TMI Blog2008 (11) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... these circumstances, the judgment of the apex Court in the case of CIT vs. Piara Singh[ 1980 (5) TMI 2 - SUPREME COURT] should have no application. However, the Supreme Court held in another case of Dr. T.A. Quereshi vs. CIT [ 2006 (12) TMI 91 - SUPREME COURT] held that illegal losses are allowable losses. In that case, where the assessee reflected the banned substances in the stock-in-trade, when such stock is seized, the loss on account of such stock is held as an allowable business loss despite the infraction of law. Thus, the Apex Court distinguished the relevance of the principles of the morality from the principles of the legality as pointed out by the Bentham and Austin. Therefore, we have examined the case, where the assessee executed the security transaction, may be in violation of the provisions of s. 15 of the SCR Act. and the loss generated out of the said transaction, when undisputedly borne out of the books of the assessee, is an allowable loss. Therefore, the said loss is eligible for set off as claimed by the assessee. Accordingly, the ground No. 1 of the assessee is allowed. Disallowance of the expenditure - incurred by the overseas branches for its Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n) Act, 1956, having failed to appreciate that a careful reading of this provision would clearly indicate that it is the responsibility of the broker, who is a member of a recognised stock exchange, and not that of your appellants to conform to the provisions of s. 15 of the Securities Contracts (Regulation) Act, 1956. 1.2 Without prejudice to the above, and assuming whilst denying that the transactions were illegal, the losses incurred thereon ought to have been set off against profits from similar transactions entered into by your appellants. Ground No. 2.-2.1 The CIT(A) erred in upholding the order of the AO disallowing expenses of Rs. 2,73,29,000 incurred by your appellants' overseas branches for its Indian operations on ground that such expenses come within the ambit of the provisions of s. 44C of the Act pertaining to head office expenses, having failed to appreciate that the expenses incurred overseas which are directly attributable to the Indian operations of your appellants do not attract the restrictive provisions of the s. 44C of the Act. Ground No. 3.-3.1 The CIT(A) erred in confirming the disallowance of Rs. 4,99,618 in respect of the payments to the employees' p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny person other than a member of a recognised stock exchange, unless he has secured the consent or authority of such person and discloses in the note, memorandum or agreement of sale or purchase that he is acting as a principal. It should be understood that the provisions of s. 15 are meant to safeguard the interests of brokers, clients, i.e., individual investors who deal only with the broker for settlement of the contract, whether the latter is acting in the capacity of an agent or a principal. In these circumstances, where the individual investor is not aware of the identity of the counterparty in the transaction, the law requires the broker to inform and obtain the consent of the client in case the broker is acting as a principal and not as an agent in the transaction. This situation is clearly distinguishable from the one wherein commercial banks like BOA, which regularly trade in securities, enter into contracts with brokers wherein contracts are always settled with the counterparty/principal, and not with the broker. When securities are bought or sold by BOA, the details of the transaction along with the name of the counterparty are recorded by the trader on deal slips. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the above transactions are violative of the Securities Contracts (Regulation) Act, 1956, we submit that the losses arising on account of the securities transactions referred to by you and your letter dt. 29th March, 1994 be set off against profits arising on similar securities transactions where brokers have acted as principals. For your reference, we enclose a statement showing profit/loss on securities transactions with brokers as counterparties during asst. yrs. 1991-92 and 1992-93." 4. AO considered the above reply of the assessee and discussed elaborately the nature and the relevance of the RBI directives and held that said directives as good as law and violation of the said directives amount to infraction of law. 5. Further, the AO also discussed how illegal losses cannot be set off against the illegal gains. Further, the AO distinguished the Supreme Court decision in the case of CIT vs. S.C. Kothari 1974 CTR (SC) 137 : (1971) 82 ITR 794 (SC) relied upon by the assessee for the proposition that the illegal loss should be taken into account for computation of the income. He also discussed the reliance of Andhra Pradesh High Court in the case of CIT vs. Maddi Venkatar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m RBI in this context was filed with the learned AO. It was pleaded that the RBI has not criticised the appellant for entering into security transactions with brokers acting as principal. It is pleaded that the learned AO has ignored the facts of the case and the report of the expert body on banking matters. That, he was wrong to hold that these transactions were in violation of the Act of 1956. The learned officer referred to s. 15 of the said Act. As per the said section, no member of a recognised stock exchange shall, in respect of any securities, enter into any contract as a principal with any person other than the member of the stock exchange. However, such a deal can be put through if consent or authority of such person Has been obtained. The learned officer, of course, observed that the brokers can act as a counterparty in very limited circumstances. That, such circumstances did not exist in assessee's case. The appellant's contention was that when the securities are bought or sold by it, the details of transactions along with the names of the counterparty are recorded by the trader on deal slips. That, in case the broker is a principal in a transaction, his name is regarded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f S.C. Kothari. He relied on pp. 80, 82, 86 and 84 of the paper book to advance his arguments. On the other hand, Sri Daniel, learned special counsel for Revenue argued that this is the issue, based on which the employer BOA punished some of the employees for entering into such illegal transactions without proper approval of the bank. He further mentioned that the Special Court had already held that such transactions entered into by the assessee were illegal in nature. He further mentioned that illegal loss is different from the illegal gains. As per the Departmental counsel, the illegal loss is neither allowable nor allowed to be set off against the illegal gains. 8. We have heard the rival parties and perused the orders of the Revenue authorities as well as the paper book filed before us. The case of the assessee is that he consented to the alleged security transactions and, therefore, there is no violation of s. 15 of SCR Act. Further, the said loss is an allowable one and the same must be allowed to be set off against the gains of comparable transactions. The case of the Revenue, as narrated in the para above, is that the assessee failed to prove the 'existence of the consent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd there is no point in referring the same back to the Revenue authorities for verification. In any case, it is the appeal of the assessee and he could produce the relevant documents before us to advance its case. In view of the above, we are of the considered opinion that the assessee has violated the provisions of s. 15 of the SCR Act, 1956. 10. Other related issue refers to allowing the set off of the said loss against the profits of the illegal transactions. Factually, this is the case where the BOA is engaged in executing the normal transactions as well as the transactions attracting the provisions of s. 15 of the SCR Act, 1956. The later type yielded both 'loss' as well as 'gains'. Assessee's prayer before us is to allow the set off of such loss against such gains. This issue has to be examined in the light of the entries in the books of account as well as the judgment in force. It is undisputed that the said transaction is recorded transaction and borne out of the books of account of the assessee. Thus, all these transactions, which yielded the losses, form part of the business of the assessee. In such circumstances, the issue for adjudication by us trickles down to whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. Accordingly, the ground No. 1 of the assessee is allowed. 12. Ground No. 2 relates to the decision of CIT(A) in upholding the action of the AO, who disallowed the expenditure of Rs. 2,73,29,000 incurred by the overseas branches of the assessee for its Indian operations on the ground that such expenses come within the ambit of the provisions of s. 44C. 13. Relevant facts in this regard are that the assessee claimed the above expenses in the computation of income and not in the P L a/c are incurred by overseas branches to the tune of Rs. 273.29 lakhs in respect of NRI branches. As per the assessee, these are directly connected expenses to the business operations of the bank of the Indian branches. Expenses were incurred by those branches abroad to earn income by Indian branches in India. These expenses were debited under the heads 'Staff related expenses' and pertained to staff manning the NRI desks at various branches outside India such as Singapore, Hong Kong, Jakarta and London. It was further stated that the expenses are directly for Indian operations and they were not considered or accounted by such overseas branches as deductible under their respective tax laws. Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely: Explanation.-For the purpose of this section: ......... (iv) 'head office expenditure' means executive and general administration expenditure incurred by the assessee outside India, including expenditure incurred in respect of- (a) rent, rates, taxes, repairs or insurance of any premises outside India used for the purposes of the business or profession; (b) salary, wages, annuity, pension, fees, bonus, commission, gratuity, perquisites or profits in lieu of or in addition to salary, whether paid or allowed to any employee or other person employed in, or managing the affairs of, any office outside India; (c) travelling by any employee or other person employed in, or managing the affairs of, any office outside India; and (d) such other matters connected with executive and general administration as may be prescribed." From the above provisions, it is evident from the use of the words and phrases in the above section i.e., 'in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount' that these provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. Pamwi Tissues Ltd. (2008) 215 CTR (Bom) 150 : (2008) 3 DTR (Bom) 66, wherein the Hon'ble High Court of Bombay has considered the decision of Hon'ble Supreme Court in the case of Vinay Cement Ltd. and held that if the contributions are not paid within the due date allowed in the respective statutes, the claim is to be disallowed. 17. We have perused the relevant parts of the order of the lower authorities and also the p. 92 of the paper book. In the light of the jurisdictional High Court's judgment. we find that the contribution made by both the employer as well as the employees before the extended due date by way of the grace period should be allowed as allowable claim and not the payments subsequent to the grace period allowed in the relevant statute. In our opinion, we have to follow the judgment of the jurisdictional High Court in the case of Pamwi Tissues Ltd. as their Lordship have held that the Supreme Court has merely dismissed the SLP in the case of Vinay Cement Ltd. and it could not be said that the said amounts to law declared by the Hon'ble Supreme Court. In the light of the above finding, we set aside this issue in ground No. 3 to the file of the AO only for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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