TMI Blog2007 (1) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... d on law in disallowing the deduction claimed on account of refund of interest on minimum balances to RBI of Rs. 3,22,79,435 in accordance with ratio laid down by the Supreme Court in the case of Prakash Cotton Mills v. CIT 201 ITR 684 . 4. The learned CIT(A) has erred in law and on facts in holding that the interest refunded on minimum balances to RBI of Rs. 3,22,99,435 was penal in nature and not compensatory." 3. As regards ground Nos. 1 and 2 both the counsels agreed that the issue is covered in favour of the assessee by the decision of this Tribunal in assessee s case for assessment years 1993-94 to 1995-96 by order dated 18-8-2006 wherein it was held as under : "7.4 We have carefully considered the rival submissions. The funds mobilized abroad were brought to India in foreign currency account and kept in India for the Indian business of the assessee bank. The benefits reaped by the Indian branch or Permanent Establishment in India have been accounted for as Indian income. We, therefore, see no reason as to why the deduction of expenditure should not be allowed. These expenses incurred for procurement of business cannot be understood as Head Office expenses and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to show cause within four weeks from the date of receipt of this notice, as to why the amount ( i )accepted and deployed by your bank under PMS (excluding the uninvested portion) should not be treated as deposits; and ( ii )received by your bank as sale proceeds under Ready Forward transactions referred to above, should not be treated as borrowings. And included in NDTL on reporting Fridays for calculating the minimum average daily balance as prescribed under section 42 of the Reserve Bank of India Act, 1934, for the period commencing from 9th August, 1991 to 26th June, 1992, as disclosed by the date furnished by you vide letters dated 12th October, 1993 and 16th June, 1994 respectively. Please also show cause why the amount of Rs. 3,22,79,435 (Rupees three crores twenty two lakhs seventy nine thousand four hundred thirty five) paid to you as interest on minimum balance should not be recovered from you. The RBI has acted on the basis of figures furnished by you. However, if any such information, particulars or figures are found to be wrong or erroneous, the Reserve Bank reserves its right to take such appropriate action as may be open in law. 7. You are therefore call ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Act, 1934, RBI can direct, by way of notification, that every schedule bank shall maintained with RBI in addition to the balance prescribed under section 42(1), an addition to the balance of any amount not less than the rate specified in the notification. Under section 42(1B), where any scheduled bank maintained CRR in excess than that required to be maintained under the provisions of section 42(1), the RBI will pay interest to be scheduled bank on such excess reserves. If, however, the average daily balance of a scheduled bank with RBI during any fortnight is below the minimum prescribed under section 42(1), such scheduled bank is liable to pay to RBI in respect of that fortnight, penal interest at 3 per cent above the bank rate on the amount by which such balance falls short of the prescribed minimum as per the provisions of section 42(3). If during the next succeeding fortnight such average daily balance is still below the prescribed minimum, the penal interest on such shortfall shall be increased to 5 per cent above the bank rate in respect of that fortnight and each subsequent fortnight during which the default continues. Initially, for the period from August 9, 1991 to Jun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertaining to statutory liquidity requirements are similar to the provisions of sections 42(3) and 42(4) of the RBI Act, 1934 respectively. According to section 24(4)( a ) of the Banking Regulation Act, 1949, if the amount of liquid assets maintained by a banking company falls below the prescribed minimum, such banking company shall be liable to pay to the RBI, interest at the rate of 3 per cent per annum above the bank rate on the amount of shortfall. As per section 24(7) of the Banking Regulation Act, 1949, if as banking company continually defaults on SLR requirements, then every director, manager, or secretary of the banking company, who is knowingly and wilfully a party to the default shall be punishable with a fine which may extend to Rs. 500. 11. She accordingly pleaded that the amount paid being refund of interest received from the Reserve Bank of India should be treated as compensatory in nature and not penalty for infraction of law. Accordingly, the same is allowable under section 37(1) of the Act or alternatively under section 28 of the Act. 12. The learned DR on the other hand, sought to rely upon the appellate order. He submitted that in para 7 of the show-caus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B) of section 42 of the Reserve Bank of India Act. Accordingly on the basis of finding of Jankiraman Committee Report, the assessee was required to repay the interest which it earlier received in respect of its deposits with RBI. Thus what is recovered by the RBI is interest earlier paid to the appellant bank under section 42(1B) of the RBI Act. The amount of penalty leviable is separately prescribed in sub-sections (3) and (4) of section 42 of the RBI Act. However, since what is recovered is excess interest paid to the bank in terms of section 42(1B) of the RBI Act and not the penalty for not maintaining cash reserve or any infraction of RBI Act it is incorrect on the part of the Assessing Officer to treat the same as penalty for violation of law. What is violation of law as observed in the show-cause notice of the RBI dated 25-7-1994 is violation of entering into ready forward transaction which persons other than scheduled banks or not treating the amount received from clients under PMS Scheme as part of demand and time liabilities. No penalty is levied for entering into such transaction or not treating such transaction as part of net demand and time liabilities. Thus the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nomenclature of the compensatory or penal in nature. The matter was, therefore, referred back to the Appellate Tribunal for deciding the matter after examining the schemes under the relevant Acts with a direction to bifurcate the two components of the impost and give deduction of that component which is compensatory in nature and to disallow that component which is penal in nature. 17. A similar view as unexplained in Prakash Cotton Mills (P.) Ltd. s case ( supra ) was held in the case of Standard Batteries Ltd. v. CIT [1995] 211 ITR 444 (SC) wherein it was held that the proportion between the compensatory and the penal nature of the payment under the Bombay Sales Tax Act had to be determined and the part which is compensatory in character alone was deductible as expenditure. 18. In the case of CIT v. Ahmedabad Cotton Mfg. Co. Ltd. [1994] 205 ITR 163 (SC), the assessee which ran a textile mill, instead of producing and packing the minimum quantity of specified type of cloth as required under the Cotton Textile (Control) Order, 1948, paid to the Textile Commissioner a sum of Rs. 1,70,766 in exercise of the option available under clause 21C(1)( b ) of the Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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