attention to the salient features of the scheme. According to her, the entire activity of investment in securities were on behalf of their client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty under section 46 of RBI Act, 1934 but it cannot result in invalidation of any contract by the bank with the third party. Therefore, the legitimate yield paid to the clients was fully valid and consequently, no payment could be disallowed. 30. Regarding the Board circular, it was pleaded that CBOT has no power to interpret the statute in a particular way. Reliance was placed on Supreme Court judgment in the case of Keshavji Ravji Co. v. CIT [1990] 183 ITR 1. According to her, the board has no power to direct that PMS Scheme should be regarded as FOR Scheme. 31. Lastly, it was contended that even assuming that business under PMS was illegal, the profits of such business has to be computed after adjusting all expenditure relating to such business. Reliance was placed on various decisions of Supreme Court, namely--CIT v. S.C. Kothari [1971] 82 ITR 794, CIT v. Kurji Jinabhai Kotecha [1977] 107 ITR 101, CIT v. Piara Singh [1980] 124 ITR 40. She also relied on the judgments of Supreme Court in the cases of CIT v. Sitaldass Tirathdas [1961] 41 ITR 367, CIT v. Shoorji Vallabhdas Co. [1962] 46 ITR 144 and CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 for the propositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of RBI norms was in the nature of infraction of law. Hence, it was pleaded by him that payments over and above the permitted rate of interest was rightly disallowed by lower authorities. 33. Rival contentions have been considered in the light of materials placed before us. We are in agreement with ld. DR that RBI directions/guidelines are statutory and violation of the same are akin to violation of statutory provisions. This contention is well supported by the judgment of Madras High Court in the case of Indian Bank wherein it was observed as under: "A consideration of the aforesaid provisions of the Banking Regulation Act, 1949, clearly points out that a banking company, more particularly, nationalized bank like the petitioner has really no free scope for carrying on the business of banking permitted under the provisions of the Banking Regulation Act in any manner it likes, but every activity is hedged in by and subjected to the control of RBI and its order and directives issued periodically, a contravention of which is also made punishable under the provisions of the Banking Regulation Act. It is, therefore, evident that if a banking company has to carryon the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there is residual price risk to the investor", Reading the entire scheme as a whole, we are of the view that scheme by itself is not a fixed deposit scheme. According to it, the bank has to act as an agent of its clients inasmuch as the bank is required to purchase and sell the securities and units etc. only on behalf of the clients and the income arising in such trading has to be credited to their accounts. The assessee bank cannot appropriate any part of it to itself. It is entitled only to a commission for managing the portfolio of its clients. Further, there is no assurance to pay any fixed return. It clearly provides that there is a risk to investor clients. Further, such scheme as launched in 1987 was approved by RBI and it is also not the case of revenue that such scheme by itself is in contravention of RBI guidelines/instructions, Therefore, acceptance of money under the scheme was not in violation of any RBI norms and consequently, it cannot be said that money received was in the nature of fixed deposits. 35. However, we are in agreement with ld. DR that implementation of the scheme was contrary to what is stated in the scheme. The learned counsel for assessee has fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact is also not in dispute. The separate accounting kept by assessee for PMS has also been accepted by CIT(A). In view of such factual position, we are of the considered view that no addition could have been made by Assessing Officer or sustained by CIT(A). It is also not the case of revenue that any surplus was earned by the assessee under this scheme. Hence, question of making any addition on this account did not arise. Accordingly, we set aside the order of CIT(A) on this issue and delete the addition sustained by him. 37. The next and last issue relates to the disallowance of Rs. 1,32,46,994 claimed as deduction in respect of salaries paid to expatriate en1ployees for services rendered inIndia. 38. Briefly stated, the facts are these: The assessee did not claim such deduction either in the return or in the assessment proceedings since such sum was paid to its expatriate employees outsideIndiaand, therefore, not debited to its profit and loss account in the books of account maintained inIndia. So the assessment was completed without any discussion on this issue vide order dated25-3-1994. However, it came to knowledge of the Government that certain non-resident/foreign compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid without grossing up of the amount of salary under section 195A; (iv) since international accounts were not subject to Indian audit, it was not verifiable as to whether such payment was made to employees and consequently, would be taxable under section 69C and would stand set off against such claim of assessee; (v) it was not clear as to whether the payments were exclusively for the services rendered in India, the possibility of making payment for services rendered outside India could not be ruled out. Hence, such expenses could be treated as head office expenses and allowed out to the extent provided under section 44C. Aggrieved by such order, the assessee is in appeal before the Tribunal. 42. Both the parties have been heard at length. As far as the issue regarding admission of additional ground is concerned, we need not refer to the arguments of the parties since such issue is covered by the latest Supreme Court judgment in the case of National Thermal Power Co. v. CIT [1998] 229 ITR 383 wherein it has been held that purely legal ground can be raised before first appellate authority even if it was not raised before Assessing Officer. Respectfully following the same, we hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt judgment in the case of Goodyear (India) Ltd. v. State of Haryana [1991] 188 ITR 402. He also relied on the judgment of Hon'ble Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 for the proposition that there is no role of equity in tax matters. 45. Submissions of rival parties have been considered carcful1y. We are in agreement with the legal proposition that entries in the books of account are not relevant if the claim is otherwise allowable. This is well supported by the judgment of Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. We also agree that claim of assessee cannot be disallowed on the ground that salaries paid were not grossed up under section 195A for the purpose of computing tax liability of assessee inasmuch as there is no material on the record that there was any agreement or arrangement to bear the burden of tax on salaries chargeable to tax. The burden to prove the existence of such agreement is on the revenue which has not been discharged. Similar view has also been taken by us in the case of Mitsubishi Corpn. v. Dy. CIT [2003] 85 ITD 414 (Delhi). There is also no dispute that salaries to expatriate employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 XVII-B. If the Legislature had intended to give similar benefit, it could have easily inserted a similar proviso to clause (iii). Deliberate departure clearly indicates the intention of the Legislature not to provide similar benefits in the case of payments of salaries. If the interpretation put forth by assessee's counsel is accepted, then the proviso to section 40(a)(z) would become redundant. Hence such interpretation cannot be accepted. In our considered opinion, the prohibitive provisions should be construed in the manner which helps the honest and law-abiding assessees and discourage the defaulter assessees. However, the Legislature's intention is very clear and does not allow deduction if tax has not been ded ..... 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