DDIT (IT)-2(1), MUMBAI vs. STANDARD CHARTERED BANK, MUMBAI

The present appeal filed by the Revenue and Cross-Objection filed by the Assessee arise from the order of Commissioner of Income CO No. 161/Mum/2003 (Assessment Year 1993-94) Tax (Appeals)-XXIV [hereinafter referred to as ‘the CIT(A)’] passed on 25/11/2002 for the Assessment Year 1993-94, which in turn arose from the Assessment Order, dated 20/09/1996, passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’].

The Revenue has raised the concise grounds of appeal:

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the disallowance of Rs. 5,00,000/- made on account of club expenses."

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made of Rs. 1,15,75,022/- on account of unrealised forward profit on the ground that the forward transaction in foreign exchange have not been actually settled and therefore income has not accrued to the assessee."

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to allow claim in respect of bad debts recovered to the extent of Rs. 70,30,360/- on the ground that the bad debts recovered during the year cannot be subjected to tax as the provisions created for such debt in earlier years have not been allowed as deduction.

On the facts and in the circumstances of the case and in law,

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 5,17,32,848/- made on account of broken period interest paid on purchase of securities, which were lying in stock at the end of the previous year on the ground that in case of trading in security, total cost of purchase of security, which included broken period interest and debited to P & A A/c. is an allowable deduction.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 14,23,38,910/- made on account of excess interest paid under Corporate Cash Deployment Scheme (CCDS) on the ground that the assessee has not claimed any deduction of expenses by way of interest and no penalty or prosecution has been imposed u/s. 46 or 47A of Banking Regulation Act or Sec. 58B of RBI Act and therefore infraction of law cannot be presumed for making disallowance of interest.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 74,86,000/- plus Rs. 4,91,500/- made on account of loss in transaction with broker on the ground that the assessee has not contravened provisions of sec. 15 of SECRA and as per the delivery order, the securities were to be delivered to the broker himself and this amounted to written consent that the broker was the principal in the transaction.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to delete the disallowance of Rs. 40,21,73,018/- on account of losses in ready forward transaction.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the Assessing Officer to delete the disallowance on account o losses in Securities transactions to the extent of Rs. 756.96 crores out the total disallowance of Rs. 1094.14 crores made by the Assessing Officer on the ground that the loss to the extent of Rs. 756.96 crores is allowable deduction u/s. 28 and 36(i)(vii) of the I.T. Act, 1961. 3 CO No. 161/Mum/2003 (Assessment Year 1993-94)

The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”

1 The Revenue has raised the additional grounds of appeal:

1 On the facts and in the circumstances of the case and in law, apart from erring in deleting the disallowance of Rs. 40,21,73,018 referred to in Ground 10 the learned CIT(A) failed to appreciate that as per explanation to section 37(1) inserted by the Finance(No 2) Act 1998 with retrospective effect from 01/04/1962, any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction shall be made in respect of such expenditure.

2 The learned CIT(A) further failed to appreciate that this was pertained to those ready forward transactions which were prohibited by section 16 of Securities Contract Regulation Act, hence these transactions were illegal and loss pertaining to them was not allowable in terms of Explanation to section 37(1).

3 The learned CIT(A) further failed to appreciate that as held by the Hon’ble Supreme Court in the case of B.O.I. Finance Ltd vs. Custodian And others [1997-(010)-SSC-0488-SC dated 19/03/1997], the purchase value of the shares/ securities relating to such illegal ready forward transactions could not be allowed as a deduction and consequently there could not be any loss.

4 The learned CIT(A) ought to have disallowed the entire purchase value of all illegal ready forward transactions.

5 It is prayed that the issue relating to determination and allowance of loss and disallowance of purchase cost of all securities in respect of illegal ready forward transactions be set aside to the file of the assessing officer for fresh determination as per law.”

2 The Assessee has raised the following grounds of Cross-Objections:

During the assessment proceedings, the Assessing Officer noted that while working out the disallowance of Travelling Expenses as per the provisions contained in Rule 6D of the Income Tax Rules, 1962 (hereinafter referred to as ‘the Rules’), the conveyance expenses incurred by the employees of the Assessee while on Tour have not been included. The Assessing Officer was of the view that the conveyance expenses incurred by the employees of the Assessee while on Tour are to be included for the purpose of working out the disallowance under Rule 6D. Since the Assessee

Being aggrieved, the Assessee carried the issue in appeal before CIT(A). It was contended on behalf of the Assessee that as per Rule 6D the expenses incurred by employees on local conveyance while on tour are not to be included while computing the disallowance under Rule 6D of the Rules. The Assessing Officer had, therefore, erred in holding that the expenditure incurred by the employees on hotels as well as on local conveyance are covered under Rule 6D of the Rules as said rule does not make any distinction on account of the nature of expenses incurred by the employees. The aforesaid contentions found favour with the CIT(A) who deleted the disallowance of INR 10,00,000/- made by the Assessing Officer.

Being aggrieved by the above relief granted by the CIT(A), the Revenue has preferred appeal on this issue before the Tribunal.

Having heard both the sides and on perusal of material on record, we note that the CIT(A) has deleted the addition by following, inter alia, the judgment of the Hon’ble Bombay High Court in the case of CIT Vs. Gannon Dunkerly and Co. : [1993] 114 CTR 56 wherein it has been held that the local conveyance expenses and other actual expenses which are incurred by the employee while on tour for conducting the assessee's business cannot be considered as travelling expenses of the employee under Rule 6D of the Rules. Further, the disallowance was made on ad-hoc basis. Thus, we do

During the assessment proceedings, the Assessing Officer noted that the Assessee has disallowed entertainment expenses of INR 20,09,510/- incurred in relation to guest/visitors on the basis of the Tax Audit Report. However, no disallowance was made in respect of entertainment expenses aggregating to INR 16,72,890/- attributable to employees accompanying the guest/visitors. The Assessing Officer made disallowance of INR 16,72,890/- under Section 37(2) of the Act on the ground that after the amendment w.e.f. 01/04/1993 the entire expenditure incurred on providing hospitality to employees outside their place of work qualifies for entertainment expenditure in respect of which deduction could be allowed subject to the limit specified in Section 37(2) of the Act.

In appeal preferred by the Assessee, the CIT(A) deleted the disallowance of INR 16,72,890/- by, inter alia, placing reliance upon the Judgment of Hon’ble Delhi High Court in the case CIT Vs. Expo Machinery Ltd: 190 ITR 576. 5. 3. Being aggrieved by the above relief granted by the CIT(A), the Revenue has preferred appeal on this issue before the Tribunal.

Having heard both the sides and on perusal of material on record, we are of the view that the order passed by the CIT(A) deleting the disallowance of entertainment expenses of INR 16,72,890/- does not call for any interference. Section 37(2) of the Act, as substituted w.e.f. 01/04/1993, placed restrictions on the quantum of deduction permissible on account of ‘Entertainment Expenditure’. The expression 'Entertainment Expenditure' was defined in Explanation to Section 37(2) of the Act to include, inter alia, the expenditure on provision of hospitality of every kind by assessee to any person whether by way of provision of food or beverages or in any other manner whatsoever but excluding expenditure on food or beverages provided by an assessee to employees in office, factory or other place of their work. Vide Circular No. 644, dated 15/03/1993, the Central Board of Direct Taxes (CBDT), clarified that the provision of food or beverages in places other than the place of work in respect of specified employees shall not attract disallowance under Section 37(2) of the Act if such food or beverages are provided during working hours even in places other than the place of work, provided the expenditure is genuine and reasonable. In the present case, the genuineness/reasonableness of expenditure was never in doubt. Further, the Assessing Officer, in our view, despite referring to the aforesaid Circular No. 644 failed to appreciate that the true purport of the said circular and the benefit extended by it. Without examining whether the entertainment expenditure was incurred for provisions of food/beverages of specified employees, the Assessing Officer concluded that the expenditure qualified as ‘Entertainment Expenditure’ and proceeded to make the disallowance of the entire entertainment expenditure attributable to employees amounting to INR 16,72,890/-. We note that the Appellant had disallowed INR

The Assessing Officer made a disallowance of INR 5,00,000/- (out of INR 9,60,412/-), on an ad-hoc basis, being the payments made to various club for corporate membership and subscription. The Assessing Officer observed that although it is true that club membership may facilitate interaction with customers, it cannot be said that the entire expenditure incurred wholly and exclusively for 10 CO No. 161/Mum/2003 (Assessment Year 1993-94) the business of the Assessee. Therefore, the Assessing Officer made an ad-hoc disallowance of INR 5,00,000/-.

In appeal, the CIT(A) deleted the above disallowance of INR 5,00,000/- by following the judgment of Bombay High Court in the case of Otis Elevators Co. India Ltd. vs. CIT:195 ITR 682 as well as the decision of the Tribunal in the appeals preferred by the Revenue in the case of the Assessee pertaining to Assessment Year 1989-90 & 1990 1991. 6. 3. Being aggrieved the Revenue has preferred the present appeal.

Both the sides agreed that similar issue has been decided in favour of the Assessee vide order, dated 29/05/2006, passed in case of Assessee [ITA No. 311/Mum/1996] for the Assessment Year 1991- 92 by following the judgment of the Hon’ble Bombay High Court in case Otis Elevator Co. India Ltd.(supra) and the order, dated 03.04.1995, passed by the Tribunal rejecting the appeals preferred by the Revenue for the Assessment Years 1989-90 &1990-91 (ITA No. 9007&9008/Bom/1992). It would be pertinent to note that Reference Applications filed by the Income Tax Department against the order of the Tribunal for the Assessment Years 1989-90 & 1990-91 was dismissed, both, by the Tribunal under Section 256(1) of the Act and by the Hon’ble Bombay High Court under Section 256(2) of the Act. In view of the aforesaid, we do not find infirmity in the order passed by the CIT(A) on this issue. Therefore, Ground No. 3 raised by the Revenue is dismissed. 7 Ground No.4: “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition made of Rs. 1,15,75,022/- on account of unrealized forward profit on the ground that the forward transaction in foreign exchange have not been actually settled and 11 CO No. 161/Mum/2003 (Assessment Year 1993-94) therefore income has not accrued to the assessee.”

During the assessment proceedings, the Assessing Officer noted that as part of the normal business of banking, the Assessee entered in to foreign exchange transaction on behalf of and with the customer including forward foreign exchange contracts. During the relevant previous year the Assessee earned net profit of INR 1,15,75,022/- on account of revaluation of the outstanding forward contracts which were credited to the Profit & Loss Account. However, in the computation of the income the aforesaid net profit was reduced from the figure of profit. The contention of the Assessee was that the figure of profit was only notional in nature. The actual profit or loss on such forward contract would be realized only on the maturity of the forward contract. The Assessee has been consistently offering to tax the income on forward contracts on the basis of actual realization on maturity of the contract. The credit to the Profit & Loss Account was made only for accounting purposes and in order for closely monitoring the outstanding forward contracts what is chargeable to tax is the real income, whereas the income arising on revaluation of the forward contract as on the last day of the previous year represents notional income which has not yet accrued and/or become due to the Assessee. However, the Assessing Officer was not convinced and therefore, an addition of INR 1,15,75,022/- was made while framing the assessment.

In appeal, the CIT(A) deleted the above said addition holding as under: “5.3 I have carefully considered the facts of the case and arguments of the learned counsel. The Hon’ble Madras High Court in the case of Indian Overseas Bank vs. CIT 183 ITR 200 on similar facts has held that the amounts in question were only estimated

Now the Revenue is in appeal before us against the order of CIT(A) deleting the addition of INR 1,15,75,022/-.

We have considered the rival submissions and perused the material available on record. We find that the CIT(A) granted relief to the Assessee by placing reliance upon the Judgment of the Hon’ble Madras High Court in the case of Indian Overseas Bank Vs. CIT: [1990] 183 ITR 200 (Madras), the relevant extract of which reads as under:

On perusal of the above judgment, we find that the Hon’ble Madras High Court has held that observed whether future of the outstanding contract will result in a profit or loss will become known only when the outstanding contracts are settled and not before that, and therefore, so long as that stage has not been reached the loss can only be notion and actual or real. However, in a subsequent judgment the Hon’ble Supreme Court has, in the case of Commissioner of Income Tax, Delhi Vs. Woodward Governor India Pvt. Ltd. : [2009] 312 ITR 254 (SC), held as under:

As per the judgment of the Hon’ble Supreme Court the loss/gain arising on account of foreign exchange fluctuation is to be recognized in the Profit & Loss Account for the relevant previous year. Accordingly, the gain arising on account of revaluation of the outstanding forward contract as on the last of the previous year as per the provisions of Accounting Standard 11 would have to be recognized as profits of the relevant previous year. A perusal of notes to financial statements for the year ended 31/03/1993 shows that the Assessee has been following account policy in relation to transactions involving foreign exchange: “(b) Transaction involving foreign exchange (i) Monetary assets and liabilities in foreign currencies are translated at market rates of exchange notified by the Foreign Exchange Dealers Association of India at the close of the year (ii) Income and Expenditure items are translated at the exchange rates prevailing on the date of the transaction.

On perusal of the above, we find that even as per the accounting policy followed by the Assessee the gains/loss arising out of foreign exchange fluctuation is recognized as profit or loss accruing to the Assessee during the relevant previous year. Accordingly, we reverse the order passed by the CIT(A) and reinstate the addition on account of foreign exchange fluctuation gains with the directions to the Assessing Officer to recompute the quantum of addition foreign exchange gain/loss on outstanding forward contracts after taking into account the profit/loss offered to tax by the Assessee on the date of actual settlement of the aforesaid forward contracts in order to avoid double taxation of the same foreign exchange gain or loss. In terms of the aforesaid Ground No. 4 raised by the Revenue is allowed.

The relevant facts in brief are that during the relevant previous year the Assessee recovered INR 70,30,360/- in respect of debts for which provisions for bad debts was created in earlier years. The Assessee did not offered the aforesaid amount of INR 70,30,360/- to tax despite the fact that same was credited to the Profit & Loss Account of the Assessee for the relevant previous year on the ground that the provisions created for such bad debts, through debited to the Profit & Loss Account in the earlier years, were added

In appeal preferred by the Assessee, the CIT(A) granted relief on this issue and deleted the addition holding as under:

The Assessing Officer added back an amount of INR 91,402/- being the interest on Cash Reserve Ratio (CRR) not received/receivable from RBI on account of deficiencies in the maintenance of CRR balance, alleging the same to be penal in nature and in infraction of law, therefore, not allowable.

The CIT(A) deleted the above addition accepting the contention of the Assessee that INR 91,402/- was neither a penalty nor a penal interest but the amount of interest not received/receivable from RBI.

Being aggrieved, the Revenue is in appeal before us on this issue.

Having heard the rival submission and on perusal of the record, we are of the view, the CIT(A) was correct in deleting the addition of INR 91,402/- since the amount of interest not received could not be regarded as payment of penalty or penal interest in the facts and circumstances of the present case. Our view also draws support from the decision of the Tribunal in the case of the Assessee for the Assessment Year 1992-93 [ITA No. 4978/Mum/1998, dated

In view of the above, we confirm the order passed by the CIT(A) on this issue. Ground No. 6 raised by the Revenue is dismissed.

The facts relevant for adjudication of the issue under consideration are that while purchasing a securities, the Appellant made a payment for broken-period interest (i.e. interest due from the 21 CO No. 161/Mum/2003 (Assessment Year 1993-94) coupon date or last interest date upto the date of purchase) which was debited to the Profit & Loss Account of the Appellant. In respect of the securities which were lying in stock at the end of the relevant previous year, the Assessing Officer disallowed deduction of broken period interest of INR 5,17,32,848/- on the ground that the same is capital in nature and should form part of cost of purchase of the closing stock.

In appeal, the CIT(A) allowed deduction for broken period interest of INR 5,17,32,848/- as revenue expenditure by following the judgment of the Hon’ble Bombay High Court in the case of American Express International Banking Corporation Vs. Commissioner of Income Tax : [2002] 258 ITR 601 (Bombay) holding as under:

Being aggrieved, the Revenue in now in appeal before us on this issue.

Having considered the rival submissions and on perusal of record, we are of the view that the issue stands decided in favour of the Assessee in Assessee’s own case for the Assessment Year 1989-90 & 1990-91 [ITA No. 4243 & 4244/Mum/2000, dated 20/05/2004] wherein the Tribunal by following the decision of the Hon’ble Bombay High Court in the case of American Express International Banking Corporation Vs. Commissioner of Income Tax: 258 ITR 601 held as under: “10 The second issue is regarding the treatment of the broken period Interest. At the time of purchasing a security, banks usually make payments towards broken period interest. This is the Interest due from the broken date fill the date of purchase. The interest so paid by the banks usually known as broken period interest is debited in the Profit & Loss account of the banks and further claimed as deduction In computing the taxable Income. The claim has been disallowed by the AO on the ground that such broken period interest is in the nature of capital outlay. The contention of the bank is that the securities are held by the bank as its stock-in-trade and therefore such payment should be treated as revenue in nature. This issue has been considered and decided by the Hon'ble Bombay High Court in the case of American Express International Banking Corporation v. CIT (255 ITR 601). The Hon'ble Court has held therein mat the accrued interest paid by the assessee bank upto the date of purchase should be allowed as revenue expenditure. The same view has been followed by the Hon'ble Bombay High Court in CIT v. Citi Bank N.A. (264 ITR 18). The very same view has been adopted by the Hon'ble Kerala High Court in the case of South Indian Bank Ltd, and Nedungadi Bank Ltd. reported in 241 ITR 374 204 ITR 545

We find that this issue is now almost settled. As far as the bank is concerned, broken period Interest paid by it on the securities acquired by the bank in its course of business as trading stock need to be allowed as revenue expenditure in computing its taxable income. Therefore, grounds raised by the Revenue on this issue fall and the issue is decided against it.”

In view of the above, we do not find any infirmity in the order passed by the CIT(A) on this issue are the CIT(A) has allowed deduction for broken period interest of INR 5,17,32,848/- by following the above said decision of the Tribunal wherein the judgment of the Hon’ble Bombay High Court has been followed. Accordingly, Ground No. 7 raised by the Revenue is dismissed.

The Appellant operated a Corporate Cash Deployment Scheme (for short ‘CCDS’) which was stated to have been implemented with the object of facilitating the deployment of surplus corporate funds in PSU Bonds, units, debentures, etc. According to the Assessee the funds under the CCDS were to be managed by the Assessee in a fiduciary capacity. However, the Assessing Officer concluded that CCDS was in the nature of portfolio management scheme operated by the Assessee in violation of the guidelines issued by the Reserve Bank of India on portfolio management. The amounts received under the CCDS by the Assessee were nothing but short-term deposits on 24 CO No. 161/Mum/2003 (Assessment Year 1993-94) which the Assessee has paid interest in excess of the rates prescribed by the Reserve Bank of India. Therefore, the Assessing Officer calculated excess interest paid at INR 14,23,38,910/- and added the same to the income of the Assessee.

Before CIT(A) the Assessee contended the interest should not be added back as the Assessee had not claimed deduction for interest expenses. The CIT(A) following the order, dated 25.11.2002, passed in the case of the Assessee in appeal against the Assessment Order for the Assessment Year 1992-93, deleted the addition of 14,23,38,910/-.

Being aggrieved, the Revenue has filed appeal before us on this issue.

We have considered the rival submissions and perused the material on record. The factual finding retuned by the CIT(A) that the Assessee had not claimed deduction for interest/payments made to the investors has not been controverted. We note that the order of CIT(A) for the Assessment Year 1992-93 followed by the CIT(A) on this issue has been confirmed by the Tribunal. Vide order dated 08/02/2007 passed in appeal preferred by the Revenue for the Assessment Year 1992-93 [ITA No.4978/Mum/1998], the Tribunal has held as under:

Respectfully following the above decision of the Tribunal, we confirm the order passed by the CIT(A) deleting the addition of INR 14,23,38,910/-. Ground No. 8 raised by the Revenue is dismissed.

During the course of assessment proceedings, on perusal of special audit report under Section 142(2A) of the Act, the Assessing Officer noted that the Assessee has entered into transactions with brokers as counterparties.

The Assessing Officer noticed that the special auditors had worked out a loss of INR 74,86,000/- in the transactions in GIC Rise II Units undertaken by the Appellant with C. Mackertich and Stewart & Co. According to the Assessing Officer, the aforesaid transaction were hit by the provisions contained in Section 15 of the Securities

The Assessing Officer also note that the original document in respect of the transaction in units of face value of INR 1 Crore, being the deal slips, did not mention any name of the counterparty. According to the Assessing Officer if there was an understanding that the broker were acting as a principal the deal slips should have reflected the name of the broker as counterparty which was not the case. Therefore, the Assessing Officer concluded that the these transactions were undertaken by the Appellant with broker as counter party without the prior written consent of the Appellant and therefore, the same were hit by the provision of Section 15 of SCRA. The Assessing Officer rejected the contention of the Appellant that the fact that as per the delivery order the securities were to be delivered to the broker himself amounted to a written understanding that the broker would be acting as counterparty. Therefore, the Assessing Officer disallowed loss of INR 4,91,500/- claimed by the Assessee in respect of the aforesaid transactions.

Being aggrieved, the Assessee carried the issue in appeal before the CIT(A). The CIT(A) held that the provisions of Section 15 of SCRA were not applicable to the Assessee and overturned the finding

The Revenue is now in appeal before us against the relief granted by the CIT(A).

The Learned Departmental Representative placed reliance on the order passed by the Assessing Officer and submitted that the transactions under consideration were clearly undertaken in violation of the provisions of Section 15 of SCRA. The broker was not permitted to enter into transaction with the Assessee without written consent from the Assessee. The deal slips were blank and did not contain the name of the broker. There was no prior written consent given by the Assessee to the broker to act as a principal. Clearly the transactions were in violation of the provisions of Section 15 of SCRA.

Per contra, it was submitted on behalf of the Appellant that there was no absolute bar against the broker acting as a counterparty. The fact that as per delivery contract the securities were to be delivered to the broker showed that the broker was acting as a principal under the consent of the Assessee. Without prejudice to the aforesaid it was also submitted that the CIT(A) was correct in holding that the provisions of Section 15 of SCRA were not applicable to the Assessee since the Assessee was not a member of stock exchange.

We have considered the rival submissions and perused the material on record. The issue that raises for consideration is the applicability of Section 15 of SCRA which reads as under: “Members may not act as principals in certain circumstances.

No member of a recognised stock exchange shall in respect of any securities enter into any contract as a principal with any person other than a member of a recognised stock exchange, unless he has secured the consent or authority of such person and discloses in the note, memorandum or agreement of sale or purchase that he is acting as a principal: Provided that where the member has secured the consent or authority of such person otherwise than in writing he shall secure written confirmation by such person or such consent or authority within three days from the date of the contract: Provided further that no such written consent or authority of such person shall be necessary for closing out any outstanding contract entered into by such person in accordance with the bye-laws, if the member discloses in the note, memorandum or agreement of sale or purchase in respect of such closing out that he is acting as a principal.”

Section 15 of SCRA deals with a contract between a member of a recognized stock exchange and a non-member. Therefore, the conclusion drawn by the CIT(A) that the provisions of Section 15 shall not apply to transaction between the Assessee and broker is not correct. Section 15 of SCRA provides that a member of stock exchange can enter into a contract with a non-member provided such member (a) secures consent or authority of the non-member in writing and (b) discloses in the note, memorandum or agreement of sale or purchase that such member is acting as a principal. In the facts of the present case both the aforesaid conditions were not complied with. The mere fact that the delivery contract provides for delivery of the securities to the broker is not sufficient and does not meet the requirements of Section 15 of SCRA. The Assessing Officer had returned a finding deal note did not disclose that the member was acting as a principal. This finding has gone uncontroverted in the appellate proceedings. Accordingly, we hold that the transaction undertaken under consideration have been undertaken in violation

The Assessing Officer observed that the Janki Raman Committee had given a finding that Ready-forward transactions were used by the banks to divert their funds to stock brokers. These transactions were undertaken at rate which had no relation to the market rates and sole purpose of such transactions was to advance funds in an unauthorized manner to the stock brokers. Therefore, special audit under Section 142(2A) of the Act was directed on this issue. The special auditors examined all the transactions in order to segregate transactions which were in the nature of Ready-forward transactions as the Assessee Bank did not provide data bifurcating Ready- forward transaction without rate transactions. The special auditors identified transactions of purchase and sale in the same security of the same face value with same counter-party to be ready-forward

During the assessment proceedings, the Assessee filed letters highlighting factual/ other inaccuracies and errors in the computation made by the special auditor, some of which were accepted by the Assessing Officer. The Assessing Officer finally computed profits/loss from Ready-forward transactions as under: Profit (INR) Loss (INR) Net (INR) Approved Securities SBI/ 17,95,07,496 4,047,36,130 (+) 13,87,71,133 Nationalized Bank Approved Securities Other 24,75,28,187, 38,44,22,046 (-) 13,68,93,859 banks/non-banks Non-approved All counterparties 15,08,74,680 61,53,839 (-) 26,52,79,159 Net Illegal Loss (-) 40,21,73,018

The Assessing Officer concluded that the Ready-forward transaction

Being aggrieved, the Assessee carried the issue in appeal. Before the CIT(A), the Assessee placed reliance upon Instruction dated 28/02/1995 issued by the Central Board of Direct Taxes wherein it was instructed that all Ready-forward transaction should be considered as a constituting as a single class of business, and hence, inter-se set off of profit and losses should be made and only the net profits should be brought to tax. The CIT(A) concluded that the aforesaid instruction was binding upon the Assessing Officer and deleted the disallowance of INR 40,21,73,018/- made by the Assessing Officer since as per the report of special auditor the net result of Ready-forward transactions was a profit of INR 54,06,54,475/-. The CIT(A) also took note of the fact that no disallowance was made by the Assessing Officer in identical facts and circumstance for immediately preceding Assessment Year 1992- 93. 13. 5. Being aggrieved with above relief granted by the CIT(A), the revenue is now in appeal before us.

The Ld. Departmental Representative submitted that the losses of INR 40,21,73,018/-, being losses from illegal transactions undertaken in contravention of Securities Contract (Regulation) Act, 1956, could not have been set off against the profits from legal

Per contra, the Ld. Senior Counsel appearing for the Assessee submitted that the Instruction dated 28/02/1995 issued by the Central Board of Direct Taxes (CBDT) clearly provided that in case the net result, after inter-se set off of profit and losses of Ready- forward transactions, was a loss, then the same would not be allowed to be set off against other profits from the banking business. The aforesaid instructions were clear and were correctly followed by the special auditor while computing the overall/net profit of INR 54,06,54,475/- arising from Ready-forward transactions. The Ld. Senior Counsel further submitted that the computation furnished vide letter dated 13/09/1996 containing re- worked position of profit and losses from Ready-forward transactions was submitted as per the directions given by the Assessing Officer to include transactions where broker was involved in one leg of the transactions while the other leg of the transactions was direct. The aforesaid directions were issued by the Assessing Officer on the basis of the act apprehension that same broker who was involved in the one leg of the transaction was also involved in the second leg of the transactions even though the second leg of the transaction was shown to be direct. Therefore, the revised computation furnished vide letter dated 13/09/1996 containing re- worked position could not be considered as the correct working of 33 CO No. 161/Mum/2003 (Assessment Year 1993-94) net/overall profits or losses arising from Ready-forward transactions.

We have heard the rival contention and perused the material on record. Having perused Letter, dated 28/02/1995, issued by CBDT we are of the view that the same was issued after taking into consideration all the facts and circumstances prevalent at the relevant time and clearly provided that all the Ready-forward transactions, whether legal or illegal, were to be regarded as constituting a single class of business. The relevant extract of the aforesaid instruction read as under:

1 Keeping in view the above guidelines issued by the CBDT, the CIT(A) granted relief to the Assessee holding as under: “14.3.1 I have very carefully considered the basis of disallowance by the Assessing Officer and the detailed arguments of the learned Counsel. I have also very carefully examined the instruction dated 28.2.1995 issued by the Board. In my considered view, the Board has made it very clear vide para 1 that ready-forward transactions in any form were not legally permissible. The Board while expressing its view has made it clear that all the ready- forward transactions should be considered as constituting a class of business, and hence, inter se set off of profits and losses should be made and only the net profit should be brought to tax. In case the net result is a loss, however, the same should not be set off against other profits from the banking business for the reason that such losses have arisen out of either

2 We concur with the CIT(A) on this issue as the guidelines issued by CBDT clearly provided that all the Ready-forward transactions should be considered as constituting a class of business; inter-se set off of profits and losses should be made; and only the net profit should be brought to tax.

3 As regards, computation furnished by the Assessee vide letter, dated 13/09/1996 containing re-worked position of profit and losses from Ready-forward transactions is concerned, we find merit in the submission advanced on behalf of the Assessee that the same was furnished as per the directions issued by the Assessing Officer and could not be considered as reflecting the correct overall/net profits/or losses arising from Ready-forward transactions. On perusal of Assessment Order we find that the direction issued by the Assessing Officer to file the aforesaid computation was given on the basis of apprehension harbored by the Assessing Officer. According to the Assessing Officer, there was a possibility of involvement of a broker where the broker name was mentioned as ‘Direct’ in the special audit report. There was no material on record to show the leg of the transactions shown to be ‘direct’ actually involved a broker. The Assessing Officer did not have any basis to change the parameters of identifying Ready-forward transactions adopted by the special auditor and the computation of net/overall profits as computed by the special auditor. As per the computation by the special auditor the Ready- forward transactions resulted in overall profit of INR 54,06,54,475/-.

4 In view of the above, we are not inclined to accept the contentions raised by the Revenue and decline to interfere with the order passed

5 Additional Ground 12.1 to 12.5 raised by the Revenue also pertain to ready-forward transactions.

6 By placing reliance of Explanation to section 37(1) inserted by the Finance (No 2) Act 1998 with retrospective effect from 01/04/1962, the Revenue has contended that no deduction can be allowed for loss of INR 40,21,73,018/- arising from Ready-forward transactions. We have already rejected the contention of the Revenue that the Ready-forward contracts resulted in overall loss and have accepted the contention of the Assessee that the Ready-forward transactions resulted in the overall/net profits. Therefore, the question of claiming deduction of losses does not arise. Ground No. 12.1 raised by the Revenue has been rendered infructuous and is, therefore, dismissed.

7 As regards Ground No. 12.2. to 12.5 whereby it has been contended that entire purchase/sale cost of the Ready-forward Contract must be disallowed as per Explanation 1 to Section 37 of the Act, we are of the view that the adjudication of this ground would require investigation into facts which are not on record. Ready-forward transactions contain two inter-connected legs, namely, the first or the ready-leg, consisting of purchase/sale of certain securities at a specified price, and the second or forward leg, consisting of the corresponding sale/purchase of the same of similar securities at a letter date at a price determined on the first date. The Hon’ble : 14 [1997] 12 SCL 99 (SC), held that Section 16 of the Securities

8 In view of the above, the Cross – Objections filed by the Assessee become infructuous and therefore, the same are dismissed.

1 In the return of income the Assessee had claimed loss of INR 1,427.59 Crores on account of securities transaction scam. During the assessment proceedings, the Assessee claimed that during the security scam various payments were made by the Assessee for purchase of securities which were never delivered to the Assessee. Similarly, the Assessee had sold several securities but did not 38 CO No. 161/Mum/2003 (Assessment Year 1993-94) receive the sale consideration. The aforesaid amounts, represented loss suffered by the Assessee during normal course of business which was allowable as deduction under Section 28 of the Act. Alternatively, it was contended by the Assessee that Assessee should be allowed deduction for the aforesaid amount under Section 36(1)(vii) of the Act being bad debts. In this regard, the Assessee relied upon Circular dated 27/04/1992, issued by CBDT.

2 The Assessing Officer examined the allowability of loss in individual transactions by testing the transaction of the following parameters:

3 The Assessing Officer was of the view that deduction could be allowed to the Assessee only in case where all the above three criteria were satisfied. After examining each of the transactions in respect of which the Assessee has made a claim for loss, the Assessing Officer allowed deduction for INR 333.45 Crores only. As regards balance claim of deduction for Loss of INR 1,094.14 Crores out of the total deduction of INR 1,427.59 Crores claimed by the Assessee, the Assessing Officer disallowed the same. The Assessing Officer concluded that the Loss of INR 1,094.14 Crores pertained to transactions which were irregular and were not undertaken in the 39 CO No. 161/Mum/2003 (Assessment Year 1993-94) normal course of business by the Assessee. Therefore, the Assessee was not entitled to claim deduction Section 28 or Section 36(1)(vii) of the Act.

4 Being aggrieved, the Assessee preferred appeal before CIT(A) against the denial of deduction of INR 1,094.14 Crores which consisted of the following: Particular INR (Crores) Losses in transactions with BOK/MCB, which are in 403.14 liquidation Settlement reached with the counterparties

97 Suits decided in favour of the Appellant and recoveries 180.19 made subsequent to the accounting year Cases pending before Special Court/Supreme Court, etc.

84 Total 1,094.14

5 Before the CIT(A), the Assessee filed various submissions including submissions dated 12/04/2000 and 03/05/2002. It was contended on behalf of the Assessee as under:

69 Gross Exposure 1,482.14 The Assessee had claimed deduction for INR 1,427.59 Crores. The difference between the loss estimated by the Janakiraman Committee Report and the loss claimed by the Assessee was on account of no tax claim made by the Assessee. The loss incurred by the Assessee stood established by the finding of the Janakiraman Committee.

6 The above submissions advanced by the Assessee found favour with the CIT(A) who allowed deduction for losses to the extent of INR

96 Crores being losses of INR 867.50 Crores written off by the Assessee reduced by the recoveries of INR 110.53 Crores. The balance claimed for deduction of losses amounting to INR 337.18 Crores (INR 1094.14 Crores – INR 756.96 Crores) was not allowed by the CIT(A) on the ground that the same were either not written off during the relevant previous year or could not be considered as having become final during the relevant previous year.

7 Now, the Revenue is in appeal before us against the order of CIT(A) allowing deduction of INR 756.96 Crores under Section 28 read with Section 36(1)(vii) of the Act.

8 The Learned Departmental Representative submitted that the transactions undertaken by the Assessee were against public policy

9 Learned Senior Counsel appearing for the Assessee took us through the order passed by the CIT(A) and submission filed before the CIT(A) to support the order passed by the CIT(A). Learned Senior Counsel submitted that the Assessee bank was a victim of fraud discovery in June 1992 in which some of the employees of the Assessee were also involved. The Assessee filed a complaint on the basis of which First Information Report (FIR) was registered with the Central Bureau of Investigation (CBI). On the complete review and reconciliation of stock of securities as per books and the physical holding of securities, it was would found that the Assessee had suffered a loss aggregating to INR 1,427.59 Crores. The Appellant initiated the process of negotiation/mediation with the counter-parties. A number of civil suits were also filed by the Appellant against the counter-parties. The Reserve Bank of India (RBI) also appointed a committee under the chairmanship of Sh. Janakiraman, the then Deputy Governor of RBI to conduct inquiry into the irregularities in the conduct of banking and security transactions in the banking industry. The preliminary inquiry by the 43 CO No. 161/Mum/2003 (Assessment Year 1993-94) said committee indicated that two banks viz Bank of Karad (BOK) and Metropolitan Co-operative Bank (MCB) had undertaken large number of sale transactions without holding the stocks. The funds received by these banks were siphoned off by certain brokers. In the event, these banks were not in a position to honor their contractual obligations for delivery of securities. Both the aforesaid banks were placed under liquidation, during the previous year relevant to Assessment Year 1993-94. Investigation of losses suffered by the banks was also conducted by the committee which estimated that the Assessee had exposure of INR 1,482.14 Crores. On the second test applied by the Assessing Officer that whether the transaction was genuine and was in the regular course of banking, the Learned Senior Counsel relied upon the judgment of the Hon’ble Supreme Court, dated 30/10/2001, passed in Civil Appeal No.4456 of 1996. Explaining the background, Learned Senior Counsel submitted that a suit was filed by the Appellant against Canara Bank and Others before the Special Court [being Suit 13 of 1994]. In that suit, the Defendants (i.e. Canara Bank and Others) sought to take a defense that the suit transactions were part of an internal arrangement between the Assessee (i.e. Standard Chartered Bank) and the broker, who was a notified party and the said arrangement was opposed to public policy. The suit was decided in favour of the Assessee-bank by the Special Court. In the appeal filed by Canara Bank and Others against the order of the Special Court, the Hon’ble Supreme Court, vide order dated 30/10/2001 passed in Civil Appeal No.4456 of 1996, confirmed the decision of the Special Court whereby it was held that the 15% Arrangement was not against the Circulars of the RBI, or not opposed to public policy. Placing reliance on Circular No.35-D

10 We have heard both the sides at length on this issue, consequent the rival submissions, perused the material on record and examined the position in law.

11 On perusal of record, we find that the Assessee had claimed deduction in respect of losses suffered by the Assessee on account (a) loss suffered in the securities transactions, where the Appellant either paid the consideration for purchase of securities but did not receive delivery of the same or (b) sold securities but had not received the consideration. It is admitted position that the Assessee-bank was permitted to undertake transaction of purchase and sale of securities. However, the Assessing Officer was of the view that 15% arraignment entered into by the Assessee with its broker was in irregular transaction which could not have been said to have been undertaken in the normal course of business. In appeal before CIT(A), the Assessee had placed reliance upon the findings of the Special Court in suit filed by the Assessee against Canara Bank and Others (Suit No. 13 of 1994) and had contended that the same have been confirmed by the Hon’ble Supreme Court while dismissing the appeal preferred by Canara Bank and Others (Civil Appeal No. 4456 of 1995). On perusal of paragraph 37 of the order passed by the Special Court reproduced in the judgment, dated 30/10/2001, passed by the Hon’ble Supreme Court. We find

12 On perusal of above, it can be seen that on the issue of the 15% Arrangement being opposed to public policy, the Special Court did

13 However, we note that dismissing the appeal preferred by the defendants the Hon’ble Supreme Court has observed : “We are also not satisfied that there is any merit in the contention that the transaction in question would be void on the grounds of public policy”. The relevant extract of aforesaid judgment of the Hon’ble Supreme Court under: