TMI Blog2016 (1) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing the decisions of the co-ordinate benches of this Tribunal in Asst. Year 1999-2000, rendered at paras 59 to 62 thereof, allow the assessee s claim put forth in ground no. 3 of its appeal. Disallowance of penal interest paid to RBI - HELD THAT:- Penal interest charged by RBI for violation of its guidelines/directives in respect of CRR, SLR etc. is not in the nature of infraction of law and is therefore allowable as deduction while computing the business income of the assessee and therefore allow the assessee s claim in this regard Settlement paid to Standard Chartered Bank - HELD THAT:- The client SCB claimed that the securities delivered to it were not those listed out by it for which an amount of ₹ 70.25 crores was admittedly paid by it, but others purchased from different counter parties. Obviously, SCB being a reputed client and keeping in mind, its own market reputation, the matter was settled through mediation agreement and Deed of Release and Indemnity by which the dispute was settled by the assessee making payment of ₹ 34.50 crores to SCB . On a careful appreciation of the facts and material on record and the judicial decisions cited, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... UM/1999, ITA NO. 5306/MUM/2001, ITA NO. 5472/MUM/2001 - - - Dated:- 22-1-2016 - SHRI JASON P. BOAZ, ACCOUNTANT MEMBER AND SHRI RAM LAL NEGI, JUDICIAL MEMBER For The Assessee : Shri Arvind Sonde For The Revenue : Shri Manjunatha Swamy, CIT-DR ORDER PER JASON P. BOAZ, AM : These are cross appeals, by the Assessee and Revenue, directed against the orders of the CIT(Appeals)-XVI, Mumbai dt. 30.3.1999 for A.Y 1995-96 and of the CIT(Appeals)-XLIV, Mumbai dt. 4.6.2001 for A.Y 1998-99. These appeals, having certain connected issues, were heard together and are being disposed off by way of this common order for the sake of convenience. ITA NO. 3176/Mum/1999 Assessee s appeal for A.Y 1995-96 2. The facts of the case, briefly, are as under :- 2.1 The assessee, a company engaged in the business of banking, filed its return of income for A.Y 1995-96 on 29.11.1995 declaring total income of ₹ 1,03,69,27,186/-. The case was taken up for scrutiny and the assessment was completed u/s 143(3) of the Income Tax Act, 1961 (in short the Act ) vide order dt. 23.2.1998; wherein after making certain disallowances and additions, the assessing officer ( AO ) det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rounds of appeal as they may be advised from time to time. 3.2 The assessee has also preferred an additional ground which is extracted hereunder :- Ground no. 7 Without prejudice to the appellants contention, the CIT(A) erred in not directing the AO to allow the appellant s claim for deduction of ₹ 12,01,37,563 being salaries paid to the expatriate officers for the periods 1984-85 to 1993-94 (relevant to the assessment years 1985-86 to 1994-95) since the tax thereon was paid during the year under appeal in accordance with the circular no. 685 issued by the CBDT. After careful consideration, the additional ground at sr. no. 7 (supra) is admitted by us for hearing and adjudication. 4. Ground no. 1 : Disallowance of broken period interest 4.1 In this ground, the assessee contends that the ld. CIT(A) erred in confirming the AO's disallowance of broken period interest of ₹ 4,37,76,815/- paid for broken period on securities purchased but not sold during the year. At the time of hearing, the ld. AR for the assessee submitted that this issue stands covered in favour of the assessee and against the revenue by various judicial pronouncements and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessee s hands the interest in respect of securities for which the due date for payment (coupon date) had not arisen in the accounting year ended 31.3.1995. 5.2.1 We have heard both the ld. AR for the assessee and the ld. DR for Revenue in the matter. The interest accrues on securities on the day after which it falls due for payment. As per the material on record it is seen that the assessee had not offered this interest income for tax in its declared total income. The AO was of the view that since the interest in respect of securities for which the due date of payment arises after the end of the previous year i.e. 31.3.1995, is the income of the assessee and proceeded to bring the same to tax in the assessee s hands. On appeal, the ld. CIT(A) upheld and confirmed the action of the AO. 5.2.2 Before us, the ld. AR could not bring on record any material to controvert the views taken by the authorities below. Rather, the ld. AR fairly conceded that this issue stands covered in favour of the Revenue by the decisions of the co-ordinate benches of this Tribunal in the assessee s own case in ITA No. 9587/Bom/1992 and 9588/Bom/1992 for Asst. Years 1989-90 and 1990-91 vide or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ronouncements cited and placed reliance on. We find that the issue in question, i.e. of the allowability of the expenses incurred on NRI deposit mobilization, has been considered and held in favour of the assessee by the decision of the co-ordinate benches of this Tribunal in ITA No. 9587 9588/Mum/1992 for Asst. Years 1989-90 and 1990-91 dt. 22.2.2006 and in ITA No. 2679/Mum/2004 for Asst. Year 1999-2000 vide order dt. 20.11.2015 at paras 59 to 62 thereof. As in the cited decisions (supra) in this year also, Revenue has not been able to bring on record any material evidence to controvert the view taken therein, we, therefore, following the decisions of the co-ordinate benches of this Tribunal in ITA No. 2679/Mum/2004 dt. 20.11.2015 for Asst. Year 1999-2000, rendered at paras 59 to 62 thereof, allow the assessee s claim put forth in ground no. 3 of its appeal. 7. Ground no. 4 : Disallowance of penal interest paid to RBI ₹ 5,70,38,075 7.1 In this ground, the assessee contends that the ld. CIT(A) erred in sustaining the disallowance of ₹ 5,70,38,075/- towards penal interest paid to RBI, without appreciating the fact that the interest was compensatory and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue is regarding disallowance of penal interest of ₹ 1,74,188/- paid to the Reserve Bank of India (RBI). At the assessment stage, the Assessing Officer found that the penalty had been levied by the RBI for infraction of certain directives of the RBI with reference to Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). The assessee claimed that the penalty was in the form of interest and compensatory was in nature and, therefore, was allowable. Rejecting the contention of the assessee, the Assessing Officer held that the penalty was levied for the purpose of infraction of law and, therefore, was not allowable, which was confirmed by the CIT(A). The learned Authorised Representative of the assessee pointed out that similar issue has been decided by the Cochin Bench of the Tribunal in the case of DCIT vs Dhanalakshmi Bank Ltd., reported in 76 TTJ 439, wherein the Tribunal held as under : Payment of penal interest to RBI, the assessee paid penal interest to RBI for non-maintenance of Cash Reserve Ratio (CRR) and/or Statutory Liquidity Ratio (SLR). The Assessing Officer disallowed such expenditure on the ground that the payment represented penal interest, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant securities/BR s had been delivered to SCB through the broker. In all these transactions, it was the common ground of SCB that the securities for which they had made payments were not delivered to them either by the assessee or the broker and that wherever such securities were received by SCB , the same were in respect of separate transactions entered into by them with other counter parties. The assessee submitted that it is acting as a mediatory to hold securities, collect dividends, obtain deliveries, ensure transfer in the name of client and deliver the same when the same client sells the same. It is further submitted that since buying or selling securities whether on its own account or on behalf of its customers is normal business of the assessee and therefore the assessee bank has claimed as deduction the amount of ₹ 34.50 crores as a business loss in pursuance of the mediation agreement. 8.2.2 On examination of the assessee s claim and submissions made in this regard, the AO noted that the dispute was in regard to the sale of the assessee and purchase by SCB of the following securities in the years 1991 and 1992, the details of which are as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities when the same are bought/sold by the clients. In this case too, in the year under consideration, the client of the assessee i.e. SCB had, inter alia, purchased certain securities for SCB as listed at S.Nos. 1 to 5 of page 20 of the order of assessment for ₹ 70.25 crores. It is submitted that its client, SCB , claimed that the securities for which they had made payments for were never delivered to them either by the assessee or the broker concerned and have therefore suffered a loss of ₹ 70.25 crores in these transactions. It is submitted that SCB being its reputed client at that point in time and to maintain its name and dignity in the market, the assessee company chose to settle this dispute through mediation of an independent party and finally in terms of the mediation agreement and Deed of Release and Indemnity dt. 12.12.1994 the dispute was settled by the assessee paying its client, SCB an amount of ₹ 34.50 crores out of the client s total claim of ₹ 70.25 crores. It is contended by the ld. AR that in the type of business the assessee is engaged in, such losses suffered by it is a business loss and should be allowed as a business loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee was also made in the normal course of its business and is to be allowed. Following the ratio of the decision of the co-ordinate bench for Asst. Year 2000-01 (cited supra), dealt with at paras 73 to 79 thereof, we set aside the orders of the authorities below and consequently allow the assessee s claim raised in ground no. 5 of this appeal. 9. Ground no. 6 : This ground being general in nature and not urged before us, is rendered infructuous and accordingly dismissed. 10. Additional Ground of appeal Sr. No. 7 10.1 In this ground the assessee submits that, without prejudice to its contentions, the ld. CIT(A) erred in not directing the AO to allow the assessee s claim for deduction of ₹ 12,01,37,563/-, being the salaries paid to the expatriate officers for the period 1984-85 to 1993-94 (relevant to Asst. Years 1985-86 to 1994-95) since the tax thereon was paid during the year under consideration in accordance with CBDT circular no. 685. In support of this contention, the ld. AR referred to the decision of the co-ordinate bench of this Tribunal in the assessee s own case in ITA No. 628/Mum/1999 and others dt. 15.2.2007 for Asst. Year 1992-93. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed therefrom under Chapter XVII-B. It is not the case of assessee that either the tax has been paid by the employees on such payments or has been deducted by the assessee from such payments under Chapter XVII-B. The only contention of assessee s counsel is that tax has been paid under Chapter XVII-B alongwith interest as per board circulars. According to her, such payments would still be payments under Chapter XVII-B and consequently no disallowance could be made. In our opinion, this contention does not help the assessee. As far as Board Circular is concerned, it only gives immunity from penalty and prosecution against default of non-deduction of tax and payment thereof under Chapter XVII-B and does not provide any benefit with reference to deduction of salary under section 37 read with section 40(a)(iii). Salaries paid outside India are allowable under section 37 itself but section 40 which is a non obstante provision disallows such payments as deduction under section 37 if the tax has not been paid thereon nor has been deducted therefrom under Chapter XVII-B. This provision being a prohibitive or disincentive provision, has to be considered strictly. Since no tax has been d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efer to the order of ITAT Mumbai Bench in the case of British Bank of Middle East, relied upon by the learned counsel for the assessee. The Tribunal considered and decided this issue in the following manner at paras 18 and 19 of the order: 18. In fourth ground of appeal, revenue is aggrieved that the CIT (A) erred in deleting the disallowance of salaries in respect of expatriate staff posted in India. 19. There is no dispute that the expatriate employees in question were working exclusively for the India operations. Following the discussions in paragraph 5 above, these expenses cannot be treated as head office expenses and have to be allowed in computation of income of India operations which is taxable in India. This view is also directly approved by Tribunal's decision in the case of ABM Amro Bank vs. JCIT, a copy of which was placed before us at page 13 of the compilation. In this view of the matter, and having heard rival contentions on the issue, we see no reasons to disturb the findings of the CIT (A). We confirm the same and decline to interfere in the matter. 29. From the above it is seen that in the case of British Bank of Middle East, the Tribunal neve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard. In response thereto, the assessee submitted that these employees rendered service in India and the salaries were paid to them by the Head office; that the tax thereon was paid in India and were therefore eligible for deduction while computing taxable income. The AO rejected the assessee s claim with liberty to claim benefit u/s 44C of the Act. It was prayed that the order of the ld. CIT(A) be reversed and that of the AO restored on this issue. 13.2 The ld. AR submitted that the issue raised in this ground stands covered in favour of the assessee by, inter alia, the decision of the co-ordinate bench of this Tribunal in the assessee s own case for Asst. Year 1999-2000 in ITA No. 2519/Mum/2004 dt. 20.11.2015 (paras 11 to 17 thereof). 13.3 We have heard the rival contentions on this issue and perused and carefully considered the material on record, including the judicial decisions cited. We find that this issue raised by Revenue in this appeal stands covered, inter alia, by the decision of the co-ordinate bench of this Tribunal in the assessee s own case for Asst. Year 1999-2000 in ITA No. 2519/Mum/2004 dt. 20.11.2015. Therefore, following the aforesaid order of the co-o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dt. 18.1.2001; wherein after making certain disallowances and additions, the assessing officer ( AO ) determined the assessee s income at ₹ 267,13,64,249/-. Aggrieved by the order of assessment for A.Y 1998-99 dt. 18.1.2001, the assessee preferred an appeal before the CIT(A)-XLIV, Mumbai who disposed off the appeal vide order dt. 4.6.2001 allowing the assessee partial relief. Both the assessee and revenue are aggrieved by the aforesaid order of the ld. CIT(A) for A.Y 1998-99 and have preferred cross appeals. We will take up the assessee s appeal first. 17.1 The assessee s original grounds of appeal being elaborate and argumentative, it subsequently filed concise grounds of appeal which are as under : Ground no. 1 The Commissioner of Income Tax (Appeals) - XLIV [CIT(A)] erred in upholding the action of the Additional Commissioner of Income Tax, Special Range 15 (AO) of disallowing ₹ 18,78,80,785 paid by your appellant towards broken period interest on securities purchased but not sold during the year. Ground no. 2 The CIT(A) erred in upholding the action of the AO of bringing to tax the interest in respect of securities for which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sors HSBC) for Asst. Year 1990-91; (vii) American Express International Banking Corporation v. CIT (258 ITR 601) (Bom.); (viii) CIT v. Deutsche Bank AG in SLP No. 345 of 2004 vide order dt. 27.1.2004; 18.2 Per contra, the ld. DR for revenue placed strong reliance on the order of the ld. CIT(A) on this issue. 18.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited (supra). We find that this ground raised by the assessee is covered in favour of the assessee by the orders and decisions of various courts including those of the co-ordinate benches of the Tribunal in the assessee s own case (cited supra); including the recent decision of the L Bench of the ITAT, Mumbai in ITA No. 2519/Mum/2004 dt. 20.11.2015 at paras 5 to 10 thereof. Respectfully following the aforesaid decisions, we reverse the order of the ld. CIT(A) in confirming the disallowance of ₹ 18,78,80,785/- on account of broken period interest and allow the assessee s claim in this regard. Consequently ground no. 1 of the assessee s appeal is allowed. 19. Ground no. 2 : Interest accrued but not due 19.1 This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently, we dismiss ground no. 2 raised by the assessee. 20. Ground no. 3 : Disallowance of NRI Deposit Mobilization Expenses ₹ 4,31,98,998 20.1 In this ground, the assessee contends that the ld. CIT(A) erred in upholding the action of the AO in disallowing the expenses of ₹ 4,31,98,998/- incurred in respect of NRI Deposit Mobilization by considering the same to be Head Office expenses, when in fact the said expenses were incurred wholly and exclusively for its Indian operations. At the time of hearing, the ld. AR for the assessee submitted before the Bench that an identical issue had come up before co-ordinate benches of this Tribunal and was held in favour of the assessee in the assessee s own case in ITA Nos. 9587 9588/Mum/1992 for Asst. Years 1989-90 and 1990-91 vide order dt. 22.2.2006, at para 8 thereof and in ITA No. 2679/Mum/2004 for Asst. Year 1999-2000 vide order dt. 20.11.2015 at paras 59 to 62 thereof. In addition thereto, the ld. AR also placed reliance on the decision of the Hon ble Bombay High Court in the case of Emirates Commercial Bank Ltd. (134 Taxman 682). 20.2 Per contra, the ld. DR placed strong reliance on the orders of the ld. CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the facts in the matter and fresh adjudication thereon, after affording the assessee adequate opportunity of being heard. Consequently, ground no. 4 of the assessee s appeal is treated as allowed for statistical purposes. 22. Ground no. 5 : This ground being general in nature and not urged before us, is rendered infructuous and accordingly dismissed. 23. In the result, the assessee s appeal for Asst. Year 1998-99 is partly allowed. ITA NO. 5306/Mum/2001 Revenue s appeal for A.Y 1998-99 24. The grounds raised by revenue in this appeal are extracted hereunder : On the facts and in the circumstances of the case and in law the ld. CIT(A), Mumbai has erred in :- 1. deleting the disallowance of ₹ 10,35,52,164/- being the salaries paid to expatriate employees in India. 2. deleting the disallowance of ₹ 29,35,546/- being guest house expenses on the maintenance of a holiday home. 3. restricting the disallowance to ₹ 1,00,000/- instead of ₹ 1,34,83,078/- made by the assessing officer out of entertainment expenses, even though the assessee has not furnished any details in respect of these expenses. 4. deleting the additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleting the disallowance made by the AO u/s 37(2A) of the Act, in respect of subscriptions to clubs, treating the same in the nature of entertainment expenditure. The ld. DR was heard in support of the grounds raised. 26.2 The ld. AR for the assessee submitted that the issue in question is covered in favour of the assessee by the decision of the co-ordinate bench of this Tribunal in the assessee s own case for Asst. Year 1992-1993 in ITA No. 628/Mum/1999 vide order dt. 15.2.2007, at para 32 thereof, following the decision of the Hon ble Bombay High Court in Otis Elevators (195 ITR 682). In this regard, the ld. AR for the assessee also placed reliance on the decision of the Hon ble Apex Court in the case of United Glass Manufacturing Co. Ltd. (Civil Appeal No. 6447 of 2012) (SC). 26.3 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. We find that this issue is covered in favour of the assessee by the decisions of the co-ordinate bench of this Tribunal in the assessee s own case for Asst. Year 1992-93 in ITA No. 628/Mum/1999 dt. 15.2.2007 at para 32 thereof, following the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the ld. CIT(A) on this issue. The ld. AR submitted that an identical issue was considered and adjudicated upon in the assessee s own case for Asst. Year 1999-2000 in ITA No. 2519/Mum/2004 dt. 20.11.2015 wherein at paras 29 to 34 thereof, the co-ordinate bench of the Tribunal had rejected a similar ground raised by Revenue and held in favour of the assessee. The ld. AR further submitted that in coming to the decision, the co-ordinate bench in its aforesaid order (supra) had considered the decision of the Hon ble Delhi High Court in the case of DIT v. Apparel Export Promotion Council I (2010) 1 Taxman.com 222 (Delhi), wherein the Hon ble Delhi High Court observed and held that the assessee is entitled to deduction for the expenditure incurred for entertainment of staff as well as outsiders for the promotion of business. The ld. AR also placed reliance on the following :- (i) Credit Lyonnais (2013) 21 ITR (T) 359 (Mumbai), and (ii) Finance Act, 1997 deleting the provisions of section 37(2A) of the Act. The ld. AR prayed that, in the light of the above factual and judicial matrix of the case, the order of the ld. CIT(A) be upheld on this issue. 27.5 We have heard the riva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. A reading of the Section shows that no deduction would be allowed in respect of any expenditure for earning an income which is not to be subjected to tax. The appellant s claim is that the tax-free income has not come out of its equity capital as well as reserves. It has been argued that no expenditure has been claimed for earning the tax-free income. It was therefore argued that as no expenditure has been incurred for earning the tax-free income, the question of disallowance of any such expenditure did not arise. On the other hand the assessing officer has held that part of the borrowed funds had been utilised for acquiring the tax-free bonds and therefore on proportionate basis he disallowed the interest expenses. In the assessment order the assessing officer has not established any nexus between the borrowings and the investment in the tax-free bonds. Incidentally, the investments in the tax-free bonds were made in the past years. The assessing officer has disallowed an amount of interest on the basis of proportion at ₹ 14,65,78 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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