TMI Blog2004 (12) TMI 285X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer as having arisen to the bank as intermediatory liability and at the stage of contingency. The assessee submitted that the loss in question had arisen in the course of regular business transaction of banking for purchase and sale of securites; that the loss of Rs. 243.21 crores arisen in the course of transaction with PNB in view of the bank's liability to deliver the securities in question to the purchaser due to reasons beyond its control; the purchaser bank i.e., PNB filed a suit against the Bank before the Special Court under Special Court (Trial of Offences Relating to Securities Transactions) Act, 1992. By judgment and decree dated 11-3-1996 the Special Court decided the issue against the assessee and in favour of the Bank decreeing the aforesaid amount. Though the assessee had preferred appeal to the Supreme Court against the judgment, the assessee had already admitted its liability to PNB to the tune of Rs. 182 crores being aggregate of Rs. 102.80 crores, the principal amount of units involved and Rs. 79.20 crores being approxmiate amount of interest at the rate of 17.5% till the date of hearing before the Supreme Court and that vide an interim order passed on 8-5-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the losses by also holding these to be a speculative loss as per the provisions of section 43(5) of the Act. 5. The CIT(A) upheld the disallowance by observing in paras 24 to 33 of his order as under:- "24. I have considered the submissions made on behalf of the appellant and also applied my mind to the issues raised by the A.O. in the assessment order and also at the time of hearing of the appeal. In my opinion, the following issues emerge on the facts and circumstances of the case: (i) Whether the loss claimed by the appellant in A.Y. 1996-97 accrued in this year and whether this is allowable. (ii) Whether transactions are speculative in nature in terms of section 43(5) of the Act. (iii) Whether the transactions are illegal/not in accordance with law and therefore loss arising from such transactions is not allowable in accordance with Explanation to section 37(A) of the I.T. Act. 25. As is apparent, the appellant has claimed loss of Rs. 2,88,07,38,158 on account of its liability towards PNB and SBP. The claim of loss in respect of PNB amounts to Rs. 243.21 crores and in the case of SBP it is 44.85 crores. These transactions were entered into between September an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one which may arise in a subsequent year where the system of accounting is mercantile. On accrual of income, the SC in the case of E.D. Sasoon Co. Ltd. v. CIT 26 ITR 27 held that income can be said to have accrued to or been earned by assessee only when debt has come into existence and the assessee has acquired the right to receive payment. Although this case is on accrual of income but the same principle is appliable to the accrual of liability also. However, where the right to receive payment is in dispute, there can be said to be no accrual. This principle was laid down by the SC in the case of CIT v. Hindustan Housing Land Development Trust 161 ITR 524. In that case, the payment of enhanced compensation and interest was disputed in appeal. The Hon'ble SC held that the income will accrue to the assessee when the issue is finally settled. Similar decision was given in the case reported in 164 ITR 524. In this case it was held that although the award was made by the arbitrator on July 29, 1955 enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. There was no absolute right to receive the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o take delivery from SBI and NHB. The appellant has claimed the loss on receipt of the order of the Special Court which passed decree in favour of PNB. But here again the claim, in my opinion, is not allowable because the appellant did not accept the decree and filed appeal before the Supreme Court which is still pending. The fact that the appellant conceded before the Supreme Court the liability of Rs. 182 crores is not borne out from the interim order of the Supreme Court. Even if the liability was conceded by the appellant before the Hon'ble Supreme Court, it was only in April, 1996 which is beyond A.Y. 1996-97. As held by the Hon'ble SC in the case of CIT v. Hindustan Housing Land Development Trust Ltd. 161 ITR 524, where right to receive payment is in dispute, there can be said to be no accrual Following this ratio, I am of the considered opinion that since the liability was disputed by the appellant before the Supreme Court, the liability was only a contingent liability not allowable in A.Y. 1996-97. 30. As regards liability in the case of SBP, I find that there are various correspondence between SBP and PNB which suggest that final settlement was made after March, 1996. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Indian Molasses Co. (P.) Ltd. v. CIT 37 ITR 66 (SC). It has been observed by the Hon'ble SC that:- 'To be a payment which is made irrevocably there should be no possibility of there being a resulting trust in favour of the company, then the money has not been spent i.e., paid out or away, but the amount must be treated as set apart lo meet a contingency.' 32. Here in the case of the appellant, there is almost hundred per cent certainty that it may receive the similar amounts from its counter claims and therefore any money payable or paid to PNB and SBP may be treated as set apart to meet a contingency and it cannot be treated as spent away or paid out. The appellant also appears to have given similar' treatment to this liability in the accounts for subsequent years. The fact that the loss has occurred during the year 1991-92 has been taken note of by the auditors as may be seen on page 10 of compilation No. 5 (RBI inspection report) submitted by the appellant. Again on page 66 of this compilation, it has been stated that- 'The counter claims filed by the Bank against NHB is in the advanced stage and is likely to be disposed off shortly.' It has been stated in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of PNB and settlement in the case of SBP is only contingent liability to be set off against receivables from other parties. I may mention here that the appellant has already received substantial amount from NHB which is good enough to take care of major part of liability. Out of 9.5 crores unit of UTI Scheme sold to PNB and SBP, 7.5 crores of units were purchased from NHB against whom the assessee has succeeded before the Special Court. Therefore, the loss claimed by the assessee of Rs. 288.07 crores is not allowable in A.Y. 1996-97." 6. The assessee is in appeal against the disallowance of loss as an admissible deduction whereas the Revenue filed cross objection against the finding of the CIT(A) that it was not a loss of speculative transactions. 7. The learned counsel for the assessee submitted that the transactions were entered into in the normal course of its business of dealing in securities. During the financial year 1991-92 relevant to assessment year 1992-93, the Bank undertook certain back to back transactions, i.e., transactions for simultaneous purchase and sale of same number of identical securities in certain securities during September to November, 1991. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NB on account of its inability to delivery the securities in question, the judgment and decree dated 11-3-1996 of the Special Court crystallised the liability/loss; that in relation to these security transactions a suit was filed by PNB which was contested by the Bank and on 11-3-1996 a decree was passed against the Bank by Special Court and thus it was resulted in crystallized liability resulting into loss in question. He relied upon the decisions in the cases of Laxmi Ginning Oil Mills v. CIT [1971] 82 ITR 958 (Punj. Har.); Radhakrishna Oil Mills v. ITO [l986] 19 ITD 587 (Cochin); Cama Motors (P.) Ltd. v. IAC [1987] 21 ITD 640 (Ahd.); CIT v. Swadeshi Cotton Flour Mills (P.) Ltd. [1964] 53 ITR 134 (SC); and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC). 7.3 The learned counsel also submitted the details of further payments etc. made by the assessee Bank after filing appeal to the Supreme Court, and submitted that the Supreme Court directed payment to the tune of Rs. 212 crores (Rs. 182 Cr. for cost of units and the difference between the original cost and the market price on the date of breach plus a further sum of Rs. 30 Cr. for balance claim) to PNB and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SC). The learned counsel for the assessee submitted that the approach of the Court has to be different while dealing with a question of taxing positive income on the ground that it has accrued or has arisen to the assessee concerned and incurring a liability resulting in claim of loss in terms of an enforceable decree. He further submitted that the above judgments are cited for limited purpose to canvass that mere counter claim or even preliminary decree which is subjudice can never tantamount to 'income earned' by the assessee. Such claim in absence of finally enforceable decree can never be taken into account in the relevant year whereas the assessee bank has incurred loss by virtue of enforceable decree passed against it by competent Court irrespective of the fact that the appeal is pending in appellate Court. The learned counsel further submitted that if the line of reasoning adopted by the CIT(A) at para 11 above is accepted, namely that the loss suffered by the Bank can be determined only after all counter claims suits by the Bank are finally decided by the Courts and recoveries thereunder effected, then grave injustice will result to the Bank, as it can then be contended by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the revenue authorities were right in disallowing the same. 8.2 As regards the cross objection which is late by more than 3 years, filed by the Revenue, the learned standing counsel submitted that no prejudice is caused to the assessee; that no new facts are required to be adjudicated and that the issue raised in the cross objection filed on advice of the counsel and therefore the delay should be condoned. On merits the questions raised are (1) That security transactions be treated as speculative within the meaning of I.T. Act, 1961; and (2) Explanation to section 37(1) of the I.T. Act, 1961 ought to have been applied by the CIT(A). 9. We have heared the parties and considered the rival submissions. Section 2(24) defines the term 'income' and it includes profits and gains of a business in the income of an assessee. Section 4 is a charging section and it provides for a charge on the total income of an assessee which is to be computed as per section 5 of the Act. Chapter IV provides for termination of income under various heads and Part D provides for computation of profits and gains of a business or a profession. Section 28 enumerates certain income to be chargeable under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee may either be arising out of contractual obligation or it may arise under a statutory provision. Statutory liability is generally ascertainable and can be determined by applying the provisions of law and could be allowed as a deduction either in the year to which the transaction to which it pertains has occurred, namely, taxable event has happened or it may be allowed in the year in which a demand was raised on the assessee by the statutory authority. It could also be claimed and allowed when it is finally settled by due process of law. The dispute raised by an assessee for its non-levy cannot deter its allowability in any of the three situations. 13. The decision of Kedarnath Jute Mfg. Co. Ltd. is an authority for claiming the deduction in the year to which transaction pertains. In that case during the assessment year 1955-56 "the assessee claimed a deduction of Rs. 1,49,776 on the basis of sales tax order determining the sales tax payable by the sales tax authorities on the sales made by the assessee during the aforesaid previous year. The claim was made by revising the return consequent to and after the receipt of demand notice. It was disallowed by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustries Ltd. v. CIT [1995] 213 ITR 523 also observed that "merely because an expense relates to a transaction of an earlier year, it does not become a liability payable in the earlier year, unless it can be said that the liability was determined and crystallised in the year in question on the basis of maintaining accounts on the mercantile basis". The Delhi High Court in the case of CIT v. Jamnadas Ram Krishan [2001] 250 ITR 155 allowed the claim of sales tax liability on the basis of demand raised by the Sales tax authorities for the sales made during the years 1972-73 and 1973-74 on the basis of completion of sales tax assessment for assessment year 1978-79. 15. The third situation is found in the case of Buxa Doors Tea Co. India Ltd. v. CIT [1991] 188 ITR 218 (Cal.). In this case an assessment was made in 1958 under Assam Taxation (Goods Carried by Road or Inland Waterways) Act, 1954 (superceded by Assam Taxation (Goods Carried by Road or Inland Waterways) Act, 1961). The revision petition against that order of 1958 was decided by the Commissioner of Taxes, Assam on January 2, 1975 finally determining and fixing the liability of the assessee. The claim was made by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd was made by the authorities and deduction can be allowed on that ground." In the present case also, the jurisdictional Gujarat High Court in the case of Saurashtra Cement Chemical Industries Ltd. is relevant on the issue. 16. We may also refer in this connection to the Commentary by Kanga and Palkhiwala, 9th Edition, Volume II page 1790 wherein it is stated under the head "YEAR IN WHICH SALES TAX, EXCISE ETC. ARE DEDUCTIBLE" that "The decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT establishes that under the mercantile system of accounting a fiscal liability (e.g. sales tax or excise) under a statute should be allowed as a deduction in the year in which the relevant transactions take place, although (i) the precise quantification of the liability in the form of an assessment and demand may come later, (ii) the assessee may contest the liability in appeal or other proceedings, and (iii) the assessee may have made no provision for the liability in his books. Alternatively, the assessee may claim a deduction in a subsequent year in which the tax is assessed and the demand is made, although the transactions may pertain to earlier years; or he may even postpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.2 In the case of Alembic Chemical Works Ltd. v. Dy. CIT [2004] 266 ITR 47, before the Gujarat High Court the assessee was following mercantile system of accounting where the liability is sought to be properly incurred when the dispute between the parties is amicably settled or finally adjudicated, where the liability in question is not a statutory liability. The Court in this connection observed that where the liability in question is not a statutory liability. The assessee in this case was manufacturing drugs, had claimed the liability to pay user charges to the ONGC in respect of the gas consumed after 29-1-1997 and the interest on the account. The Government of India issued a circular on 30-1 -1987 for fixing the price of gas supplied by the ONGC, but the said circular was challenged before the High Court and in 1993 the petition filed by the assessee came to be dismissed by the Court and an appeal was pending before the Supreme Court against the decision. According to the assessee, there was an earlier decision of the Supreme Court dated 4-5-1990, wherein it was held that ONGC was entitled to demand as per its decision, and therefore, the assessee submitted that in light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing out of a contractual obligation is disputed, the assessee is entitled in the assessment year relevant to the previous year in which the dispute is finally adjudicated upon or settled to claim a deduction in that behalf. 18.4 In the case of CIT v. Shebux Jahurilal [1962] 46 ITR 688 before the Calcutta High Court, the assessee entered into contract with the another company to supply jute at a specified rate. Under the contract the buyer had option to cancel the contract in the event of non-delivery of goods and to recover the difference between the price in the contract and the market price. The assessee was not able to deliver the goods and buyer cancelled the contract and claimed the difference in price. The matter was referred to the Bengal Chamber of Commerce which passed an award in 1948 and the award was filed in the High Court in 1949. The settlement was subsequently reached, by which the sum payable was fixed at Rs. 1,35,000 and it was made payable in February, 1950. The assessee paid the amount and claimed the amount as loss in assessment year 1950-51. The Assessing Officer disallowed the loss by stating that it pertains to the year 1946, and therefore it could have cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re never delivered to PNB, even though the assessee was promising to give delivery of the units. Consequently, by letter dated 1-7-1992 PNB claimed compensation as calculated in the annexure to the letter and computation of claim was given according to which PNB treated the breach of the contract to have taken place on 30-5-1992 and on that basis it claimed difference in price between the rate that was paid and the rate of Unit Trust of India as on 30-5-1992. As the amount was not paid, PNB filed a suit inter alia claiming the delivery of the units in respect of which the payment had been made. An alternative prayer which was made was for damages for a sum of Rs. 249,19,00,549 plus further interest at the rate of 17.5 per cent per annum on the said sum till the date of payment. The Special Court granted relief to the PNB for specific performance which required the assessee to buy 7.5 crore units for which payment had been made and in addition thereto it was also required to purchase and sell to the PNB the units representing the right issue which the PNB was deprived of availing because of the non delivery of the units. Costs of Rs. 27,87,000 were also awarded. 21. Against the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s said letter as under:- "From the aforesaid ground of appeal and the statement made in the interim application the bank has accepted that PNB were entitled to refund of the purchase price of the securities along with the damages i.e., the difference between the contract price and the market price prevailing at the date of breach of the contract." "On 8-5-1996 the Hon'ble Supreme Court was pleased to admit the above appeal and pass an interim order inter alia, directing the Bank to pay Rs. 182 crores to PNB or in the alternative transfer Units worth Rs. 182 crores (at the repurchase price) to PNB, A copy of the order dated 8th May 1996 is enclosed herewith." 23. The Interim Order of the Supreme Court reads as under:- "After hearing counsel we direct that there will be an interim order to the effect that the appellant bank will pay Rs. 182 crores to the respondent bank or in the alternative transfer units (1964 Scheme) worth Rs. 182 crores calculated on repurchase price within a period of six weeks but on condition that if, in the meantime, the books closed and transfer cannot be effected before dividend is declared, appellant bank will also pay the dividend due on those Uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. The other difference of Rs. 31,21,86,000 between the amount of compensation granted by the Special Court at Rs. 243,21,86,000 and the sum of Rs. 212 crores as settled by the Supreme Court would not be allowable at all as the dispute is finally settled in subsequent year 2001 at the amount of Rs. 212 crores and therefore there is no liability as such remained to be payable by the assessee. 27. As regards the second claim for the deduction of Rs. 44.85 crores to SBP the finding of the CIT(A) to that the claim had not been settled in the year under consideration and that various correspondence given by the assessee between SBP and the assessee suggest that final settlement was made after March 1996. This observation of the CIT(A) in our opinion is not based on the facts. It is true that letters filed by the assessee and referred to by the CIT(A) bear the dates subsequent to the close of the year, these being dated 11-6-1996 and 13-6-1996 and July 1996 but they refer to settlement reached between the assessee and SBP before 31-3-1996 when the assessee handed over the cheque of Rs. 27,09,00,000 to SBP, which is dated 30-3-1996. This cheque was given by the assessee to SBP pursuant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting held in March, 1996 but the interest portion of the dispute was left to be settled subsequently. There the CIT(A) could be said to be right in stating that the interest liability was settled in June or July, 1996. We therefore, hold that in so far as the liability of the principal amount of Rs. 27,09,50,000 is concerned, that has crystallised by amicable settlement during the year under consideration and has to be allowed as deduction but in so far as the interest on the aforesaid amount for the period from 16-11-1991 to 30-3-1996 amounting to Rs. 17,76,02,158 was settled in the immediately subsequent year and the assessee would be at liberty to claim the same by seeking appropriate remedy, if so advised in accordance with law. 30. One of the other reasons for confirming the disallowance given by the CIT(A) in his order is that Harshad Mehta has not denied his liability to delivery the securities and therefore it was a claim which has to be decided after all the cases are finally decided and the payables to the parties may match with the receivables from counter parties, resulting in, possibly, no liability for the bank. That proposition does not seem to be in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the income of the assessee for the years during which the amount was actually recovered. The pendency of litigation about the loss suffered cannot militate against the fact that the loss was suffered by the assessee during the accounting year in question and the amount of that loss cannot be postponed in view of the pendency of the litigation. Therefore, the Tribunal was not justified in upholding the disallowance of Rs. 9,160 on account of loss and damages suffered by the assessee owing to the breach of contract by the company." "It cannot be said that the amount of loss would have crystalized only after the litigation between the assessee firm and the Amrit Banaspati Company Ltd. had been finally decided. The loss was suffered by the assessee firm in the accounting year relevant to the assessment year 1953-54, and if, as a result of litigation, it was found entitled to less amount than the amount claimed, the difference could be included in the assessable income of the assessee for year during which the final decision of the litigation was made. Similarly, if the assessee had been successful in obtaining the entire amount of the loss from the company, the amount could be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that the write off was improper or lacked bona fides." The decision of the Gujarat High Court in the case of Sarangpur Cotton Mfg. Co. Ltd. v. CIT [1983] 143 ITR 166, was also referred to with the observations of their Lordships at page 708 that "When a businessman writes off an amount, there is prima facie evidence that that amount is irrecoverable. Undoubtedly, the Department can rebut the prima facie inference by drawing attention to circumstances or by lending some evidence to suggest that the position taken up by the assessee was not correct. In this case there is no evidence whatsoever on the record except the fact that the assessee wrote off this amount in the year of account. In the absence of any evidence we are entitled to presume that the amount became irrecoverable when the assessee wrote it off in its books of account." The Tribunal ultimately allowed the claim of the assessee by stating: "We respectfully following the ratio laid down by the aforesaid decisions, accept the first ground in the appeal and direct that the claim of Rs. 2,86,516 be allowed. We have also kept in mind the various other ease laws cited by both sides in coming to the conclusion that we have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure." (iii) In the case of Navjivan Roller Flour Pulse Mills Ltd. v. Dy. CIT [2000] 73 ITD 265 (Ahd.), the assessee company which was engaged in the business of manufacturing of dal, besan, sooji etc. had entered into a contract with a foreign company for the inport of yellow gram and as per the terms of agreement, the assessee was to open letter of credits within some stipulated time. The assessee failed to open letter of credits, which ensued the protracted litigation and the foreign buyer claimed damages for breach of the contract by the assessee. But the assessee disputed the payment of damages because there was no stipulation regarding the damages to be paid to the party in the terms of contract. The arbitrator awarded certain damages under the arbitration agreement, and the legality of which was challenged by the assessee and preferred appeal before the Board of Appeal which has given decision on 20-3-1989. For the Assessment Year 1988-89, the assessee claimed deduction on account of damages and certain amount on account of expenditure for legal fees. The Assessing Officer allowed the claim but the Commissioner initiated proceedings under section 263. The Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CIT v. Bharat Iron Steel Industries [1993] 199 ITR 67, before the Gujarat High Court, the entitlement of the assessee to the refund of excise duty was in jeopardy in view of the pendency of the review or revisional proceedings and therefore there was no final decision on the question whether or not assessee was entitled to excise duty. It was only when the review or revisional proceedings were dropped in the subsequent year that the assessee became finally entitled to claim refund and the High Court, therefore, held that it would not be taxable in the year when the matter was pending for review. Firstly, it is a case for determining the taxability of refund under section 41(1) and not case for allow-ability of deduction and in any case the liability has been settled by the Supreme Court and in the present case a part of that liability alone was disputed in the appeal, and therefore, at best it could be said that only that part of the liablity was in jeopardy, which was a subject-matter of appeal, viz., liability over and above Rs. 212 crores. (vi) In the case of CIT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122, before the Supreme Court, a firm which exploited a motion pictur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court it was held that although the award was made by the Arbitrator on 29-7-1955, enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. In this case, the dispute was regarded by the Court as real and substantial because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. It was held that there was no absolute right to receive the amount at that stage. The Court also observed that there is no clear distinction between cases such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles. (viii) In the case of Addl. CIT v. New Johangir Vakil Mills Co. Ltd. [1979] 117 ITR 849 before the Gujarat High Court land belonging to the assessee was acquired by the Government of Gujarat and the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decided in this regard is whether these transactions in securities were speculative transactions. The arguments put forth on behalf of the appellant has been already discussed earlier. I don't agree on certain conclusions arrived at by the learned counsel for the appellant, but the ratio laid down by the Hon'ble Supreme Court in the case of CIT v. Shantilal (P.) Ltd. 144 ITR 57 clinches the issue in favour of the appellant. Even if the units of UTI are not considered shares nevertheless they do not cease to be a commodity. It is also beyond doubt that there is no delivery of the units in furtherance of the contract. But, I agree that the settlement of the contract was not for the payment of difference of value of units contracted to be purchased and sold. The intention of the Bank has always been to take delivery and hand it over to the purchasing party. The bank could not deliver the commodity because it could not enforce delivery from the parties from whom it had purchased the Units. In the case of Shantilal (P.) Ltd. the Hon'ble Supreme Court has held that a contract can be said to be settled if instead of effecting the delivery or the transfer of the commodity envisaged by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the regular course of banking business of the assessee. 37. Assessee's contentions for this objection are: (i) that the transactions were of Ready Forward Contract and amount to settlement of dispute and therefore not speculative; (ii) that the assessee bank has not incurred any expenditure much less any claim having been made for deduction as expenditure; (iii) that even assuming for the sake of argument that the claim of loss would be treated as expenditure, it is not for any purpose which is an offence or that it is prohibited by law. In this connection, Reference was made to the speech of the Hon'ble Finance Minister while moving the Finance (No. 2) Bill, 1998 and CBDT Circular No. 722, dated 22-12-1998. He also referred to Memorandum explaining the provisions in Finance (No. 2) Bill, 1998. The findings given by the learned CIT(A) shows that by no strecth of imagination the Explanation to section 37(1) can be attracted in the case of appellant because the deduction has not been claimed on account of any expenditure incurred as mentioned in Explanation to section 37 nor any such similar expenditure. It is a claim of loss incurred by the assessee allowable under section 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the broker at the time of purchase of these shares. The assessee sold these shares and suffered a loss. He paid a sum of Rs. 4 lakhs to the broker to cover up the risk of the broker against the loss due to fluctuations of cost. The transaction in purchase and sale of the said 2000 shares of TISCO was made by the assessee during seven periods of fortnightly settlements and the said transaction was settled by the assessee at the end of each badla period and the amount of loss was determined and the payment against such loss was made to the broker and the assessee claimed the loss suffered in the purchase and sale of shares as a short-term capital loss, but it was disallowed by the Revenue Authorities treating it to be a speculative loss. The Tribunal held that transactions relating to purchase and sales of shares in question made by the assessee were clearly speculative transactions and constituted speculative business. This is a case where the assessee has settled the transactions with the broker for purchase and sales of the shares. No actual delivery was taken or contemplated either for sale and/or purchase of the shares and in these circumstances, the Tribunal held that transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... livery of shares. The assessee, therefore, borrowed 300 shares and delivered them to the party. The assessee firm then purchased 530 shares, out of which 200 shares were returned to the person from whom shares had been borrowed and the balance of 330 shares were sold in the market which resulted in a net profit of Rs. 38,060 and in the same year, the assessee had incurred a loss of Rs. 39,893 in his speculation business and claimed before the ITO that the loss should be set off against the profit of Rs. 38,060, which the assessee claimed was profit from speculation business. The Assessing Officer has held that since the profit arose from a transaction where there was actual delivery of shares, the profit could not be treated as arising from a speculative transaction. On appeals, the AAC and the Tribunal affirmed the order of the Assessing Officer and on reference before the High Court, it was held that as there was actual delivery of the shares sold by the assessee and purchased by the respective purchasers, the profit was not profit from speculative transactions within the meaning of section 43(5) of the Act. In this case, the issue was not whether the loss had arisen from specula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speculation business and allowed the set off. The High Court on reference held that if the transaction under which the assessee paid compensation to 'R' amounted to a speculative transaction, it also amounted to speculation business attracting the operation of section 73(1) and the loss of Rs. 1,35,000 and the loss could not be set off against the profits of the other business of the assessee. Both the Tribunal and High Court have proceeded on the assumption that the transaction was speculative transaction, and therefore, this case was no help either to the assessee or to the Revenue. 45. In the case of M.G. Bros., before the Andhra Pradesh High Court, the assessee firm carried on business in the manufacture and sale of groundnut oil and its by-products. It claimed a deduction of Rs. 1,760,946 being the loss suffered in respect of certain transactions, which had entered into in cotton seed oil and neem oil. The assessee admitted that this loss had been suffered by paying differences pursuant to settlement of contracts otherwise than by delivery of goods but claimed that these were hedging transactions. The claim of the assessee was disallowed by the Assessing Officer and AAC and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total amount of Rs. 35,000 in full settlement of the contractual obligations, and therefore, the transaction entered into by the assessee with the buyer was a speculative transaction and payment of Rs. 35,000 amounted to a speculative loss within the meaning of section 43(5) of the Act. In this case, the contract was kept alive, and therefore, the Court held that the settlement of the contract was in the nature of speculative transact ion and not as damages for breach of the contract, because the buyer instead of willing to take delivery of the cotton, had accepted the compensation. This case, therefore, is no help to the Revenue. 47. In the case of Maya Ram Jia Lal, before the Punjab Haryana High Court, the assessee entered into agreement for supply of goods to certain parties and since the assessee could not fulfil the contracts in time, the assessee settled the contracts by paying compensation to the parties and claimed the compensation paid as a business loss. It was disallowed by the Assessing Officer and disallowance was upheld by the AAC. The Tribunal however allowed the claim by observing that the settlement was made long after the date of delivery was contemplated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares into stock-in-trade and during the previous year on 27-8-1973 the assessee purchased 10,000 shares of company 'O' and obtained delivery of those shares. The shares were in possession when, on that very date, the assessee entered into a contract for sale of these shares. The shares, however, were not delivered and on September, 1973 instead of delivering the shares, the assessee entered into another contract for purchase of 10,000 shares which was not followed up by taking delivery of the shares, but the contract for sale was entered into on August, 1973 was settled by payment of the difference in price to the share broker. On October, 1973, the assessee sold and delivered the said shares of 'O' company and made a profit in the process and claimed loss arising to the assessee on the sale and re-purchase effected on 22-8-1973 and 20-9-1973. It was disallowed by the Assessing Officer by observing that as a loss arising out of a speculative transaction, and therefore, cannot be allowed as deduction. The Tribunal, however, held that it was a single speculative transaction and does not amount to speculative business. The High Court on reference held that there was nothing on recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or accepts, instead of it, any satisfaction which he thinks fit. It is this sense of the law which must prevail in sub-section (5) of section 43 and not that of the layman in Shantilal (P.) Ltd.'s case. A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract the promise, in terms of section 63 of the Contract Act, accepts, instead of it, any satisfaction which he thinks fit. It is quite another matter where instead of such acceptance the parties raise a dispute and no agreement can be reached for a discharge of the contract. There is a breach of the contract and by virtue of section 73 of the Contract Act the party suffering by such breach becomes entitled to receive from the party who broke the contract compensation from any loss or damage caused to him thereby... The award of damages for the breach of a contract is not the same breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof. It may be that in a general sense the layman would understand that the contract must be regarded as settled when d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a 'speculative transaction' within the meaning of sub-section (5) of section 43 of the Income-tax Act, 1961, where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation." (4) Anamalai Timber Trust Ltd.'s case wherein Kerala High Court held that "Whether the nature of the business carried on by an assessee is such that the risk of negligence of the assessee's servants while acting in the course of their employment is also incidental to such business, the liability of the assessee to pay damages for such negligence is also incidental to the business, and loss resulting from payment of such damages is allowable as a trading loss in computing the assessee's income from such business. The fact that the loss was due to the negligence of the assessee's servants or that such negligence has resulted in a breach of contract would make no difference." 51. Another ground for disallowance of the loss is the claim of Revenue that the transaction was tainted with illegality and therefore cannot be a normal feature of trade and therefore not allowable as a deduction under section 37(1) read with Explanation thereto. The CIT(A) held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not severable in the case of the appellant. Therefore, having regard to the contentions of the appellant's learned counsel, I am of the view that the explanation to section 37(1) is not applicable in the case of the appellant because the deduction has not been claimed on account of any expenditure made as mentioned in Explanation to section 37 or any such similar expenditure. Therefore, this provision does not appear to be applicable." 52. As regards this aspect of the matter (which is also taken as 2nd cross objection in CO filed by the Revenue) the learned Standing Counsel submitted that the entire claim for deduction of Rs. 243.21 crores was not allowable since part of the same is penal in nature and tainted with illegality and fraud. 53. The contention of the learned counsel for the assessee, on the other hand, is that the Explanation is clarificatory in nature and it states that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business and shall not be deductible as an expenditure. The Explanation merely tries to further limit the scope of applicability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or similar securities at a latter date at a price determined on the first date. Such ready forward transactions have, in most cases, been entered into either by execution of a single document or by execution of two documents contemporaneously, one representing the first or ready leg and other the forward or second leg. On such contracts being entered into the ready leg of the transactions were completed with the appellants having the agreed price and receiving the delivery of the securities which were agreed to be purchased". It was further observed that Banking Regulation Act (10 of 1949), section 36 - Reserve Bank of India - Confidential circular issued to banking companies prohibiting them from entering into buy back arrangement - Bank entering into such arrangement with third party despite prohibition - Contract entered is not rendered void - Bank however is liable for penalty "referring to the Securities Contracts (Regulation Act 42 of 1956) section 16 and the Contract Act (9 of 1872), section 57. Prohibition to forward contract to securities and the effect on ready-forward transaction, it was also observed that such transaction is severable and where the ready leg which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) as Ground No. 5 but there is no discussion on this issue in his order. In these circumstances we set aside the order of CIT(A) for this limited purpose and direct him to decide the ground of chargeability of interest under section 234B of the Act. 57. The first ground in the Revenue's appeal is against allowance of claim of depreciation of Rs. 33,06,56,000 on securities treating the same as stock-in-trade. The Assessing Officer held that the securities were not depreciable assets and therefore depreciation at any fixed rate cannot be allowed upon the same from year to year. According to him, the claim of depreciation was notional claim which does not form part of any allowance under the Act. He also noted that a similar claim was disallowed in earlier years Assessment Years 1985-86, 1992-93 to 1995-96 and the CIT(A) has allowed the claim of the assessee and that though similar claim allowed by the Assessing Officer for Assessment Years 1987-88 and 1988-89 but has been withdrawn by the CIT under section 263. The Tribunal had also dismissed the Revenue's appeal by taking aid from the provisions under section 32AB. 58. Before the CIT(A) the assessee submitted that under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at since 1977-78 the assessee bank is consistently and regularly following the basis of valuation from year to year and the income arisen from the sale of securities are being taxed year after year on the basis of profit and not capital gains. He referred to a chart right from assessment years 1977-78 to 2001-2002 which reads as under:- ------------------------------------------------------------------------------------------------ Sr. Year Depreciation Depreciation Remarks No. on on investment investment claimed in its allowed by return the AO ------------------------------------------------------------------------------------------------ 01 AY 77-78 31,66,676.80 31,66,676.80 ------------------------------------------------------------------------------------------------ 02 AY 78-79 12,42,541.25 - Appreciation taxed as such by the Assessing Officer ------------------------------------------------------------------------------------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Second Appeal before ITAT dismissed as not maintainable ------------------------------------------------------------------------------------------------ 13 AY 89-90 34,17,321.00 Nil (not allowed) CIT(A) Rajkot-1 upheld and allowed bank's claim. Department's Second appeal before ITAT dismissed as not maintainable ------------------------------------------------------------------------------------------------ 14 AY 90-91 82,72,101.00 Nil (not allowed) CIT(A) Rajkot-1 upheld and allowed bank's claim. Departments Second appeal before ITAT dismissed as not maintainable. ------------------------------------------------------------------------------------------------ 15 AY 91-92 58,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank's appeal fully allowed and upheld by CIT(A) Rajkot-II. Second appeal preferred by the department to the ITAT pending for disposal ------------------------------------------------------------------------------------------------ 21 AY 97-98 37,16,17,718.00 - Appreciation taxed as such by the Assessing Officer. Bank's first appeal pending before CIT(A), Ahmedabad. ------------------------------------------------------------------------------------------------ 22 AY 98-99 48,27,67,914.00 Nil (not allowed) Bank's appeal fully allowed and upheld by CIT(A) Rajkot-II. Second appeal preferred by the department to the ITAT pending for disposal. ----------------------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further and the appeal failed for want of permission of COD. The securities are required in the normal course of banking business which requires keeping of enough cash and easily realizable securities to meet any possible demand of the depositors. They are so required as per guidelines of RBI. The Circular No. 599 dated 24-4-1991 also declared such securities as stock-in-trade of the banks, though the later Circular has left it open for the decision of the Assessing Officer to decide whether they are stock-in-trade or not. The assessee is following the system of valuation regularly from assessment year 1977-78 and claiming depreciation in its Income-tax return and same are being accepted by the Department - in some cases by the ITO and in some other-cases by the CIT(A). Therefore the attempt to file further appeal to the Tribunal has failed because even COD has not permitted to proceed with the matter'. In these circumstances, in our opinion, the CIT(A) was justified in allowing the claim of the assessee. We accordingly reject the ground of appeal of the Revenue on this point. 63. The next dispute is with regard to disallowance of interest of Rs. 20.20 crores on the ground that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eady forward transactions, often circumventing regulations regarding issue of BRs etc. The dominant intention behind trading in securities through ready forward transactions was to boost the profits of the banks. It is another matter that in the process some of these banks left themselves open to fraud by unscrupulous brokers and employees. This was at worst, an incidental business hazard, but cannot become a non-business activity. The CIT(A) in view of this observations, held that those transactions in respect of which the appellant bank had not received BRs from counter party banks cannot be denied the status of normal course business. He further held that there is no loss of interest to the bank because its Civil Suits before the Special Court against Shri H.S. Mehta and SBI also include the interest element on the funds misappropriated by Shri H.S. Mehta and these claims are still pending before the Special Court. The CIT(A) also held that the Assessing Officer failed to establish any direct nexus between the appellant's borrowed funds and the funds utilized in these five transactions. It was also held by him in his order that the appellant bank was having interest free deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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