TMI Blog2010 (7) TMI 791X X X X Extracts X X X X X X X X Extracts X X X X ..... al being ITA No. 1670/Mum./01 relates to the disallowance of Rs. 83,38,502 made by the Assessing Officer and confirmed by the ld. CIT(A) on account of Head Office expenses. 4. At the time of hearing before us, the learned representatives of both the sides have agreed that this issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee s own case for assessment year 1992-93 rendered vide its order dated 31-5-2010 passed in ITA No. 3425 3388/Mum./96 wherein similar disallowance made by the Assessing Officer and confirmed by the ld.CIT(A) was deleted by the Tribunal relying on the decision of Hon ble Bombay High Court in the case of CIT v. Emirates Commercial Bank Ltd. [2003] 262 ITR 55. The Tribunal also relied on the decision of the Hon ble Bombay High Court in assessee s own case for assessment year 1987-88 and 1989-90 wherein it was held that direct expenses incurred at the Head Office on behalf of the Indian branches are not governed by section 44-C of the Act, but are governed by section 37. Respectfully following the said judicial pronouncements, we delete the disallowance made by the Assessing Officer and confirmed by the ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses incurred abroad for mobilizing NRI deposits and allow ground No. 3 of assessee s appeal. 7. The issue raised in ground No. 4 relates to the disallowance of various expenses made by the Assessing Officer and confirmed by the ld. CIT(A) U/R 6B, Rule 6-D and section 43-B as well as out of entertainment expenses and guest house expenses. 8. After considering the rival submissions and perusing the relevant material on record, it is observed that this issue is also squarely covered in favour of the assessee and against the revenue by the order of the Tribunal dated 31-5-2010 passed in assessee s own case for assessment year 1992-93 ( supra ) wherein similar disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) on account of various expenses was deleted by the Tribunal relying on the decision of cordinate Bench in the case of Bank Indosuez v. Dy. CIT (IT Appeal Nos. 2089 to 2091 (Bom.) 1991 dated 9-3-1998. As noted by the Tribunal in its order dated 31-5-2010, a similar issue was decided in the case of Bank Indosuez ( supra ) as under: "The first common ground in these appeals is that the disallowance under sections 40A(5), 37(2A), 37(3) and 37(3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commercial profits of a permanent establishment (PE), there shall be allowed as deduction all expenses, wherever incurred, reasonably allocable to such permanent establishment including extensive and general administration expenses so allocable." This would mean that, firstly the PE may not necessarily mean only the Head Office. Secondly, the expenses have to be allowed wherever incurred which are reasonably allocable to such PE and expenses allocable to administration and general administration have to be allowed. Since there is no dispute regarding the fact that where the provisions of DTAA over write the provisions of the Income-tax Act, the provisions of DTAA shall........ are not applied in this case. Therefore, the disallowances made under the above mentioned sections are directed to be deleted. Respectfully following the above mentioned order of the Tribunal, we hold that the artificial disallowances imposed by the Income-tax Act under the above mentioned sections are not permissible. This ground is allowed." Respectfully following the aforesaid decisions of the Tribunal, we delete the disallowances made by the Assessing Officer and confirmed by the ld. CIT(A) U/R 6-B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 22,52,773 made by the Assessing Officer and confirmed by the ld. CIT(A) on account of assessee s claim for deduction of irrecoverable transfer charges under section 36(1)( vii ) read with section 36(2). 13. The claim of the assessee for deduction on account of bad debts representing irrecoverable transfer charges was disallowed by the Assessing Officer on the ground that the requirement of section 36(1)( vii ) read with section 36(2) were not satisfied. Even before the ld. CIT(A), the assessee could not satisfactorily explain as to how the said requirements were complied with by it in order to claim deduction under section 36(1)( vii ) read with section 36(2). The ld. CIT(A), therefore, confirmed the disallowance made by the Assessing Officer in this issue. Even at the time of hearing before us, the learned counsel for the assessee has not been able to establish that the requirements of section 36(1)( vii ) read with section 36(2) have been complied with by the assessee in order to claim deduction for the amount in question under the said provisions. He, however, has invited our attention to the details of the sundry balances written off given at page No. 102 of his paper bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see s own case for assessment year 1992-93 ( supra ) wherein a similar issue has been decided by the Tribunal in favour of the assessee. A perusal to the relevant portion of the said order of the Tribunal shows that reliance was placed on behalf of the assessee in support of its case on this issue on the decision of Mumbai Bench of ITAT in the case of Bank of America v. Dy. CIT [2009] 27 SOT 97 . The Department, on the other hand, relied on the decision of the Tribunal in assessee s own case for assessment year 1990-91 wherein the claim of the assessee for loss in ready forward transactions was disallowed. After discussing both these decisions of the co-ordinate Bench, the Tribunal preferred to follow the decision rendered in the case of Bank of America ( supra ) for the following reasons given in para 26 to 28 of its order : "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the content 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 case S.C. Kothari v. CIT 82 ITR 794 (SC) and Kurji Jinabhai Kotecha 107 ITR 101 (SC). 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 ( ii ) that the same quantity was either sold or purchased by the assessee on behalf of the same constituent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot derive benefit by carrying forward and 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 there from is carried forward for set-off against any other lawful speculative business in the following year . 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. An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the transactions of securities without physical delivery was disallowed by the Assessing Officer in assessee s case for assessment year 1991-92. Before the ld. CIT(A), it was, however, pointed out on behalf of the assessee that substantial profit was also earned on similar transactions, quantum of which was actually more than the loss suffered by the assessee. It was contended that after adjustment of the said loss against the profits earned by the assessee, there was actually no loss which was suffered by the assessee in the transactions of securities without physical delivery and no question of disallowance of such loss. Since the transactions were identical, the ld. CIT(A) directed the Assessing Officer to allow the loss suffered by the assessee against the profits earned from the similar transaction and the Tribunal vide its order dated 31-5-2010 has already upheld the order of the ld. CIT(A) for assessment year 1991-92 on this issue. At the time of hearing before us, the ld. Counsel for the assessee has invited our attention to the relevant details given on page No. 114 of his paper book to show that even in the year under consideration, the profits earned by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ti Bank carried on through assessee company whereby on 27-11-1992, the assessee company purchased 11.5 per cent GOI 2007 securities of the face value of Rs. 30 crores at the rate of Rs. 93 each from Citi Bank and sold the same to State Bank of Travancore at Rs. 93.90 each. On the same day the assessee company also purchased 11.5 per cent GOI 2010 securities of the face value of Rs. 30 crores at Rs. 95.65 each from State Bank of Travancore (Rs. 95.60 paid to State bank of Travancore and Rs. 0.05 paid to M/s. Darashaw Co. against brokerage) and sold the same to Citi Bank at Rs. 95.65 each (assessee company received Rs. 97.70 from Citi Bank and paid Rs. 0.05 to M/s. Darashaw Co. as brokerage). Thus the assessee company made a profit of Rs. 27 lacs from these composite transactions and the same having been already brought to tax in its hands as claimed by the ld. Counsel for the assessee, we are of the view that the brokerage of Rs. 3 lacs paid by the assessee to earn the said income has to be allowed as deduction as claimed by the assessee. We, therefore, delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) on account of the said brokerage and allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was restored to the file of the Assessing Officer with a direction to allow the expenditure in question only to the extent it was related to corporate membership of the club and treat the balance amount as entertainment expenses. As rightly submitted by the learned counsel for the assessee before us, no disallowance on account of entertainment expenses can be made for the year under consideration i.e., 1993-94 due to amendment in Income-tax Act and consequently the entire club expenses are liable to be allowed being revenue expenses incurred in connection with the assessee s business. We, therefore, uphold the impugned order of the ld. CIT(A) deleting the disallowance made by the Assessing Officer on account of club expenses. Ground No. 3 of revenue s appeal is thus dismissed. 27. In ground No. 4, the revenue has challenged the action of the ld. CIT(A) in deleting the disallowance made by the Assessing Officer on account of Architect charges amounting to Rs. 2,48,720. 28. During the year under consideration, a sum of Rs. 2,48,720 was claimed to be incurred by the assessee company on charges paid to architect in connection with the services rendered for renovating its Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 1992-93 vide order dated 31-5-2010 ( supra ) wherein the order of the ld. CIT(A) deleting the similar addition made by the Assessing Officer was upheld by the Tribunal for the following reasons given in para No. 45 : "After hearing both the parties, we do not find merit in the ground raised by the revenue. Where the transaction is routed through a broker, the broker may issue a contract note for the actual price payable to the other party and in addition may charge the brokerage. The other mode of billing may be to charge consolidated amount including the brokerage. In both the cases, the price paid by the assessee would form part of the cost price. In the present case, the broker, for e.g., contracted at the rate of Rs. 100 and charged brokerage of Rs. 1 and consequently charged the assessee the sum of Rs. 101. Naturally, there is a difference between the contracted price and the delivery price but in any event, the cost of security to the assessee would be Rs. 101. Therefore, in our opinion, no addition was warranted by the Assessing Officer since the money paid by the assessee was allowable as deduction. Therefore, the Learned CIT(A) was justified in dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s own case for assessment year 1987-88 and 1989-90 wherein it was held that direct expenses incurred at the Head Office on behalf of the Indian expenses are not governed by section 44-C of the Act but are governed by section 37. Respectfully following the same judicial pronouncements, we delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) on account of Head Office expenses and allow ground No. 1 of assessee s appeal. 36. As regards ground No. 2, it is observed that the issue raised therein relating to the disallowance of Rs. 3,24,211,381 made by the Assessing Officer and confirmed by the ld. CIT(A) on account of expenses incurred by the assessee for solicitation of deposits from non-resident Indians outside India is similar to the one involved in ground No. 1 of assessee s appeal being ITA No. 1670/Mum./2001 for assessment year 1993-94. It is also observed that a similar issue had come up for consideration before the Tribunal in assessee s own case for assessment year 1992-93 and vide its order dated 31-5-2010 ( supra ), the same was decided by the Tribunal in favour of the assessee holding that the expenses in question having been incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reserve Bank of India was compensatory in nature and the same was allowable as deduction in view of the judgment of Hon ble Supreme Court in the case of Prakash Cotton Mills (P.) Ltd. ( supra ). Respectfully following the said decision of the Tribunal in assessee s own case for earlier year, we delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) on account of penal interest paid by the assessee to Reserve Bank of India and allow ground No. 4 of assessee s appeal. 39. The issue raised in ground No. 5 relates to the disallowance of various expenses made by the Assessing Officer and confirmed by the ld. CIT(A) U/R 6B, Rule 6-D and section 43-B as well as out of entertainment expenses and guest house expenses. 40. After considering the rival submissions and perusing the relevant material on record, it is observed that this issue is also squarely covered in favour of the assessee and against the revenue by the order of the Tribunal dated 31-5-2010 passed in assessee s own case for assessment year 1992-93 ( supra ) wherein similar disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) on account of various expenses was dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions. In our view, the assessee deserves a favourable consideration in view of the decision of the Jaipur Bench of the Tribunal ( supra ) as well as the provisions of section 90(2) of the Income-tax Act. We have taken note of the fact that the provisions of DTAA on which the learned CIT(A) has relied as under : "In determining the industrial or commercial profits of a permanent establishment (PE), there shall be allowed as deduction all expenses, wherever incurred, reasonably allocable to such permanent establishment including extensive and general administration expenses so allocable." This would mean that, firstly the PE may not necessarily mean only the Head Office. Secondly, the expenses have to be allowed wherever incurred which are reasonably allocable to such PE and expenses allocable to administration and general administration have to be allowed. Since there is no dispute regarding the fact that where the provisions of DTAA over write the provisions of the Income-tax Act, the provisions of DTAA shall....are not applied in this case. Therefore, the disallowances made under the above mentioned sections are directed to be deleted. Respectfully following the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer for deciding the same afresh after affording an opportunity to the assessee to establish that the loss on account of the amounts in question was related to its business and the same was actually incurred in the year under consideration. Ground No. 6 of the assessee s appeal is accordingly treated as allowed for statistical purposes. 44. In the result, appeal of the assessee for assessment year 1994-95 being ITA No. 6658/Mum./02 is treated as allowed as indicated above. 45. Now, we shall take up the appeal of the revenue for assessment year 1994-95 being ITA No. 7047/Mum./02. 46. As regards ground No. 1, it is observed that the issue raised therein relating to disallowance made on account of club expenses is similar to the one which has been decided by the Tribunal in assessee s own case for assessment year 1992-93 vide order dated 31-5-2010. It was held by the Tribunal in this context that the decision of Hon ble Bombay High Court in the case of OTIS Elevator Co. (India) Ltd. ( supra ) relied upon by the ld. CIT(A) is applicable only in respect of payment to the club by way of corporate membership. It was held by the Tribunal that other expenses h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The ld. CIT(A), however, deleted the said disallowance observing that such customary gifts given on festivals, weddings etc. represented expenses incurred by the assessee for the purpose of its business and the same was allowable under section 37(1). For this inference, the ld. CIT(A relied on the decision of Hon ble Calcutta High Court, in the case of CIT v. Shalimar Industries (P.) Ltd. [1995] 78 Taxman 521 and that of Jaipur Bench of ITAT in the case of Mangalam Cement Ltd. v. Dy. CIT [1992] 43 ITD 292. 50. We have heard the arguments of both the sides and also perused the relevant material on record. Keeping in view the decision of the Tribunal in the case of Mangalam Cement Ltd. ( supra ) as well as that of Hon ble Calcutta High Court in the case of Shalimar Industries (P.) Ltd. ( supra ) relied upon by the ld. CIT(A) and the nature of the business of the assessee, we find ourselves in agreement with the ld. CIT(A) that the expenditure incurred by the assessee on customary gifts was for the purpose of its business and the same was allowable as business expenditure. We, therefore, uphold the impugned order of the ld. CIT(A) giving relief to the assessee on thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the said decision of the Tribunal in assessee s won case for earlier year on similar issue, we delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) on account of expenses incurred abroad for mobilizing NRI deposits and allow ground No. 2 of assessee s appeal. 56. The issue raised in ground No. 3 relates to the disallowance made by the Assessing Officer on account of broken period interest. After considering the rival submissions and perusing the relevant material on record, it is observed that a similar issue had come up for consideration before the Tribunal in assessee s own case for assessment year 1992-93 and after dealing with all the arguments raised on behalf of the assessee in detail, this issue was finally restored to the file of the Assessing Officer by the Tribunal for fresh adjudication in accordance with the guidelines laid down in para 14 of the order of the Tribunal dated 3-1-2007 passed in assessee s own case for assessment year 1990-91. The Tribunal also allowed liberty to the assessee to urge all the contentions put forth before it in the set aside precedings before the Assessing Officer Respectfully following the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in these appeals is that the disallowance under sections 40A(5), 37(2A), 37(3) and 37(3A) be deleted in view of the specific provisions in Article 111(3) of the Double Taxation Avoidance Agreement (DTAA) between India and France. 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 section 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 111(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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowances made by the Assessing Officer and confirmed by the ld. CIT(A) U/R 6-B, Rule 6-D and section 43-B and also on account of entertainment expenses and guest house expenses and allow ground No. 5 of assessee s appeal. 60. The appeal of the assessee being ITA No. 6659/Mum./02 for assessment year 1995-96 is thus treated as allowed as indicated above. 61. Now, we shall take up the appeal of the revenue being ITA No. 7052/Mum./2002 for assessment year 1995-96. 62. The solitary issue raised in this appeal relating to disallowance made on account of club expenses is similar to the one which has been decided by the Tribunal in assessee s own case for assessment year 1992-93 vide order dated 31-5-2010. It was held by the Tribunal in this context that the decision of Hon ble Bombay High Court in the case of OTIS Elevator Co. (India) Ltd. ( supra ) relied upon by the ld. CIT(A) is applicable only in respect of payment to the club by way of corporate membership. It was held by the Tribunal that other expenses had to be treated as revenue expenses and the matter was restored to the file of the Assessing Officer with a direction to allow the expenditure in question only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of the assessee by the decision of the Tribunal in assessee s own case for assessment year 1992-93 rendered vide its order dated 31-5-2010 passed in ITA No. 3425 3388/Mum./96 wherein similar disallowance was deleted by the Tribunal relying on the decision of Hon ble Bombay High Court in the case of Emirates Commercial Bank Ltd. ( supra ). The Tribunal also relied on the decision of the Hon ble Bombay High Court in assessee s own case for assessment year 1987-88 and 1989-90 wherein it was held that direct expenses incurred at the Head Office on behalf of the Indian expenses are not governed by section 44-C of the Act but are governed by section 37. Respectfully following the same judicial pronouncements, we delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) on account of Head Office expenses and allow ground No. 2 of assessee s appeal. 68. The issue raised in ground No. 3 relates to the disallowance made by the Assessing Officer on account of broken period interest. After considering the rival submissions and perusing the relevant material on record, it is observed that a similar issue had come up for consideration before the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial on record, it is observed that this issue is also squarely covered in favour of the assessee and against the revenue by the order of the Tribunal dated 31-5-2010 passed in assessee s own case for assessment year 1992-93 ( supra ) wherein similar disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) on account of various expenses was deleted by the Tribunal relying on the decision of co-ordinate Bench in the case of Bank Indosuez ( supra ). As noted by the Tribunal in its order dated 31-5-2010, a similar issue was decided in the case of Bank Indosuez ( supra ) as under : "The first common ground in these appeals is that the disallowance under sections 40A(5), 37(2A), 37(3) and 37(3A) be deleted in view of the specific provisions in Article 111(3) of the Double Taxation Avoidance Agreement (DTAA) between India and France. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... general administration have to be allowed. Since there is no dispute regarding the fact that where the provisions of DTAA over write the provisions of the Income-tax Act, the provisions of DTAA shall.......are not applied in this case. Therefore, the disallowances made under the above mentioned sections are directed to be deleted. Respectfully following the above mentioned order of the Tribunal, we hold that the artificial disallowances imposed by the Income-tax Act under the above mentioned sections are not permissible. This ground is allowed." Respectfully following the aforesaid decisions of the Tribunal, we delete the disallowances made by the Assessing Officer and confirmed by the ld. CIT(A) U/R 6-B, Rule 6-D and section 43-B and also on account of entertainment expenses and guest house expenses and allow ground No. 5 of assessee s appeal. 72. The appeal of the assessee being ITA No. 6021/Mum./2000 for assessment year 1996-97 is treated as allowed as indicated above. 73. In the result; (1)Appeals of the assessee being ITA No. 1670/Mum./01 and ITA No. 6021/Mum./2000, and appeal of the revenue being ITA No. 1187/Mum./01. are partly allowed. (2)Appeals of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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