9911796707
TMI Blog2016 (1) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... 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') determined the assessee's income at Rs. 156,15,95,590/-. Aggrieved by the order of assessment for A.Y 1995-96 dt. 23.2.1998, the assessee preferred an appeal before the CIT(A)-XVI, Mumbai who disposed off the appeal vide order dt. 31.3.1999 allowing the assessee partial relief. Both the assessee and revenue are aggrieved by the aforesaid order of the ld. CIT(A) for A.Y 1995-96 and have preferred cross appeals. We will take up the assessee's appeal first. 3.1 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) - XVI [CIT(A)] erred in upholding the action of the Deputy Commissioner of Income Tax, Special Range 15 (AO) of disallowing interest of Rs. 4,37,76,815 paid for broken period 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his issue stands covered in favour of the assessee and against the revenue by various judicial pronouncements and orders rendered in the assessee's own case. In support of this contention, the ld. AR placed reliance, inter alia, on the following decisions: (i) The Hongkong & Shanghai Banking Corporation Ltd. v DCIT in ITA Nos. 9587/Mum/92 and 9588/Mum/92 vide orders dt. 22.2.2006 for Asst. Years 1989-90 and 1990-91 at para 3 of the order; (ii) The Hongkong & Shanghai Banking Corporation Ltd. v DCIT in ITA No. 4802/Mum/97 dt. 29.11.2006 for Asst. Year 1991-92 at paras 5 to 10 thereof; (iii) The Hongkong & Shanghai Banking Corporation Ltd. v JCIT in ITA Nos. 709, 2604, 2605, 4709/Mum/99 dt. 15.2.2007 for Asst. Years 1992-93 to 1994-95, 1996-99 and 1997-98 at paras 24 to 37 thereof; (iv) Mercantile Bank Ltd. v. ACIT in I.T Reference No. 153 of 1996 and RA Nos. 865 and 866 of Bombay/1992 order (A.Y's 1980-81 and 1992-92) dt. 9.10.2002; (v) ADIT (International Taxation) v. Hongkong and Shanghai Banking Corporation Ltd. in ITA Nos. 2591 and 2520/Mum/2004 dt. 20.11.2015; (vi) Supreme Court in the case of British Bank of Middle East (through their successors HSBC) for Asst. Yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 9587/Bom/1992 and 9588/Bom/1992 for Asst. Years 1989-90 and 1990-91 vide order dt. 22.2.2006; wherein at para 2 thereof, this issue was decided against the assessee by holding that the retrospective amendment has been brought into section 145 of the Act w.e.f. Asst. Year 1989-90, interpreting that any interest on securities not charged to tax in an earlier year shall be charged to tax on receipt basis in a subsequent year. It was submitted that similar views were taken by the co-ordinate benches of ITAT in the assessee's own case in ITA No. 709/Mum/1999 for Asst. Year 1992-93 vide order dt. 15.2.2007 at paras 22 and 38 thereof and in ITA No. 2679/Mum/2004 dt. 20.11.2015 for Asst. Year 1999-2000 at paras 55 to 58 thereof. 5.2.3 Taking into account the facts and circumstances of the case and the judicial pronouncements placed before us in the matter, and following, inter alia, the decisions of the co-ordinate bench of the Tribunal in the assessee's own case in ITA No. 2679/Mum/2004 dt. 20.11.2015, we hold that this issue is covered against the assessee and therefore uphold the order of the ld. CIT(A) on this issue. Consequently, we dismiss ground no. 2 raised by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the interest was compensatory and not penal in nature and was thus allowable as deduction in arriving at the business income of the assessee. Before us, the ld. AR for the assessee contended that this issue was considered and held in favour of the assessee, as an allowable deduction, in a number of judicial pronouncements. In support of this contention, the ld. AR for the assessee placed reliance on the following decisions : i) Dhanalakshmi Bank Ltd. [SLP(C) No. 2252 of 2004] 277 ITR (St) 3 wherein the SLP filed by the Department against the decision of the Hon'ble Kerala High Court, inter alia, on the question of whether penal interest charged by RBI for contravention of the provisions of the Banking Regulation Act, 1949 in relation to non-maintenance of SLR was in the nature of penalty and not allowable as deduction, was dismissed; ii) State Bank of India in ITA No. 3403/Mum/99 dt. 17.9.2009 for Asst. Year 1995-96; iii) Deutsche Bank A.G, Mumbai in ITA No. 4699/Mum/1999 and ITA No. 4396/Mum/2000 for Asst. Years 1996-97 and 1997-98; iv) Deutsche Bank A.G, Mumbai in ITA Nos. 3082 to 3084/Mum/2000 for Asst. Years 1993-94 to 1995-96; v) Dhanalakshmi Bank Ltd. (76 TTJ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esented penal interest, which is not justified. The word 'penalty' used in section 24(6)(a) of the Banking Regulation Act, 1949, would not lead to the conclusion that interest paid by the assessee is not interest but penalty for infraction of law. Penal interest is automatic in nature and without any further action on the part of the assessee. Penal interest could not be considered as having been incurred for any infraction of law. The CIT(A) was, therefore, justified in deleting the disallowance." 3.1 Nothing contrary was brought to our knowledge by the Revenue in this regard. In view of the above, we hold that the alleged penal interest is not of the nature of penalty for infraction of law and as such is allowable as business expenditure." 7.3.2 Respectfully following the decision of the co-ordinate bench of the ITAT, Mumbai in the case of Deutsche Bank A.G in ITA No. 4699/Mum/1999 and 4396/Mum/2000 dt. 4.5.2007 for the Asst. Years 1996-97 and 1997-98 (supra) we hold that the 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escription Purchase date Purchase price paid (Rs.) 1 13.5 crores 13% CIL (11/2) 16/03/1992 13.54 crores 2 16.5 crores 13% NPC (23/2) 16/12/1991 18.75 crores 3 27.5 crores 9% IRFC (1/1) 10/02/1992 25.45 crores 4 5 crores 9% PFC (13/2) 03/03/1992 4.63 crores 5 10 crores 9% IRFC (1/1) 24/04/1992 7.88 crores Total 70.25 crores 8.2.3 According to the AO, as per RBI guidelines dt. 2.5.1989 for client investment scheme, it is clear that the risks of loss on such investments were to be borne by the clients, in this case 'SCB', and not by the assessee bank, and in these circumstances it was not the business loss of the assessee. The AO also referred to the adverse comments on the functioning of the assessee bank in the Janki Raman Committee's report to buttress his point that the assessee was only performing 'agency' functions on behalf of its clients and therefore the claim of the assessee that it is a business loss of the assessee is not acceptable as the transactions referred to in the dispute with 'SCB' does not arise in the normal course of the assessee's business. The AO observed that except for making the claim that the loss of Rs. 70.25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim of business loss in respect of payments made to make good the loss suffered by the assessee's client in share transactions. The ld. AR submits that in view of the factual matrix of the case and the judicial precedent in the assessee's own case (supra), the assessee's payment of Rs. 34.50 crores to its client 'SCB' be allowed as business loss. 8.4 Per contra, the ld. DR supported the orders of the authorities below on this issue. 8.5 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. In the case on hand, the facts that emerge from the record are that the assessee in the course of its business acts as a mediatory to hold securities, collect dividends, obtain deliveries, ensures transfer in the name of its clients and delivers the securities when the same are sold by the clients. In the case of 'SCB' also, the client 'SCB' had purchased certain securities (listed supra). The client 'SCB' claimed that the securities delivered to it were not those listed out by it for which an amount of Rs. 70.25 crores was admittedly paid by it, but others purchased from different counter parties. Obviously, 'SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of salaries to expatriate employees in the light of CBDT's circular no. 685 dt. 12.8.1994 held as under at paras 27 to 29 : "27. We have considered the rival submissions and have carefully gone through the decisions cited before us. Admittedly the payment of salaries was made by the head office without deduction of tax at source as required under section 40(a)(iii) of the Income-tax Act. As per this provision any payment of salaries outside India is not allowable if the tax on such salaries has not been paid or deducted under Chapter XVII-B of the Income-tax Act. The admitted position is that in the present case tax was not deducted/paid as per the requirements of Chapter XVII-B. The Board issued Circular N. 685 dated 12th August 1994 which permitted the defaulting companies to pay the amount of TDS along with interest, with the promise that if such payment is made, no penalty will be levied or prosecution will be launched. In the present case the assessee made the payment of tax and interest pursuant to the Board's Circular. In the case of ANZ Grindlays Bank (supra) the facts were similar and the Tribunal recorded a finding of fact that salaries to expatriate employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other sum chargeable to tax which is payable outside India on similar terms but the proviso to clause (i) specifically allows such payments as deduction in the year in which the assessee pays or deducts the tax under Chapter XVII-B. It clearly provides that deduction is to be allowed in the year in which obligations arising to the assessee are complied with. 47. However, there is no such proviso to clause (iii) of section 40(a). That clearly shows the intentions of the Legislature to the effect that disallowance is not to be made only where the tax has been deducted or paid within the prescribed time under Chapter XV11-B. If the Legislature had intended to give similar benefit, it could have easily inserted a similar proviso to clause (iii). Deliberate departure clearly indicates the intention of the Legislature not to provide similar benefits in the case of payments of salaries. If the interpretation put forth by assessee's counsel is accepted, then the proviso to section 40(a)(i) would become redundant. Hence such interpretation cannot be accepted. In our considered opinion, the prohibitive provisions should be construed in the manner which helps the honest and law-abiding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prevailing in the case on hand for Asst. Year 1992-93. As brought out by the co-ordinate bench in its order in ITA No. 628/Mum/1999 dt. 15.2.2007 (supra), after considering the CBDT's circular no. 685, the assessee's admitted position being that the taxes were not deducted or paid as per the requirements of Chapter XVII-B, it is hit by the provisions of section 40(a)(iii) of the Act and therefore the assessee's claim cannot be entertained. In this view of the matter, we dismiss the additional ground no. 7 raised by the assessee. 11. In the result, the assessee's appeal for Asst. Year 1995-96 is partly allowed. ITA NO. 3138/Mum/1999 - Revenue's appeal for A.Y 1995-96 12. 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) has erred in holding that salary paid to expatriate staff employed in India can not be regarded as head office expenses, thereby he further erred in deleting the addition of Rs. 13,66,540/-. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 14,58,735/- made u/s 37(2A) of the Act." 13. Ground n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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). 14.3 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 the Hon'ble Bombay High Court in Otis Elevators (195 ITR 682). We also find that this issue in question is no longer res integra in view of the decision of the Hon'ble Apex Court in the case of United Glass Manufacturing Co. Ltd. (Civil Appeal No. 6447 of 2012) (SC). We, therefore, uphold the order of the ld. CIT(A) on this issue an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur appellant craves leave to add to alter or modify the above grounds of appeal as they may be advised from time to time." 18. Ground no. 1 : Disallowance of broken period interest 18.1 In this ground, the assessee contends that the ld. CIT(A) erred in confirming the AO's disallowance of broken period interest of Rs. 18,78,80,785/- 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 orders rendered in the assessee's own case. In support of this contention, the ld. AR placed reliance, inter alia, on the following decisions: (i) The Hongkong & Shanghai Banking Corporation Ltd. v DCIT in ITA Nos. 9587/Mum/92 and 9588/Mum/92 vide orders dt. 22.2.2006 for Asst. Years 1989-90 and 1990-91 at para 3 of the order; (ii) The Hongkong & Shanghai Banking Corporation Ltd. v DCIT in ITA No. 4802/Mum/97 dt. 29.11.2006 for Asst. Year 1991-92 at paras 5 to 10 thereof; (iii) The Hongkong & Shanghai Banking Corporation Ltd. v JCIT in ITA Nos. 709, 2604, 4709/Mum/99 dt. 15.2.2007 for Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 31.3.1998, 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. 19.2.2 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 order dt. 22.2.2006; wherein at para 2 thereof, this issue was decided against the assessee by holding that the retrospective amendment has been brought into section 145 of the Act w.e.f. Asst. Year 1989-90, interpreting that any interest on securities not charged to tax in an earlier year shall be charged to tax on receipt basis in a subsequent year. It was submitted that similar views were taken by the co-ordinate benches of ITAT in the assessee's own case in ITA No. 709/Mum/1999 for Asst. Year 1992-93 vide order dt. 15.2.2007 at paras 22 and 38 thereof and in ITA No. 2679/Mum/2004 dt. 20.11.2015 for Asst. Year 1999-2000 at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions 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. 21. Ground no. 4 : Disallowance of fees charged by Master Card & Visa towards services rendered by them - Rs. 2,10,29,000 21.1 In this ground, the assessee contends that the ld. CIT(A) erred in upholding the action of the AO of disallowing the expenses of Rs. 2,10,29,000/- in respect of fees charged by Master Card and Visa towards services rendered by them. 21.2 We have heard both parties in the matter and perused and carefully considered the material on record; including the judicial pronouncements cited in the matter. The ld. AR brought to the notice of the Bench that an identical issue was before the co-ordinate bench of this Tribunal in the assessee's own case in ITA No. 2679/Mum/2004 dt. 20.11.2015 for Asst. Year 1999-2000, wherein at paras 63 and 64 thereof, this issue was restored to the file of the AO for verification of the facts and adjudication thereon. We find that the co-ordinate bench while rendering this decision in the aforesaid order for Asst. Ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explanation in this 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. 25.2 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). 25.3 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Club Rs. 7,97,187/- (ii) Expenditure nomenclatured as Entertainment expenditure Rs. 59,31,029/- (iii) Entertainment expenditure included in staff welfare, training, advertisement, sales promotion, local travel and other expenses Rs. 67,54,862/- Total Rs. 1,34,83,078/- The AO, being of the view that the above expenditure had not been incurred wholly and exclusively for the assessee's business purposes, disallowed the entire expenditure u/s 37(1) of the Act. 27.3 On appeal, the ld. CIT(A) observed that the provisions of section 37(2A) of the Act had been deleted w.e.f. 1.4.1998 and he was therefore of the view that the expenditure on entertainment could not be disallowed. The ld. CIT(A) further observed that the mere claiming deduction of such expenditure is not sufficient and the assessee should support its claim by corroborative material evidence to establish its case. The ld. CIT(A) also observed that while applying the provisions of the Act, the AO should take a reasonable view in the matter and directed the AO to restrict the disallowance to Rs. 1,00,000/- on estimated basis and delete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.2 The facts of the matter, as emanate from the record, is that the assessee earned interest of Rs. 19,68,96,102/- on investment made in purchase of tax free bonds and claimed the same as entirely exempt from tax. The AO sought the assessee's explanation in respect of its claim for exemption of the aforesaid interest. The AO did not accept the assessee's explanation in the matter and proceeded to allow the assessee's claim to the extent of Rs. 5,03,17,893/- out of Rs. 19,68,96,102/- and proceeded to disallow the balance claim amounting to Rs. 14,65,78,209/-. On appeal, CIT(A) allowed the assessee's claim vide para 13 of his order which is extracted hereunder : "13 I have considered the facts of the case and the arguments of the appellant. The assessing officer has made the disallowance on a reasoning given in the order. The law as it stood on the date the assessment was made has been explained by the Supreme Court in the case of Rajasthan Warehousing Corporation 109 Taxman 145 (SC). According to the said ratio, no such disallowance could have been made. But the Finance Act 2001 has introduced a new Section i.e. Section 14A. Section 14A reads as under.- For the purposes of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration in this appeal. The ld. AR submitted that in view of the above, this issue is covered in favour of the assessee by the aforesaid decision of the co-ordinate bench for Asst. Year 1999-2000 (supra) and consequently, revenue's ground is liable to be dismissed. 28.4 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement cited and placed reliance on. We find that the issue of the assessee's claim for exemption of interest on investment in purchase of tax free bonds has been considered and adjudicated upon by a co-ordinate bench of this Tribunal in the assessee's own case in ITA No. 2519/Mum/2004 dt. 20.11.2015 for Asst. Year 1999-2000 at paras 35 to 40 thereof. In this order, (supra), the co-ordinate bench affirmed the order of the ld. CIT(A) for that year wherein the ld. CIT(A) had relied upon his predecessors order for Asst. Year 1998-99 dt. 4.6.2001; which incidentally is the order and assessment year under consideration in this appeal. In this factual and legal matrix of the case on this issue and following the decision of the co-ordinate bench in the assessee's own case for Asst. Year 1999-200 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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