TMI Blog2011 (4) TMI 920X X X X Extracts X X X X X X X X Extracts X X X X ..... hin the meaning of the clause (iv) of the Explanation to section 44C of the Act. - book entries are not very important for determining the correct assessed income of the assessee. The claim can be made through the 'Computation of Income' route. The provision of section 44C are inapplicable in a case of expenses incurred exclusively by the Bank branches abroad in respect of NRI Desks maintained by those branches. - section 44C is inapplicable to this claim of the assessee - Decided in favor of assessee. Indo-USA treaty - limits of certain deductions of a permanent establishment with respect to head office expenditures. - held that:- the limitations for allowing certain expenses under the domestic law i.e., the Act, will apply to the income attributable to the permanent establishment. - as far as expenses incurred in India attributable to the business carried on in India are concerned, they have to be allowed subject to the limitations provided in the Act. - 141 AND 421 (BOM.) OF 1996, 1611, 1638, 2734, 4656 & 5644 (MUM.) OF 1998 AND 4903 (MUM.) OF 1999. - - - Dated:- 27-4-2011 - P.M. JAGTAP, N.V. VASUDEVAN, JJ. Dr. P. Daniel for the Appellant. P.J. Pardiwala for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... member of a recognized stock exchange shall in respect of any securities enter into any contract as a principal with any person other than a member of a recognized stock exchange, unless he has secured the consent or authority of such person and discloses in the note, Memorandum or agreement of sale or purchase that he is acting as a principal. 3.2 The assessee entered into transactions of purchase as well as sale of securities where the counter party was a broker and where they were acting as principals. The assessee incurred loss on purchase and sale in respect of some of the transactions of Rs. 5,34,235 and profit in respect of the some of the transactions of Rs. 5,33,235. The loss was reported by the special auditors. 3.3 According to the Assessing Officer the loss incurred on transactions in violation of SCR Act being loss incurred violating a law should not be allowed to be set off against business income and he therefore refused to allow the loss. The profit on sale and purchase transaction was however brought to tax as business income. Alternatively, the assessee submitted that even if the loss is not allowed to be set off against business income it should at least be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he some of the transactions of Rs. 16,99,401. The loss was reported by the special auditors in Schedule-16 to the Special Audit report and in part V of the report. 24. According to the Assessing Officer the loss incurred on transactions in violation of SCR Act being loss incurred violating a law should not be allowed to be set off against business income and he therefore refused to allow the loss. The profit on sale and purchase transaction was however brought to tax as business income. Alternatively, the assessee submitted that even if the loss is not allowed to be set off against business income it should at least be allowed to be set off against the profit on purchase and sale of transactions through brokers and only the resultant remainder loss should be held to be not allowable as deduction. Even this plea was not accepted by the Assessing Officer. On appeal by the assessee, the learned CIT(A) held that the profit and losses of these transactions should be mutually set off and the net result should be brought to tax. The CIT(A) found that the resultant figure of loss after setting off the profit was Rs. 43,677. He held that this loss cannot be set off against income under an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, a medical practitioner, claimed deduction of the value of heroin seized from his gross income. The Department denied the deduction. On appeal the Appellate Tribunal held as a fact that heroin was a part of his stock-in-trade and allowed deduction of the estimated value of the heroin seized from the gross income as a business loss. On appeal the High Court held that the rigour of the Explanation to section 37 of the Income-tax Act, 1961, was fully satisfied, that possession of heroin was an offence, that it was disgraceful for a doctor to indulge in activities against humanity, and that hence the question of claiming deduction of the value of the seized article did not arise. On appeal to the Supreme Court it was held, reversing the decision of the High Court, (i) that the Explanation to section 37 had no relevance as this was not a case of business expenditure but was one of business loss. Business loss was allowable on ordinary commercial principles in computing the profits. Once it was found that the heroin seized formed part of the stock-in-trade of the assessee, it followed that the seizure and confiscation of such stock-in-trade had to be allowed as a business los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. It incurred a loss of Rs. 3,40,443 in these transactions. The assessee had also earned a profit of Rs. 2,19,046 from speculative transactions. On the above facts, the Hon ble Supreme Court held that (i) that the contracts in respect of which the loss of Rs. 3,40,443 was incurred by the assessee were illegal contracts; (ii) that the assessee was not entitled to a set off under the first proviso to section 24(1) of the Indian Income-tax Act, 1922, of the loss of Rs. 3,40,443 against its profit in speculative transactions; (iii) that however if the business in which the loss was sustained was the same as the business in which the profit was derived, then the loss had to be taken into account while computing the profits of the business under section 10(1). In the case of Kurji Jinabhai Kotecha (supra) the Hon ble Supreme Court held that (i) that loss incurred by the assessee in the previous year in hedging transactions of banned items under section 15(4) of the Forward Contracts (Regulation) Act, 1952, could not be set off against the profits of the assessee's business of the same previous year under section 24(1) of the Indian Income-tax Act, 1922, (ii) that loss incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37(1) would be relevant only when claiming deduction of expenditure while computing income. The earlier trend of allowing expenditure which are illegal while computing income from illegal business and not allowing illegal expenditure while computing income of lawful business did put a person in illegal business to an advantage. The decision of the Hon ble Supreme Court in the case of Dr. T.A. Quereshi (supra) however has neutralized this position. The decision of the Tribunal in assessee s own case for assessment year 1990-91 had been rendered prior to the decision of the Hon ble Supreme Court in the case of Dr. T.A. Quereshi (supra). We are of the view that the Tribunal while deciding the case of Bank of America (supra) has followed the later decision of the Hon ble Supreme Court said decision and therefore the same has to be followed. Respectfully following the decision of the Tribunal in the case of Bank of America (supra), we direct the Assessing Officer to allow the loss as deduction by adjustment or set off against other business income. The relevant ground No. 4 is allowed." 6. The ld. D.R however, relied on the order of the CIT(A). 7. We are of the view that facts and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stationery and supplies, training, business travel, miscellaneous expenses and data processing charges directly relate to expenditure connected with the "NRI Desks" as well as other operations of the Indian Branches. The "NRI Desks " of the assessee are located in cities which have a high concentration of India notionals, and this helps the bank to survey the market and identify potential customers, and to thereafter render a more efficient service to them. Foreign Currency Non-Resident deposits maintained by the assessee in India stood at Rs. 615 crores as at 31-3-1992. These deposits, which resulted from the efforts put in by the various "NRI Desks" at overseas locations, were deployed in assessee s Indian operations. 10. The Assessing Officer disallowed the claim of the assessee for deduction of a sum of Rs. 77,054,195 for the reasons given in 1991-92 on an identical claim made by the assessee. He held that the expenses to be in the nature of head office expenses and applied the restrictions contained in section 44C of the Act and added a sum of Rs. 7,70,54,195 to the total income of the assessee. 11. On appeal by the assessee the CIT(A) confirmed the order of the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ictional High Court judgment in the case of Emirates Commercial Bank Ltd. (262 ITR 55) as well as the Tribunal order in ITA No. 2297/Mum./1996 in the case of British Bank of the Middle East and in ITA No. 4082/Mum./97 (Para 11) in the case of the Hong Kong and Shanghai Banking Corporation Ltd. for the proposition that where the expenditure was incurred abroad exclusively for the Indian branches, the provisions of section 44C has no application. On the other hand, the ld. D.R for the revenue argued that the expenses claimed is not possible to be directly linked to the Indian operations for the reason that such NRI Desks must also be guiding the customers of not only of Indian origin but also the other Asian countries. He further mentioned that the claim of the assessee under section 37 is not correct. He further relied on the orders of the lower authorities. 15. We have heard the rival submissions and also the relevant part of the paper book connected to this ground. We have also gone through the provisions of section 44C in this regard, the same are reproduced as under: "44C. Deduction of head office expenditure in the case of non-residents. Notwithstanding anything to the con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of the assessee. The claim can be made through the 'Computation of Income' route. The provision of section 44C are inapplicable in a case of expenses incurred exclusively by the Bank branches abroad in respect of NRI Desks maintained by those branches. Therefore, we are of the considered opinion that the provision of section 44C is inapplicable to this claim of the assessee. Accordingly, ground No. 2 is allowed." 13. Ld. D.R however relied on a decision of the Tribunal in the case of Addl. DIT (IT) v. Bank of Bahrain Kuwait [2011] 44 SOT 693 (Mum.) for assessment year 2002-03. In the said decision the Tribunal held that if the expenses are shared/allocated/apportioned/ non-exclusive head expenses then they will fall within the limits under section 44C of the Income-tax Act, 1961 (the Act). The Tribunal further held that if expenses are exclusively incurred by the head office for the Indian Branch then they shall be considered under general provisions of the Income-tax Act, 1961. According to the ld. D.R in the present case it has not been established by the assessee that the expenses had been incurred exclusively for the purpose of business carried on in India. In this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndirect Income received from the Department" The assessee paid interest to the Income-tax Deptt. amounting to Rs. 10,26,906 during the present assessment year. The assessee claimed that this was a business expenditure and, therefore, this should have been allowed. The assessee has received an interest of Rs. 1,07,57,930. It was claimed that the amount of interest paid by the assessee should have been allowed to be set off against the interest received from the department and taxed in the hands of the assessee. The ld. Advocate pleaded that the interest paid to and received from was from the same party i.e., Government of India. That, therefore, both the transactions should be taken together and the interest paid by the assesee should be adjusted against the interest received by the assessee and only net interest so arrived at should be taxed in its hands. The ld. A.O relying upon appellate orders for the assessment year 1990-91, rejected the claim of the assessee. The ld. Advocate, however, placed reliance on the two Tribunal judgments in this regard. The two decisions are: (a) Cyanamidi India v. ITO [ITA No. 4561(Bom.) of 1991-92, dated 23-5-1984]. (b) R.M. Agarwal v. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to consider the net interest received by the assessee as assessee s income from other sources. Accordingly we direct the Income-tax Officer to reduce the business income by an amount of Rs. 3,52,988 and to charge income from other sources an amount of Rs. 3,44,600." In R.N. Agarwal v. ITO (supra) at paragraph 14, the same issue is discussed wherein it is held as follows: "14 It is true that in view of the decision of the Punjab and Haryana High Court in Oriental Carpets case (supra), interest paid by the assessee on delayed payment of tax could not be deducted under section 37(1) of the Act as business expenditure. But if the facts of the case are taken into consideration it would appear that it is not the assessee s case that deduction for the interest paid should be allowed in the computation of income from business. It is also not seriously urged before us that deduction for the amount should be made in terms of section 57(iii). The case of the assessee merely is that only the net income from interest which is the real income should be assessed. To us this argument seems to be plausible. The assessee was to receive from the Government certain amount of refund obviously bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing full deduction for all expenses incurred for your Appellant s business in India. The CIT(A) failed to appreciate that under Article 7(3) of the Indo US Tax Treaty, such expenses incurred to the purpose of your Appellants business in India are deductible in full in computing taxable income without being subjected to the disallowance under the Act. 5. The CIT(A) erred in confirming the disallowance of Rs. 1,74,892 in respect of expenditure incurred on providing tea and coffee to customers and other business associates during their visits for transacting business, having failed to appreciate that such expenditure was not entertainment expenditure but was necessitated by commercial expediency. 6. The CIT(A) erred in confirming the disallowance of depreciation on the guest house furniture and building having failed to appreciate that such depreciation being allowable under section 32 of the Act cannot be disallowed under section 37(4) or (5)." 18. We have already seen that the assessee is a branch in India of a Banking company incorporated in USA. Since the assessee is a non-resident company, the provisions of DTAA between India and USA will apply. The income that accru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, research and development expenses, interest, and other expenses incurred for the purposes of the enterprise as a whole (or the part thereof which includes the PE), whether incurred in the state in which the PE is situated or elsewhere in accordance with the provisions of and subject to the limitations of the taxation laws of that state." According to the assessee, Article 7(3) should be read ignoring the punctuations in accordance with the Maxwell s Interpretations of Statutes. If Article 7(3) of the Tax Treaty is interpreted ignoring the punctuation, then the words of restriction would govern only the executive and general administration expenses and not all expenses of the PE. 20. The Assessing Officer, however, held that the proper way to read Article 7(3) of DTAA was as follows : "In the determination of the profits of the PE, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the PE, including .in accordance with the provisions of and subject to the limitations of the taxation laws of that state." Among the various uses of the punctuation ',' (coma), one such use of the coma is before and afterwards phrases or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of allowability of 25 per cent of the expenditure on participating employees, amounting to Rs. 8,63,869 was disallowed by the Assessing Officer. 24. In the Tax Audit Report it has been stated that expenses on Tea, Coffee, Soft drinks etc. to visitors at office premises have not been treated as entertainment because they were customers and any expenses incurred in providing tea, coffee etc. to customers cannot be said to be expenditure on providing entertainment. The however, as in the past years i.e., assessment year 1991-92, disallowed expenditure of Rs. 1,74,892 being expenditure incurred in providing tea, coffee, soft drinks to customers which was quantified by the assessee at Rs. 1,74,892. 25. Expenditure on Maintenance of Guest House. As per the Tax Audit report the total expenditure incurred on maintenance of guest house amounts to Rs. 17,73,511. Out of the above, the assessee had only disallowed Rs. 6,78,627 under section 37(4), being maintenance charges and expenses on meals, in the computation of income enclosed with the original return of income. Regarding the other expenses, being rent, repairs and depreciation, assessee has claimed that the same are allowable in vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of DTAA between India and USA will apply. The income that accrues to the assessee consequent to it s business operations in India are chargeable to tax under the Act India and USA have entered into a DTAA and therefore taxing income of an enterprise of USA has to be done only in accordance with DTAA. Since the assessee has a Permanent Establishment in India, the business profits of the assessee in India attributable to the PE are taxable under Article 7(1) of the DTAA. Article 7(3) of the DTAA lays down the manner in which profits of a PE are to be determined. It lays down that all expenses incurred for the purpose of business of a PE are to be allowed as deduction, while computing income attributable to the PE. 12. In accordance with the law that applied to assessment year 1992-93 under section 37(3) and (2B), there was a ceiling on certain type of expenditure incurred on entertainment [Section 37(2B)]. Advertisement expenditure (Rule 6B) and Travelling expenses (Rule 6D). These expenses are revenue in nature and even if they are incurred wholly and exclusively for the purpose of business of the assessee, they have to be disallowed under the aforesaid provisions. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such use of the coma is before and afterwards phrases or clauses let into a body of the sentence. In this case, the clause is 'including . This clause has been introduced into the body of the sentence which in its simple form, reads as a sentence mentioned in the preceding paragraph. Moreover, another use of the coma is to separate the clause that is not restrictive in meaning but is coordinate with the principle clause. Even with respect to this usage of coma, the principle clause would be the same as simple sentence mentioned earlier and the clause which is coordinate with the principle clause would be the same as the one described in the preceding paragraph 'including a reasonable allocation . In which the PE is situated or elsewhere . 14. For the above reasons, the Assessing Officer held that the limitations set out by Indian Tax Laws with respect to expenses incurred by the assessee in India apply to the assessee s case. 15. Learned CIT(A) confirmed the order of the Assessing Officer. Hence, Ground No. 2 raised by the assessee before the Tribunal. 16. We have heard the rival submissions. The issue raised in Ground No. 2 is no longer res integra and has been deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenses which are applicable to the Head Office expenses only and did not relate to the other expenses. The learned DR supported the orders of the lower authorities." We have considered the rival submissions. 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-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith Indo-UAE treaty which had a similar article like Article XIX(1) of Indo-French Treaty and therefore the Tribunal proceeded to hold that artificial disallowances under the Act will have to be made while determining profits of a PE attributable to operations in India. The decision of the Delhi Bench of ITAT in the case of Mitsubishi Heavy Industries Ltd. (supra) was rendered in the context of Indo-Japan Treaty in which Article XI provided that the laws in force in either of the contracting states will continue to govern the taxation of income in the respective contracting state except where specific provisions to the contrary is made in the treaty. We are in the present case concerned with Indo-USA treaty. We have perused the Indo-USA treaty. As contended by the learned counsel for the assessee, that there is no clause in the said treaty which provides that the laws in force in either of the contracting states will continue to govern the taxation of income in the respective contracting state except where specific provisions to the contrary is made in the treaty. The decision in the case of Mashreqbank PSC (supra) proceeded to hold that even in the absence of such a provision in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, gross receipts have to be subjected to tax at 30 per cent. Secondly, the AAR held that Article 7(3) cannot be pressed into service because of the specific provisions of section 44D of the Act. The decision in the case of Steel Authority of India Ltd. v. Asstt. CIT [2007] 105 ITD 679 (Delhi) is a case arising under the Indo-German DTAA in the context of Article 7(3) thereof which is in pari materia the same as that of Article 7(3) of Indo-US treaty. In this decision fees for technical services were treated as business profits and the gross receipt was held taxable and the assessee s claim for deduction of expenses was negative because of the specific provisions of section 44D of the Act. The decision of the ITAT Mumbai in the case of Dresdner Bank AG (supra) was a case where the assessee (non-resident) opted to be governed by the provisions of the Income-tax Act, 1961. Further the question in that case was taxability of interest paid to head office. In that context the Tribunal held that though head office and the branch office in India are one entity but when computing profits attributable to business carried out in India of the Indian Branch, the branch has to be fictio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development, interest, executive and general administrative expenses and other expenses incurred for the purposes of the enterprise as a whole (or part thereof which includes the permanent establishment). The language of this paragraph differs from that in the U.S. Model in one significant respect. Under the US Model, deductions are not subject to the limitations of local laws which may conflict with the general principle of the paragraph. Paragraph 3 in the Convention provides for such deductions in accordance with the provisions of and subject to the limitation of the taxation laws of the State in which the permanent establishment is situated. Indian law limits certain deductions of a permanent establishment with respect to head office expenditures. The deduction of amounts characterized as executive and general administration expenditures (not interest) is capped at five per cent of the adjusted total income of the permanent establishment. This limitation was included in the Convention because of the difficulties India has had in verifying claimed deductions for head office expenses and because of the desire of the Indians to avoid litigation on this issue. In practice, the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can no longer be followed in view of the later decisions referred to above. The above aspects were not brought to the notice of the bench when it decided the case of American Express Bank (supra). Consequently, the limitations for allowing certain expenses under the domestic law i.e., the Act, will apply to the income attributable to the permanent establishment. We therefore hold that the view taken in the case of American Express Bank (supra) can no longer be followed. We therefore agree with the submission on behalf of the revenue that as far as expenses incurred in India attributable to the business carried on in India are concerned, they have to be allowed subject to the limitations provided in the Act. We therefore allow ground No. 4 raised by the assessee. We however make it clear, as explained in the commentary by Klaus Vogel (supra) that the treaty provisions have to be perused carefully to find out whether the limitations provided by internal laws would apply or not. 35. As far as ground No. 5 is concerned, the definition of entertainment expenses under Explanation 2 to section 37(2A) makes it clear that expenditure on provision of hospitality of every kind by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... predetermined return to PMS clients. In the case of Unit Trust of India (UTI) it was alleged by the Assessing Officer that the assessee had committed an yield on the portfolio, since UTI in its letter had mentioned "If the yield on the fund is over 14 per cent per annum, the Bank will be entitled to keep appropriate amount towards fees, commission, etc. out of the same." The assessee reiterated that there was no commitment on their part to provide a predetermined yield to UTI and the inclusion of this clause by UTI in their letter was intended to reflect their expectation, keeping in mind the variety of investments that were allowed under the Portfolio Management Scheme. The attention of the CIT(A) was drawn by the assessee to another clause in the same letter wherein it was stated "We understand clearly that Bank of America makes no warranty or guarantee as to the performance of the Fund and that the investments are being made entirely on account of UTI". It was submitted that this clause which appears in the same letter as the other clause referred to by the Assessing Officer, and which has not been considered by the Assessing Officer, clearly indicates that the assessee did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility being properly "reflected" and not "disclosed" in the published accounts, the assessee submit that they have complied with the said guidelines. It was pointed out that even the RBI, which is the regulatory authority in banking matters, in its Inspection Report with reference to the assessee s position as on 29-11-1991 has confirmed that the assessee had complied with RBI guidelines in handling PMS funds. There has been no finding by the RBI that the amounts accepted under PMS represents deposits. It was argued that the above facts were brought to the notice of the Assessing Officer during the course of assessment, but these facts have not been considered in concluding whether the transactions under the PMS were violative of the guidelines laid down by RBI. Further, it was submitted that there is no material whatsoever from which the Assessing Officer could conclude that the amounts placed with the assessee under the PMS were in the nature of normal long-term deposits. 42. The CIT(A) allowed the claim of the assessee by following the order in assessee s own case for assessment year 1990-91. 43. Before us it is not in dispute that in assessee s own case similar issue had c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted for a period of less than one year on facts. The learned special counsel for the revenue was not able to contradict these factual findings of the first appellate authority. The assessee has also given a comprehensive reply to the Inspection Report of RBI and there was no further action from RBI indicating that the reply has been accepted. Thus we fully agree with these findings of the first appellate authority and dismiss ground No. 1 of the revenue. 44. In assessment year 1991-92 in assessee s own case in ITA No. 6133/Bom./95 the decision in assessment year 1990-91 was followed. Respectfully following the decision of the Tribunal in assessee s own case we dismiss Ground No. 1 raised by the revenue. 45. Ground No. 2 raised by the revenue reads as follows: "2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing the share issue expenses which were disallowed by the Assessing Officer thereby overlooking the fact that these expenses were not legitimate expenses of the business and even in the hands of its clients on whose behalf it has said to have been incurred, they were capital expenses;" 46. The Assessing Officer di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rving that expenditure was incurred on behalf of the clients. The expenditure incurred was certainly for the purpose of the business carried on by the assessee and, therefore, the same was allowable as business expenditure. Accordingly, we uphold the order of the ld. CIT(A) on this issues." Respectfully following the same we uphold the findings of the first appellate authority and dismiss this ground." This order of the Tribunal has since been confirmed by the Hon ble Bombay High Court as stated by the ld. Counsel for the assessee. In view of the above we find no merits in the Ground No. 2 raised by the revenue and the same is dismissed. 48. Ground No. 3 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in treating the securities as stock-in-trade instead of investments." 49. In the course of banking business, the assessee deals in various securities such as Central/State Government Securities, Units of Unit Trust of India, Bonds of Financial Institutions and taxable/tax fee bond of Public Sector Units. These securities are always classified by the assessee as stock-in-trade. As per Part I of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... category which generated trading profit and loss, and which the bank has offered for tax under the head of income "Profits and gains of business or profession". The Assessing Officer, without examining whether any particular security constitutes stock-in-trade or investment, held all securities are held on capital account. The Assessing Officer therefore rejected the lower valuation of the securities and consequent loss on such valuation was not allowed by the Assessing Officer. It was the plea of the assessee that securities in the case of a banking company would be its stock-in-trade. The assessee claimed that in keeping with the assessee s policy of valuing "current" securities on the basis of market quote, the profit/loss on valuation of securities held as stock-in-trade, included in the total income for assessment years 1991-92, 1992-93 and 1993-94 are as follows: Assessment Year Profit/Loss on valuation of securities. 1991-92 2,728,449 Profit 1992-93 (104,207,126) Loss 1993-94 193,093,170 Profit The assessee pointed that that it has determined the market value of these securities by obtain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penalty paid to RBI which was in the nature of penalty for infraction of RBI direction which is the law for banks. The learned CIT(A) has erred in treating it as a minor default incidental to carrying on of business for it were so there would be no penalty for such default." 22. The relevant facts are like this. During the course of assessment proceedings the Assessing Officer noticed that the assessee has paid Rs. 19,000 to the Reserve Bank of India. The Assessing Officer observed that, as held by Hon ble Supreme Court in the case of Haji Aziz Abdul Shakoor Bros. v. Piara Singh [1980] 124 ITR 40, penalties are not deductible as infraction of law is not a normal incident of business. The Assessing Officer further observed that the payments made by the bank by way of penalties have to be viewed as incurred "in some character other than that of the trader". With these observations, the Assessing Officer disallowed the payment made to the Reserve Bank of India. Aggrieved by the stand so taken by the Assessing Officer, assessee carried the matter in appeal before the Ld. CIT(A) who reversed the action of the Assessing Officer and observed as follows: "20. The amount was paid to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that Assessing Officer has disallowed only 25 per cent of expenditure on seminars/meetings because a part of this expenditure is likely to be in the nature of entertainment expenses incurred on hospitality extended to customers. The learned CIT(A) has also overlooked that any expenditure covered under section 37(2A) is excluded from section 37(1) by way of non obstate clause". "6. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in treating expenditure on presentation articles as not of advertisement kind and accordingly allowing the whole of it under section 37(1) of the Income-tax Act." "7. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in not including the other expenses while calculating the disallowance under Rule 6D of the Income-tax Rules." "9. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing the expenses on guest house thereby ignoring the provisions of section 37(4) of the Income-tax Act". 55. As far as Ground No. 5 is concerned, it is a recurring issue and has been decided in favour of the assessee by the Tribunal in assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1638/M/98 is an appeal by the revenue against the order dated 10-11-1997 of CIT(A) VII, Mumbai relating to assessment year 1993-94. The assessee has filed a Cross Objection against the very same order of the CIT(A). 60. Ground No. 1 raised by the revenue reads as follows: "1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of Rs. 80,22,76,000 made on account of losses in respect of sale of securities." 61. The assessee is a banking company incorporated in the United States and regulated by the provisions of the Banking Regulation Act, 1949. In the course of its normal business, the assessee buys and sells various types of securities. The securities thus constitute stock-in-trade of the assessee. In addition, the assessee is required to maintain stock of securities to comply with the provisions of the Banking Regulation Act, 1949. The securities are, therefore, trading assets in the assessee hands. As required under RBI s guidelines, the assessee have classified these securities as "current investments" in its accounts. In the past also these securities have been classified as "current investments". Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on 20-6-1992. It was pointed out that all but one transaction referred to by the Assessing Officer had value dates prior to 20-6-1992, the date on which the RBI circular was issued. 64. The assessee also submitted that the Special Court in the case of A.K. Menon, Custodian v. Canbank Financial Services Ltd. (Misc. Application No. 53 of 1993), had held "A Bankers Receipt is in the nature of a document of title to the equivalent of the securities mentioned therein. It is a document which is ordinarily used in the course of sale and purchase of securities. It is a proof of the control of the possession or control over the equivalent of the securities mentioned therein. By delivery of a Bankers Receipt the Institution/Bank receiving , it is authorized not just to receive but also to transfer the equivalent of the securities mentioned in the Bankers Receipt. Therefore, in effect, by delivery of the Bankers Receipt what has taken place is a transfer in the property of the goods itself." The Special Court further held "In these transactions very often the selling Institute or Bank may not have actual securities in their possession. They may themselves be holding only a Bankers Rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above plea of the assessee. It was the plea of the assessee that the Assessing Officer s conclusion that where SGL facility was available, the issue of BRs did not constitute valid delivery, was not correct and that in coming to such conclusion the Assessing Officer failed to appreciate or understand that the assessee could not have issued SGL forms to counterparties in cases where the stock of a particular security in assessee s Investment Account was held in the form of BRs or physicals. The Assessing Officer held that securities, being capital assets had not been transferred and did not give rise to an allowable loss of Rs. 802,276,000. He further held that the said loss could not be set off against the assessee s other income. 66. On appeal by the assessee the CIT(A) held as follows: "10. I have very carefully considered the submissions given by the appellant in this regard. I have also considered the reasons advanced by the Assessing Officer, the arguments of the appellant and the facts of the case. Respectfully following the ITAT s order in the appellant s own case for the assessment year 1983-84, and CIT(A) s order in the appellant s own case for the assessment year 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Special Court in the case CanBank Financial Services (supra) should be upheld. The learned D.R. relied on the order of the Assessing Officer. 68. We have considered the rival submissions. We are of the view that on both counts the order of the CIT(A) has to be upheld. Firstly, there was physical delivery in the form of BR s and following the special court decision, we have to hold so. If we assume that there was no delivery and consequently a violation of RBI norms, then also, following the decision in the case of American Express Bank (supra), the loss has to be allowed a incidental to the business. In this regard, we may usefully refer to the relevant observations in the case of American Express Bank (supra): "27. 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 losses from such transactions are losses from illegal business and are generally not allowable. Thereafter the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Annamalai Chettiar [1972] 86 ITR 607, where it was pointed out, that business income is to be computed on ordinary principles of commercial accounting. Section 37 did not apply, where business loss is concerned. Only where business expenditure is claimed, section 37 would be relevant. This decision of the Supreme Court in Quereshi s case (supra) highlights the distinction between a business loss and business expenditure and Explanation to section 37(1) would be relevant only when claiming deduction of expenditure while computing income. The earlier trend of allowing expenditure which are illegal while computing income from illegal business and not allowing illegal expenditure while computing income of lawful business did put a person in il ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer, also drawn his attention to the fact that not only where the transactions in question duplicated by the auditors in different schedule of the special audit report, they also appeared in one schedule as resulting in a "loss" of Rs. 55,459,000 while appearing in another schedule of the same report as resulting in a net profit of Rs. 24,179,000. The relevant extract from the assessee s letter dated 13-9-1996 to the Assessing Officer was as follows: "At the hearing on 9-9-1996 we discussed item No. 2 of the show cause notice dated July 10,1995 which states that losses incurred in buy back transactions in Government and other approved securities in which Bank of America did not have sufficient balance amounted to Rs. 5.55 crores in the month of April 1992. The list of such transactions referred to in item No. 2 of the show-cause notice are set out in Schedule 'G of the special audit report of J.K. Khanna Co. On checking J.K. Khanna s audit report it is observed that the transactions listed in Schedule 'G , in which the Bank was alleged to not have had sufficient stock of securities and which, in the opinion of the auditors resulted in a "loss" of Rs. 5.5 crores, also app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. Besides, the so called loss has not been debited to the Profit and Loss Account and as a matter of fact, such loss has not been booked anywhere in the account. From a study of both Schedule "G" and Schedule "C", I am inclined to agree with the computation made in Schedule "C". The profit emanating thereon has been duly accounted for and offered to tax. Therefore, in my considered opinion, there is no loss which can be disallowed. In the result, the disallowance of loss of Rs. 5,54,59,000 is not upheld and the same is deleted." 74. Before us the ld. D.R relied on the order of the Assessing Officer. We have considered his submission and are of the view that the order of the CIT(A) has to be upheld. Admittedly the case of short sales sought to be made by the Assessing Officer is on an assumption that the assessee did not have securities which it sold. This assumption is on the basis that BR s do not constitute evidence of holding. This assumption has rightly held by the CIT(A) to be incorrect in view of the decision of the Special Court, in the case of Canbank Financial Services Ltd. (supra). Secondly, factually the basis of computation of loss itself has been established by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly mentions that it is a non-banking finance company" and that in the case of American Express Bank for assessment year 1991-92, the special auditors had listed Kotak Mahindra Finance Ltd. as one of the brokers with which the bank had securities transactions" As regard Pennar Patterson Securities Ltd. the DCIT stated - " the certificate merely mention that the company is not involved in any Government securities broking". The assessee vide letter dated 27-12-1995 had drawn the Assessing Officer s attention to the fact that in respect of transactions with Panner Finance and Panner Patterson, the auditors had stated that these transactions were done through broker "Paters" which is a different entity from Panner Finance and Panner Patterson. The Assessing Officer however concluded that securities transactions with brokers as the counterparty were violative of the Securities Contract Regulation Act, 1956. 79. On appeal by the assessee the CIT(A) deleted the addition made by the Assessing Officer for the following reasons. "44. I have considered this issue carefully. In coming to such a conclusion, the Assessing Officer has heavily relied on the case of American Express Bank for as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances, we confirm the order of CIT(A) and dismiss ground No. 4 of the revenue. 81. Ground No. 5 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs. 1,05,66,930 being a difference having been taxed which represents the difference in contract and delivery rates for purchases and sale of securities." 82. In the ordinary course of business, the assessee contract to purchase/sale securities to various parties. These transactions are generally done with brokers. The deal is struck at a price for which the broker issues a contract note. The contract note discloses the rate for the purchase/sale of the security. The broker may in turn deal with another party for the purchase/sale of the same security. The broker s rate for the purchase/sale of this security may vary from the assessee s contract rate. On the delivery date, the broker issues instructions to the assessee to take from or give delivery to various parties, the securities contracted to be bought or sold. At the same time, the broker issues instructions for the payment/receipt of the consideration. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the broker through whom the transaction has been concluded, subject to the limits specified in the assessee internal policy guidelines. The assessee submitted that apart from the brokerage referred to above, the assessee have not paid any other brokerage. Further, the amount of Rs. 10,566,930 has not been debited by the assessee to their profit and loss account and have consequently not claimed the same as a deduction. The assessee pointed out that all payments made to or received from the brokers are by crossed and account payee cheques. 84. The Assessing Officer however rejected the above explanation and taxed the difference in contract and delivery rate for purchase and sale of securities. 85. On appeal by the assessee, the CIT(A) deleted the addition made by the Assessing Officer holding as follows. "50. In this connection, I have gone through certain concrete examples given in the paper book to drive home the fact that the difference in the contract and delivery rates represents the amount to be paid to the broker and is not income of the appellant. This difference was actually paid, that too, through crossed account payee cheques. In this connection, I have also g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght 9 per cent HUDCO 1997 (face value Rs. 20 crores) on 27-4-1992 from CANFINA (Deal No. 4624) at the rate of Rs. 90 when the prevailing market rate of that security on that day was Rs. 85.33, the Assessing Officer made an addition of Rs. 93,40,000 to the total income of the assessee. The audit report further stated that due to the higher rate contracted with CANFINA the assessee paid a higher amount of Rs. 9,340,000 over the prevailing market rate. 89. The assessee explained to the Assessing Officer vide their letter dated 27-11-1995 that the prevailing market rate of Rs. 85.33 referred to in the special audit report related to Deal No. 4641 for sale of 9 per cent HUDCO 1997 (face value Rs. 7.5 crores) on 27-4-1992 to Apollo Tyres. The assessee had explained to the Assessing Officer that the auditors had failed to realize that they had themselves classified transaction with Apollo Tyres (Deal No. 4641) as the first leg of a ready forward transaction and, therefore, ought to have realized that the rate for ready forward transactions could not be compared with the rates of other spot transactions since the rates for ready forward transactions do not conform to market rates. The As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1993-94 includes Rs. 193,385,018 on account of profit on revaluation of outstanding spot purchase and sale contracts in securities as of 31-3-1993. In order to be consistent in their accounting treatment for all outstanding securities contracts, the assessee decided to mark-to-market also the outstanding forward purchase and sale contracts in securities. The revaluation of outstanding forward securities contract as of 31-3-1993 resulted in a loss of Rs. 291,848. The Assessing Officer rejected the assessee s claim for deduction on the ground that such revaluation is not allowed under the Income-tax Act, as a notional loss cannot be claimed as a deduction. 96. On appeal by the assessee, the CIT(A) held as follows: "71. On a careful consideration of the issue, I am of the view that revaluation of spot contracts and forward securities contracts is being made consistently. On account of such revaluation, profits are offered to tax and are taxed and by the same token, loss, if any, is also to be allowed. Consistency is the hallmark of this revaluation, both in respect of spot contracts and forward contracts, and since the appellants are following consistently the same method, the mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 105. Ground No. 1 raised by the assessee reads as follows: "The ld. CIT(A)VII, Bombay erred in confirming the decision of the learned Assessing Officer in not allowing interest of Rs. 12,453 paid to the Income-tax Authorities to be set off against interest of Rs. 19,715,128 received from the Income-tax authorities during the assessment year 1994-95." 106. This ground of appeal is identical to Ground No. 3 in ITA No. 421/M/96 for assessment year 1992-93. For the reasons stated therein this ground of appeal is allowed. 107. Ground No. 2 raised by the assessee is identical to Ground No. 4 raised in ITA No. 421/M/96 for assessment year 1992-93 and it reads as follows: 2. Expenditure incurred for your appellant s business in India be allowed in full under Article 7(3) of the Indo-US Tax Treaty. For the reasons stated while deciding Ground No. 4 in ITA No. 421/M/96, this ground of appeal of the assessee is dismissed. 108. In the result, the appeal by the assessee is partly allowed. ITA No. 2734/M/98 109. Ground No. 1 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in directing the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s during the Assessment year 1995-96." 118. This ground of appeal is identical to Ground No. 3 in ITA No. 421/M/96 for assessment year 1992-93. For the reasons stated therein this ground of appeal is allowed. 119. Ground No. 2 raised by the assessee is identical to Ground No. 4 raised in ITA No. 421/M/96 for assessment year 1992-93 and it reads as follows: 2. Expenditure incurred for your appellant s business in India be allowed in full under Article 7(3) of the Indo-US Tax Treaty. For the reasons stated while deciding Ground No. 4 in ITA No. 421/M/96, this ground of appeal of the assessee is dismissed. 120. In the result, the appeal by the assessee is partly allowed. ITA No. 5644/M/98: Revenue s appeal: 121. Ground No. 1 raised by the revenue reads as follows: "On the facts and in the circumstances of the case and in law the learned CIT(A) has erred in holding that provisions of section 44C are not applicable to the expenses of Rs. 7,15,67,655 barring expenditure pertaining to entertainment, gift and give aways out of it." 122. Both the parties agree that this ground of appeal is identical to ground No. 2 in ITA No. 421/M/96. For the reasons stated therein this g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 44A(1)(a) 0.10 per month from 1-4-1995 to 31-3-1997 on a tax refund of Rs. 2,00,12,453. It was also contended that the tax refund having been received by the appellant on 26-8-1997, the Assessing Officer ought to have paid interest under section 244A(1)(a) of the Act for the period from 1-4-1995 to 31-8-1997. 37. It is further contended that the Bombay High Court in the case of Associated Cement Companies Ltd. v. CIT 141 ITR 318 and in the case of CIT v. Pfizer Ltd. 191 ITR 626 has held that an assessee is entitled to interest upto the date of receipt of the refund order. The CIT(A) VII, Mumbai in the appellant s own case for assessment years 1987-88 and 1988-89 has held that interest payable to the assessee should be granted upto the date of receipt of the refund. 38. I have considered this issue carefully. As a matter of fact, this issue stands resolved in favour of the appellant by the orders of the learned CIT(A) in the earlier assessment years. Respectfully following the decision of the Bombay High Court in the cases cited supra, and also the decision of the learned CIT(A) in the appellants own case on the very same issue, I direct the Assessing Officer to grant interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) has erred in deleting the addition of Rs. 9,51,814 made on account of membership fees and subscription paid to clubs." 138. This ground of appeal is identical to ground No. 8 raised by the revenue in ITA No. 141/M/96 for assessment year 1992-93. For the reasons stated while deciding the aforesaid ground we dismiss the ground of appeal of the revenue. 139. In the result, the appeal by the revenue is dismissed. CO NO. 400/M/99 140. Ground No. 1 raised by the assessee reads as follows: "The ld. CIT(A) VII, Bombay erred in confirming the decision of the learned Assessing Officer in not allowing interest of Rs. 40,623 paid to the Income-tax Authorities to be set off against interest of Rs. 77,836,400 received from the Income-tax authorities during the assessment year 1996-97." 141. This ground of appeal is identical to Ground No. 3 in ITA No. 421/M/96 for assessment year 1992-93. For the reasons stated therein this ground of appeal is allowed. 142. Ground No. 2 raised by the assessee is identical to Ground No. 4 raised in ITA No. 421/M/96 for assessment year 1992-93 and it reads as follows: 2. Expenditure incurred for your appellant s business in India be allowed in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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