Any salary payable outside India or to Non-Resident in India and if
a) TDS not deducted or,” during the previous”
b)TDS deducted but not paid to Govt up to due date of TDS payment
– then such sum shall not be allowed as deduction.
Note: If TDS deposited late even by one day, the salary shall not be allowed as deduction
Special Case Study on Section 40(a)(iii):
Anz Grindlays Bank vs Dy. Commissioner Of Income-Tax, … on 29 August, 2003
Equivalent citations: 2004 88 ITD 53 Delhi, (2004) 82 TTJ Delhi 995
Bench: K Singhal, K Prasad
ORDER Singhal, JM
1. The first issue arising in this appeal relates to the addition of Rs, 1,20,86,352/- on account of disallowance of speculation loss as sustained by CIT(A).
2. Brief facts relating to this issue are these: The assessee is a foreign company which is engaged in banking business and related activities such as purchase and sale of securities in India. As per banking norms, the assessee is required to maintain standard liquidity ratio (SLR in short), meaning thereby that assessee is required to invest certain percentage of its total deposits and liabilities in the Government securities. To maintain such ratio, the assessee has either to purchase or sell such securities from time to time throughout the year. These transactions are done through Banker’s Receipts (BRs) without actual delivery but against full payments. According to the BR, delivery can be given at a fixed future date. In such process, according to the AO, the assessee suffered loss of Rs. 4,66,34,835/- The assessee was asked to explain as why such loss be not disallowed being speculative loss. The explanation of assessee was that transaction through BRs were squared up through BRs only without actual delivery as actual delivery was not possible because of the volume of business involved. It was further stated that assessee was in actual possession of securities and, therefore, this process should be treated as part of normal banking business. In the absence of actual delivery, the AO treated the losses in these transactions as speculative loss not to be adjusted against profits of normal banking business in view of Section 73. Accordingly, he made an addition of Rs. 4,66,34,835/-.
3. The matter was carried in appeal before CIT(A) before whom two-fold arguments were made. Firstly, it was contended that assessee had undertaken the transactions only in relation to Government securities and units of UTI which could not be classified either as stocks or shares or as commodity and consequently, such transactions were outside the scope of Section 43(5). Secondly, the assessee had earned profits as well as incurred loss in such transactions and, therefore, the AO could not tax the profits without setting off the losses. With reference to the first contention, reliance was placed on the decision of Calcutta High Court in the case of Nirmal Trading Co., 82 ITR 782 wherein it was held that letter of renunciation of the right to apply for shares were neither shares nor commodity.
4. The CIT(A) rejected the first contention of assessee by holding that the word commodity in Section 43(5) could be taken as inclusive and not restrictive. According to him, the word ‘commodity’ would include items of the same genre as stocks and shares and, hence, would include the units of UTI and Govt. securities. The decision of Calcutta High Court was distinguished by him by stating that letters of renunciation could not be equated with shares of commodity. Accordingly, it was held that transactions fell within the ambit of Section 43(5) and, therefore, subject to the prohibition contained in Section 73. The CIT(A) also observed that assessee had not produced any evidence either before AO or before him to show that the assessee either possessed the requisite securities at the time of transactions or to show that it ultimately settled the transactions by actual delivery of these securities or units. He also referred to the inspection report of RBI dated 25.7.94 in the case of assessee to substantiate his above said observations. He also referred to a letter of assessee dated 1.11.95 stating that all transactions done through BRs could not automatically be concluded as ready forward transactions since outright sales or purchases were also done through BRs. However, it was not possible for the bank to distinguish the ready forward transactions from the transactions of outright sales or purchases. Ultimately, it was held that the AO had rightly invoked the provisions of Section 43(5) and Section 73 to deny the claim for deduction of loss.
5. It was also observed by him that ready forward transactions were per se illegal in view of decision of special court in the case of Fair Growth Financial Services Ltd. Hence. loss arising from illegal business was not allowable as deduction against normal banking profits.
6. However, the CIT(A) accepted the second contention of assessee and held that assessee was entitled to set off speculation losses against speculation profits and only net loss on this account can be disallowed. The addition has therefore, been reduced to Rs. 1,20,85,352/-. Still aggrieved, the assessee has preferred this appeal before the Tribunal.
7. The learned counsel for assessee has vehemently challenged the findings of CIT(A) by making various submissions. The first contention raised by her was that units of UTI and Government securities traded by assessee did not fall within the ambit of the expression “any commodity including stocks and shares” words commodity or stocks or shares used by the legislature in Section 43(5). According to her, all the three words are mutually exclusive and exhaustive since that is presumption that the legislature does not use superfluous words. Proceeding further, it was submitted the legislature has used the words ‘commodity including stocks and shares’ which only indicate that the word ‘commodity’ does not include stocks and shares otherwise there was no need to include stocks and shares in the word ‘commodity’. Then, it was submitted by her that units and Government securities, not being stock or share, can not be included in the word ‘commodity’. She drew our attention to Explanation 2 to Section 2(42A) and also Explanation to Section 115AD which define the word ‘security’ according to which it would carry the same meaning as given in clause (h) of Section 2 of Securities Control (Regulation) Act, 1956 (in short SCRA). Then, she referred to clause (h) of Section 2 of SRCA according to which ‘securities’ would include (i) stocks and shares, bonds, debentures, Govt. securities and rights or interest in securities. So, according to her, the expression ‘stocks and shares’ is a narrower term than the word ‘securities’. It was strongly pleaded that the word ‘security’ is a broad generic term while ‘stock and shares’ is a specie and therefore, the units of UTI & Govt. securities would not be covered by the words ‘stock & shares’ and consequently, not covered by the word ‘commodity’ as the legislature has used the word in a narrower sense. She also made distinction between ‘stock & shares’ and ‘securities’ by submitting that ‘stock or share’ is a capital based item while ‘security’ is a debt based item and, therefore, different in nature. Hence, Govt. securities cannot be included in ‘stocks and shares’. She also pleaded that the legislature has considered the ‘commodity’ as distinct from ‘securities’ since trading in commodity is regulated by Forward Contract Regulation Act (in short FCRA) while trading in securities is governed by SCRA. It was also argued by him that units, securities or shares are different items as is clear from the provisions of Section 115AD, 115AC and 115AB of Income-tax Act which deal with computation of income separately in respect of these items. She relied on the judgment of Supreme Court in the case of Appollo Tryres Ltd., 255 ITR 273 wherein it has been held that units are not shares. Further reliance was placed on Calcutta High Court judgment in the case of Nirmal Trading Co., 82 ITR 782 wherein it was held that ‘letter of renunciation’ cannot be considered as ‘commodity’ u/s 43(5). On the same reasonings, it was argued, the transactions in Govt. securities would not fall u/s 43(5).
8. The next contention of Id. Counsel for assessee is that even assuming the trading in units and Government securities is covered by Section 43(5), still such transactions would not fall within the ambit of Section 43(5) in as much as transactions through BRs is as good as transaction through physical delivery. It was submitted by her that earlier such transactions used to be effected by physical delivery but due to great inconveniences caused, a new methodology was adopted and approved by the banking sector by which securities could be dealt with through BR without giving immediate delivery and ultimate delivery could be effected within 90 days. Hence, no adverse inference could be drawn merely on the ground that transactions were effected through BRs. Therefore, such transactions should be considered falling outside the ambit of Section 43(5).
9. The next contention of assessee’s counsel was that Section 73 Explanation excludes specifically the banks/investment companies and, therefore, transactions by banks cannot be considered as speculative one. According to her, deeming provisions are to be construed strictly and one cannot travel outside the ambit of deeming provisions to include what is expressly excluded by the deeming provisions.
10. On the other hand, the learned Sr. DR has strongly opposed the contentions of assessee’s counsel and has supported the order of CIT(A). According to him,the word ‘commodity’ in its natural meaning is a wide word which includes every articles of commerce or trade. Hence, it would include not only stocks and shares but also nits and securities since these are freely sold and purchased in the open market. Therefore, the expression ‘including stocks and shares’ has been used by the legislature just to avoid confusion. He, in support of his contention, referred to various dictionary meanings according to which the word ‘commodity’ would include any article of trade. To buttress his arguments, he also referred to the definition of ‘goods’ in Sale of Goods Act and in FRCA. According to him, the words ‘commodity’ and ‘goods’ are interchangeable and thus, would include shares, securities, units, debentures etc. Hence, expression “including stock and shares” would not make any difference.
11. Proceeding further, he submitted that thee was no evidence as to which units or securities were sold or purchased by the assessee. Further, there was no evidence as to whether the assessee possessed such securities at the time of sale through BR. Lastly, there is no evidence that actual delivery of units or securities was ever given or taken by assessee. According to him, mere payment is not sufficient to bring the transactions out of the purview of Section 43(5). What is important is the actual delivery of the item purchased or sold. Proceeding further, it was contended that Banker’s receipt cannot be considered as a substitute for physical delivery of securities or units. He placed his reliance on the judgment of Supreme Court in the case of Davenport& Co.(P) Ltd., 100 ITR 715, Nirmal Trading Co., 121 ITR 54 and Jute Investment Co., 121 ITR 56.
12. He also distinguished the decision of Calcutta High Court in the case of Nirmal Trading Co. Relid upon by assessee’s counsel by submitting that letter of renunciation contained only a right in securities and by itself did not fall within the ambit of the word ‘commodity’. Commodity must be an object which is actually sold and not the right in such object. He also refers to certain decisions in respect of rule of interpretations in support of the contention that word ‘commodity’ would itself include the securities and units.
13. Rival contentions of the parties have been considered carefully. The first question to be considered is whether the units of UTI and Government securities would fall within the ambit of the word ‘commodity’ appearing in Section 43(5) of Income-tax Act. This word has neither been defined in the Income-tax Act or any other enactment. In the absence of any definition clause, the cardinal rule of interpretation is that any word or expression used by the legislature should care its plain and natural meaning and nothing should either be added to or taken away from such meaning. To understand such meaning, it would be appropriate to refer to certain dictionary meanings:
As per Black’s legal dictionary:
“Those things which are useful or serviceable, particularly articles of merchandise movable in trade. Goods, wares and merchandise of any kind; articles of trade or commerce. Movable articles of value; things that are bought and sold.”
As per Oxford’s dictionary:
“An article of trade, especially a product as opposed to a service.”
As per Webster’s dictionary:
“An economic good; esp: a product of agriculture, mining or sometimes manufacture as distinguished from services (commodities such as meat, fats and sugar); an article of commerce; esp. one delivered to a transportation company for shipment; parcel or quantity of goods.”
The perusal of above dictionary meaning shows that according to every dictionary meaning, the word ‘commodity’ would mean ‘Any article of trade or commerce’. This should, therefore, be considered as plain and natural meaning. So, any article which is ordinarily purchased and sold in the market would be within the ambit of the word ‘commodity.’ There is no dispute that shares, securities and units are freely traded in the market and their price is normally quoted in the daily newspapers. Hence, these items would be included in the plain and natural meaning of the word ‘commodity’. At this stage, we may mention that no judicial interpretation of the word ‘commodity’ has been brought to our notice by either party. However, we have come across to an English decision in the case of Imperial Tobacco Co. (of Great Britain and Ireland) Ltd. vs. Kelly (H.M. Inspector of Taxas) 25 Tax cases 292 wherein at page 300, their Lordships observed as under:
“That being so, what is the true analysis of the position. A manufacturer has provided himself with a commodity, namely dollars. I call dollar a ‘commodity’ not for the reason that they are not currency in this country but because they have a characteristics which is common in other commodities and is not shared by sterling, namely, that their value from day to day varies in terms of sterling just in the same way as coal or bricks or anything else may do.”
So, even the court of appeal considered the foreign currency as ‘commodity’ since value of such currency varied like other commodities on day to day basis. If currency can be considered as ‘commodity’, then, in our opinion, there is no reason to exclude shares, securities or units from the natural meaning of the word ‘commodity’.
14. The question may arise as to why the legislature used the expression “including stocks and shares” after the words ‘commodity’ if the word ‘commodity’ included within its ambit such items. Whenever the legislature intends to enlarge the plain and natural meaning of a word, it generally and very oftenly, use the word ‘includes’. But it is not always so. Sometimes, it may include which are already included in its plain and natural meaning. Such inclusion is only for the purpose of clarification or dispelling the doubts. For example, let us take the meaning of word ‘transfer’ in definition clause (47) of Section 2 of Income-Tax Act. On one hand, it includes ‘sale’ and on the other hand, it includes compulsory acquisition. There is not doubt that the natural and plain meaning of word ‘transfer’ would always include ‘sale’ but still the same is also included by the legislature. On the other hand natural meaning of the word ‘transfer’ does not include compulsory acquisition but is included in ‘transfer’ by adding in the list given in Section 2(47) . So, by inclusion of the word ‘sale’, the meaning of the word ‘transfer’ is never enlarged but such inclusion is only by way of clarification or abundant caution. On the other hand, by inclusion of ‘compulsory acquisition’ natural meaning of the word ‘transfer’ is enlarged. Let us take another example. The word ‘Income” has been defined u/s 2(24) by way of inclusive definition. On one hand, it includes profits and gains while on the other it also includes voluntary contribution received by trusts. Profits and gains are part of natural and plain meaning of the word ‘income’ while voluntary contributions are otherwise don’t fall within the plain meaning of the word ‘income’. This shows that by inclusion of ‘profits and gains’. meaning of income is not enlarged while meaning of income has been enlarged by including the voluntary contribution by trust. Similarly, Article 366 of Constitution of India defined ‘goods’ as under:
“Goods’ includes all materials, commodities and articles”.
By no stretch of imagination, it can be said that the meaning of the word ‘goods’ has been enlarged by including alone three items. These items are already covered by the plain and natural meaning of the word ‘goods’. It cannot be anybody’s case that ‘commodity’ does not fall within the plain meaning of the word ‘goods’. From these examples, it is clear beyond doubt that the word ‘includes’ is not always used for the purpose of enlarging the meaning of a word but sometimes it is also used for clarification or removing doubts or by way of abundant caution.
15. In view of the above discussion, it is held that the word ‘commodity’ in Section 43(5) would not only include stocks and shares but also securities and units in its plain and natural meaning. Consequently, trading is such items, would fall within the scope of ‘speculative transactions’ subject to other conditions being fulfilled.
16. The next question to be considered is whether sale or purchase of securities or units were affected by actual delivery? On the facts of the case, we are of the view that answer to this question is in negative. There is no dispute that transactions of scrips through Bankers receipt is a recognized mode in banking sector. Delivery of scrips is not affected immediately due to inconveniences but that does not mean that actual delivery of scrips is prohibited. On the contrary, the rules relating to BR clearly provides vide rule 6 that “BR must be exchanged with actual scrips as early as possible, and in any case within 90 days of issue”. Further, the format itself provides that “scrips relating to the said security will be delivered within days on surrender of this receipt duly discharged and in the meanwhile the security sold would be held by us in trust for (buyer).”
17. The above discussions makes it clear beyond doubt that even the BR specifically provides actual delivery of the scrips within the stipulated time. So, the contention of the learned counsel for assessee that issue of BR itself should be equated with the actual delivery of the scrips, cannot be accepted. As far as, actual delivery of units and securities is concerned, there is no evidence on record. Para 6 of assessment order refer to the submissions of assessee’s representative to the effect “the assessee has squared up these transactions without actual delivery and by issue of BRs only because (a) delivery of securities is not possible because of the volume of business involved in these transactions (b) sometimes even the instruments transacted were not available and (c) bank business is rather impossible without dealing through BRs.” Such submissions of assessees clearly shows that not deliver of scrips was effected by the assessee. It is also not the case of assessee either before CIT(A) or before us that actual delivery of scrips was ever effected by the assessee. Accordingly, it has to be held that there was no actual delivery of either units or securities traded by assessee through BR.
18. Before parting with this aspect of the issue, we would like to mention the two decisions relied upon by assessee’s counsel. The first decision is in the case of Nirmal Trading Co. (supra) delivered by Hon’ble Calcutta High Court. In that case, the High Court was concerned about the renunciation of right of assessee to apply for shares. The High Court, therefore, held that letter of renunciation could not be considered as commodity. Right in an inanimate object cannot be equated with that object and, therefore, that case is distinguishable. The other decision is of Hon’ble Supreme Court in the case of Appollo Tyres (supra). That case is an authority for holding that units of UTI are not shares but such judgment is not an authority regarding the issue whether such units would fall within the meaning of the word ‘commodity’. Hence, this judgment also does not help the assessee.
19. Further, the contention of assessee’s counsel that Banks are excluded from the scope of ‘speculation business’ in view of Explanation to Section 73, also cannot be accepted. This explanation, in our opinion,only enlarges the scope of ‘speculation business’ by legal fiction. It says that in the case of companies, if any part of business consists in purchase and sale of shares of other companies then such business shall be deemed to be speculative business of such company. However, such deeming provisions excludes certain assessees including banking companies. In our considered opinion, this section cannot be applied to a case where part of business of a company consists of articles other than shares. In the present case, the assessee was dealing in Government securities and units which cannot be considered as shares. The Hon’ble Supreme Court in the case of Appollo Tyres (supra) has held that units are not shares. Further, securities as per the definition given in SCRA is a generic term which includes ‘shares’ but contrary is not true. The nature of shares and securities is entirely different. The share is equity based and holder of the same is entitled to profits of the company by way of dividend and there is inherent risk of investment while the security is debt based and the holder is entitled to get back the amount after a certain period along with interest thereon. Hence, the explanation itself would not apply to the present case.
20. There is another aspect of the matter. Explanation to Section 73 is only a deeming provision and therefore, is applicable only where the case of assessee does not fall within the scope of Section 43(5). This explanation is applicable only where a company is dealing in shares by actual delivery. Since the legislature intended to discourage companies in dealing in shares of other companies, it inserted deeming provision in the form of Explanation to Section 73 and made such dealings as part of speculative business so as to deprive such assessee from setting of losses in such business against other incomes of such assessee. It is only in such case,the legislature has provided exception by way of exclusion of certain companies including banking companies. Therefore, the result is that if banking company is engaged in business of shares by actual delivery then such business shall not be regarded as speculative business and consequently, such banking company would be entitled to set off losses in such business against its normal profits. However, if the business of such banking company consists of purchase and sale of shares without actual delivery, then such business would itself fall within the scope of Section 43(5) read with Explanation 2 to Section 28 and consequently,the losses incurred in such business would not be allowed to set off against other income in view of main provisions of Section 73 itself and there would be no occasion to apply the Explanation to such section. In the present case, the case of assessee falls within the scope of Section 43(5) and therefore, losses in transactions of purchase and sale of units and securities without actual delivery cannot be set off against normal income from banking in view of the main provisions of Section 73.
21. Before parting with this issue, we would like t mention two decision of Hon’ble Supreme Court. The first decision in the case of Raghunath Prasad Poddar, 90ITR 140 wherein it was held that transactions through Pucca delivery orders (PDO) could not be considered as speculative one if ultimately the last endorsee of such PDO got the actual delivery. However, in subsequent decision in the case of Davenport & Co. (P) Ltd., 100 ITR 715. the Hon’ble Supreme Court overruled its earlier decision in the case of Raghunath Prasad Poddar (supra) and held that actual delivery is a must and, therefore, transactions through PDO fell within the scope of Section 43(5). In view of such decision, the contention of assessee’s counsel that transactions through BR should be considered as transactions with actual delivery cannot be accepted.
22. In view of the above discussion, it is held that the transactions of purchase and sale of units and Govt. securities by assessee through BR, without actual delivery would fall within the scope of speculative transaction as defined in Section 43(5). Consequently, the loss arising from such transactions can be set off only against speculative profits and cannot be set off against normal banking profits in view of the main provisions of Section 73. The order of CIT(A) is, therefore, upheld on this issue.
23. The next issue relates to the addition of Rs. 8,74,23,058/- under the head “Portfolios management Scheme” (PMS).
24. Since August, 1986, the merchant banking division of assessee had been providing PMS facilities to its clients. The nature of the scheme has been discussed by to AO in Para 7 of his order as under:
“Under this scheme prospective clients were supposed to deposit their investible funds with the bank for a minimum period of one year and the minimum monetary limit was Rs. one lakh. The bank will have the right to invest these funds in bonds and securities and handle disinvestments of the same as per bank’s wisdom. In brief the scheme as advertised by the bank was ‘the Portfolio Management Scheme is a discretionary fund management service provided by the bank for all types of clients of the bank. The scheme aims at investment of finds of clients in a portfolio of high grade debt and liquidity securities and obtain a safe, secure and consistent appreciation of the funds over a period of time”. The bank also mentioned the benefits of the Scheme:
a) Investments backed by ANZ Grindlays funds management expertise;
b) No worry t you in respect of volatility, registration formalities, etc. of securities;
c) Investments in safe high grade securities;
d) Liquidity after one year assured;
e) Consistent, safe secured income;
f) Simple documentation.
Out of the profits earned under the scheme the bank will get commission while the clients were assured to get a consistent percentage of return on the amounts deposited with the bank under the scheme.”
The AO has also referred to the inspection report of RBI which says that such scheme was not being implemented in accordance with the guidelines issues by RBI as well as broad policies laid down by the bank’s London head office. According to AO, the clients of bank invested their money in the scheme because of minimum percentage of return on their deposits as was evident from the details furnished by the assessee. According to such details, the return was between 12.5% to 13.5%. The assessee denied that bank promised andy likely return under the scheme. However, the AO held that it was a fact though could not be substantiated by any written evidence. According to him, the bank not only held such promises but also fulfilled such promises. Hence, investment by clients were like fixed deposits as no client was allowed to withdraw at least for one year and the return was almost fixed as promised. Since assessee could not pay the interest more than fixed by RBI it was held by him that any payment over and above the permitted percentage contravened such guidelines. Consequently, addition on this account was worked out at Rs. 8,74,23,058/-.
25. The matter was carried in appeal before the CIT(A). Two folds arguments were made by assessee before him. Firstly, it was submitted that under the PMS Scheme no firm assurance was given regarding fixed return on investment by the clients. Since the assessee was investing in units and Government bonds the yield was more or less uniform, assurance was given of likely return. Therefore, AO could not conclude that investment by the clients were in nature of fixed deposits merely because of varied yield between 12.5% to 13.5%. Regarding head office guidelines, it was stated that these were internal matters and did not involve any violation of statutory provisions. Secondly, it was contended that even assuming that business was either irregular or illegal, the amount paid to their clients could not be disallowed or treated as income of the bank by any overriding title.
26. However, the CIT(A) did not accept such contentions of assessee. He rejected the contention of assessee that violation of RBI guidelines were not in the nature of violation of statutory provisions in view of Madras High Court decision in the case of Indian Bank vs. U.A.B. Gurukul, AIR 1982 Mad 296, decision of Karnataka High Court in the case of Bank of India vs. Karkam Ranga Rao, AIR 1986 Kar 242 and the decision of Special court in the case of A.K. Menon vs. Fairgrowth Financial Services Ltd. Accordingly, it was held PMS business carried on by assessee, being in violation of RBI guidelines, could not be legally termed as PMS activity. Consequently, any funds obtained in the course of such activity could only be treated as fixed deposits on which no return could be made beyond special percentage fixed by RBI. To strengthen his view, he also referred to the board’ latter dated 28.2.95 communicated to all Chief Commissioners which stated that the returns paid to the clients under PMS in excess of normal rate of interest should be disallowed. Further, he referred to the show cause notice issued by RBI on 25.7.94 which refers to irregularities and violations of the directions of RBI based on the reports of Jankiraman Committee & G.P. Kapadia. According to such reports, the show cause notice state, the assessee bank had conducted securities transactions in utter disregard of the instructions and guidelines of RBI. Accordingly, he upheld the orders of AO. Aggrieved by the same, the assessee is in appeal before the Tribunal.
27. The learned counsel for assessee has vehemently contended that nature of payments by clients under PMS could not be characterized in the nature of fixed deposits. She drew our attention to the salient features of the scheme. According to her the entire activity of investment in securities were on behalf of their clients and the asseesee was only entitled to management fee. It was further stated that distinct client-wise investment details were maintained. Separate record was maintained for regular banking business and there was no mixing of record inter se. Further, the scheme was being in operation since 1987 and there was no violation till the year under consideration. The probe by Jankiraman Committee was in the Financial Year 1992-93 and, therefore, its report is not relevant for deciding the issue for the year under consideration. The un-invested funds of PMS was kept in fiduciary capacity and the same was reported regularly in the statutory returns. The operation of the scheme was subject to audit by the bank’s internal audit as well as statutory audit. The scheme was closely supervised by RBI. Accordingly, it was argued that bank was only acting as an agent for managing the funds of its clients for which assessee was only entitled to commission. Hence, the entire profits/losses belonged to its clients. Therefore, such receipts from the clients could not be said to be fixed deposits merely on the ground that money was received for a minimum period of one year.
28. Secondly, it was contended that payments made to the clients was out of PMS corpus fund which was kept separately for which separate record was maintained. Separate books for normal banking business were maintained and payments made to the clients were never debited to profit and loss account of the banking business as is apparent from audited books of account. Since, payments made to clients was neither debited to profit and loss account nor claimed as deduction while computing the income of the assessee, the question of disallowance does not arise. It was also clarified that commission receivable by bank as transferred to Profit & Loss account and consequently, the same was duly included in the total income of assessee.
29. Proceeding further, it was contended by her that RBI instructions/circulars ware binding on banks only and not on the third parties and therefore, contract by the bank with third parties were valid contract and no adverse inference could be drawn against assessee. Reliance was placed on the judgment of Supreme Court in the case of Bank of India Finance Ltd. vs. Custodian (1997) 10 SCC 488. According to her, non compliance of the directions of RBI may result in prosecution/levy of penalty u/s 46 of RBI Act, 1934 but it cannot result in invalidation of any contract by the bank with the third party. Therefore, the legitimate yield paid to the clients was fully valid and consequently, no payment could be disallowed.
30. Regarding the Board Circular, it was pleaded the CBDT has no power to interpret the stature in a particular way. Reliance was placed on Supreme Court judgment in the case of Keshavji Raoji & Co., 83 ITR 335. According to her, the board has no power to direct that PMS Scheme should be regarded as EDR scheme.
31. Lastly, it was contended that even assuming that business under PMS was illegal, the profits of such business has to be computed after adjusting all expenditure relating to such business. Reliance was place on various decisions of Supreme Court, namely:- S.C.Kothari, 82 ITR 794, Kurfi Jijabhai Kotecha, 107 ITR 101, Piara Singh, 124 ITR 41. She also relied on the judgments of Supreme Court in the case of Sitaldass Tirathdass, 41 ITR 367, Shoorji Vallabhdas, 46 ITR 144 and Bijli Cotton Mills, 116 ITR 60 for the proposition that tax is to be levied on real income of the assessee.
32. ON the other and, the learned DR has vehemently supported the order of CIT(A). The gist of the argument was that scheme itself could not be read in isolation. According to hi, the scheme of PMS should be considered in the light of actual activity carried on by the assessee. The modus operandi of the scheme had been examined by the Janakiraman Committee and the RBI and the assessee was found to implement such scheme in utter disregard of RBI guidelines. Proceeding further, it was argued by him that if the scheme is considered coupled with the return on investment between 12.5% to 13.5% it is clear that assessee obtained money as fixed deposit for a period of one year to three years in violation of banking norms under the cover of PMS and, therefore, any payment in excess of normal rate of deposit, the payment was in violation of RBI norms which are in the nature of statutory law. He also drew our attention to the fact that assessee never kept separate account of its clients vis-a-vis the dealing in securities which under the scheme was supposed to be on behalf of the clients. On the contrary, the entire funds were pooled together and trading in units and securities were done as its own like mutual funds. This fact was admitted by assessee’s counsel in the course or the arguments. So entire dealings were contrary to the said scheme. He also referred to the decision of Supreme Court in the case of Kedar Nath Jute Mfg. Co., 82 ITR 363 for the proposition that entries in the books of account are irrelevant and it is the nature of transaction which is relevant. According to him, the scheme itself may not be prohibitive but actual implementation was in utter disregard of RBI norms/guidelines. Hence, excessive interest over and above the permitted rate of interest on deposits could not be allowed as deduction in view of Supreme Court decision in the case of Maddi Venkataraman, 229 ITR 534 wherein it was held that payment for infraction of law in the course of legal business could not be allowed. He also drew our attention to the retrospective amendment to Section 37 under which such payments are to be disallowed. He also referred to the decision of Supreme Court in the case of Bank of India Finance Ltd. (supa) for the proposition that violation of RBI norms was in the nature of infraction of law. Hence, it was pleaded by him that payments over and above the permitted rate of interest was rightly disallowed by lower authorities.
33. Rival contentions have been considered in the light of materials placed before us. We are in agreement with Id. DR that RBI directions/guidelines are statutory and violation of the same are akin to violation of statutory provisions. This contention is well supported by the judgment of Madras High Court in the case of Indian Bank vs. U.A.B. Gurukul, AIR 1982 Mad 292 wherein it was observed as under:
“A consideration of the aforesaid provisions of the Banking Regulation Act, 1949, clearly points out that a banking company, more particularly, nationalized bank like the petitioner has really no free scope for carrying on the business of banking permitted under the provisions of the Banking Regulation Act in any manner it likes, but every activity is hedged in by and subjected to the control of RBI and its order and directives issued periodically, a contravention of which is also made punishable under the provisions of the Banking Regulation Act. IT is, therefore, evident that if a banking company has to carry on the business of banking, it has to carry out the mandate and directions of the RBI issued by it periodically, as enjoyed by the statute.”
The Hon’ble Supreme Court in the case of BOI Finance Ltd. (supra) has also held that directions of RBI are binding on the banks. Such violations are punishable under the provisions of Banking Regulation Act. Hence, in our considered view, any payment in violation of RBI directions is not allowable as deduction u/s 37. at this stage, it would be useful to refer to the Explanation inserted by Finance (No.2) Act, 1998 retrospectively w.e.f. 1.4.62 which reads as under:
“Section 37(1) Explanation: For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by la shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”
The above provisions of Explanation makes it clear beyond doubt that any expenditure prohibited by law cannot be allowed as deduction u/s 37.
34. Now let us examine the nature of the scheme. The perusal of the scheme shows that any person can invest with the bank with minimum amount of Rs. 1 lakh and the bank is obliged to trade in Gilt edged securities, Bonds of Public Sector Undertakings and units of UTI on behalf of such client. Clause 7 of scheme says, “Should you need the funds back, your investment will be sold any proceeds credited to your account as desired”. Clause 11 says that RBI does not permit banks to assure any return but the past record shows the yield between 12% to 14%. However, the actual returns are dependent on the market. Clause 12 provides that interest income and capital gains are continuously reinvested and the entire investment is liquidated after a minimum period of one year and the initial investment along with the total income is credited to the account of the clients. If desired, such amount can be separately credited to the client on a quarterly or a half yearly basis. Clause 15 provides that “details of the transactions executed by the bank on your behalf and investments held in your portfolio as on a specified date can be provided on request”. The last clause 16 says that “while risks are minimized by investments in largely gilt edged securities, there is residual price risk to the investor”. Reading the entire scheme as a whole, we are of the view that scheme by itself is not a fixed deposit scheme. According to it, the bank has to act as an agent of its clients in as much as the bank is required to purchase and sell the securities and units etc. Only on behalf of the clients and the income arising in such trading has to be credited to their accounts. The assessee bank cannot appropriate any part of it to itself. It is entitled only to a commission for managing the portfolio of its clients. Further, there is no assurance to pay any fixed return. It clearly provides that there is a risk to investor clients. Further, such scheme as launched in 1987 was approved by RBI and it is also not the case of revenue that such scheme by itself is in contravention of RBI guidelines/instructions. Therefore, acceptance of money under the scheme was not in violation of any RBI norms and consequently, it cannot be said that money received was in the nature of fixed deposits.
35. However, we are in agreement with Id. DR that implementation of the scheme was contrary to what is stated in the scheme. The learned counsel for assessee has fairly admitted that the entire monies received from its clients were pooled together and the same were invested in purchase and sale of securities. No separate accounts of clients were maintained by the assessee. Further, the profits earned by the assessee under this scheme was never credited to the accounts of the clients. As an agent the bank was required to distribute the profits (after deducting commission) in the same ratio in which individual investments were made. But that was not done by assessee. On the contrary, a particular percentage of return raging between 12.5% to 13.5% depending upon the period of investment was given by asessee to its clients. So, the implementation of scheme was in utter disregard of RBI directions or approval of the scheme as found by Jankiraman Committee. We are unable to accept the contention of assesse’s counsel that not adverse inference could not be drawn from the findings of such committee since such committee gave its report for subsequent year and not for the year under consideration in as much as the scheme and implementation through out was in the similar manner. It is further noted that bank was also penalized for such violations by RBI. Therefore, we are of the view that any loss arising from scheme was disallowable u/s 37 read with Explanation thereto.
36. Despite the above findings, we are unable to uphold the order of CIT(A) on this issue. The question of disallowance would arise only where either such loss or expenditure is claimed in profit & loss account or in the computation of income and not otherwise. We fail to understand as to how any addition could be made where the assessee neither debited such amounted in the profit and loss account nor claimed such deduction while computing the income. Admittedly, the books of account in respect of banking business other than the PMS activity were maintained separately and also got audited as per low. Commission income earned from PMS activity is duly credited to profit and loss account and offered for taxation. Nowhere the loss arising from PMS activity was claimed as deduction either in profit and loss account or in computation of income. The learned DR has not been able to show that regular income of assessee has been reduced by such amount of loss/expenditure. The Excess payment to its clients was made out of PMS corpus itself and this fact is also not in dispute. The separate accounting kept by assessee for PMS has also been accepted by CIT(A). In view of such factual position, we are of the considered view that no addition could have been made by AO or sustained by CIT(A). It is also not the case of revenue that any surplus was earned by the assessee under this scheme. Hence, question of making any addition on this account did not arise. Accordingly, we set aside the order of CIT(A) on this issue and delete the addition sustained by him.
37. The next and last issue relates to the disallowance of Rs. 1,32,46,994/- claimed as deduction in respect of salaries paid to expatriate employees for services rendered in India.
38. Briefly stated, the facts are these: The assessee did not claim such deduction either in the return or in the assessment proceedings since such sum was paid to its expatriate employees outside India and, therefore, not debited to its profit and loss account in the books of accounts maintained in India, So the assessment was completed without any discussion on this issue vide order dated 25.3.94. However, it came to knowledge of the Government that certain non resident/foreign companies were paying salaries to its expatriate employees outside India for services rendered in India without deducting any tax at source even though such payment was chargeable to income tax u/s 9(1)(ii) in the hands of recipients. The Board issued circular No. 685 dated 17/20.6.94 and circular No.686 dated 12.8.94 permitting such companies to pay the amount of TDS along with interest subject to no penalty/prosecution. In pursuance of such circulars, the assessee made the payments of TDS along with interest on 28.7.94 which were accepted by CIT, West Bengal VII vide his order dated 11.11.94. The amount of salary pertaining to this year was Rs. 1,32,46,994/-. Since the assessment had already been completed the assessee made claim for deduction or such amount u/s 37 read with 40(a)(iii) before the CIT(A) for the first time.
39. Such claim was objected by he AO on various grounds namely – (i) there was no justification of failure to make such claim at the time of regular assessment; (ii) the payment of such salaries ware not routed through Indian accounts: (iii) such payments be treated as head office expenses covered by the provisions of Section 44C and no further claim could b allowed.
40. The CIT(A) rejected the claim of additional ground by observing (i) the assessee paid such amount outside INdia without disclosing particulars of such payment to the AO; (ii) the TDS amount was paid only after the issue of circular and not in accordance with the relevant provisions; (iii) the provisions of Section 40(a); (iii) could not be applied as salary was not payable outside India but was only paid outside India; (iv) having failed to make any claim at the time of assessment, the assessee was not entitled to make such claim in the appellate proceedings in view of Supreme Court judgment in the case of Gurjavases, 111 ITR 1.
41. Having rejected the claim of assessee regarding admission of additional ground, strangely, the CIT(A) proceeded to adjudicate the claim assessee on merits. Such claim was rejected on various grounds – (i) the assessee failed to deduct tax at source at the time of making payment of salaries outside India (ii) even subsequently, the assessee had paid the tax out of its own pocket and not recovered from the concerned employees (iii) TDS amount was paid without grossing up of the amount of salary u/s 195A; (iv) since international accounts were not subject to Indian audit, it was not verifiable as to whether such payment was made to employees and consequently, would be taxable u/s 69C and would stand set off against such claim of assessee (v) It was not clear as to whether the payments were exclusively for the services rendered in India, the possibility of making payment for services rendered outside India could not be ruled out. Hence, such expenses could be treated as head office expenses and allowed out to the extent provided u/s 44C. Aggrieved by such order, the assessee is in appeal before the Tribunal.
42. Both the parties have been heard at length. As far as the issue regarding admission of additional ground is concerned, we need not refer to the arguments of the parties since such issue is covered by the latest Supreme Court judgment in the case of National Thermal Power Corporation, 229 ITR 383 wherein it has been held that purely legal ground can be raised before first appellate authority even if it was not raised before AO. Respectfully following the same, we hold that CIT(A) ought to have admitted the additional ground raised by assessee. Normally, we would have restored the matter to the CIT(A) for adjudication of such ground but considering the fact that CIT(A) has already adjudicated such ground on merits also, we treat such ground to have been admitted and proceed to adjudicate the same on merits.
43. Both the parties have been heard at length on merits of this issue. The learned counsel for the assessee has challenged the various observations of CIT(A) by submitting (i) that entries in the book of account are irrelevant in determining the liability of assessee. Reliance was placed on Supreme Court decision in the case of Kedar Nath Jute Mfg. Co., 82 ITR 363. Hence, the claim of assessee can be allowed if it is in accordance with law (ii) that there is no dispute that salaries in respect of which deduction is claimed was paid outside India (iii) the provisions of Section 195A cannot be invoked as there is no material on record to prove that there was any agreement or arrangement to bear the ax burden on such salaries (iv) that entire tax deductible on such salaries has been paid and accepted by the department and consequently CIT(A) was not justified in observing that tax paid was not with reference to salaries paid to expatriate (v) that there is no basis for holding that such salaries were in the form of head office expenses u/s 44C. Once the tax has been paid under Chapter XVII, the legal presumption is that it leads to Indian business. Further there is no dispute that expatriate employees rendered services in India.
44. On the other hand, the Id, DR has supported the order of CIT(A) and also contended that claim is not allowable in view of the language employed in Section 40(a)(i) and 40(a)(iii). According to him, the claim of assessee can be allowed only if the tax has been deducted or paid in accordance with the provisions of Chapter XVII. He drew our attention to the provision to Section 40(a)(i) which in clear terms provides that similar claim regarding interest paid outside India would be allowed in the subsequent year if such tax has been deducted or paid in such subsequent year. By implication, it was pleaded, no claim is allowable u/s 40(a)(ii) if tax is deducted or paid in subsequent year. It was also contended that fiscal statute should be strictly construed in view of Supreme Court judgment in the case of Good Year (India) Ltd., 188 ITR 402. He also relied on the judgment of Hon’ble Supreme Court in the case of Maharashtra Sugar Mills, 82 ITR 452 for the proposition that there is no role of equity in tax matters.
45. Submissions of rival parties have been considered carefully. We are in agreement with the legal proposition that entries in the books of account are not relevant if the claim is otherwise allowable. This is well supported by the judgment of Hon’ble Supreme Court in the case of Kedar Nath Jute Mfg. Co (supra). We also agree that claim of assessee cannot be disallowed on the ground that salaries paid were not grossed up u/s 195A for the purpose of computing tax liability of assessee in as much as there is no material on the record that there was any agreement or arrangement to bear the burden of tax on salaries chargeable to tax. The burden to prove the existence of such agreement is on the revenue which has not been discharged. Similar view has also been taken by us in the case of Mitsubhishi Corporation, 85 ITD 414. There is also no dispute that salaries to expatriate employees were paid outside India and the tax deductible on such income along with interest has been paid by the assessee in accordance with circulars of the Board. Such payments have been accepted by the department.
46. Despite the above findings, we are unable to uphold the claim of assessee. In our opinion, the claim of assessee is hit by the provisions of Section 40(a)(iii). Section 40 is ‘salaries if :
(i) it is payable outside India; and
(ii) the tax has not been paid thereon nor deducted there from under chapter XII-B.
It is not the case of assessee that either the tax has been paid by the employees on such payments or has been deducted by the assessee from such payments under Chapter XVII-B. The only contention of assessee’s counsel is that tax has been paid under Chapter XVII-B along with interest as per board circulars. According to her, such payments would still be payments under Chapter XVII-B and consequently no disallowance could be made. In our opinion, this contention does not help the assessee. As far as Board Circular is concerned, it only gives immunity from penalty and prosecution against default of non deduction of tax and payment thereof under Chapter XVII-B and does not provide any benefit with reference to deduction of salary u/s 37 read with Section 40(a)(iii). Salaries paid outside India are allowable u/s 37 itself but Section 40 which is a non obstante provision disallows such payments as deduction u/s 37 if the tax has not been paid thereon nor has been deducted there from under Chapter XVII-B. This provision being a prohibitive or disincentive Provision, has to be considered strictly. Since no tax has been deducted at source under Chapter XVII-B, the only question is whether any benefit can be given to assessee if the tax has been paid by the assessee after the completion of assessment. In our opinion, the answer is in negative. If we read the entire section as a whole, we find that intention of the legislature is to allow the deduction only if the tax has been paid strictly in accordance with the provisions of Chapter XVII-B i.e. within the prescribed time. Section 40(a)(i) disallows payments on account of interest, royalty, fees for technical services or other sum chargeable to tax which is payable outside India on similar terms but the proviso to clause (i) specifically allows such payments as deduction in the year in which the assessee pays or deducts the tax under Chapter XVII-B. It clearly provides that deduction is to be allowed in the year in which obligations arising to the assessee are complied with.
47. However, there is no such proviso to clause (iii) of Section 40(a). That clearly shows the intentions of the legislature t the effect that disallowance is not to be made only where the tax has been deducted or paid within th prescribed time under Chapter XVII-B. If the legislature had intended to give similar benefit, it could have easily inserted a similar proviso t clause (iii) . Deliberate departure clearly indicates the intention of the legislature not to provide similar benefits in the case of payments of salaries. If the interpretation put forth by assessee’s counsel is accepted then the proviso to Section 40(a)(i) would became redundant. Hence such interpretation cannot be accepted. In our considered opinion, the prohibitive provisions should be construed in the manner which helps the honest and law abiding assessees and discourage the defaulter assesses. However, the legislature’s intention is very clear and does not allow deduction if tax has not been deducted or paid within prescribed time under Chapter XVII-B. Admittedly, neither the tax was deducted as source nor payment of tax was made as per the provisions of Chapter XVII-B. Tax was only paid after long period of three years from the end of financial year concerned to avoid penalty/prosecution and, therefore, no benefit can be given to assessee on the account for the reasons given by us. Accordingly, we uphold the order of CIT(A) on this account.
48. In the result, the appeal of assessee is partly allowed.
Section 36(1)(vii) : Bad Debts written off
Bad debts should be written off in the books of A/c’s of Assessee in the P.Y. in which deduction is claimed.
The debt should have been taken into account for computing income for P.Y. or earlier P.Y. No need to prove that the debts have become bad debt.
Where the amount of such debt has been taken into account in computing the income for PY or earlier PY (on the basis of ICDSS without recording the same in the accounts). Such debt shall be allowed in the previous year in which such debt becomes bad and It shall be deemed that such debt has been written off as irrecoverable in the accounts.
Table Need to Inserted
Bad-Debts Recovery
Where deduction has been allowed in respect of bad debts, recovery shall be taxable as PGBP in the year of recovery. This shall apply even if the business or profession is not in existence in the previous year in which recovery has been made.
Example:Local Searchee Ltd. sold goods of Rs. 1,50,000 on credit to Onlinesolves.Ltd during the previous year 2017-18. Despite all efforts,Local Searchee Ltd could not recover the money and finally the amount of Rs. 1,50,000 was written off in the accounts of Local Searchee Ltd. during the previous year 2018-19. This amount of Rs. 1,50,000 was allowed as deduction for the assessment year 2019-20. In the previous year 2019-20, Local Searchee Ltd.could recover Rs. 25,000 from Onlinesolves.Ltd out of the amount written off. This amount of Rs. 85,000 shall be treated as an income in the assessment year 2019-20.
Firm claims bad debts- Firm dissolved
Partner recovered bad debts Section 41(4) NOT applicable because it is applies only if assessee who claims th bad debts and assessee who recover is same.
Debts of a Discontinued Business Not Deductible –
No allowance can be claimed in respect of bad debts of a business which has been discontinued before the commencement of the previous year. Such bad debt cannot be deducted even from profits of a separate existing business.
Allowable in the hands of Successor –
In some cases (e.g., one of the partners taking over business of the firm with all assets and liabilities or conversion of firm into company by taking over all assets and liabilities), the successor can claim the benefit of deduction of bad debt if the successor carries on the business of the predecessor and bad debt is written off in the books of account of the successor.
The amount of any bad debt or part thereof, which has been written off as irrecoverable in the accounts of the assessee for the previous year, shall be allowed as a deduction subject to the provisions of section 36(2) which are as under:—
Such debt or part thereof must have been taken into account in computing the income of the assessee of the previous year or of an earlier previous year, or
It represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.
If there is a bad debt on account of sale made, it will be allowed as a deduction because sale has been treated as income. Similarly, in the case of a money lending business if interest is not realisable it will be allowed as a deduction because it has been treated as income either of current year or earlier year. However, there is one exception to this rule, where bad debt will be allowed even if such debt, which has become bad, has not been treated as an income. In the case of money lending business, interest is an income. If that income is not realisable, it can be treated as a bad debt. However, in this case even the money which was lent, if not realised, can be treated as a bad debt as per condition (b) above.
Thus, the following are the requisite conditions for allowance of a debt as bad debt:
It must be a debt or part thereof;
Such debt must be revenue in nature;
Such debt must have taken into account in computing the income of the assessee or it represents money lent in the ordinary course of business of banking or money lending which is carried on by assessee;
Such debt must be incidential to the business or profession of the assessee;
Such debt must have been written off as irrecoverable in the accounts of the assessee for the previous year.
