TMI Blog2005 (6) TMI 218X X X X Extracts X X X X X X X X Extracts X X X X ..... credit/guarantees, executing forward transaction in foreign currencies for importers/exporters, money market lending/borrowings, investment in securities etc., in terms of the existing rules and regulations governing such transactions. In the years under consideration, the appellant had three branches in India at Mumbai, Kolkata and New Delhi. There is an agreement between India and Netherlands for Avoidance of Double Taxation and Prevention of Fiscal Evasion (hereinafter called as DTAA). Article 7 of the DTAA provides for taxation in India of a foreign enterprise in respect of profits attributable to its permanent establishment (hereinafter referred to as PE) in India. Since the ABN AMRO Bank NV was having a PE in India, the appellant is liable to tax in respect of income attributable to the PE. 3. One of the common issues involved in all the four assessment years is relating to deduction on account of remuneration paid to the expatriate employees outside India for the services rendered in India. Tax deducted at source and paid in previous year relevant to assessment year 1995-96 is also claimed as a deduction in the respective assessment years. Interest under section 201(1A) for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services in India, on the basis of the reasons stated in his order for the assessment year 1996-97, without controverting the submissions made by the appellant. 2. That, on the facts and in the circumstances of the case, the learned CIT(A), on the basis of the reasons stated in this earlier order for the assessment year 1996-97, erred in confirming the disallowance of Rs. 35,86,781, being that part of the remuneration of the expatriate employees rendering service in India paid by the appellant and representing the tax deducted at source after grossing up the expatriate's total income taxable in India as per the terms of employment. Assessment year 1995-96: On the facts and in the circumstances of the case the CIT(A) erred in confirming disallowance of Rs. 89,04,276 being the remuneration, tax and interest paid in the current financial year in respect of the expatriate employees. The CIT(A) erred in not appreciating that all the details and explanations called for by the Assessing Officer had duly been filed during the course of the assessment proceedings, but, which were not taken note of by the Assessing Officer in his assessment order. The CIT(A), therefore, erred in not givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remuneration outside India. It is not disputed that the income derived by such expatriate employees from the services rendered in India is liable to tax in India notwithstanding the fact that they received their remuneration outside India. The assessee had failed to deduct tax from the remuneration paid to the said expatriate employees. Whereas the remuneration paid to the expatriate employees in India had been taken into account in the books of account of the assessee relevant to the PE, the remuneration paid to the offshore employees who had rendered services in India but whose remuneration was paid abroad, had been debited in the books of account of head office. As pointed out earlier, the assessee-bank had failed to deduct taxes under section 192 in respect of remuneration of such employees paid outside India for services rendered in India. The CBDT, in order to encourage the compliance in respect of TDS, issued Circular No. 685, dated 20th June, 1994 providing exemption from penalty and prosecution to those employers who paid the tax deducted/deductible at source by the specified date in the circular. The said circular is quoted for ready reference: 1. It has come to the noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployers, any consequential action will be taken in the hands of the employees. 2. The Board has considered the matter. The spirit behind issue of Circular No. 685, dated 20th June, 1994, was to encourage immediate voluntary compliance on the part of the employers defaulting in tax deduction. In order that this intention is fully achieved, the Board has decided that the assessments of the employees, in respect of whom payments of short deduction and interest thereon are made by the employers in pursuance of Circular No. 685, dated 20th June, 1994, will not be reopened or otherwise disturbed merely on account of the excess salary payments now disclosed by the employers. 7. The assessee took advantage of the circular and paid a sum of Rs. 2,06,54,499 detailed below as tax deducted at source and interest under section 201(1A) for assessment years 1990-91 to 1995-96. The net offshore remuneration in respect of expatriate employees is also indicated in the statement as under: Details Asst. yr. 1990-91 Asst. yr. 1991-92 Asst. yr. 1992-93 Asst. yr. 1993-94 Asst. yr. 1994-95 Asst. yr. 1995-96 Total Tax (As TDS arrears) 3,61,635 10,54,924 29,86,963 49,44,312 35,86,781 36,15,895 1,65,50,510 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r stated in the said letter of 13th January as under: We have paid tax in fiscal year 1994-95 on remuneration to expatriates offshore pertaining to the period under the Amnesty Scheme announced by the CBDT vide Circular No. 685, dated 17/20th June, 1994. To the extent such tax pertained to fiscal year 1991-92 (relevant to assessment year 1992-93) we now wish to claim the deduction of tax paid by us in fiscal year 1994-95 in pursuance of the Amnesty Scheme amounting to Rs. 29,86,963.00. The break-up of the figures filed by the assessee are as under: Name of the expatriates offshore staff Net offshore remuneration (Rs.) Additional tax borne by the bank (Rs.) Total offshore remuneration (Rs.) Tax thereon (Rs.) Mr. Moulder 14,00,121 17,81,972 31,82,093 17,81,972 Mr. Merckx 7,98,546 10,16,333 18,14,879 10,16,333 Mr. Koster 1,88,658 1,88,658 3,77,316 1,88,658 23,87,325 29,86,953 53,74,288 29,86,963 10. For assessment year 1993-94, the assessee had filed a letter dated 21st April, 1995, during the course of assessment proceedings making the claim for deduction for remuneration and tax paid in respect of expatriate employees who had rendered services in India but had received payment abroa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same has not been debited to the accounts of the bank in India. In the circumstances, the claim for deduction of Rs. 61,90,206 cannot be accepted. As regards the claim for deduction of Rs. 49,44,312 being tax borne by the bank as salary paid to the expatriates offshore, it is to be noted that the payments have been made only in fiscal year 1994-95. In the circumstances, the assessee's claim for deduction of Rs. 49,44,312 in the assessment for the assessment year 1993-94 cannot be entertained. Hence, the assessee's claim for deduction of Rs. 61,90,206 on account of salary paid to expatriates offshore and Rs. 49,44,312 being tax paid on salaries to expatriates are disallowed in the assessment year but will be considered in the assessment for the assessment year 1995-96 relevant to the fiscal year 1994-95. 11. For assessment year 1994-95, the assessee vide letter dated 8th Oct., 1996, claimed a deduction in respect of offshore remuneration and the tax paid in respect of such remuneration. The claim of the assessee was rejected by the Assessing Officer vide para 8 of the assessment order, which is reproduced hereunder: 8. OFFSHORE PAYMENTS (GROSS) MADE TO EXPATS: RS. 83,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mnesty Scheme and it is not a regular payment. Therefore, not allowable under regular provisions. (e) Assessee is allowed head office expenses at the rate of 5 per cent of taxable income in India. Therefore in such expenditure including the remuneration under consideration has merged with head office expenses and, therefore, it is treated as allowed by way of head office expenses. The Assessing Officer has further observed in the assessment order as under: The above said reasons for not allowing offshore expatriates remuneration applies to interest, TDS and remuneration paid for earlier-years also. Therefore, in view of the above discussion and reasons, the claim of assessee relating to interest, TDS and remuneration for earlier years and for the year under consideration is disallowed. 14. The CIT(A) has confirmed the disallowance. The relevant portion of the order being paras 8, 9 and 10 are reproduced hereunder: 8. Ground No. 4(a) of appeal relates to disallowance of a sum of Rs. 89,04,276 being the remuneration, tax and interest paid in the current financial year to the expatriate employees. While disallowing, the Assessing Officer has given the following reasons: (a) the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if there is any liability for payment of the same to the bank it rests on those expatriate employees. The appellant cannot say that this should be treated as revenue expenditure. Therefore, for the detailed reasons given above, I am of the opinion that the taxes paid by the appellant-company because of its own fault in not collecting taxes from its expatriate employees in time and depositing the same with the Government of India cannot be allowed as a revenue expenditure. The Assessing Officer was perfectly justified in disallowing the same and, therefore, the addition of Rs. 2,06,54,499 is sustained. 15. The learned counsel for the assessee contended that the assessee is entitled to deduction on account of remuneration paid to expatriate employees outside India for the services rendered in India. Since the expenditure is directly related to PE in India, deduction is allowable as expenses pertaining to the PE. It was pointed out that the salary paid to the employees does not fall within the ambit of section 44C as head office expenses. The learned counsel pointed out that the 'head office expenditure' is defined to mean executive and general administration expenditure incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA between India and Netherlands provides for taxation of income of the PE. The said article also provides certain guidelines for determination of the profits of PE for the purpose of taxation in India. It will be useful to reproduce paras 2 and 3(a) of article 7 of the DTAA: 2. Subject to the provisions of para 3, where an enterprise of one of the States carries on business in the other State through a permanent establishment situated therein, there shall in each State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is permanent establishment. In any case, where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in respect of the remuneration paid to the expatriate employees having rendered services in India notwithstanding the fact that the payment for such remuneration was paid to them outside India. This view has also been taken by the co-ordinate Bench in the assessee's own case for the assessment year 1996-97 and the issue has been decided vide paras 12 and 13 of the order in ITA No. 692/Cal./2000, dated 30th March, 2001. The relevant portion of the said order of the Tribunal is reproduced hereunder: 12. When the undisputed facts are that the employees concerned rendered whole-time services in India throughout the accounting year under consideration, any salary paid to them whatever the same may be, will have to be allowed as expenses pertaining to the business of the assessee in India. It is also the case of the assessee that even taxes were deducted at source from those components of salary payment to the three expatriate employees in Netherlands and that the said taxes were duly deposited with the Government of India. If that be the case, we do not find any reason to disallow the claim of the assessee. In principle, therefore, we hold that the claim of the assessee toward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer to consider the claim of the assessee for assessment years 1992-93, 1993-94 and 1994-95 as under: In principle, the remuneration paid to expatriate employees for the services rendered in India is to be accepted as allowable deduction in computing the profits attributable to PE. So, however, the Assessing Officer is required to verify that the assessee has not taken such remuneration into account in working out the head office expenses under section 44C. Section 44C read as under: 44C. Notwithstanding anything to the contrary contained in sections 28 to 43A, in the case of an assessee, being a non-resident, no allowance shall be made, in computing the income chargeable under the head 'Profits and gains of business or profession', in respect of so much of the expenditure in the nature of head office expenditure as is in excess of the amount computed as hereunder, namely:- (a) an amount equal to five per cent of the adjusted total income; or (b) (c) the amount of so much of the expenditure in the nature of head office expenditure incurred by the assessee as is attributable to the business or profession of the assessee in India, whichever is the least. Once the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respective assessment years. So, however, deduction has got to be allowed, as already pointed out, in accordance with section 40(a) read with proviso. The tax not having been deducted at source in the respective assessment years but having been paid in assessment year 1995-96, the deduction in respect of remuneration is allowable in the year of payment, i.e., assessment year 1995-96. This takes care of part of the additional ground raised by the assessee before us in assessment year 1995-96, whereby the deduction in respect of the remuneration and tax component pertaining to assessment years 1992-93 to 1994-95 is claimed as deduction in assessment year 1995-96. For assessment year 1995-96, tax has been paid by the assessee in the same assessment year. Therefore, the prohibition under section 40(a) is not attracted. The claim of the assessee shall be considered accordingly. We direct accordingly. 23. Tax deducted at source in respect of remuneration paid outside India to the expatriate employees . As pointed out earlier, the assessee had neither deducted nor paid any tax in respect of the remuneration paid to the expatriate employees. It is the claim of the assessee that expatriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the bank's external tax adviser. Payment of taxes and social security Taxes and social security premiums (employer's as well as employee's share) should, if possible be paid by the bank direct to the respective authorities as soon as these are due. Guide International Career Bankers (ICB) Expatriate salary - System - General In order to ensure that changes in local taxes and social security regulations do not influence the application of this policy a net salary system is effective for all ICBs. The net base salary is defined as a base salary less tax, social security, schooling and housing expenses. It includes typical expatriate allowances. Net Guarantee/Gross up The ICB's salary is a net salary which means that tax, social security premiums, etc., related to the employment income will be for account of the bank. Exception is made for the Line of Business Bonus. Tax and social security premiums from other personal income are not for account of the bank. We, thus, submit that it is the bank's responsibility and obligation to bear the Indian taxes on offshore remuneration of expatriate employees rendering services in India. In the computation of remuneration a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had neither paid nor deducted taxes in assessment years 1992-93 to 1994-95. However, in assessment year 1995-96, the assessee has paid the tax deductible at source. Therefore, in principle the assessee would be entitled to deduction in respect of the tax component of the salary also if the salary is found to be deductible as per the directions of the Tribunal for assessment year 1996-97, which has also been adopted by us. So, however, no deduction will be permissible in assessment years 1992-93 to 1994-95 by operation of section 40(a)(i) of the Income-tax Act, 1961. The claim for the said assessment years shall have to be disallowed for the reason of non-deduction of tax. So, however, the deduction shall have to be considered for assessment year 1995-96 as per proviso to section 40(a)(i). 25. Thus, subject to verification that the claim of remuneration and tax deductible has not been taken into account under section 44C in regard to the expatriate employees, the deduction relating to assessment years 1992-93 to 1994-95 would be permissible in assessment year 1995-96 as per proviso to section 40(a)(i). For assessment year 1995-96, the assessee has paid the tax and, therefore, secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the assessment years 1990-91 and 1991-92. No evidence has been placed on record to establish that the assessee had at any stage made the claim for deduction in the said assessment years. In principle, the claim of the assessee has got to be considered in the assessment year to which the claim pertains to. It is only when the claim is considered and found allowable but for provisions of section 40(a) that the same can be allowed in the year of payment. Since the claim for assessment years 1990-91 and 1991-92 is not established to have been made and considered in earlier years, the benefit is not permissible in assessment year 1995-96 merely because the tax has been paid in the year under appeal. The benefit of the proviso to section 40(a)(i) is thus not available to the assessee for which no claim is made in the respective assessment years. Therefore, the claim of the assessee does not fall for consideration in assessment year 1995-96 on the basis of provisions of section 40(a) read with proviso. The disallowance pertaining to assessment years 1990-91 and 1991-92 in regard to the remuneration and the tax component in assessment year 1995-96 is upheld. 28. Interest: That leaves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtmental Representative, on the other hand, contended that the assessee is not entitled to deduction on account of interest for non-deduction of tax and non-payment of the same as it is neither part of remuneration nor as an expenditure incurred for purposes of business. 31. We have given our careful consideration to the rival contentions. The issue relating to the claim of interest is peculiar in this case insofar as the interest is on account of income-tax, which the assessee was required to deduct at source and pay to the Government. We have dealt with this issue relating to the remuneration and tax component on the remuneration and in principle agreed that the assessee would be entitled to deduction subject to the verification as laid down in the order. It would appear that when the assessee is entitled to deduction on account of income-tax, the same principle would apply to the interest charged for non-payment of tax-the interest being compensatory in nature. 32. For appreciation of the issue in proper perspective, it would be relevant to consider as to whether the income-tax is allowable as a deduction. If income-tax is allowable as a deduction, the interest payable on such t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome chargeable under the head 'Salaries' shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. 195A. Where, under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions, such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. 200. Any person deducting any sum in accordance with the provisions of sections 192 to 194, 194A, 194B, 194BB, 194C, 194D, 194E, 194EE, 194F, 194G, 194H, 194-I, 194J, 194K, 194L, 195, 196A, 196B, 196C and 196D shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. 201.(1) If any such person a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TDS is deducted from the income of somebody, the assessee is merely a custodian of the TDS amount. He cannot touch the amount. That amount is to be deposited within the time prescribed in the Central Government account and any loss or profit in the business of the assessee has nothing to do with deposit of the TDS amount. Reference may be made to the definition of tax under the DTAA. Article 3(d) reads as under: (d) the term 'tax' means Indian tax or Netherlands tax as the context requires, but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Convention applies or which represents a penalty imposed relating to those taxes; It is evident from the above definition that even DTAA does not cover such a levy. It may also be pertinent to mention that income-tax paid by the assessee does not qualify for deduction as such. This view is supported by the decision of the Supreme Court in the case of Smt. Padmavati Jaikrishna v. Addl. CIT [1987] 166 ITR 176. In the case of East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC), their Lordships of the Supreme Court held that the interest paid on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) failed to appreciate that the appellant's staff would invariably accompany the guest during the course of which the said entertainment expenses were incurred. The CIT(A), therefore, should have first allowed 50 per cent of the total entertainment expenditure as a fully allowable deduction. Without prejudice to this contention and in any event of the matter, the CIT(A) erred in confirming the additional disallowance made by the Assessing Officer to the extent of Rs. 70,000 on this account. The CIT(A) failed to appreciate that having confirmed the entire amount of entertainment as falling within provisions of section 37(2), there was no need to confirm any additional ad hoc amount of disallowance. The assessee had incurred an expenditure of Rs. 19,54,892 on account of entertainment. 50 per cent of the said expenditure was treated as attributable to employees and the balance of Rs. 9,72,446 was offered for taxation in the return of income. However, during the course of assessment proceedings, the assessee claimed that, keeping in view the fact that the employees of the assessee accompanied the customers, deduction to the extent of 50 per cent may be allowed as attributable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses exclusively pertaining to the employees. The CIT(A) has sustained a disallowance of Rs. 70,000 out of the said amount. Thus, the total entertainment expenses disallowed under section 37(2) would work out to Rs. 9,72,446 + Rs. 70,000, aggregating to Rs. 10,42,446. This amount pertains to the entertainment expenses of customers. The claim of the assessee that employees have also participated in entertaining the customers has been accepted to the extent of 25 per cent by the Tribunal. Therefore, the assessee would be entitled to the deduction to the extent of 25 per cent out of the amount treated as entertainment expenses pertaining to customers. This is how the direction to allow 25 per cent of Rs. 10,42,446 is justified. We, therefore, direct the Assessing Officer to allow relief of Rs. 2,60,610 to the assessee. The ground relating to disallowance of Rs. 70,000 also stands disposed of by respectfully following the order of the co-ordinate Bench for assessment year 1996-97 subject to 25 per cent relief as indicated above. Assessment years 1992-93, 1993-94 and 1994-95: 38. The following common grounds of appeal relating to rate of tax applicable in the case of appellant-comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s claimed by the assessee that the issue had been considered by the Tribunal in assessee's own case in ITA No. 692/Cal/2000, dated 30th March, 2001, and that for assessment year 1991-92, the rate of tax was charged as applicable to domestic companies. The CIT(A) has referred to the decision of the Tribunal in favour of the assessee, but has pointed out that after the decision of the Tribunal, there has been amendment by the Finance Act of 2001, in section 90 of the IT Act, 1961, by virtue of which an Explanation to section 90(2) was added. The CIT(A) has on the basis of the said Explanation, which is applicable retrospectively with retrospective effect from 1st April, 1962, held that the assessee was liable to tax at the rates applicable to foreign companies. 40. The learned counsel for the assessee contended that the CIT(A) was not justified in invoking his powers under section 251 insofar as the issue was covered by the CBDT Instruction No. 500/45/94-FTD, dated 21st November, 1994 and also the decision of the Tribunal in the assessee's own case for the assessment year 1996-97. It was contended that the appeal of the assessee before the CIT(A) was in regard to the income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended. 42. Sri Dastur, as an alternative to the aforementioned argument, contended that in any case the circulars of the Board are binding upon the Revenue authorities working under their jurisdiction. Relying upon the decision of the Supreme Court in the case of Ellerman Lines Ltd. v. CIT [1971] 82 ITR 913, it was contended that even the letters issued by the Board are considered as circulars having a binding force under section 119 of the Income-tax Act, 1961. It was further contended that the withdrawal of the circular issued by the Board is effective prospectively and not retrospectively. In this connection reliance was placed on the decision of Bombay High Court in the case of Unit Trust of India v. P.K. Unny, ITO [2001] 249 ITR 612. The learned counsel further invited our attention to the decision of the Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889 in support of the contention that the CBDT has the power to issue circulars having effect of relaxing the rigour of law and also providing of uniform application of law consonant with concept of income. Such circulars are not to be treated as inconsistent with provisions of the statute. Their Lordships have fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Finance Act, 2001, with retrospective effect from 1st April, 1962. It is well-settled law, according to the learned Departmental Representative, that in the event of conflict between a treaty and the statutory law, the statutory law will prevail. It was further contended that section 90 is an enabling provision for entering into agreements with other countries for double taxation avoidance, etc. It was contended that the CIT(A) exercises his powers co-terminus with the Assessing Officer, as held by their Lordships of the Supreme Court in the case of CIT v. Kanpur Coal Syndicate [1964] 53 ITR 225 and, therefore, the CIT(A) had the power to enhance the rate of tax applicable in the case of the assessee. Referring to the contention on behalf of the assessee that the taxation of the appellant was governed by the CBDT circulars, it was contended that the letters issued by the Board do not partake the character of circulars. In this connection, reliance was placed on the decision of the Supreme Court in the case of CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1, at p. 15 and that of the Delhi High Court in the case of Geep Industrial Syndicate Ltd. v. CBDT [1987] 166 ITR 88. It was furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Revenue, according to the learned counsel, are distinguishable on facts. It was, accordingly, pleaded that the appeal of the appellant on this ground may be accepted. 46. We have given our careful consideration to the rival contentions. The issue relating to the applicability of rate of tax in the case of the assessee had come up for consideration of the Tribunal in the assessee's own case for assessment year 1996-97. The Tribunal vide order, dated 30th March, 2001, in para 23 relating to applicability of article 24(1) held- We are of the opinion (as discussed above) that the assessee-company cannot be considered to be in the same circumstances as an Indian company in view of the fact that the scope of taxation of the Indian company is wider enough than that of a non-resident company like the assessee . However, the contention on behalf of the assessee was accepted to be covered under article 24(2) of DTAA. Para 28 of the order of the Tribunal is quoted as under: 28. Taking into consideration the different aspects of the case, we are finally of the opinion that by virtue of article 24(2) of the DTAA between India and Netherlands, the assessee-company cannot be subjected t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his Act and under the corresponding law in force in that country, and may, by notification in the official gazette, make such provisions as may be necessary for implementing the agreement. (2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. The following Explanation was inserted by the Finance Act, 2001, with retrospective effect from 1st April, 1962: Explanation.- For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India. 49. Before considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for avoidance of double taxation of income, etc. Thus, the source of DTAA with Netherlands is section 90 of the Income-tax Act, 1961. Section 90 has been quoted in para 48 above. 51. It is noteworthy that sub-section (2) of section 90 provides for application of beneficial provisions of the agreement in contrast to the contrary provisions of the Income-tax Act, 1961. It has, however, to be borne in mind that in the event of there being no conflict between the provisions of the DTAA and the Income-tax Act, 1961, the effect shall have to be given to the provisions of the Income-tax Act, 1961. It is only when there is a conflict between the provisions of the agreements in contrast with the provisions of the IT Act, 1961, that the beneficial treatment is to be given as per section 90(2) of the IT Act, 1961. In this connection, circular of the CBDT, being No. 333, dated 2nd April, 1982, also clarifies the position of law, which is quoted hereunder:- Subject: Conflict between the provisions of the IT Act, 1961, and the provisions of the DTAA - Clarification. It has come to the notice of the Board that sometimes effect to the provisions of DTAA is not given by the Assessing Officers when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: Article 24 - Non-discrimination 1. Nationals of one of the Stales shall not be subjected in the other State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected. These provisions shall, notwithstanding the provisions of article 1, also apply to persons who are not residents of one or both of the States. 2. Except where the provisions of para 3 of article 7 apply, the taxation on a permanent establishment which an enterprise of one of the States has in the other State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. 3. The provisions of para 2 shall not be construed as obliging one of the States to grant to residents of the other State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents. 4. Except where the provisions of para 1 of article 9, para 9 of article 11, or para 9 of article 12 apply, interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be relevant to refer to article 2, para 4 of the DTAA which reads as under: 4. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the States shall notify to each other any substantial changes which have been made in their respective taxation laws. 55. It is thus evident that even the DTAA recognizes the fact that the amendments effected by the respective Legislatures after the execution of the DTAA are not affected insofar as they are not repugnant to the specific provisions of the DTAA. In this view of the matter, the amendment in section 90 is applicable in this case with retrospective effect insofar as it is not in conflict with the provisions of DTAA. 56. The contention, advanced on behalf of the assessee that the said Explanation to section 90 is unimplementable because of inappropriate language, does not appeal to us. The Explanation in our view provides for two eventualities. One is the charge of tax in respect of a foreign company vis-a-vis an Indian company, (i.e., a domestic company). The second categ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re has been paid or deducted during the relevant previous year as required under Chapter XVII-B of IT Act. In fact, admittedly the amount of tax (TDS) has been paid in the subsequent previous year ended 31st March, 1995, relevant to assessment year 1995-96. As per the provision of section 40(a)(i) and proviso thereto, any sum chargeable under the IT Act which is payable outside India on which tax has not been paid or deducted under Chapter XVII-B, shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession . It is further provided that where in respect of any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such sum shall be allowed as deduction in computing the total income of the previous year in which such tax has been paid or deducted . In view of the express provision of section 40(a)(i), restricting the allowance for deduction under certain circumstances, which are applicable to the facts of the appellant's case, the claim for deduction in respect of remuneration paid to the expatriates offshore and TDS thereof, cannot be allowed in the assessment year 1993-94. The order of the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) did not have any occasion to disturb the same by directing to apply the higher rate and in disturbing the position accepted even by the CBDT in that way. Finally, therefore, we knock down the enhancement, as directed by the CIT(A) in this case and, on the other hand, order that the rate of tax as considered in the assessment be adopted.' 6. However, the Finance Act, 2001 has inserted an Explanation to section 90(2) of the Act, with retrospective effect from 1st April, 1962. The said Explanation is produced below: 'For the removal of doubts, it is hereby declared, that the charge of tax in respect of foreign companies at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign companies, where such foreign companies has not made prescribed arrangement for declaration and payment within India of dividends (including the dividends on preference share) payable out of its income in India.' It is evident that the Explanation effectively seeks to override non-discrimination article of the DTAA with retrospective effect. The Explanation inserted is clarificatory in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in regard to these two letters issued by the CBDT. It is evident from the contents of the letters that the opinion of the Board is expressed in the aforementioned letters. If the law were not amended, perhaps we would have no difficulty in holding that the Assessing Officer could not have overlooked the opinion of the Board in regard to the taxation of the appellants. So, however, the law has been amended retrospectively. Therefore, the only issue that requires to be considered is as to whether the circular of the CBDT prevails over the statutory law passed by the Supreme Legislature. The CBDT is the creation of statute. The instructions issued under section 119 of the IT Act, 1961, is under the delegated power by the Parliament. Therefore, it is futile to suggest that the CBDT circulars would prevail over the conscious amendment of the law by the Legislature which overrides the law prevalent before the amendment including the CBDT circulars. Their lordships of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 held that the circulars issued by the Board would be binding on all officers and persons employed in the execution of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to interpret the law. This view is in consonance with the view expressed by their Lordships of the Supreme Court in the case of State Bank of Travancore. 62. We may further refer to the observations of Sri K. Srinivasan, author of the book on DTAA contained in para 7.2 of the book as under:- 7.2 While a treaty may supersede the existing law insofar as its specific terms are concerned, its scope cannot be obviously widened by provisions covering future enactments, for no sovereign Legislature will ever agree to be eternally bound by such executive stipulations. There is nothing in law preventing the Legislature from revising its own views and amending the existing enactments. A treaty cannot afford protection against such subsequent changes in law. However, all that is required for revision of a treaty is the prescribed notice. Whenever the law undergoes any modification that may affect the terms of a treaty, the administration may have to give due notice to the concerned countries immediately to avoid giving any cause for a grievance. Courts have held in the UK that any unilateral legislation enacted after a treaty has come into force will override the treaty, whereas if it had be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paras. When it seems advisable in order to reach agreement to have an oral exchange of opinions, such exchange may take place through a Commission consisting of representatives of the competent authorities of the two States. We admit our failure to appreciate as to how a letter written to the CBDT seeking opinion about the rate of tax chargeable in the case of the appellant fits in within the framework of reference under article 25 of the DTAA. We find no merit in the contention in this regard advanced on behalf of the appellants. 64. For assessment years 1997-98 and 1998-99, (he common grounds of appeal relating to rate of tax are as under: 1a. That, on the facts and in the circumstances of the case, the learned CIT(A) erred in upholding the action of the Assessing Officer of charging tax at a higher rate (55 per cent) applicable to foreign companies instead of the tax rate applicable to domestic companies (43 per cent) as claimed by the appellant. 1b. That, without prejudice to ground 1a above, the learned CIT(A) without considering the elaborate submissions made in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Mumbai, purportedly for investment in the purchase of NPC Bonds. The said cheque was encashed by the bank on the same day. Sri N.K. Agarwal, the broker, through whom the investment was made, failed to deliver the 17 per cent NPC Bonds in spite of repeated reminders. On 18th March, 1992, Sri N.K. Agarwal delivered original letter of allotment covering 1 lakh 9 per cent tax-free secured redeemable non-convertible bonds of Rs. 1,000 each fully paid-up (6th 'A' series) Railway Bond 1991-92 issued by the Indian Railway Finance Corporation Ltd. (IRFC). It is the claim of the assessee that the delivery of IRFC Bonds was accepted from Sri N.K. Agarwal on the understanding that the same would be held as alternate security pending delivery of 17 per cent NPC Bonds. The assessee sought information from Andhra Bank about the non-delivery of NPC Bonds vide letter dated 18th June, 1992. The Andhra Bank vide letter, dated 22nd June, 1992 informed the assessee that the amount received from Sri N.K. Agarwal was credited in the account of Sri Hitendra Dalai, the broker, as per the instructions of Sri N.K. Agarwal. The assessee had lodged the IRFC Bonds with Indian Railway Financial Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revious year and, accordingly, allowable as a business loss. It was stated by the learned counsel that the interest paid to PHB has been allowed as a deduction. The learned counsel pointed out that in order to avoid adverse publicity, the assessee in the business interests considered it prudent lo settle the claim with the PHB. Our attention was invited to the decision of the Supreme Court in the case of CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 where the jewellery pledged with the bank had been stolen. Though the bank was not legally bound to compensate the borrowers for the loss of jewellery, it was decided to do so in the interests of business. Such expenditure incurred by the assessee was held to be allowable as business loss. Reference was also made to the CBDT Circular No. 35D, in support of the contention that the loss incidental to business is to be allowed in the year in which it was discovered. Reference was also made to the decision of the Gujarat High Court in the case of Dinesh Mills Ltd. v. CIT [2002] 254 ITR 673 in support of the contention that the loss suffered by the assessee in the course of business was allowable. It was, accordingly, pleaded that the deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal by reason of refund of principal and interest to the investor, PHB. We first propose to deal with the second aspect. As is evident from the facts, the assessee had received the amount from PHB on 28th Feb., 1992. The assessee had received IRFC Bonds from Sri N.K. Agarwal in March, 1992, as indicated in the decision of the Company Law Board, Northern Region, New Delhi, placed on record. These bonds had been lodged with IRFC. It was in June, 1992, that the assessee was informed that the original bonds had already been transferred in favour of the Standard Chartered Bank. So, if at all the assessee can be said to have lost the investment made through Sri N.K. Agarwal, its discovery could be said to be on receiving the information from IRFC in June, 1992. The said date falls in assessment year 1993-94. We are dealing with assessment year 1994-95. In assessment year 1994-95, the assessee has settled the claim with PHB by repaying the investment along with 17 percent interest on such investment. The claim of the assessee is that the investment had been made on behalf of the PHB and that it had no legal obligation to refund the investment to the PHB. However, the refund was made as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were refused to be registered in the name of the assessee, even then the loss falls in assessment year 1993-94. However, assessee is to claim the loss only after losing the reasonable hope of recovery, the loss can be considered only in the event of the decision in the suit instituted against Sri N.K. Agarwal and Andhra Bank. This may be explained with an example. In the case of a trader, the assessee supplying goods to party 'A' may find it difficult to make recovery on account of the sale price of the goods. The assessee without making any efforts for recovering the amount cannot be said to have suffered the loss unless all reasonable means are exhausted for the recovery of the sale price. In this case, Sri N.K. Agarwal is stated to be the agent for Andhra Bank and the receipt of money has been pursued through Sri N.K. Agarwal, as admitted by Andhra Bank. The dispute is about the nature of the instructions received from the assessee regarding the investments. The suit has been instituted and there is still reasonable hope of recovery of the amount. The loss in the year under appeal cannot be said to have been incurred by the assessee notwithstanding the fact that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judice to the right of the assessee to claim the loss, if any, in which it can be said to have been incurred. 73. Before parting, we may point out that the assessee had filed application dated 10th March, 2003 on 11th March, 2003 with the Registry raising the following additional ground of appeal for assessment year 1993-94: In the event of the appellant's claim for operational loss on securities amounting to Rs. 9,57,58,904 is not allowed in the assessment year 1994-95, the same ought to be considered and allowed in the assessment year 1993-94. The hearing of appeal for assessment year 1993-94 was concluded on 6th March, 2003, along with appeals for assessment years 1992-93 and 1995-96. The filing of additional ground of appeal after concluding the hearing and subsequent to the date of hearing is inconsequential and, accordingly, does not require any consideration. It may also be pertinent to mention that the assessee has filed a suit against Andhra Bank and Sri N.K. Agarwal and facts stated by the assessee are disputed. Therefore, whether the assessee has incurred the loss or not is dependent on the outcome of the suit. In such circumstances the claim of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) is thus not available to the assessee for which no claim is made in the respective assessment years. 78. In my considered view, however, in cases where deduction in respect of sums paid to non-residents is claimed in the year in which the relevant tax deduction at source obligations are discharged, and such an year is subsequent to the year to which relevant expenses pertain, it is not sine qua non that the assessee should have first claimed the deduction in the year to which it pertains and the deduction should have been rejected by the Assessing Officer under section 40(a)(i). I am, therefore, unable to subscribe to the aforesaid proposition laid down in learned Vice President's proposed draft. 79. I may reproduce the contents of section 40(a)(i) for ready reference: Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',- (a) in the case of any assessee (i) any interest (not being interest on a loan issued for public subscription before the 1st day of April, 1938), royalty, fees for technical services or other sum charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n any event, there is nothing between the lines to justify such an interpretation either. I am of the considered view that, in any event, it can be nothing short of a meaningless ritual for an assessee to claim a deduction knowing well that the same is specifically inadmissible in view of the provisions of section 40(a)(i), or, for that purpose, for the Assessing Officer or the appellate authorities to adjudicate on the academic questions of allowability of such a deduction on merits when the same is clearly not admissible in view of specific provisions of section 40(a)(i). By the virtue of section 40(a)(i), in my considered view, deductions in respect of payments made outside India, involving tax deduction at source obligations by the payee, are admissible in the year in which such tax deduction at source obligations have been discharged, and this principle operates de hors the method of accounting employed by the assessee. For all these reasons, in my considered view, it is not a condition precedent for admissibility of deduction under proviso to section 40(a)(i) that the assessee should have first claimed the deduction in the year to which it pertains and that deduction should h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arrived at by the learned Vice President. In my considered view, therefore, the deduction of remuneration and tax in respect of 1990-91 and 1991-92 is to be allowed in the assessment year 1995-96, i.e., the year in which the assessee has duly discharged the tax deduction at source obligation in respect of the same. B: Deducibility of interest under section 201(1A) 84. In para 28 of the proposed draft, learned Vice President has observed as follows: That leaves us to consider the interest paid by the assessee under section 201(1A). Before proceeding to consider this issue, we would make it clear that for assessment years 1992-93 to 1994-95 interest paid by the assessee was neither claimed in the course of assessment proceedings nor in the grounds of appeal before the CIT(A) or before us. The claim has, however, been made in the assessment year 1995-96. Thus, at the very outset the claim of interest pertaining to period falling in 1990-91 to 1994-95 is disallowable in any case for the reason that no such claim has been made for the relevant years. In my considered view, however, since the aforesaid interest was in the nature of employee cost and since it was paid in the previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his case. [The expression interest paid by the assessee as 'an assessee-in-default' of tax refers to interest paid by the assessee under section 201(1A) of the Act.] However, in my considered view, interest paid by the assessee on the facts of this case is in the nature of a compensatory levy and part of the employee cost. I am also of the view that since the interest in question is not in respect of taxes on income of the assessee, but in respect of employee tax liability which is in the nature of 'employee cost' for the assessee, Hon'ble Supreme Court's judgments in the cases of Smt. Padmavati Jaikrishna and East India Pharmaceutical Works Ltd. are not relevant in the present context. 86. In the proposed order, the learned Vice President has declined the claim by observing that income-tax does not constitute an admissible deduction and since interest in question is paid in connection with income-tax, the interest paid on account of delay in deposit of tax deducted at source also cannot be allowed as a deduction. Interestingly, however, in the proposed order, the learned Vice President himself has allowed the deduction on account of tax deductible at source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook note of the legal position that the expenditure to be deductible... must be laid out or expended wholly and exclusively for the purpose of making or earning such income... as also the finding that the expenditure in this case was to meet the personal liability of payment of income-tax and wealth-tax which was obviously not to earn income. To my understanding, the principle that could be said to emerge from this judgment is that only such expenses can be allowed as a deduction which are incurred to earn that income, but then income-tax is certainly not 'to earn an income', and, therefore, rightly inadmissible as a deduction. In the case of East India Pharmaceutical Works Ltd. relied upon by the learned Vice President, Hon'ble Supreme Court has simply followed this principle and observed that as has been already noticed in Smt. Padmavati Jaikrishna's case, this Court had affirmatively held that, meeting the liability for income-tax was a personal liability and such expenditure can never be held to be wholly and exclusively for the purpose of earning income. On the facts of the present case, however, none of these judgments have any application. It is not in disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided for under section 3(3) is in the nature of compensation paid to the Government for delay in the payment of cess. It is not by way of penalty. The provision for penalty as a civil liability has been made under section 3(5) and for penalty as a criminal offence under section 4. Their Lordships were thus of the opinion that a compensatory levy of interest is a deductible expenditure. In view of Tribunal's decision in the case of Titagarh Steels Ltd., interest levy under section 201(1) is a compensatory levy, and, therefore, the same constitutes an admissible deduction. The circumstances leading to this levy may be such as to invite a penal action but then what is material in the present context is the precise nature of deduction being claimed, and no further. It may be recalled that in Mahalakshmi Sugar Mills Co.'s case, Their Lordships had further observed as follows: In our opinion, the interest paid under section 3(3) of the Cess Act cannot be described as a penalty paid for an infringement of the law. As that is the only ground on which the Revenue resists the claim of the assessee to a deduction of the interest under section 10(2)(xv) of the Indian Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scam and the loss incurred was not business loss, this loss of Rs. 9,57,58,904 cannot be allowed to the appellant. The Assessing Officer is directed to give effect to this order enhancing the income of the appellant to this extent. Aggrieved by the enhancement so made by the first appellate authority, assessee is in appeal before us. 93. In order to appreciate the nature of this loss in correct perspective, it may also be useful to understand the nature of transaction as also modus operandi of the broker. 94. As evident from the document placed before us at p. 47 of the paper book, the assessee received a sum of Rs. 10 crores from Punjab Housing Board (PHB), for investment by the assessee, for a period of 180 days subject to the condition that the money is to be invested in Government securities, UTI or tax-free bonds, that a return of 17 per cent minimum will be guaranteed, that all services were to be rendered in Chandigarh, and that in case of emergency, money may be made available to PHB with whatever returns that becomes due at that time. It was in the course of investment of money so received by the assessee that on 9th March, 1992, it issued a cheque of Rs. 9,57,58,904 to A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anking industry which proved to be a fertile ground for ingenious and unscrupulous scamsters. 95. It is not in dispute in the present case that it was this payment advice-cum-cheque which was handed over by the assessee to the broker, and this fact is also evident from acknowledgement on copy of the payment advice-cum-cheque placed before us at p. 49 of the paper book. What has apparently been done by someone in this case is that he removed the top portion of payment advice-cum-cheque, ignored its contents altogether, and used the bottom portion, i.e., the cheque, for affording credit to the account of one Hiten Dalal, one of the central characters in several cases of security scams in this country. This exercise, in our considered view, is nothing short of a fraud within meanings of section 17 of the Indian Contracts Act, 1872, which describes fraud as, inter alia, active concealment of a fact by one having knowledge or belief of the fact. Now, it cannot be in dispute that the person who received the payment advice-cum-cheque was aware that the cheque in the name of Andhra Bank was specifically for the purpose of purchase of NPC Bonds in the name of PHB, but he actively conceals t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 10 crores from PHB, and investment in NFC Bonds are interconnected and integral part of the transaction entered into by the assessee-bank. While making this, purchase of 17 per cent NPC Bonds, assessee was not making an investment in the course of its business, but making an investment specifically on behalf of the constituent, i.e., PHB as an agent. It would also appear to us that the assessee acted in the manner in which a normal prudent person would have acted by issuing the cheque in the name of Andhra Bank with specific instructions to use the proceeds of this cheque for buying the securities in question. The loss suffered by the assessee in such a situation, i.e., acting as an agent of PHB and while conducting the business in a bona fide manner, prima facie is on account of the principal, i.e., PHB. In our considered view, therefore, no loss was incurred by the assessee as such on his account, but on account of its client, i.e., PHB, specifically on whose behalf and specifically in whose name, the assessee was trying to acquire securities. Yet the assessee agreed to bear this loss by making good the loss caused to PHB, not because the assessee had a legal duty to do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. The amount so paid was, however, disallowed by the Revenue on the ground that the assessee-bank did not have any liability to settle the claim. When the matter finally reached the Hon'ble Supreme Court, Revenue contended that the loss incurred by the bank was under no legal liability to pay to the constituents the value of the jewellery pledged. Revenue also pointed out that the bank was, as a pledgee, a bailee of the jewellery and was in law required to take as much care of the pledged jewellery as a person of ordinary prudence would take under similar circumstances of his own jewellery of the same bulk, quantity and value, and the bank having provided an adequate number of watchmen, it was not liable for the loss of the property pledged. It was in this backdrop that Their Lordships observed that, Granting that, on proof that it had taken as much care of the jewellery pledged with it as it would have taken if it belonged to it, the bank could enforce its rights and recover the full amount due from the constituents, the question still remains whether in admitting liability for the purpose of the business, and thus answered the question posed to themselves: ... The credit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is argument proceeds on the fallacy that it is the loss incurred on behalf of PHB which is being claimed as deduction, whereas, in my view, it is the payment to PHB, which is a payment warranted on account of commercial expediency rather than contractual obligations, which is being claimed as a deduction. Secondly, assuming that such a possibility may have any relevance in this matter, even the 'possibility' of recovery has to be a reasonable possibility, i.e., what a reasonable person would expect in the given circumstances. The material on record, in my understanding, indicates that the assessee-bank has been taken for a ride by unscrupulous operators, misusing the loopholes in the system, and exploiting the fact that transactions involving such huge amounts were entered into, perhaps as a normal course in the banking industry, without taking highest degree of safety measures and incorporating checks and balances as such, and but for this laxity inherent in the normal banking practices, scams of the kind which have become somewhat common in the recent past could not have taken place. Learned CIT(A) has made this enhancement merely on the basis that the matter is still pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas the appeals for the asst. yrs. 1992-93 to 1994-95 are disposed of by way of the consolidated order, a reference is made to the Hon'ble President for nomination of Third Member in order to resolve the points of difference amongst the members of the Bench for the asst. yr. 1995-96. The points of difference are as under: (a) Whether or not, on the facts and in the circumstances of the case, the assessee is entitled to deduction of tax component of salary of expatriate employees, relating to asst. yrs. 1990-91 and 1991-92, in the asst. yr. 1995-96 i.e. the year in which the tax has been paid by the assessee. (b) Whether or not, on the facts and in the circumstances of the case, the assessee was entitled to deduction of interest levied under Section 201(1A). (c) Whether or not, on the particular facts and in the particular circumstances of this case, the assessee was entitled to deduction on account of operational loss of Rs. 9,57,58,904. 102. It is, therefore, requested that the Hon'ble President may kindly nominate a Third Member for a decision in regard to the points of difference referred to above M.A. Bakshi, Vice President. 1. A consolidated order in the case of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -96 notwithstanding the fact that no claim was either made in assessment year 1990-91 or 1991-92 by the assessee before any authority. According to the AM, section 40(a)(i) permits deduction in the year of payment. Therefore, the omission of the claim in relevant years, i.e. in assessment years 1990-91 and 1991-92 is of no consequence. Hence the point of difference: Whether the assessee is entitled to deduction of tax component of salary of expatriate employees relating to assessment years 1990-91 and 1991-92 in assessment year 1995-96 in which the tax has been paid by the assessee, not claimed in the respective assessment years before any authority. 3. Interest paid by the assessee as a defaulter of non-payment of tax deductible at source: In the order proposed by the Vice President, the assessee has been held to be entitled to deduction on account of remuneration paid to the expatriate employees including the taxes payable on such remuneration. The assessee had committed a default in discharging its obligation of deduction of tax and payment to the Government in respect of the salaries paid to expatriate employees. As a result of the default committed by the assessee of non-deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order held that the assessee is entitled to deduction. Hence the difference on the following point: Whether the assessee is entitled to deduction of Rs, 9,57,58,904 on account of payment to Punjab Housing Board in respect of investment made by them with the assessee notwithstanding the fact that facts relating to loss of investment are disputed and the issue is sub judice. 5. It is, therefore, requested that Hon'ble President may nominate a Third Member for a decision in regard to the points of difference referred to above. THIRD MEMBER ORDER R.P. Garg, Vice President (As a Third Member) 1. A reference under section 255(4) of the IT Act, 1961, was made by the President, Tribunal, for my opinion as Third Member on the following points of difference arising out of the appeal for the assessment year 1995-96: (a) Whether or not, on the facts and in the circumstances of the case, the assessee is entitled to deduction of tax component of salary of expatriate employees, relating to assessment years 1990-91 and 1991-92, in the assessment year 1995-96, i.e., the year in which the tax has been paid by the assessee. (b) Whether or not, on the facts and in the circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 7 of which provides for taxation in India on a foreign enterprise in respect of profit attributable to its Permanent Establishments (PE) and since ABN Amro was having a PE in India, it is being subjected to tax in India. 5. Four years' appeals for assessment years 1992-93,1993-94, 1994-95 and 1995-96 came up before the Tribunal simultaneously and there struck a difference of opinion between the two Members while disposing of the appeals for assessment year 1994-95 in ITA No. 106/Kol/2001 and assessment year 1995-96 in ITA No. 496/Cal/1999 and the point of difference is referred to above in para 2. 6. The assessee has not deducted tax in respect of the remuneration paid to its expatriate employees on the prescribed dates as required under section 192 of the Act. The CBDT, in order to encourage the compliance in respect of TDS, issued Circular No. 685, dated 20th June, 1994, providing exemption from penalty and prosecution to those employers who paid the tax deducted/deductible at source at a specified date. By another Circular No. 686, dated 12th Aug., 1994, the Board has also clarified that the assessments of the employees in respect of whom payments of short deduction and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment years 1992-93 to 1994-95 by observing that the decision of Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 was not applicable; that the salary was paid to the expatriate employees rendering services in India by the head office of the bank and the same has not been debited to the accounts of the bank in India and that the tax borne by the assessee-bank on salary paid to the expatriate offshore the payment has been made only in the subsequent year. He, therefore, disallowed both the payment of salary by the head office as well as the tax deducted at source and interest thereon and paid in the assessment year 1995-96 by stating that TDS for earlier years was not covered by section 43B as it was not a regular payment of tax or Government dues, that the amount has been paid under Amnesty Scheme and, therefore, it is not allowable and that the amount does not pertain to the year under consideration and further that the remuneration and TDS paid by the assessee for the earlier years have not been included in the income of the concerned employees for their income-tax purpose in India for which the assessee is liable, and also that the interest on T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on those expatriate employees and, therefore, the assessee cannot say that this should be treated as revenue expenditure. He further held that the taxes paid by the assessee-company because of their own fault in not collecting taxes from its expatriate employees in time and depositing the same with the Government of India, cannot be allowed as a revenue expenditure. 11. The matter came up before the Tribunal. Insofar as the claim for remuneration in the appeals for assessment years 1992-93 to 1994-95 is concerned, both the members agreed that the remuneration paid to the expatriate employees rendering whole-time service in India throughout the accounting year has to be accepted as allowable deduction in computing the profits of the PE subject however with a rider that such payment is not taken into account in working out the deduction under section 44C and once the Assessing Officer is satisfied that the assessee is entitled to deduction in respect of remuneration, the claim of the assessee shall have to be dealt with in accordance with section 40 of the Act. The aforesaid directions were also stated to be valid for offshore remuneration pertaining to the assessment years 1992-93, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to the extent the amount has been deducted from the income. It was, therefore, observed that the tax deducted at source by the assessee and paid to the Government is to be treated as fine paid on behalf of the expatriate employees. 13. As regards tax deducted at source in respect of remuneration paid outside India to expatriate employees, the Tribunal held that in principle, the assessee would be entitled to deduction in respect of tax component of the salary also if the salary is found to be deductible as per the directions of the Tribunal for assessment year 1996-97 and, accordingly, no deduction would be permissible in assessment years 1992-93 to 1994-95 by operation of section 40(a)(i) of the IT Act and the claim for the said assessment year shall have to be disallowed for the reason of non-deduction of tax but allowed the same in assessment year 1995-96. Both the Members, therefore, held that subject to verification, the claim of remuneration and tax deducted has not been taken into account under section 44C in regard to expatriate employees, the deduction relating to assessment years 1992-93 to 1994-95 would be permissible in assessment year 1995-96 as per the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both the JM and the AM insofar as the claim for assessment years 1992-93 to 1994-95 is concerned. The learned Departmental Representative, however, supported the orders of the Departmental Authorities and the view taken by the JM. 16. I have heard the parties and considered their rival submissions. There is no dispute as to the allowability of the remuneration and tax deducted/ deductible at source as revenue expenditure. Both the Member's have agreed on this point and in fact, as aforesaid have allowed similar deduction for payment of remuneration relating to assessment years 1992-93 to 1994-95. A sum chargeable under this Act (remuneration in this case) which is payable either outside India or in India to a non-resident, is not allowable as a deduction because of the provisions of section 40(a)(i) if the tax has not been deducted or after deduction has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with the other provisions of Chapter XVII-B of the Act. When a deduction is not allowable because of the statutory provisions, it would make no difference whether the same was claimed or not by the assessee. Because of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le due to specific prohibition. Such a restriction, therefore, cannot be read in the language of section 40(a)(i) of the Act nor could it be inferred so. The deduction for assessment years 1990-91 and 1991-92 has also to be allowed similarly as an admissible deduction with similar direction as were given for allowing the claim for assessment years 1992-93 to 1994-95. 19. Second difference is with regard to allowability of interest paid under section 201(1A). As aforesaid, the assessee had also claimed interest paid by the assessee as a defaulter of non-payment of tax deductible at source. Here, the Vice President (JM) held that the assessee had committed a default in discharge of its obligation of deduction of tax and payment to the Government in respect of salary paid to expatriate employees as a result of which it had to pay interest under section 201(1A) of the Act. No deduction according to him, would be permissible to the assessee in respect of interest payable as an assessee-in-default for its failure to discharge its statutory obligation of non-deduction of tax and nonpayment thereof to the Government in contrast to the obligation of the assessee as an employer. The AM, on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y not deducting the same within the prescribed time under the Income-tax Act. The interest was thus payable for that default or omission in relation to the tax deducted at source. Therefore, on a combined reading of the definition of tax in article 3(d) of the DTA in conjunction with the provisions of sections 192 and 195 of the Act, the interest, in my opinion, would not be an allowable deduction. It has nothing to do with carrying on the business of the assessee. It may be that the tax was deducted for and on behalf of the employees but it was an obligation of the assessee itself under the Income-tax Act, 1961, to deduct the tax within the prescribed time and, therefore, it was a personal liability of the assessee-bank. In the decision of Jubilee Investments Industries Ltd. v. Asstt. CIT [1999] 238 ITR 648 (Cal.), the Calcutta High Court dealt with the scope of levy of penalty under section 221 of the Act for failure to deposit the tax deducted at source in time and in that connection, the Calcutta High Court observed that when the assessee is found to be in default in depositing the amount of TDS within the time prescribed, he is liable to pay interest as well as he is liable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rning income. Similarly, in this case, the liability to deduct tax and pay the same to the Government was personal one imposed under the IT Act on the payer of the salary and, therefore, interest paid by the assessee for the delayed payment thereof would also be a personal liability of the assessee-bank and failure to discharge that liability in time would not entitle the assessee to claim the deduction for such interest payment. 23. In the case of East India Pharmaceutical Works Ltd., the interest was paid on the overdraft which was utilized for payment of income-tax and it was held to be not allowable as an expenditure wholly and exclusively laid out for the purpose of business. Again in the case of Bharat Commerce Industries Ltd. v. CIT [1998] 230 ITR 733 (SC), the Supreme Court held that when interest is paid for committing the default in respect of statutory liability to pay advance tax, the amount paid and expenditure incurred in that connection is in no way connected with the preserving or promoting the business of the assessee. Their Lordships held that interest levied on the assessee under section 139 of the Income-tax Act, 1961, for delay in filing the return and under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hatever returns that becomes due at that time. No specific directions were there to invest the money in specific securities. It was in the course of investment of this money received, the assessee issued a cheque of Rs. 9,57,58,904 on 9th March, 1992, to Andhra Bank for purchase of 17 per cent NPC Bonds at the rate of Rs. 97 per bond plus accrued interest and handed over a payment advice and the cheque, to a broker Shri N.K. Agarwal. As Shri N.K. Agarwal failed to deliver the said 17 percent NPC Bonds, the assessee sought information from Andhra Bank who vide their letter dated 2nd June, 1992 informed that the amount received was credited in the account of Shri Hiten Dalai, as per the instructions of Shri. N.K. Agarwal. 26. With the advent of 'payment advice-cum-cheque' in the Indian Banking, it is no longer a cheque book which is used by the large corporate account-holders. These cheque books are now replaced by packets of perforated computer friendly forms, used as a continuous computer stationery. These are numbered advices. These are in two parts and can be separated by tearing off at the perforated points-the top portion containing the details of the person issuing the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,57,58,904 and 17 per cent interest payment was claimed as a loss. 28. The Vice President (JM) held that the assessee had made the investment in the course of its business with Andhra Bank through the broker Shri N.K. Agarwal. Andhra Bank credited the amount received through Shri N.K. Agarwal in the account of Shri Hiten Dalal as per the instructions of Shri N.K. Agarwal. The claim of the assessee, on the other hand, is that no such instructions were issued by the assessee and the cheques paid in the name of Andhra Bank were issued for the purchase of NPC Bonds on behalf of the PHB. This fact is disputed by Andhra Bank. According to him, if at all the assessee can be said to have lost the investment made through Shri N.K. Agarwal, its discovery was on receiving the information from IRFC in June, 1992, informing that IRFC Bonds have already been transferred in the name of Standard Chartered Bank. The said date, according to him, fell in assessment year 1993-94. The Vice President (JM) held that refund to PHB was of their investment with the assessee and the payment of interest on such investment was rightly allowed as an expenditure incurred for the purpose of business. It is, accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the system, and exploiting the fact that transactions involving such huge amounts were entered into, perhaps as a normal course in the banking industry, without taking highest degree of safety measures and incorporating checks, and balances as such, and but for this laxity inherent in the normal banking practices, scams of the kind which have become somewhat common in the recent past could not have taken place. The fact that the matter is still pending before the Special Courts set up for dealing with security scam cases, by itself, cannot imply that there are reasonable prospects of recouping the loss, because, it is also a well-known fact, perhaps as equally well-known as the fact about existence of these Special - Courts itself, that the claims on these scamsters are several times the value of their own assets. This money does not also appear to be recoverable from Andhra Bank also as in response of RBI's letter dated 16th June, 1993, stating issue of a licence to assessee-bank for opening a branch in Madras had again been decided to be kept in abeyance till such time as the dispute on securities transactions between assessee-bank and Andhra Bank is resolved , the assessee-b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lients. It is true that the assessee was making investment specifically on behalf of PHB and it was bound to conduct the business of the customer as per directions given by him, or, in the absence of such instructions, according to the normal usage. The assessee received a sum of Rs. 10 crores from PHB, for investment by the assessee, for a period of 180 days not necessarily and specifically in the investment of these 17 per cent NPC Bonds but with an understanding and subject to the condition that the money was to be invested in any Government securities, UTI or tax-free bonds with a minimum guaranteed return of 17 per cent. It was also with a further understanding that in case of emergency, money would be made available to PHB with whatever returns that becomes due at that time. It was for the investment of this money received that the assessee issued a cheque of Rs. 9,57,58,904 on 9th March, 1992, to Andhra Bank. It was for the purchase of 17 per cent NPC Bonds at the rate of Rs. 97 per bond plus accrued interest. The assessee arranged investment. It however, fell down. The assessee made another deal though stated to be as a security for the 1st deal in substitute in the form of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement for payment of Rs. 9.57 crores is with PHB and not Andhra Bank. Nainital Bank's case, therefore, is of no help to the assessee, I, therefore, hold that the refund of money to PHB was not a loss to the assessee. Loss, if any, which could be said to have been suffered by the assessee was on account of the decision to invest in NPC Bonds through Shri N.K. Agarwal. Here, the broker Shri N.K. Agarwal had played a mischief and consequently taken that upon himself by offering another security in IRFC Bonds, Andhra Bank has transferred the money on the instructions of Shri N.K. Agarwal, stated to be on behalf of the assessee. That fact is disputed by the assessee. The assessee had not pursued the matter vis-a-vis Andhra Bank. It had carried the matter further accepting the alternative security in the form of IRFC Bonds, the registration for which was refused on the ground that they have already been registered in the name of another bank. The matter of registration of alternative security ended in 1998 whereas the matter visa-vis Shri N.K. Agarwal is pending even on date. In these circumstances, in my opinion there was no loss which can be said to have arisen to the assessee in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and hence ordered that they might be restored to the registered owners. On appeal by the assessee, the High Court stayed the Magistrate's order and directed that the jeeps be placed in the custody of the assessee for safe keeping till the final decision by the Court. The High Court also ordered that the vehicles must be kept unused and that the Magistrate should dispose of the case before 31st Dec, 1982. The dispute about ownership remained unsolved even till September, 1986. For the assessment year 1982-83, the assessee claimed the amount of Rs. 2,87,516 as a business loss, but the claim was rejected by the IAC and the CIT(A). The High Court held that the four jeeps lying with the company under orders of the Court were not the property of the company. They were not reflected in the closing stock of the company and were undergoing continuous deterioration being subjected to the elements day in and day out. As against this, a sum of Rs. 2,78,516 had gone out of the coffers of the company for purchase of four jeeps which had been handed over to the executive engineer. It was not known as of today what the company would recover as a result of the conclusion of the legal proceeding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goods in the open market for a lesser amount. All these cases could have helped the assessee in the present case if the claim was made in the appeal for assessment year 1993-94 when the assessee got the information that the cheques issued for investment in NPC Bonds were diverted to the account of Shri Hiten Dalal or when the alternative security in IRFC Bonds was found to be registered in some other bank's name. Both these dates were falling in assessment year 1993-94 and consequently, the assessee cannot claim the loss in the year under consideration even on the basis of the three decisions referred to above. In view of the above, in my opinion, the CIT(A) was right in disallowing the claim of the assessee. 36. The matter will now go to the Division Bench which heard the appeals for passing a majority order. Per Dinesh K. Agarwal, Judicial Member 1. As there was a difference of opinion between the Hon'ble Vice President (KZ) and Accountant Member, following revised questions were referred to a Third Member: Assessment year 1995-96: (a) Whether or not, on the facts and in the circumstances of the case, the assessee is entitled to deduction of tax component and salary of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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