Income Tax Appellate Tribunal - Ahmedabad
State Bank Of Saurashtra vs Deputy Commissioner Of Income Tax on 31 December, 2004
Equivalent citations: [2005]93ITD662(AHD), (2005)95TTJ(AHD)225
ORDER
R.P. Garg, Vice President
1. The cross-appeals and cross-objection are against the order of the CIT(A) for asst. yr. 1996-97. For the sake of convenience, they are being disposed of by this common order.
2. In the assessee's appeal, the first dispute is with regard to the disallowance of loss arising on account of security transaction with Punjab National bank--Rs. 2,43,21.86,000 and Rs. 44,85,52,158 and with State Bank of Patiala aggregating to Rs. 2,88,07,38,158. The assessee is a scheduled bank and 100 per cent subsidiary of State Bank of India. The business of the assessee is banking which included earning of interest and other income, commission on LCs and guarantees, overdue demand bills purchased, discount on various facilities, exchange, brokerage and incidental activities.
3. The loss of Rs. 2,43,21,56,000 fell upon the assessee by virtue of judgment and decree dt. 11th March, 1996 of the Special Court disallowed by AO as having arisen to the bank as intermediatory liability and at the stage of contingency. The assessee submitted that the loss in question had arisen in the course of regular business transaction of banking for purchase and sale of securities; that the loss of Rs. 243.21 crores had arisen in the course of transaction with PNB in view of the bank's inability to deliver the securities in question to the purchaser due to reasons beyond its control; the purchaser bank, i.e., PNB filed a suit against the bank before the Special Court under Special Court (Trial of Offences Relating to Securities Transactions) Act, 1992. By judgment and decree dt. 11th March, 1996, the Special Court decided the issue against the assessee and in favour of the bank decreeing the aforesaid amount. Though the assessee had preferred appeal to the Supreme Court against the judgment, the assessee had already admitted its liability to PNB to the tune of Rs. 182 crores being aggregate of Rs. 102.80 crores, the principal amount of units involved and Rs. 79.20 crores being approximate amount of interest at the rate of 17.5 per cent till the date of hearing before the Supreme Court and that vide an interim order passed on 8th May, 1996 the Supreme Court has directed the bank to make the payment/deliver securities of the aggregate value of Rs. 212 crores to PNB, which directions have been complied with. On complying with such directions only the appeal of the assessee was admitted against the judgment and decree of the Special Court of course without in any way varying the judgment and decree of the Special Court. Such liability, according to the assessee, had legally crystallised and arisen by virtue of Special Court judgment dt. 11th March, 1996 and, therefore, admissible as business loss and, consequently cannot be said to be intermediatory liability at the stage of contingency. The assessee submitted that the disputed amount of such liability in question to be adjudicated by the Supreme Court was only with regard to the liability of Rs. 61.23 crores only being the excess of the monetary value of the judgment and decree of the Special Court (Rs. 243.21 crores) over the amount of liability (Rs. 182 crores) admitted by the assessee. The AO however, did not accept the contention of the assessee. According to him, that the appeal of the assessee against the order of the Special Court had been admitted and it is clear that the liability was still at the stage of contingency.
4. Another part of the loss claimed is of Rs. 44.85 crores, in respect of security transactions with State Bank of Patiala, (hereinafter referred to as SBP). The assessee claimed that it was beyond its control to deliver the securities sold to SBP and since SBP did not resort to litigation and the matter was settled in March, 1996, by mutual negotiations the liability had arisen. The payment was made after the current financial year on 20th June, 1996. Correspondence regarding the same had also been filed on going through which the AO however noted that the correspondence related to June and July, 1996 and in one of the letters dt. 11th June, 1996 from SBP to assessee, the fact regarding agreeing of board of directors of the SBP held on 28th May, 1996 at Mumbai has been stated. According to the said letter, SBP decided for the payment of interest on transactions of Rs. 27.09 crores for purchase of 2 crores units. Noticing the fact that the assessee-bank has no evidence in the form of settlement deed between SBP and the assessee, he rejected the claim of the assessee. AO had also disallowed both the losses by also holding these to be a speculative loss as per the provisions of Section 43(5) of the Act.
5. The CIT(A) upheld the disallowance by observing in paras 24 to 33 of his order as under :
"24. I have considered the submissions made on behalf of the appellant and also applied my mind to the issues raised by the AO in the assessment order and also at the time of hearing of the appeal. In my opinion, the following issues emerge on the facts and circumstances of the case :
(i) Whether the loss claimed by the appellant in asst. yr. 1996-97 accrued in this year and whether this is allowable.
(ii) Whether transactions are speculative in nature in terms of Section 43(5) of the Act.
(iii) Whether the transactions are illegal/not in accordance with law and, therefore, loss arising from such transactions is not allowable in accordance with Explanation to Section 37(1) of the IT Act,
25. As is apparent, the appellant has claimed loss of Rs. 2,88,07,38,158 on account of its liability towards PNB and SBP. The claim of loss in respect of PNB amounts to Rs. 243.21 crores and in the case of SBP it is 44.85 crores. These transactions were entered into between September and November, 1991. The contract note suggests that the delivery was to be on the same day but it was not done. Hence the breach of contract occurred on the same day and liability arose immediately thereafter. The claim of PNB and SBP arose in that year and similarly counter claim of the appellant against SBI/Harshad Mehta and NHB also arose simultaneously. Thus the claim was off set by the counter claim resulting in no liability. The appellant had no provision for the claim in the accounts for asst, yr. 1992-93.
26. It is claimed by the appellant that it follows hybrid system of accounting and, therefore, its liability arose in the month of March, 1996 when the Special Court quantified the liability vide decree dt. 11th March, 1996 and also on settlement of liability with the SBP. On the claim of the appellant regarding method of accounting followed by it, I will like to refer to Section 209 of the Companies Act which was amended w.e.f. 15th June, 1988, whereby all companies were mandatorily required to maintain account on accrued basis, i.e., mercantile system of accounting. However, Central Government issued a notification dt. 16th May, 1989 directing that a Government company engaged in business of financing industrial projects approved under Section 36(1)(viii) of the IT Act, 1961, shall not be barred by Clause (b) of Section 209(3) of the Companies Act insofar as it relates to income from interest on loan and advances, provided such accrued income which is not accounted for in the books is disclosed by way of annual account. In other words, such a company was allowed to show its' income from interest on cash system. Undoubtedly, the provision of Companies Act are applicable on the appellants also. Security transactions are not covered by notification dt. 16th May 1989, therefore, the claim of the appellant that it follows hybrid system of accounting cannot be accepted. In the case of Amarpali Mercantile (P) Ltd. v. Asstt. CIT (1993) 47 TTJ (Del) 55 : (1995) 115 Taxation 14 (Del)(Mag) it was held that assessee cannot be permitted to maintain account on cash basis only for income-tax purposes while maintaining the same on mercantile basis for other practical purposes. The appellant on the facts of the case has to compulsorily maintain its account on mercantile basis.
27. An expenditure incurred to meet a liability of the business accuring in that year is allowable, but not one which arose in an earlier year or one which may arise in a subsequent year where the system of accounting is mercantile. On accrual of income, the Supreme Court in the case of E.D. Sassoon & Co. Ltd. and Ors. v. CIT (1954) 26 ITR 27 (SC) held that income can be said to have accrued to or been earned by assessee only when debt has come into existence and the assessee has acquired the right to receive payment. Although, this case is on accrual of income but the same principle is applicable to the accrual of liability also, However, where the right to receive payment is in dispute, there can be said to be no accrual. This principle was laid down by the Supreme Court in the case of CIT v. Hindustan Housing & Land Development Trust (1986) 161 ITR 524 (SC). In that case, the payment of enhanced compensation and interest was disputed in appeal. The Hon'ble Supreme Court held that the income will accrue to the assessee when the issue is finally settled. Similar decision was given in the case reported in 164 ITR 524 (sic) (supra). In this case it was held that although the award was made by the arbitrator on 29th July, 1955 enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. There was no absolute right to receive the amount at that stage. Therefore, income did not accrue in the relevant assessment year. The Full Bench of the Hon'ble Gujarat High Court in the case of CIT v. Bharat Iron & Steel Industries (1993) 199 ITR 67 (Guj)(FB), has also held the same view. In this case, the Asstt. Collector refunded the excise duty in August, 1975, during pendency of review proceedings. It was held that in view of pendency of review or revisional proceedings, the assessee's claim for refund of the excise duty was in jeopardy. In other words, there was no final decision on the question whether or not assessee was entitled to claim the refund of excise duty of Rs. 1,81,427, It was only when the review proceedings were dropped in April, 1976, that the assessee became finally entitled to claim refund of Rs. 1,81,427. The year of accounting of the assessee was financial year, therefore, refund of excise duty was not includible in assessee's total income for the asst. yr. 1974-75 under Section 41(1) of the IT Act.
28. In the case of dispute subsequent events may have a bearing on the issue of allowability of expenditure. The general rule is that deduction can be permitted in respect of only those expenditure or losses which have accrued in the relevant accounting year. This general rule, however, is required to be applied after taking into account such subsequent events which have a bearing on the issue being decided. It is, therefore, permissible in law to take into consideration, at the time of deciding an issue, such subsequent events legal or factual, which may have an effect on the decision of the issue. It is necessary to do so for the obvious reason that the aim of law is to do substantial justice between the parties and to impart to them not merely legal or technical justice but, as far as possible, real and substantial justice. Justice is to be imparted in accordance with law and not simply in subordination to law. It was held so in the case of Assam Roller Flour Mills v. CIT (1997) 227 ITR 43 (Raj).
29. When examined from the above principle as laid down by the Hon'ble Supreme Court, Gujarat High Court and other High Courts, the initial liability arose when the contract was not honoured i.e., in the asst. yr. 1992-93. However, the appellant could not have claimed it in that year because the claims were offset by the counter claims, in this case, the appellant was liable to deliver securities to PNB and SBP and it had to take delivery from SBI and NHB. The appellant has claimed the loss on receipt of the order of the Special Court which passed decree in favour of PNB. But here again the claim, in my opinion, is not allowable because the appellant did not accept the decree and filed appeal before the Supreme Court which is still pending. The fact that the appellant conceded before the Supreme Court the liability of Rs. 182 crores is not borne out from the interim order of the Supreme Court. Even if the liability was conceded by the appellant before the Hon'ble Supreme Court, it was only in April, 1996 which is beyond asst. yr. 1996-97. As held by the Hon'ble Supreme Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. (supra), where right to receive payment is in dispute, there can be said to be no accrual. Following this ratio, I am of the considered opinion that since the liability was disputed by the appellant before the Supreme Court, the liability was only a contingent liability not allowable in asst yr. 1996-97.
30. As regards liability in the case of SBP, I find that there are various correspondence between SBP and PNB which suggest that final settlement was made after March, 1996.
31. Even if the settlement with SBP was reached before March, 1996, the liability cannot be allowed in this year. As is apparent from the five security transactions as appearing on p. 2 of this order, the appellant bought securities from SBI/Harshad Mehta and NHB. The appellant sold the same lot to PNB, SBP, etc. on the same date. The appellant has been sued by the parties who had purchased securities from it and the appellant has similarly filed suit against the parties from whom it had purchased securities. It is found from the audit report that the appellant has succeeded against NHB. Shri Harshad Mehta has not denied his liability to deliver the securities. Facts are similar in the case of claims and counter claims, therefore, ultimately, after all the cases are finally decided, the payables to parties may match the receviables from the counter parties, resulting in, possibly, no liability for the appellant. The cases are at various stages but are likely to be decided soon. All these transactions were done almost at the same time i.e., from September to November, 1991, all these transactions were of the similar nature, therefore, in my opinion, an overall view should be taken of the liability of the appellant once all the cases are decided. I have already mentioned earlier, based on the decision of Rajasthan High Court in the case of Assam Flour Mills (supra), that subsequent events which have a bearing on the issue of allowability of expenditure have to be taken into consideration while deciding such issue. If a transaction has two faces, both of them have to be considered while deciding the issues arising out of the same transaction. If we look at one face and ignore the other, that will not be correct. Both on legal principle and on accountancy principle, this has to be done. In this regard reference may be made to para 5.4 of accounting standards of the Institute of Chartered Accountants of India. Para 5.4 is as below :
'A potential loss to an enterprise may be reduced or avoided because a contingent liability is matched by a related counter claim or a claim against a third party. In such cases, the amount of the provision is determined after taking into account the probable recovery under the claim if no significant uncertainty as to measurability or collectibility exists.' On this point, I will like to refer to the decision of Hon'ble Supreme Court also in the case of Indian Molasses Co. (P) Ltd. v. CIT (1959) 37 ITR 66 (SC). It has been observed by the Hon'ble Supreme Court that :
'To be a payment which is made irrevocably there should be no possibility of there being a resulting trust in favour of the company, then the money has not been spent, i.e., paid out or away, but the amount must be treated as set apart to meet a contingency.'
32. Here in the case of the appellant, there is almost hundred per cent certainty that it may receive the similar amounts from its counter claims and, therefore, any money payable or paid to PNB and SBP may be treated as set apart to meet a contingency and it cannot be treated as spent away or paid out. The appellant also appears to have given similar treatment to this liability in the accounts for subsequent years. The fact that the loss has occurred during the year 1991-92 has been taken note of by the auditors as may be seen on p. 10 of compilation No. 5 (RBI inspection report) submitted by the appellant. Again on p. 66 of this compilation, it has been stated that :
'The counter claims filed by the bank against NHB is in the advanced stage and is likely to be disposed off shortly.' It has been stated in the last para that the bank has made a provision of Rs. 267.89 crores only during the year 1995-96 after taking into account its counter claim against NHB expecting a favourable decree for Rs. 166 crores. The bank has, while providing for the liability, taken credit of Rs. 166 crores recoverable from NHB. In the tax return, it has been claimed total loss. In fact, in my opinion, it should not have been claimed as loss because the appellant is likely to recover these amounts also in due course from SBI, Harshad Mehta, etc. On p. 80 also of compilation 5, the bank claims that it is confident of getting claim from NHB. On p. 87, it is mentioned that the bank has since received at least a part of the amount from NHB. In this regard reference may also be made to the inspection report of the RBI for financial year 1997-98, the appellant-bank has commented on the inspection report as below vide para 4.2.8.
'As mentioned in the inspection report, judgment in our suit filed against NHB was delivered in June, 1998, received 2.20 crores units (US-64) from NHB along with our application for dividend of Rs. 4.40 crores for the year 1997-98 has also been, disposed of by the Special Court in our favour and we have received this amount or 10th Jan., 1997.
In the second transaction of 5.50 crore units, NHB was directed to deposit the amount of Rs. 181.20 crores with the Special Court, Mumbai. We received this amount along with interest (since it was placed with other banks) aggregating to Rs. 135.71 crores through an order of the Supreme Court in the appeal filed by the bank against the orders of the Special Court, Mumbai. The amount has been paid over to our bank subject to our undertaking that the monies will be returned with interest upto the rate of 12.50 per cent as may be decided by the Hon'ble Supreme Court.
As per the judgment of Special Court and subsequent interim orders of Supreme Court the payments made are debited to PB a/c pending final judgment of Supreme Court and receipt of counter party claims from other banks/others. The PB account will be netted off against the receivables/ provision held. This is as per prescribed procedure of the bank.' The above comments of the bank indicate that the receivables are to be netted off against the liabilities.
33. From the facts and legal position as narrated above, it is concluded that no final liability has arisen in the asst. yr. 1996-97. The liability arising on account of Special Court decree in favour of PNB and settlement in the case of SBP is only contingent liability to be set off against receivables from other parties. I may mention here that the appellant has already received substantial amount from NHB which is good enough to take care of major part of liability. Out of 9.5 crore units of UTI scheme sold to PNB and SBP, 7.5 crores of units were purchased from NHB against whom the assessee has succeeded before the Special Court. Therefore, the loss claimed by the assessee of Rs. 288.07 crores is not allowable in asst. yr. 1996-97."
(Emphasis, italicized in print, supplied)
6. The assessee is in appeal against the disallowance of loss as an admissible deduction whereas the Revenue filed cross-objection against the finding of the CIT(A) that it was not a loss of speculative transactions.
7. The learned counsel for the assessee submitted that the transactions were entered into in the normal course of its business of dealing in securities. During the financial year 1991-92 relevant to asst. yr. 1992-93, the bank undertook certain back to back transactions, i.e., transactions for simultaneous purchase and sale of same number of identical securities in certain securities during September to November, 1991. The bank has earned profits of Rs. 2,62,500 and had offered the same as 'business profit' during the asst. yr. 1992-93 which has been duly taxed. However, the bank could not effect physical delivery of securities sold by it for the reasons beyond its control, as it could not obtain physical delivery of securities purchased by it from counter party banks and financial institutions. It had thus committed a breach of contract for which it had to pay damages and compensation, Therefore, the loss had occurred in the course of carrying on the business by the assessee and is accordingly allowable as a business deduction.
7.1 It is further submitted that the bank is maintaining its accounts mainly on the basis of 'mercantile system of accounting' except in relation to few items (expenditure and income), as per established practice in the field of accountancy, where cash system is followed. He referred to printed accounts and Annex. B to the tax audit report where the method of accounting of the bank is described by the statutory auditors. The system of accounting as is followed by the bank is technically known as 'hybrid system of accounting' which incorporates the basic features of the 'cash system' and the 'mercantile system' as stated by the Hon'ble Supreme Court in the case of CIT v. A. Krishnaswami Mudaliar and Ors. (1964) 53 ITR 122 (SC). The learned counsel for the assessee also placed reliance on the decisions in the cases of Lord's Dairy Farm Ltd. v. CIT (1955) 27 ITR 700 (Bom); Jethabhai Hirji & Jethabhai Ramdas v. CIT (1979) 120 ITR 792 (Bom); Sarangpur. Cotton Mfg. Co. Ltd. v. C]T (1983) 143 ITR 166 (Guj); Badridas Daga v. CIT (1958) 34 ITR 10 (SC) and Anamalai Timber Trust Ltd. v. CIT (1963) 47 ITR 814 (Ker).
7.2 The learned counsel further submitted that the bank has suffered loss of Rs. 2,88,07,38,158 during the year under consideration by virtue of judgment and decree dt. 11th March, 1996 of the Special Court constituted under Special Court (Trial of Offences Relating to Security Transactions) Act, 1992, in suit filed by PNB against the bank and also by virtue of settlement with SBP. The assessee-bank claimed such aggregate loss of Rs. 2,88,07,38,158 being admissible business loss of the bank for the present year. It was also submitted by the learned counsel that the loss of Rs. 243.21 crores having arisen to the bank in the course of its transactions with the PNB on account of its inability to deliver the securities in question, the judgment and decree dt. 11th March, 1996 of the Special Court crystallised the liability/loss; that in relation to these security transactions a suit was filed by PNB which was contested by the bank and on 11th March, 1996 a decree was passed against the bank by Special Court and thus it resulted in crystallised liability resulting into loss in question. He relied upon the decisions in the cases of Laxmi Ginning & Oil Mills v. CIT (1971) 82 ITR 958 (P&H); Radhakrishna Oil Mills v. ITO (1986) 19 ITD 587 (Coch); Cama Motors (P) Ltd. v. IAC (1987) 29 TTJ (And) 452 : (1987) 21 ITD 640 (And); CIT v. Swadeshi Cotton & Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC); and Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC).
7.3 The learned counsel also submitted the details of further payments, etc., made by the assessee-bank after filing appeal to the Supreme Court, and submitted that the Supreme Court directed payment to the tune of Rs. 212 crores (Rs. 182 crores for cost of units and the difference between the original cost and the market price on the date of breach plus a further sum of Rs. 30 crores for balance claim) to PNB and that the bank has already complied with the directions of Supreme Court and the same has also been taken note of by the AO without appreciating the import of the same. The Supreme Court finally decided the matter modifying the compensation at Rs. 212 crores on 26th April, 2001, and according to it, it has a relation back to the order of the Special Court dt. 11th March, 1996 by the theory of relation back as appeal is a continuation of the original suit. He referred to decision of Federal Court in the case of Raja Bahadur Kamaksya Narain Singh of Ramgarh v. CIT (1947) 15 ITR 311 (FC) and of Rajasthan High Court in Assam Roller Flour Mills v. CIT (1997) 227 ITR 43 (Raj) ' 7.4 So far as the transaction with SBP is concerned, the learned counsel submitted the loss/liability had also arisen in the year in question on account of amicable settlement with the said bank on 30th March, 1996 a date which falls in the accounting year under consideration.
7.5 The learned counsel also referred to order of CIT(A) whereby disallowance of loss arising on account of dealing in security transactions amounting to Rs. 2,88,07,38,158 is confirmed by giving one of the principal reasons that the bank had succeeded against PNB. Shri Harshad Mehta has not denied his liability to deliver the securities. The facts are taken as similar in the case of 'claims' and 'counter claims' and it is observed that ultimately after all the cases are finally decided, the payables to parties may match with the receivables from counter parties, resulting in, possibly, no liability for the bank. It is, therefore, concluded that overall view should be taken of the liability of the appellant once all the cases are decided. The learned counsel submitted that it is settled law that mere 'claim' will not tantamount to 'accrual' of any income. He relied upon the decision of the Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT (1954) 26 ITR 27 (SC). He also placed reliance on the decisions, on accrual of income; namely; Union of India and Anr. v. J.K. Synthetics Ltd. (1993) 199 ITR 14 (SC); CIT v. Bharat Iron & Steel Industries (1993) 199 ITR 67 (Guj)(FB); Meghdoot Laminart (P) Ltd. v. Rajiv Sinha or His Successor in office of the Dy. CIT (1999) 238 ITR 918 (Guj); CIT v. Hindustan Housing & Land Development Trust Ltd. (1986) 161 ITR 524 (SC); CIT v. Swadeshi Cotton & Flour Mills (P) Ltd. (supra); and E.D. Sassoon & Co. Ltd. (supra). The learned counsel for the assessee submitted that the approach of the Court has to be different while dealing with a question of taxing positive income on the ground that it has accrued or has arisen to the assessee concerned and incurring a liability resulting in claim of loss in terms of an enfoceable decree. He further submitted that the above judgments are cited for limited purpose to canvass that mere counter claim or even preliminary decree which is sub judice can never tantamount to 'income earned' by the assessee. Such claim in absence of finally enforceable decree can never be taken into account in the relevant year whereas the assessee-bank has incurred loss by virtue of enforceable decree passed against it by competent Court irrespective of the fact that the appeal is pending in appellate Court. The learned counsel further submitted that if the line of reasoning adopted by the CIT(A) at para 11 above is accepted, namely that the loss suffered by the bank can be determined only after all counter claims suit by the bank are finally decided by the Courts and recoveries thereunder effected, then grave injustice will result to the bank, as it can then be contended by the Revenue at that time that the loss on account of the claim on the bank was not suffered in the year in which the counter claim was decreed in favour of the bank. It is submitted that the counter claims are separate transactions and tax treatment thereof will depend on the events connected with those transactions.
8. The learned standing counsel Shri Bhatt, on the other hand, submitted that the liability arising to the assessee is contingent one which has not yet crystallised and, therefore, not deductible in view of the decisions in the cases of Ballal & Padival Tiles v. CIT (1987) 163 ITR 752 (Kar); CIT v. Shewbux Jahurilal (1962) 46 ITR 688 (Cal); CIT v. Phalton Sugar Works Ltd. (1986) 162 ITR 622 (Bom); CIT v. Swadeshi Cotton & Flour Mills (P) Ltd. (supra); CIT v. Hindustan Housing & Land Development Trust Ltd. (supra); Union of India v. J.K. Synthetics Ltd. (supra); CIT v. Bharat Iron & Steel Industries (supra); Alembic Chemical Works Ltd. v. Dy. CIT (2004) 266 ITR 47 (Guj); Topandas Kundanmal v. CIT (1978) 114 ITR 237 (Guj); Addl. CIT v. New Jehangir Vakil Mills Co. Ltd. (1979) 117 ITR 849 (Guj) and Navjivan Roller Flour & Pulse Mills Ltd. v. Dy. CIT (2000) 66 TTJ (Ahd) 876 : (2000) 73 ITD 265 (Ahd). He further submitted that apart from the above judgments, the assessee itself did not offer the amount received towards the security transaction for taxation on the ground that the payer bank had filed an appeal and in this connection he drew our attention to the return of income for asst. yrs. 1999-2000 and 2003-04. He further submitted that the transaction was not a business dealing as is evident from the decree of the Special Court and Janki Raman Committee Report. It was the transaction tainted with fraud and, therefore, the effect of the Supreme Court decision in the case of Maddi Venkataraman & Co. (P) Ltd. v. CIT (1998) 229 ITR 534 (SC) is to be seen.
8.1 As regards the other claim of State Bank of Patiala (SBP) of Rs. 44.85 crores, the learned counsel for the Revenue submitted that no evidence has been furnished. The settlement was reached after previous year i.e., on 28th May, 1996; that the payment of Rs. 27.09 crore being principal amount made on 20th June, 1996 and that the interest of Rs. 17.76 crores was paid on 20th July, 1996. According to him the loss has not arisen in the year under consideration and, therefore, the Revenue authorities were right in disallowing the same.
8.2 As regards the cross-objection which is late by more than three years, filed by the Revenue, the learned standing counsel submitted that no prejudice is caused to the assessee; that no new facts are required to be adjudicated and that the issue raised in the cross-objection filed on advice of the counsel and, therefore, the delay should be condoned. On merits the questions raised are (1) that security transactions be treated as speculative within the meaning of IT Act, 1961; and (2) Explanation to Section 37(1) of the IT Act, 1961, ought to have been applied by the CIT(A).
9. We have heard the parties and considered the rival submissions. Section 2(24) defines the term 'income' and it includes profits and gains of a business in the income of an assessee. Section 4 is a charging section and it provides for a charge on the total income of an assessee which is to be computed as per Section 5 of the Act. Chapter IV provides for determination of income under various heads and Part D provides for computation of profits and gains of a business or a profession. Section 28 enumerates certain income to be chargeable under the head 'Profits and gains' and Clause (i) thereof, provides 'the profits and gains' of any business or profession which was carried on by the assessee at any time during previous year, is included therein. Section 29 provides for computation of income under Section 28 in accordance with the provisions contained in Sections 30 to 43D of the Act. There are certain specific sections providing for deduction of expenditure from Sections 30 to 36, Section 37 is a residuary section which provides for such other expenditure which are not described in Sections 30 to 36 and which are not in the nature of capital expenditure or personal expenditure and which are laid out or expended wholly and exclusively for the purposes of the business or profession. Explanation to Section 37(1) provides that 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 or allowance shall be made in respect of such expenditure.
10. There is a distinction between the expenditure and loss. "An expenditure is something or other which the trader pays out"; as observed by Finlay J. in Alien v. Farqusharson Bros. & Co, 17 Tax Cases 59, "I think some sort of volition is indicated". He chooses to pay out some disbursement; it is an expense; it is something "which comes out of his pocket. A loss is something different. That is not a thing which he expends or disburses. That is a thing which, so to speak, comes upon him ab extra." These observations have approval of the Supreme Court in the case of CIT v. S.C. Kothari (1971) 82 ITR 794 (SC). .
11. An expenditure, not being capital, incurred for the purpose of business or profession and which is not enumerated in Sections 30 to 36 may fall to be deducted under the residuary Section 37. But business losses though it may fall outside the purview of Sections 30 to 37 are allowable on ordinary commercial principle of computing the profit provided, the loss is of a non-capital nature and it is connected with and is incidental to the trade or business. These are the principles enumerated and affirmed by the Supreme Court in the case of Badridas Daga v. CIT (supra); CIT v. Nainital bank Ltd. (1965) 55 ITR 707 (SC) and in the case of Ramchandar Shivnarayan v. CIT (1978) 111 ITR 263 (SC).
12. A liability to an assessee may either be arising out of contractual obligation or it may arise under a statutory provision. Statutory liability is generally ascertainable and can be determined by applying the provisions of law and could be allowed as a deduction either in the year to which the transaction to which it pertains has occurred, namely, taxable event has happened or it may be allowed in the year in which a demand was raised on the assessee by the statutory authority. It could also be claimed and allowed when it is finally settled by due process of law. The dispute raised by an assessee for its non-levy cannot deter its allowability in any of the three situations.
13. The decision of Kedarnath Jute Mfg. Co. Ltd. (supra) is an authority for claiming the deduction in the year to which transaction pertains. In that case during the asst. yr. 1955-56 "the assessee claimed a deduction of Rs. 1,49,776 on the basis of sales-tax order determining the sales-tax payable by the sales-tax authorities on the sales made by the assessee during the aforesaid previous year. The claim was made by revising the return consequent to and after the receipt of demand notice. It was disallowed by the AO on two grounds,--(i) that the assessee had disputed the liability to pay the amount and (ii) that no provision in the books of account was made. The Supreme Court allowed the claim of sales-tax liability as it related to the sales made during the previous year relevant to the asst. yr. 1955-56. It observed that "whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights; nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. A reference was made of the case of Pope The King Match Factory wherein a demand for excise duty was served on the assessee and though he was objecting to it and seeking to get the order of the Collector of Excise reversed, he debited that amount in his accounts on the last day of his accounting year and claimed that amount as a deductible allowance on the ground that he was keeping his accounts on the mercantile basis. The Madras High Court had no difficulty in holding that the assessee had incurred an enforceable legal liability on and from the date on which he received the Collector's demand for payment and that his endeavour to get out of that liability by preferring appeals could not in any way detract from or retard the efficacy of the liability which had been imposed upon by the competent excise authority. In our judgment, the above decision lays down the law correctly." Similarly in the decision of the Supreme Court in the case of Jonnalla Narashimharao & Co. v. CIT (1993) 200 ITR 588 (SC) the liability to pay sales-tax collected by the assessee' in the name of 'Rusum' was held to be allowable in the year in which the sales were effected and the 'Rusum' was collected by the assessee in asst. yr. 1968-69.
14. The decision of the Supreme Court in the case of CIT v. Bharat Carbon & Ribbon Mfg. Co. (P) Ltd (1999) 239 ITR 505 (SC) is an authority for allowance of deduction for the second situation, i.e., a claim can be made and allowed in the year in which a demand notice is issued, even though the liability pertains to the earlier years and no provision is made in the accounts. Similar are the observations of Madras High Court in CIT v. English Electric Co. of India Ltd. (1997) 225 ITR 970 (Mad). The Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. v. CIT (1995) 213 ITR 523 (Guj) also observed that "merely because an expense relates to a transaction of an earlier year, it does not become a liability payable in the earlier year, unless it can be said that the liability was determined and crystallised in the year in question on the basis of maintaining accounts on the mercantile basis". The Delhi High Court in the case of CIT v. Jamnadas Ram Krishan (2001) 250 ITR 155 (Del) allowed the claim of sales-tax liability on the basis of demand raised by the sales-tax authorities for the sales made during the years 1972-73 and 1973-74 on the basis of completion of sales-tax assessment for asst. yr. 1978-79.
15. The third situation is found in the case of Buxa Doors Tea Co. India Ltd. v. CIT (1991) 188 ITR 218 (Cal). In this case an assessment was made in 1958 under Assam Taxation (Goods Carried by Road or Inland Waterways) Act, 1954 (superseded by Assam Taxation (Goods Carried by Road or Inland Waterways) Act, 1961]. The revision petition against that order of 1958 was decided by the Commissioner of Taxes, Assam, on 2nd Jan., 1975 finally determining and fixing the liability of the assessee. The claim was made by the assessee for its deduction in asst. yr. 1976-77 and was allowed by the Calcutta High Court in asst. yr. 1976-77 that being the year during the previous year of which the revision order dt. 2nd Jan., 1975 finally quantified and fixed the liability of the assessee under the said Act. In the case of Ruby Mills Ltd. v. ITO (1992) 41 ITD 171 (Bom) the Bombay Bench of the Tribunal have observed with regard to allowability of statutory liability by stating that. "The liability of excise duty arises against the assessee in the year in which chargeable goods were produced/manufactured. No quantification in an assessment thereof by any authority, nor any demand notice, nor any entry in the account book would by necessary to claim such a liability as a deduction. It being a statutory liability, it would be an allowable deduction to the assessee in the year of manufacture/production even though the assessee disputed the same before the excise authorities or in a Court of law". It further observed in para 18 "Courts have held that a statutory liability can alternatively be claimed as a deduction in the year in which the assessment was made/duty was assessed and demand made irrespective of the fact that the transaction relates to earlier years. See in this connection two decisions of the Bombay High Court in Shrikant Textiles' case (supra) and Central Provinces Manganese Ore Co. Ltd.'s case (supra); that of the Calcutta High Court in CIT v. Orient Supply Syndicate (1982) 134 ITR 12 (Cal); that of the Delhi High Court in Addl. CIT v. Rattan Chand Kapoor (1984) 149 ITR 1 (Del); and by the Madras High Court in the case of Pope The King Match Factory (supra). Although we find contrary view taken by the Punjab & Haryana High Court in the case of CIT v. United India Woollen Mills (1981) 132 ITR 457 (P&H) and Sirsa Industries v. CIT (1989) 178 ITR 437 (P&H); by the Patna High Court in CIT v. General Trading Agency (1989) 176 ITR 303 (Pat); and by the Allahabad High Court in CIT v. Brijmohan Das Laxman Das (1979) 117 ITR 121 (All), taking a view that as per the judgment of the Supreme Court in the case of Kedamath Jute Mfg. Co. Ltd. (supra) a liability can only be claimed in the year of taxable event and not in the year of demand but insofar as Bombay Benches of the Tribunal are concerned the view of the jurisdictional High Court is binding and is to be given effect to. We, therefore, proceed to examine the assessee's case as to whether a demand was made by the authorities and deduction can be allowed on that ground." In the present case also, the jurisdictional Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. (supra) is relevant on the issue.
16. We may also refer in this connection to the Commentary by Kanga and Palkhiwala, 9th Edition, Vol. n p. 1790 wherein it is stated under the head "Year in which sales-tax, excise, etc. are deductible" that "The decision of the Supreme Court in Kedamath Jute Mfg. Co. Ltd. (supra) establishes that under the mercantile system of accounting a fiscal liability (e.g. sales-tax or excise) under a statute should be allowed as a deduction in the year in which the relevant transactions take place, although (i) the precise quantification of the liability in the form of an assessment and demand may come later, (ii) the assessee may contest the liability in appeal or other proceedings, and (iii) the assessee may have made no provision for the liability in his books. Alternatively, the assessee may claim a deduction in a subsequent year in which the tax is assessed and the demand is made, although the transactions may pertain to earlier years; or he may even postpone his claim to a deduction to the year in which he loses in appellate proceedings and the levy becomes final."
17. In the case of contractual liability, however, ascertainment is generally difficult in view of the conflicting stands taken by the parties as to their rights and as to the terms of the contract. This liability may also perhaps be claimed in the year to which the transaction relates provided it can be fairly ascertained or estimated on agreed and admitted terms of the contract. The three decisions of the Supreme Court in Calcutta Co. Ltd. v. CIT (1959) 37 ITR 1 (SC); Bharat Rare Earth (supra) (sic) and Metal Box Co. of India Ltd. v. Their Workmen (1969) 73 ITR 53 (SC) are the example of that situation. Where, however, a dispute is raised by the -parties, it would be allowable only on its final outcome of the dispute either in the year of amicable settlement by the parties or in the year of final determining of judicial process. The Supreme Court decision in Swadeshi Cotton & Flour Mills (P) Ltd. (supra), Bombay High Court decision in Phalton Sugar Mills Ltd. (supra) and Gujarat High Court decision in Alembic Chemical Works Ltd. (supra) are three examples of this situation.
18. In the present case the liability has arisen out of contractual obligation. We, therefore, need not go about the concept of allowability of statutory obligation and would confine ourselves to contractual liability alone. Here the breach of contract had occurred in asst. yr. 1992-93, the year much before the impugned asst. yr. 1996-97 and, therefore, here also we need not express any opinion about the allowability of the expenditure in the year 1992-93 and restrict ourselves to its allowability in asst. yr. 1996-97. The relevant case laws on this issue are discussed hereunder :
18.1 The Supreme Court in Swadeshi Cotton & Flour Mills (P) Ltd. 's case (supra) held that "An employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication". It further held that "The system of re-opening of accounts does not fit in with the scheme of the IT Act. As far as receipts are concerned there can be no reopening of accounts, and the position is the same in respect of expenses." In the present case, the Special Court has decided the issue fixing the liability in one case and by mutual understanding in the other.
18.2 In the case of Alembic Chemical Works Ltd. (supra), before the Gujarat High Court the assessee was following mercantile system of accounting where the liability is sought to be properly incurred when the dispute between the parties is amicably settled or finally adjudicated, where the liability in question is not a statutory liability. The Court in this connection observed that where the liability in question is not a statutory liability. The assessee in this case was manufacturing drugs, had claimed the liability to pay user charges to the ONGC in respect of the gas consumed after 29th Jan., 1997 and the interest on the account. The Government of India issued a circular on 30th Jan., 1987 for fixing the price of gas supplied by the ONGC, but the said circular was challenged before the High Court and in 1993, the petition filed by the assessee came to be dismissed by the Court and an appeal was pending before the Supreme Court against the decision. According to the assessee, there was an earlier decision of the Supreme Court dt. 4th May, 1990, wherein it was held that ONGC was entitled to demand as per its decision, and, therefore, the assessee submitted that in light of that decision, the rejection by the Court of the petition preferred by the assessee the claim of the assessee was allowable in full as there was no likelihood that the Supreme Court would allow the appeal in view of its earlier judgment. It was also submitted that the liability in relation to the demand for the entire period after 29th Jan., 1987, which had been incurred but had not been paid fully in the light of the pending litigation. All the three authorities, viz. the AO, the CIT(A) and the Tribunal held that the liability was contingent and could not be allowed and consequently the interest could not also be allowed. The High Court on reference held that the liability to ONGC was pending adjudication by way of appeal in the Supreme Court and till the point of time, the same was finally adjudicated the liability in question would remain a contingent liability and so the interest payable on the arrears of such unpaid liability. By relying upon the Supreme Court decision in the case of Swadeshi Cotton & Flour Mills (P) Ltd. (supra) the Court observed that despite the earlier view declared by the Supreme Court between the same parties, the present appeal has been admitted and is pending, and, therefore, if not possible to accept the contention on behalf of the assessee that the conclusion in the pending appeal is a foregone conclusion. In the present case the assessee has admitted a part of the liability and the matter was pending before the Supreme Court with respect to other part.
18.3 In the case of CIT v. Phalton Sugar Works Ltd. (supra), the assessee claimed certain expenditure with regard to expenses for extra staff engaged by the Maharashtra State Farming Corpn, Ltd. for loading and unloading for sugar cane purchased by the assessee from them for collection of fallen settis and the salaries and wages of extra staff at the factory gate and contribution to employees' provident fund for the period 25th Nov., 1964 to 6th May, 1965. The assessee disputed its liability in regard to the said bills and the liability was settled only during the previous year relevant to the asst. yr. 1968-69. The assessee claimed deduction in that assessment year when the dispute was finally settled. The High Court following the decision of Supreme Court in the case of Swadeshi Cotton & Flour Mills (P) Ltd. (supra) held that where the liability arising out of a contractual obligation is disputed, the assessee is entitled in the assessment year relevant to the previous year in which the dispute is finally adjudicated upon or settled to claim a deduction in that behalf.
18.4 In the case of CIT v. Shewbux Jahurilal (supra) before the Calcutta High Court, the assessee entered into contract with the another company to supply jute at a specified rate. Under the contract the buyer had option to cancel the contract in the event of non-delivery of goods and to recover the difference between the price in the contract and the market price. The assessee was not able to deliver the goods and buyer cancelled the contract and claimed the difference in price. The matter was referred to the Bengal Chamber of Commerce which passed an award in 1948 and the award was filed in the High Court in 1949. The settlement was subsequently reached, by which the sum payable was fixed at Rs. 1,35,000 and it was made payable in February, 1950. The assessee paid the amount and claimed the amount as loss in asst. yr. 1950-51. The AO disallowed the loss by stating that it pertains to the year 1946, and, therefore, it could have claimed the loss in asst. yr. 1947-48 and not in asst. yr. 1950-51, as he maintained the accounts in mercantile system. The High Court (held) that even though the assessee maintained his accounts on the mercantile system he was not bound to show all anticipated loss as and when the claims were made and pay tax on that basis and have the matter readjusted later when the anticipated loss was quantified; the loss could be claimed only when it was ascertained and the assessee was, therefore, entitled to have the loss allowed in the asst. yr. 1950-51. It was observed that mercantile system of book-keeping does not cast on an assessee any obligation to take note of all claims that may be raised against him whether good or bad.
19. Let us examine the facts of this case. In the present case, the loss which the assessee had suffered is not truly speaking an item of expenditure. The allowability of this loss has to be considered on ordinary principle of computing the business profits, viz. whether it is not a capital loss; whether it has a relation and connection with the trade or business carried on by the assessee. The assessee in the present case is a bank carrying on the business of banking. In the course of carrying on that business, it has to purchase and sell the securities. The loss incurred by the assessee in the present case is in connection with the securities purchased by the assessee during September and November, 1991. On these very transactions of purchase and sale of securities, the assessee had earned the profit of Rs. 2,62,500 which was offered/assessed as business profit in asst. yr. 1992-93. The loss has two parts--one is for 244 crores and other for Rs. 44.85 crores.
20. As regards the first claim the facts are that PNB has paid to the assessee a sum of Rs. 26,82,00,000 on 10th Sept., 1991 for purchase of 2 crore units of UTI at the rate of Rs. 13.41 per unit. Subsequently, on 23rd Oct., 1991 PNB paid a further sum of Rs. 75,83,12,500 as consideration for the purchase of 5.50 crore units at the rate of Rs. 13.7875 per unit. In respect of these two transactions, the assessee issued two bankers' receipts, one bearing No. 53 dt. 10th Sept., 1991 and the other bearing No. 81 dt. 23rd Oct., 1991. As per these bankers' receipts units were to be delivered by the assessee to PNB against discharge of said receipts. The units were never delivered to PNB, even though the assessee was promising to give delivery of the units. Consequently, by letter dt. 1st July, 1992 PNB claimed compensation as calculated in the annexure to the letter and computation of claim was given according to which PNB treated the breach of the contract to have taken place on 30th May, 1992 and on that basis it claimed difference in price between the rate that was paid and the rate of UTI as on 30th May, 1992. As the amount was not paid, PNB filed a suit inter alia claiming the delivery of the units in respect of which the payment had been made. An alternative prayer which was made was for damages for a sum of Rs. 2,49,19,00,549 plus further interest at the rate of 17.5 per cent per annum on the said sum till the date of payment. The Special Court granted relief to the PNB for specific performance which required the assessee to buy 7.5 crore units for which payment had been made and in addition thereto it was also required to purchase and sell to the PNB the units representing the right issue which the PNB was deprived of availing because of the non-delivery of the units. Costs of Rs. 27,87,000 were also awarded.
21. Against the order of the Special Court, the assessee-bank made appeal to the Supreme Court but admitting the liability of Rs. 182 crores representing value of units on the date of purchase plus the difference between the price on the date of purchase and the original price for which the contract was entered into. This is evident by the affidavit of Shri K.S. Mohanan, Dy. GM (Finance), para 7 of which reads as under:
"7. In the bank's appeal to the Supreme Court preferred against the judgment and decree of the Special Court dt. 11th March, 1996 above referred to, bank while admitting its liability of a substantial portion of the decretal value awarded by Special Court to PNB, contested the judgment and decree of the Special Court on the ground that in view of the breach of contract on the part of the bank to deliver the securities sold by it PNB is entitled to be awarded only the refund of the purchase price paid by it to the bank along with damages for such difference between the contract price and the market price of the securities sold as on the date of breach of the contract. Bank in its appeal to the Supreme Court accordingly prayed and submitted that PNB was not entitled to be awarded specific performance of the contract as decreed by the Special Court. The relevant portion of the grounds raised in the bank's appeal preferred to Supreme Court is reproduced hereinbelow :
'(cccc) The learned Judge failed to appreciate that a contract for specific performance of an agreement to sell securities could not be specifically enforced as compensation in money is adequate relief for the respondents.
(dddd) The learned Judge failed to appreciate that the said securities were easily available in market and that the respondents would only be entitled to refund of price of the said securities alongwith damages, being the difference between the sale price and the market price on the date of the breach and not at the time of the trial.
(mmmm) The learned Judge failed to appreciate that the respondents were entitled to refund of price of securities along with damages to be ascertained on the difference between the contract price and market price prevailing on the date of breach and not at the time of trial'."
22. This is further evident by letter of the Solicitor dt. 18th April, 1999 seeking clarification on the appeal filed by the assessee and the Solicitor has advised by stating in his said letter as under :
"From the aforesaid ground of appeal and the statement made in the interim application the bank has accepted that PNB were entitled to refund of the purchase price of the securities alongwith the damages, i.e., the difference between the contract price and the market price prevailing at the date of breach of the contract."
"On 8th May, 1996, the Hon'ble Supreme Court was pleased to admit the above appeal and pass an interim order inter alia, directing the bank to pay Rs. 182 crores to PNB or in the alternative, transfer units worth Rs. 182 crores (at the repurchase price) to PNB. A copy of the order dt. 8th May 1996 is enclosed herewith."
23. The interim order of the Supreme Court reads as under :
"After hearing counsel we direct that there will be an interim order to the effect that the appellant-bank will pay Rs. 182 crores to the respondent-bank or in the alternative, transfer units (1964 Scheme) worth Rs. 182 crores calculated on repurchase price within a period of six weeks but on condition that if, in the meantime, the books close and transfer cannot be effected before dividend is declared, appellant-bank will also pay the dividend due on those units to the respondent-bank.
In regard to the balance amount, i.e. the balance between the amount worked out by the Special Court and Rs. 182 crores, appellant-bank will transfer units (1964 Scheme) worth Rs. 30 crores to the respondent-bank within even time and with the same stipulation as regards dividend on condition that if the Court so directs at the final disposal of the appeal and the said units shall be liable to restitution by the respondent-bank.
In the event of the appellant-bank not complying with the order within the time of six weeks, the interim order shall stand dissolved and the order of the Special Court will be enforceable."
24. From the above it is evidently clear that the dispute before the Supreme Court was only with respect to the damages otherwise granted by the Special Court and not for the purchase price and the difference between the price at the time of purchase and at the time of breach which amounted to Rs. 182 crores. Insofar as this amount is concerned, there was no dispute raised by the assessee before the Supreme Court and the decision of the Special Court was accepted by the assessee. That order being dt. 11th March, 1996 falls within the previous year under consideration and, therefore, the liability to this extent, i.e. Rs. 182 crores has arisen to the assessee in the previous year relevant to asst. yr. 1996-97 and it has to be allowed as deduction which is an ascertainable one in view of the decision of the Special Court and admitted by the assessee.
25. Insofar as the difference of Rs. 30 crores between the sum paid by the assessee at Rs. 212 crores pursuant to the direction of the Supreme Court and the amount of Rs. 182 crores, the decision of the Special Court on which has been accepted by the assessee, is concerned, that liability was still pending adjudication before the Supreme Court pursuant to an appeal filed by the assessee and, therefore, would not be an allowable deduction in the year under consideration. It would either be allowable to the assessee when the liability for the said Rs. 30 crores was accepted by the assessee either in the subsequent year when the payment was made or in the year when the Supreme Court finally decided the issue in April, 2001. The assessee would be at liberty to make appropriate claim in either of the year on production of evidence before appropriate authority, if so advised.
26. The other difference of Rs. 31,21,86,000 between the amount of compensation granted by the Special Court at Rs. 2,43,21,86,000 and the sum of Rs. 212 crores as settled by the Supreme Court would not be allowable at all as the dispute is finally settled in subsequent year 2001 at the amount of Rs. 212 crores and, therefore, there is no liability as such remained to be payable by the assessee.
27. As regards the second claim for the deduction of Rs. 44.85 crores to SBP the finding of the CIT(A) to that the claim had not been settled in the year under consideration and that various correspondence given by the assessee between SBP and the assessee suggest that final settlement was made after March, 1996. This observation of the CIT(A) in our opinion is not based on the facts. It is true that letters filed by the assessee and referred to by the CIT(A) bear the dates subsequent to the close of the year, these being dt. 11th June, 1996 and 13th June, 1996 and July 1996, but they refer to settlement reached between the assessee and SBP before 31st March, 1996 when the assessee handed over the cheque of Rs. 27,09,00,000 to SBP, which is dt. 30th March, 1996. This cheque was given by the assessee to SBP pursuant to their settlement of outstanding security transaction vide memorandum for executive committee dt. 23rd March, 1996 for the meeting to be held on 26th March, 1996, which were approved by the chairman of the meeting before the close of the previous year. The said settlement reads as under:
"On 16th Nov., 1991, we had purchased 2 crores units (US-64) from NHB at a cost of Rs. 27,09,00,000. Since the units were not ready for immediate delivery, NHB issued, their BR to us. Based on the purchase from NHB, we sold these securities to SBP for Rs. 27,09,50,000. As we did not receive the securities from NHB, these could not be delivered to SBP. All along these years, we have been requesting SBP to bear with us till our claim against NHB is settled. SBP is pressing hard for settlement of the transaction. There is no dispute as to the principal amount payable to SBP.
SBP have not filed a suit against our bank. We propose to settle their claim now without further waiting for our claims against NHB to get settled. We, therefore, propose to refund the principal amount of Rs. 27,09,50,000 by debit to protested bill account.
For payment of interest/compensation, while the matter will be mutually settled later on, we propose to wait for the final outcome of our claim on NHB."
28. In the light of the aforesaid memorandum it is clear that the liability for Rs. 27,09,50,000 had been amicably and finally settled during the year under consideration on or before 31st March, 1996 consequent to which the assessee made payment of the sum of Rs. 27,09,50,000 to SBP, which has been accepted by them vide their letter dt. 29th March, 1996. This letter is also extracted below :
"We acknowledge receipt of your bankers cheque No. 421516 dt. 30th March, 1996 for Rs. 27,09,50,000 (Rupees twenty seven crores nine lacs and fifty thousands only) being the payment of principal amount of your bank receipt No. 92 dt. 16th Nov., 1991 covering sale of 2 crores units under UTI (1954) Scheme. While we acknowledge receipt of the principal amount, covered by the BR. We are awaiting payment of the interest due thereon from 15th Nov., 1991 which please expedite.
The original BR has been seized by the CBI on 18th Jan., 1993, which will be delivered to you when received, suitably discharged,"
29. On a reading of this letter it however is evident that insofar as the principal amount was concerned, it was settled by the meeting held in March, 1996, but the interest portion of the dispute was left to be settled subsequently. There the CIT(A) could be said to be right in stating that the interest liability was settled in June or July, 1996. We, therefore, hold that insofar as the liability of the principal amount of Rs. 27,09,50,000 is concerned, that has crystallised by amicable settlement during the year under consideration and has to be allowed as deduction but insofar as the interest on the aforesaid amount for the period from 16th Nov., 1991 to 30th March, 1996, amounting to Rs. 17,76,02,158 was settled in the immediately subsequent year and the assessee would be at liberty to claim the same by seeking appropriate remedy, if so advised in accordance with law.
30. One of the other reasons for confirming the disallowance given by the CIT(A) in his order is that Harshad Mehta has not denied his liability to deliver the securities and, therefore, it was a claim which has to be decided after all the cases are finally decided and the payables to the parties may match with the receivables from counter parties, resulting in, possibly, no liability for the bank. That proposition does not seem to be in accordance with the provisions of law. Mere claim of the party will not tantamount to accrual of receipt or claim in favour of the party in view of the decision of the Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. (supra) and Union of India v. J.K. Synthetics Ltd. (supra) and the two decisions of Gujarat High Court in the cases of CIT v. Bharat Iron & Steel Industries (supra) and Meghdoot Laminart (P.) Ltd. v. Rajiv Sinha (supra). Such inquite claim in absence of any finally enforceable decree, in our opinion, cannot be taken into account in the relevant year when the bank has incurred loss by virtue of enforceable decree passed against it by the Court; that no corresponding determination of any right against said Harshad Mehta.
31. In the case of Laxmi Ginning & Oil Mills (supra) before the Punjab & Haryana High Court, the assessee sold a certain quantity of oil to a company for a total value of Rs. 26,642. The purchaser company did not take delivery of the oil contracted to be purchased by it and thus committed a breach of the contract. The assessee then sold that quantity of oil in the open market at the risk of the purchaser and realized only a sum of Rs. 20,572 incurring a loss of Rs. 9,160 which was debited by him to the 'groundnut account' and credited to the 'claim in dispute account'. The assessee, thereafter, filed a suit against the company for recovery of the said loss and ultimately obtained a decree in 1962. In the meantime, the assessee claimed the above loss in its return for the asst. yr. 1953-54. The ITO disallowed, the loss on the ground that, as the loss debited to the trading account had not been finally settled, the debit created in the groundnut account cannot be allowed and added back the same. On appeals, the AAC and the Tribunal upheld the contention of the ITO. The High Court, on reference held :
"...that the loss was suffered by the assessee in the accounting year relevant to the asst. yr. 1953-54 and if, as a result of the litigation, it was found entitled to less amount than the amount claimed, the difference could be included in the assessable income of the assessee for the year during which the final decision of the litigation was made. Similarly, if the assessee had been successful in obtaining the entire amount of the loss from the company, the amount could be included in the income of the assessee for the years during which the amount was actually recovered. The pendency of litigation about the loss suffered cannot militate against the fact that the loss was suffered by the assessee during the accounting year in question and the amount of that loss cannot be postponed in view of the pendency of the litigation.
Therefore, the Tribunal was not justified in upholding the disallowance of Rs. 9,160 on account of loss and damages suffered by the assessee owing to the breach of contract by the company."
"It cannot be said that the amount of loss would have crystalized only after the litigation between the assessee-firm and the Amrit Banaspati Co. Ltd. had been finally decided. The loss was suffered by the assessee-firm in the accounting year relevant to the asst. yr. 1953-54, and if, as a result of litigation, it was found entitled to less amount than the amount claimed, the difference could be included in the assessable income of the assessee for year during which the final decision of the litigation was made. Similarly, if the assessee had been successful in obtaining the entire amount of the loss from the company, the amount could be included in the income of the assessee for the years during which the amount was actually recovered. The pendency of litigation about the loss suffered cannot militate against the fact that the loss was suffered by the assessee during the accounting year in question and the amount of that loss cannot be postponed in view of the pendency of the litigation referred to above."
32. The Cochin Bench of the Tribunal in the case of Radhakrishna Oil Mills (supra) observed that "Pendency of settlement of insurance claim is no bar to the allowability of loss in this year as has been held by the Punjab & Haryana High Court in the case of Laxmi Ginning & Oil Mills v. CIT (supra). So, in the circumstances, we hold that there is a mistake of law apparent from the record and direct the ITO to look into the assessee's claim of trading loss and allow it."
33. Similarly Ahmedabad Bench of the Tribunal in the case of Cama Motors (P) Ltd. (supra) observed that the CIT(A) erred in not allowing the sum of Rs. 2,87,516 being the amount of provision made in respect of stolen jeeps by stating that the loss is not yet become mature. The jeeps have been recovered and are in custody of assessee. There is a reasonable chance for assessee to recover back the goods. The mere dispossession is not loss. Secondly, the matter is subjudice and it is not yet finally settled whether or not the jeeps were stolen. It is learnt that the accused had taken the stand that the jeeps were sold in regular fashion and the regular sale bills, etc. were prepared and that the jeeps were not stolen at all. Till the Court decides on the issue whether the jeeps were stolen or sold, the claimed loss cannot be allowed. The Tribunal in para 6.2 held that "Under these circumstances, we feel that the claim of the assessee merits allowance not only on the basis of the system of accounting being followed by him but also the facts surrounding the claim." We are supported in our decision by the judgment of the Hon'ble Punjab & Haryana High Court in the case of Laxmi Ginning & Oil Mills (supra). It also referred to the decision of the Hon'ble Bombay High Court in the case of Jethabhai Hirji & Jethabhai Ramdas v. CUT (supra) wherein it has been observed that "Nor would the fact that an assessee, subsequent to the write off of a debt, continued legal proceedings against the debtor necessarily lead to the conclusion that the write off was improper or lacked bona fides." The decision of the Gujarat High Court in the case of Sarangpur Cotton Mfg. Co. Ltd. v. CIT (supra), was also referred to with the observations of their Lordships at p. 708 that "When a businessman writes off an amount, there is prima facie evidence that that amount is irrecoverable. Undoubtedly, the Department can rebut the prima facie inference by drawing attention to circumstances or by lending some evidence to suggest that the position taken up by the assessee was not correct. In this case there is no evidence whatsoever on the record except the fact that the assessee wrote off this amount in the year of account. In the absence of any evidence we are entitled to presume that the amount became irrecoverable when the assessee wrote it off in its books of account." The Tribunal ultimately allowed the claim of the assessee by stating :
"We respectfully following the ratio laid down by the aforesaid decisions, accept the first ground in the appeal and direct that the claim of Rs. 2,86,516 be allowed. We have also kept in mind the various other case laws cited by both sides in coming to the conclusion that we have."
34. Reference was made to certain decisions. These are discussed hereunder:
(i) the case of CIT v. Dalmia Dadri Cement Ltd. (1992) 195 ITR 290 (Del), a liability arose under the scheme was ascertainable was held to be not contingent even though an attempt was made out by the assessee to get out of its liability to pay the CACO the freight advantage by raising disputes could not, in any way, detract from or retard the liability under the arrangement. This liability was analogus to the one arising under a statute. In the present case the liability was to deliver the units sold and having not delivered the same it committed a breach of the contractual obligation. It was thus an ascertainable liability directed to be discharged by the decree of the Court.
(ii) in the case of Assam Roller Flour Mills v. CIT (supra)--"Business expenditure--Mercantile system of accounting--Expenditure in which year allowable--Penalty imposed on assessee for infraction of Customs Act in asst. yr. 1979-80--Government setting aside order of penalty in 1982--By applying the doctrine of 'Relating Back' liability stood wiped out in asst. yr. 1979-80 itself--Deduction not allowable merely because payment was made. The general rule is that deduction can be permitted in respect of only those expenses or losses which have accrued in the relevant accounting year. This general rule, however, is required to be applied after taking into account subsequent events which have a bearing on the issue being decided by the authority concerned. It is, therefore, permissible in law to take into consideration, at the time of deciding an issue, such subsequent events legal or factual, which may have an effect on the decision of the issue. It is necessary to do so for the obvious reason that the aim of law is to do substantial justice between the parties and to import to them not merely legal or technical justice but, as far as possible, real and substantial justice. That, however, taking into account the subsequent order of the Government of India knocking off the penalty in 1982, and on taking the effect of such order of the Government of India to the year of account with the help of the doctrine of 'relating back' the resulting position was that in the year of account the liability stood wiped out and did not survive for deducibility as a business expenditure."
(iii) In the case of Navjivan Roller Flour & Pulse Mills Ltd. v. Dy. CIT (surpa), the assessee-company which was engaged in the business of manufacturing of dal, besan, sooji, etc., had entered into a contract with a foreign company for the import of yellow gram and as per the terms of agreement, the assesses was to open letter of credits within some stipulated time. The assessee failed to open letter of credits, which ensued the protracted litigation and the foreign buyer claimed damages for breach of the contract by the assessee. But the assessee disputed the payment of damages because there was no stipulation regarding the damages to be paid to the party in the terms of contract. The arbitrator awarded certain damages under the arbitration agreement, and the legality of which was challenged by the assessee and preferred appeal before the Board of Appeal which has given decision on 20th March, 1989. For the asst. yr. 1988-89, the assessee claimed deduction on account of damages and certain amount on account of expenditure for legal fees. The AO allowed the claim but the CIT initiated proceedings under Section 263. The Tribunal held that dispute involved the very liability of the assessee to pay any damages to the foreign party and unless the dispute was finally settled, it could not be said that any liability for payment of damages had accrued or arisen during the year to the assessee. Reference was to the decision of the Supreme Court in the case of Hindustan Housing & Land Development Trust Ltd. (supra) wherein it was held that an enforceable liability will spring into existence only when it is determined and finally fixed by a Court or any other mutually agreed forum. In this case, the contract did not provide for payment of any damages and that the question of liability of the assessee itself was referred to arbitrator which was challenged by the assessee and the assessee declined to nominate the arbitrator. In these circumstances, the Tribunal held that liability for damages was not a liability in praesenti during the assessment year under consideration. In the present case the liability of the assessee was to deliver the security contract for sale and assessee's failure to give delivery made him liable to pay damages by. Special Court, and only a part of the liability was subject-matter of further dispute before the Supreme Court and, therefore, the entire liability cannot be said to have accrued against the assessee. Only the liability which has been accepted by the assessee and not disputed before the Supreme Court in one case and amicably settled with SBP was allowable.
(iv) In the case of Union of India v. J.K. Synthetics Ltd. (supra), before the Supreme Court, the High Court allowed the liability for excise duty, though its writ petition challenging its liability to pay had been accepted by a Single Judge of the High Court because the matter was pending in appeal before a Division Bench and, therefore, Section 41 of the Act could not be invoked. The Supreme Court dismissed the appeal of the Revenue by observing that since the liability to tax under Section 41 would depend on the outcome of the appeal, there would be no prejudice to the Department if the assessment were modified thereafter. This decision is an authority for the proposition that even if the matter is disputed before the higher forum, the liability may be allowed as deduction and it would open to the Revenue to invoke Section 41, if the outcome of the appeal is in favour of the assessee.
(v) In the case of CIT v. Bharat Iron & Steel Industries (supra), before the Gujarat High Court, the entitlement of the assessee to the refund of excise duty was in jeopardy in view of the pendency of the review or revisional proceedings and, therefore, there was no final decision on the question whether or not assessee was entitled to excise duty. It was only when the review or revisional proceedings were dropped in the subsequent year that the assessee became finally entitled to claim refund and the High Court, therefore, held that it would not be taxable in the year when the matter was pending for review. Firstly, it is a case for determining the taxability of refund under Section 41(1) and not case for allowability of deduction and in any case the liability has been settled by the Supreme Court and in the present case a part of that liability alone was disputed in the appeal, and, therefore, at best it could be said that only that part of the liability was in jeopardy, which was a subject-matter of appeal, viz., liability over and above Rs. 212 crores.
(vi) In the case of CIT v. A. Krishnaswami Mudaliar (supra), before the Supreme Court, a firm which exploited a motion picture during the period 25th Dec., 1947 to 2nd Aug., 1948 maintained its accounts on cash system, filed return of income by debiting against the total receipt from the exploitation of the firm certain expenditure and sum of Rs. 1 lakh being the price paid for the exploitation the right of the firm. It did not take credit for the value of the unexpired exploitation rights at the end of the accounting period. The ITO estimated the value of the unexpired exploitation rights of the film at the end of that period and added it to the amount returned by the firm. But the Supreme Court (held) that Section 13 does not compel the ITO to accept a balance sheet of cash receipts and outgoings prepared from the books of account; that he has to compute the income in accordance with the method of accounting regularly employed by the assessee. It was further observed that whichever method of book keeping is adopted, in the case of a trading venture for computing the true profits of the year, the stock-in-trade must be taken into account. If the value of the stock-in-trade is not taken into account, in the ultimate result, the profit or loss resulting from trading is bound to get absorbed or reflected in the stock-in-trade unless the value of the stock-in-trade remains unchanged at the commencement of the year and the end of the year.
(vii) In the case of CIT v. Hindustan Housing & Land Development Trust Ltd. (supra), before the Supreme Court, the Land Acquisition Officer awarded compensation in respect of land in which the assessee was dealing in. On appeal by the assessee, the arbitrator made an award on 29th July, 1955 fixing the compensation at a higher amount and directing the payment of interest from the date of acquisition. Thereupon, the matter was carried to High Court and pending appeal, the State Government deposited in the Court the additional compensation under the award which was allowed to be withdrawn by the assessee on 9th May, 1956 on furnishing of security bond. The question was whether the additional compensation could be taxed as the income of the assessee for asst. yr. 1956-57 on account that it became payable pursuant to the arbitration award. The Tribunal held that the amount did not accrue to the respondent as its income during the relevant previous year relating to assessment year under consideration. The High Court agreed with the Tribunal and on appeal to the Supreme Court it was held that although the award was made by the Arbitrator on 29th July, 1955, enhancing the amount of compensation payable to the respondent, the entire amount was in dispute in the appeal filed by the State Government. In this case, the dispute was regarded by the Court as real and substantial because the respondent was not permitted to withdraw the amount deposited by the State Government without furnishing a security bond for refunding the amount in the event of the appeal being allowed. It was held that there was no absolute right to receive the amount at that stage. The Court also observed that there is no clear distinction between cases such as the present one, where the right to receive payment is in dispute and it is not a question of merely quantifying the amount to be received, and cases where the right to receive payment is admitted and the quantification only of the amount payable is left to be determined in accordance with settled or accepted principles.
(viii) In the case of Addl. CIT v. New Jehangir Vakil Mills Co. Ltd. (supra) before the Gujarat High Court land belonging to the assessee was acquired by the Government of Gujarat and the assessee received a sum of Rs. 1,74,807 as and by way of compensation together with interest, etc. Not being satisfied with that amount of compensation awarded, the assessee, the matter was carried in appeal and the company's claim was revised to Rs. 5,10,891. The AO was of the view that even as per the assessee's own contention, the total compensation receivable was Rs. 4,73,047 on the basis of the fair market value and proceeded to invoke the provisions of Section 52(2) of the Act and on that basis determined the fair market value in lieu of the full value of consideration received by the assessee and after making adjustment, he determined the longterm capital gains at Rs. 4,21,098. In appeal before the Tribunal, the Tribunal held that Section 52 is not affected as higher amount compensation received by the assessee at later date in the year under consideration and that if a higher amount of compensation was received by the assessee at a later date, it would be open to the AO to proceed with the matter in accordance with the law. On reference, the High Court held that liability to pay unliquidated damages or additional compensation which are contingent do not become a debit. It is on the final determination of the amount of compensation that the right to that income in the nature of compensation would arise or accrue and till then there is no liability in presenti in respect of the additional amount of compensation claimed. High Court also held that for the purpose of capital gain what is relevant is the year in which transfer is affected. However, in view of the provisions of Section 155, the High Court agreed with the Tribunal in holding that capital gain had to be considered with reference to the amount of compensation payable to the assessee and it would be open to the AO to recompute as and when the amount of compensation is finally determined.
35. Another reason given by AO for disallowance of both the losses is that the loss has arisen from speculative transactions and, therefore, the losses are in any case speculative loss as per the provisions of Section 43(6) of the Act and consequently cannot be allowed against business income of the assessee. The CIT(A) however accepted the claim of the assessee that it was not a speculative loss by observing in para 34 as under :
"The second issue to be decided in this regard is whether these transactions in securities were speculative transactions. The arguments put forth on behalf of the appellant has been already discussed earlier. I don't agree on certain conclusions arrived at by the learned counsel for the appellant, but the ratio laid down by the Hon'ble Supreme Court in the case of CIT v. Shantilal (P) Ltd. (1983) 144 ITR 57 (SC) clinches the issue in favour of the appellant. Even if the units of UTI are not considered shares nevertheless they do not cease to be a commodity. It is also beyond doubt that there is no delivery of the units in furtherance of the contract. But, I agree that the settlement of the contract was not for the payment of difference of value of units contracted to be purchased and sold. The intention of the bank has always been to take delivery and hand it over to the purchasing party. The bank could not deliver the commodity because it could not enforce delivery from the parties from whom it had purchased the units. In the case of Shantilal (P) Ltd. (supra) the Hon'ble Supreme Court has held that a contract can be said to be settled if instead of effecting the delivery or the transfer of the commodity envisaged by the contract, the promise, in terms of Section 63 of the Contract Act accepts, instead of it, any satisfaction which he thinks fit. It is quite an other matter where instead of such acceptance, the parties raise a dispute and no agreement can be reached for discharge of the contract. There is a breach of contract and by virtue of Section 73 of the Contract Act, the party suffering by such breach becomes entitled to receive from the party who broke the contract compensation for any loss or damage caused to him thereby. The award of damages for the breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with original terms thereof. In view of this decision of the Supreme Court. I am of the view that the transactions were not speculative as per Section 43(5) of the IT Act."
36. Learned standing counsel objected to this finding of the CIT(A). This issue is raised also in the cross-objection. His submission is that the loss has arisen in a speculative transaction within the meaning of Section 43(5) r/w Section 73 of the Act as observed by the AO and, therefore, would not be an allowable deduction as a business loss in view of the following decisions : Talakshi Lalji & Co, v. ITO (1991) 41 TTJ (Ahd) 139 : (1991) 39 ITD 44 (Ahd); Kanubhai A. Patel v. Asstt. CIT (2004) 89 TTJ (Ahd) 1032 : (2004) 89 ITD 255 (Ahd); P.L KN. Meenakshi Achi v. CIT (1974) 96 ITR 375 (Mad); A. Musthukumara Pillai v. CIT (1974) 96 ITR 557 (Mad); Ramdayal Somani & Co. v. CIT (1979) 119 ITR 1 (Bom); Pankaj Oil Mills v. CIT (1978) 115 ITR 824 (Guj)(FB); Sri Ranga Vilas Ginning & Oil Mills v. CIT (1982) 133 ITR 85 (Mad); CIT v. Bhikamchand Jankilal (1981) 131 ITR 554 (MP); M.G. Bros. v. CIT (1985) 154 ITR 695 (AP); V.N. Sarsetty v. CIT (1987) 163 ITR 727 (Kar); CIT v. Maya Ram Jia Lal (1986) 162 ITR 520 (P&H); Nuddea Mills Co. Ltd. v. CIT (1988) 171 ITR 169 (Cal) and CIT v. Ganga Prasad Birla (HUF) (1993) 199 ITR 173 (Cal). According to him, the Special Court did not cover the issue regarding transaction within the meaning of Section 43(5). The claim of the Revenue is not covered by Section 23 of the Contract Act but that it was a speculative transaction. He further submitted that there were no units against which negotiations were there and as the assessee was not holding units and, therefore, the transactions are speculative and not in the regular course of banking business of the assessee.
37. Assessee's contentions for this objection are : (i) that the transactions were of ready forward contract and amount to settlement of dispute and, therefore, not speculative; (ii) that the assessee-bank has not incurred any expenditure much less any claim having been made for deduction as expenditure; (iii) that even assuming for the sake of argument that the claim of loss would be treated as expenditure, it is not for any purpose which is an offence or that it is prohibited by law. In this connection, reference was made to the speech of the Hon'ble Finance Minister while moving the Finance (No. 2) Bill, 1998, and CBDT Circular No. 722, dt. 22nd Dec., 1998. He also referred to Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 1998. The findings given by the learned CIT(A) show that by no stretch of imagination the Explanation to Section 37(1) can be attracted in the. case of appellant because the deduction has not been claimed on account of any expenditure incurred as mentioned in Explanation to Section 37 nor any such similar expenditure. It is a claim of loss incurred by the assessee allowable under Section 28 itself. Supporting the finding of the CIT(A) the learned counsel referred to judgment given by the Supreme Court in the case of BOI Finance Ltd. v. Custodian AIR 1997 SC 1952 wherein after relying upon the findings of Special Court as well as interim report of Jankiraman Committee it is held that the transactions of the bank are not illegal.
38. We have heard the parties and considered their rival submissions. We find ourselves in agreement with the CIT(A) on this issue. Units of UTI may not be considered shares nevertheless they are a commodity. It is true that there was no delivery of the units in terms of the contract, but as the settlement of the contract was not for the payment of difference of value of units contracted to be purchased and sold, it would not be a speculative transaction within the meaning of Section 43(5) of the Act. The assessee's intention has throughout been to take delivery and hand it over to the purchasing party. It could not deliver the units because it in turn had not taken the delivery for the purchase of the units and could not enforce the delivery from the parties from whom it had purchased. In the case of CIT v. Shantilal (P) Ltd (1983) 144 ITR 57 (SC) the Hon'ble Supreme Court has held that it is quite an other matter in the case of a breach of contract where instead of such acceptance, the parties raise a dispute and no agreement can be reached for discharge of the contract. In that case there is a breach of contract and by virtue of Section 73 of the Contract Act, the party suffering by such breach becomes entitled to receive, from the party who broke the contract, compensation for any loss or damage caused to him thereby. The award of damages for the breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with original terms thereof. We are in agreement with CIT(A) in holding that the transactions were not speculative as per Section 43(5) of the IT Act.
39. In the case of Kanubhai A. Patel (supra) before the Ahemdabad Bench of the Tribunal, the assessee owned certain shares of TISCO along with investment of various other companies. He purchased 2,000 shares of TISCO originally purchased on 2nd April, 1992, which were purchased for total consideration of Rs. 14 lakhs, through a broker, but did not take actual delivery of the said shares nor made payment to the broker at the time of purchase of these shares. The assessee sold these shares and suffered a loss. He paid a sum of Rs. 4 lakhs to the broker to cover up the risk of the broker against the loss due to fluctuations of cost. The transaction in purchase and sale of the said 2,000 shares of TISCO was made by the assessee during seven periods of fortnightly settlements and the said transaction was settled by the assessee at the end of each badla period and the amount of loss was determined and the payment against such loss was made to the broker and the assessee claimed the loss suffered in the purchase and sale of shares as a short-term capital loss, but it was disallowed by the Revenue authorities treating it to be a speculative loss. The Tribunal held that transactions relating to purchase and sales of shares in question made by the assessee were clearly speculative transactions and constituted speculative business. This is a case where the assessee has settled the transactions with the broker for purchase and sales of the shares. No actual delivery was taken or contemplated either for sale and/or purchase of the shares and in these circumstances, the Tribunal held that transactions were speculative in nature. In the present case, on the contrary, the assessee had a forward contract of back-to-back transaction, delivery was contemplated and assesses failed to make delivery and had to suffer a loss, and, therefore, it cannot be equated with a speculative transaction.
40. In the case of P.L.KN. Meenakashi Achi (supra) before the Madras High Court, Kannappa Chettiar was carrying on business in yarn and he entered into contracts of sales. Delivery period was fixed. Market price of the yarn was rising during the period of delivery and the difference between the contract price and market price was Rs. 14,000. These contracts for sale were covered by any item of purchase contract. Yarn was not delivered under this contract, but a sum of Rs. 9,500 paid to Nagappa Chettiar and the contract was settled. There were 13 other sales contracts in which deliveries were not effected, but in these cases the assessee received the price difference amounting to Rs. 3,313. The loss of Rs. 9,500 was disallowed by the AO as being speculative loss. The High Court held that the contracts were settled otherwise than by the delivery of goods and, therefore, the sale which is ultimately settled and not delivery of the goods were effected under the settlement, then it is a speculative transaction, irrespective of the intention of the parties at the time of contract. This is also a case of settlement of the contract by paying the difference and without affecting the delivery and not the case of breach of contract.
41. In the case of Sri Ranga Vilas Ginning & Oil Mills (supra), before the Madras High Court, the assessee entered into a forward contract for delivery of groundnut oil, but settled the same not by actual delivery, but payment of difference and the Court held that it was a speculative transaction. This also not the case of non-performance of the contract, for which damages are to paid, but a settlement of the contract without delivery of goods, and, therefore, cannot be equated to the facts of the present case.
42. In the case of Ramdayal Somani & Co. (supra), before the Bombay High Court, the assessee-firm carried on speculation business in shares, bullion and various other commodities. A party with whom the assessee had entered into a contract for forward delivery of shares wanted the contract to be closed either by payment of differences or by actual delivery of shares. The assessee, therefore, borrowed 300 shares and delivered them to the party. The assessee-firm then purchased 530 shares, out of which 200 shares were returned to the person from whom shares had been borrowed and the balance of 330 shares were sold in the market which resulted in a net profit of Rs. 38,060 and in the same year, the assessee had incurred a loss of Rs. 39,893 in his speculation business and claimed before the ITO that the loss should be set off against the profit of Rs. 38,060, which the assessee claimed was profit from, speculation business. The AO has held that since the profit arose from a transaction where there was actual delivery of shares, the profit could not be treated as arising from a speculative transaction. On appeals, the AAC and the Tribunal affirmed the order of the AO and on reference before the High Court, it was held that as there was actual delivery of the shares sold by the assessee and purchased by the respective purchasers, the profit was not profit from speculative transactions within the meaning of Section 43(5) of the Act. In this case, the issue was not whether the loss had arisen from speculative transaction, but whether the profit made by the assessee was arising out of the speculative transaction and since delivery of shares have been taken and given, it was held that the profit was not from speculative transaction.
43. In the case of Pankaj Oil Mills (supra), before the Full Bench of Gujarat High Court, the assessee was carrying on business of manufacturing oil in the previous year relevant to asst. yr. 1965-66. The assessee entered into business of transaction of sale of oil. The transactions were ultimately settled otherwise than by actual delivery of the goods and the settlement resulted in a loss which was claimed as business deduction. This was disallowed as being speculative in nature and it claimed before the Tribunal that for all intention and purposes, that were hedging contract, and, therefore, the loss should be allowed as a deduction. The High Court held that it was not a hedging contract and that the assessee is not entitled to set off of loss being the amount of loss against its other business income suffered on account of settlement of forward transactions of sale of oil, since the hedging transactions must be in respect of raw materials so far as manufacturers are concerned.
44. In the case of Bhikamchand Jankilal (supra), before the Madhya Pradesh High Court, the assessee who was a dealer in cotton entered into two contracts for the sale of 200 cotton bales. He did not deliver the bales in accordance with the contracts and offered instead 2,000 bales of cotton, but as they were of inferior quality, which offer was rejected and refused to take delivery. The assessee made a proposal to settle the contract by payment of damages for breach of contract, to which proposal the assessee agreed and paid the compensation. At the time of entering into the contract, the assessee had 194 quintals of raw cotton which was equivalent to 65 quintals of cotton on 38 fully pressed bales. The assessee had contemplated to purchase extra quantity of cotton needed to supply, but as the market went up, the assessee could not purchase the same and failed to perform its part of the contract. The AO took a view that two contracts with the party constituted speculative transactions as defined under Section 43(5), and, therefore, consequently, disallowed the loss. The Tribunal held that the transaction being a single transaction did not amount to a speculation business and allowed the set off. The High Court on reference held that if the transaction under which the assessee paid compensation to 'R' amounted to a speculative transaction, it also amounted to speculation business attracting the operation of Section 73(1) and the loss of Rs. 1,35,000 and the loss could not be set off against the profits of the other business of the assessee. Both the Tribunal and High Court have proceeded on the assumption that the transaction was speculative transaction, and, therefore, this case was no help either to the assessee or to the Revenue.
45. In the case of M.G. Bros, (supra), before the Andhra Pradesh High Court, the assessee-firm carried on business in the manufacture and sale of groundnut oil and its by-products. It claimed a deduction of Rs. 17,60,946 being the loss suffered in respect of certain transactions, which had been entered into in cotton seed oil and neem oil. The assessee admitted that this loss had been suffered by paying differences pursuant to settlement of contracts otherwise than by delivery of goods but claimed that these were hedging transactions. The claim of the assessee was disallowed by the AO and AAC and also by the Tribunal. The High Court under reference held that there was no material on record to show that when the assessee entered into the forward transaction, it had adequate stocks of raw materials or merchandise, in hand and that hedge contracts did not exceed the ready stock. The forward transactions were speculative in character and the loss arising therefrom could not be set off against the assessee's income from the business in the manufacture and sale of groundnut oil. This is case where the assessee had admitted the loss as settled pursuant to the settlement of the contract, otherwise than by the delivery of goods. There is no question of settlement of the contracts in this case, because the assessee had not settled the contract and liability has been fastened upon it by the decision of the Special Court for not carrying his obligation under the contract.
46. In the case of V.N. Sarsetty (supra), before the Karnataka High Court, the assessee who was a merchant, dealing in groundnut, kapas, cotton and cotton seeds, under an agreement entered into between the assessee and a buyer, the assessee was required to deliver cotton to the buyer before the end of April, 1969. The agreement also provided that the buyer could extend the time for the delivery of the goods. The assessee failed to deliver the cotton even till 23rd May, 1969 in spite of repealed demands from the buyer and the buyer had extended the time for delivery but inspite of such extension, the assessee did not deliver the goods. The assessee paid a sum of Rs. 35,000 by way of loss on account of non-delivery of the goods in full settlement of the contract to the buyer as per the decision of the panchas and claimed the same as deduction. The inspecting officer rejected the claim of the assessee on the ground that the loss on account of non-delivery of goods was a 'speculative loss' within the meaning of Section 43(5) of the Act and the disallowance was upheld by the Tribunal and on the reference, the High Court held that the buyer had kept the contract subsisting with his right to extend the time for performance and, since there was no performance of the contract even within the extended time, the buyer accepted the amount agreed upon by the panchas in full settlement of the contract and not as damages for the breach of the contract. The buyer instead of waiting to take actual delivery of the cotton, had accepted the total amount of Rs. 35,000 in full settlement of the contractual obligations, and, therefore, the transaction entered into by the assessee with the buyer was a speculative transaction and payment of Rs. 35,000 amounted to a speculative loss within the meaning of Section 43(5) of the Act. In this case, the contract was kept alive, and, therefore, the Court held that the settlement of the contract was in the nature of speculative transaction and not as damages for breach of the contract, because the buyer instead of willing to take delivery of the cotton, had accepted the compensation. This case, therefore, is no help to the Revenue.
47. In the case of Maya Ram Jia Lal (supra), before the Punjab & Haryana High Court, the assessee entered into agreement for supply of goods to certain parties and since the assessee could not fulfil the contracts in time, the assessee settled the contracts by paying compensation to the parties and claimed the compensation paid as a business loss. It was disallowed by the AO and disallowance was upheld by the AAC. The Tribunal however allowed the claim by observing that the settlement was made long after the date of delivery was contemplated in the contracts and that the claim of the assessee was based on breach of contract and did not come within the meaning of contract 'settled' as used in Section 43(5) of the Act. Revenue's appeal was allowed by the High Court observing that there was no evidence to show whether the person with whom the assessee had contracted to sell, gave any notice to the assessee alleging breach of contract on the part of the assessee or filed suits against the assessee claiming compensation. There was also no evidence as to why the assessee was not able to perform his part of the contract or as to how the damages were quantified or as to what was the agreed rate and what rate prevailed on the date of delivery. The Court further observed that merely because the contract had not been performed by the agreed date, it could not be said that it was due to the default of the assessee. If the default of the assessee was not established the question of liability would not arise and consequently the question of payment of damages would not arise and since there was no delivery of goods was effected and the contracts between the parties were settled by payment and, therefore, such payment could not be allowed as they were of a speculative nature and came within the meaning of Section 43(5) of the Act. This case is of no help to the Revenue, as the suit was by the purchaser by claiming compensation and the assessee was not in a position to perform his part of the contract because in turn received delivery of the goods purchased as forward contract. In the present case, there was clear breach of contract for not making delivery, as agreed by the agreement between the parties.
48. In the case of Nuddea Mills Co. Ltd. (supra), before the Calcutta High Court, was also a case of settlement of the contract without delivery and/or transfer of contracted goods, and, therefore, it was held that the transaction was speculative transaction. Here also the claim of hedging was not allowed by the High Court and in view of the fact that it was not case of the assessee that it entered into the future contract of purchase for settlement of the future contracts of sale with the object of guarding against any loss through price fluctuations.
49. In the case of Ganga Prasad Birla (HUF) (supra), before the Calcutta High Court, the assessee made a declaration in March, 1972 that he had converted his investments in shares into stock-in-trade and during the previous year on 27th Aug., 1973 the assessee purchased 10,000 shares of company 'O' and obtained delivery of those shares. The shares were in possession when, on that very date, the assessee entered into a contract for sale of these shares. The shares, however, were not delivered and on September, 1973, instead of delivering the shares, the assessee entered into another contract for purchase of 10,000 shares which was not followed up by taking delivery of the shares, but the contract for sale was entered into on August, 1973, was settled by payment of the difference in price to the share broker. On October, 1973, the assessee sold and delivered the said shares of 'O' company and made a profit in the process and claimed loss arising to the assessee on the sale and repurchase effected on 22nd Aug., 1973 and 20th Sept., 1973. It was disallowed by the AO by observing that as a loss arising out of a speculative transaction, and, therefore, cannot be allowed as deduction. The Tribunal, however, held that it was a single speculative transaction and does not amount to speculative business. The High Court on reference held that there was nothing on record to say that there was any dispute between purchaser and the seller because of which delivery could not be taken by the assessee, when he purchased the shares or delivery could not be given by the assessee when he sold the shares. The assessee had full knowledge of the trend of the market and also had inside knowledge of working of the company. The contracts for purchase and sale of shares without delivery were clearly of speculative nature. The assessee had entered into at least two transactions where goods were not delivered--one for the sale of shares in August, 1973 and other for the purchase of shares in September, 1973, therefore, the High Court reversed the order of the Tribunal stating that it was an isolated transaction. In this case, it is evident that the assessee intended not to deliver in respect of transactions he has incurred loss on 22nd Aug., 1973 and 20th Sept., 1973 and transactions were settled without taking delivery. In these circumstances, the High Court held that they were speculative in nature and the present case on the contrary, the delivery was contemplated in agreement itself, but the same could not be effected by the assessee because of reasons beyond the control, as it could not take delivery of purchase made from the purchaser counter party bank. This case, is therefore, of no help to the Revenue.
50. On the contrary, the following decisions would clinch the issue in establishing the fact that the assessee in the present case has not entered into speculative transactions, but the loss has been suffered by it because of the breach of the contract for not delivering the goods, as per the terms of the contract. These are discussed hereunder in subsequent paragraphs :
(1) Shantilal (P) Ltd.'s case (supra), wherein it is held that "Transaction cannot be described as a 'speculative transaction' within the meaning of Sub-section (5) of Section 43 of the IT Act, 1961, where there is a breach of the contract and on a dispute between the parties, damages are awarded as compensation by an arbitration award. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. Section 43(5), however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promisee dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts, instead of it, any satisfaction which he thinks fit. It is this sense of the law which must prevail in Sub-section (5) of Section 43 and not that of the layman in Shantilal (P) Ltd.'s case (supra). A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract the promise, in terms of Section 63 of the Contract Act, accepts, instead of it, any satisfaction which he thinks fit. It is quite another matter where instead of such acceptance the parties raise a dispute and no agreement can be reached for a discharge of the contract. There is a breach of the contract and by virtue of Section 73 of the Contract Act the party suffering by. such breach becomes entitled to receive from the party who broke the contract compensation from any loss or damage caused to him thereby.... The award of damages for the breach of a contract is not the same breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof. It may be that in a general sense the layman would understand that the contract must be regarded as settled when damages are paid by way of compensation from its breach. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. The law, however, speaks of a settlement of the contract, and a contract is settled when it is either performed or the promise dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts instead of it any satisfaction which he thinks fit. We are concerned with the sense of law, and it is that sense which must prevail in Sub-section (5) of Section 43. Accordingly, we hold that a transaction cannot be described as a 'speculative transaction' within the meaning of Sub-section (5) of Section 43, IT Act, 1961, where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation by an arbitration award."
(2) Shree Bhagpatia Food Industries wherein the Rajasthan High Court held that Section 43(5) contemplates a transaction in which a contract for purchase or sale of any commodity was periodically or ultimately settled otherwise than by actual delivery or transfer of commodity. There must be not only actual non-delivery of goods, but it must be coupled with settlement of contract in a transaction for which the payment was made. If the payment was by way of damages and not by way of settlement of a contract, then the question of actual delivery or transfer of goods would be irrelevant. The assessee in this case was a dealer in mustard oil and had entered into a contract for supply of goods through a dealer. Due to closure of loading by the Railway authorities and/or due to nonavailability of wagons, the goods could not be dispatched on or before the agreed date. The assessee paid Rs. 17,316 as damages and claimed it as a business loss. The ITO stated the same as a loss in speculation but the Tribunal held that it was a business loss. On a reference it was held :
"Held, that since the payments were made by way of damages for non-performance of the contract and that non-performance of the contract was for reasons beyond the control of the assessee, the Tribunal was justified in coming to the conclusion that the amount of Rs. 17,316 was to be treated as business loss."
(3) Panachand Khemchand, Gujarat High Court at p. 1053 of the reports held that "A transaction cannot be described as a 'speculative transaction' within the meaning of Sub-section (5) of Section 43 of the IT Act, 1961, where there is a breach of the contract and on a dispute between the parties damages are awarded as compensation."
(4) Anamalai Timber Trust Ltd.'s case (supra) wherein Kerala High Court held that "Whether the nature of the business carried on by an assessee is such that the risk of negligence of the assessee's servants while acting in the course of their employment is also incidental to such business, the liability of the assessee to pay damages for such negligence is also incidental to the business, and loss resulting from payment of such damages is allowable as a trading loss in computing the assessee's income from such business. The fact that the loss was due to the negligence of the assessee's servants or that such negligence has resulted in a breach of contract would make no difference."
51. Another ground for disallowance of the loss is the claim of Revenue that the transaction was tainted with illegality and, therefore, cannot be a normal feature of trade and, therefore, not allowable as a deduction under Section 37(1) r/w Explanation thereto. The CIT(A) held that the provisions of Explanation to Section 37(1) do not hit the transaction and make it payment which is illegal or otherwise prohibited by the law observing in para 43 as under:
"43. I have considered the submissions made on behalf of the appellant. From the facts on record, it is found that no claim of deduction was made on account of any payment of hafta, bribe or any expenditure of this nature. It is also found that the Special Court has also not declared transactions as illegal. Had the transaction been illegal, it would not have been enforceable by law. The very fact that Special Court has directed the appellant to make payment to the PNB for breach of contract shows that contract between the appellant and the PNB was legally enforceable contract. The interim report of the Jankiraman Committee has also made certain observations on the nature of the transactions. Jankiraman Committee has pointed out certain irregularities committed by the banks in regard to security transactions but has not said that these transactions were illegal. From the facts on record it is found that these transactions were in the form of ready forward contract, The AO has not dealt with the ready forward nature of the contract of the transactions either in the assessment order or at the time of appeal hearing. The Hon'ble Supreme Court in Civil Appeal No. 1758 of 1994 in the case of BOI Finance Ltd. v. Custodian has dealt with this issue. The summary of the findings of the Hon'ble Supreme Court is as below :
(a) Infringement of the instructions issued by the RBI under the banking Regulation Act prohibiting the banks from entering into buy back arrangements do not invalidate such contract entered into between the banks and its customers.
(b) The ready forward contract is severally into two parts, namely, the ready leg and the forward leg. The ready leg of the transaction having been completed, the forward leg which alone is illegal, has to be ignored.
(c) With the ready leg having been performed, the illegality of the forward leg contained in the agreements cannot effect transactions which had already taken place.
In view of the judgment of the Supreme Court as mentioned above, apparently it appears that ready forward contracts cannot be treated as illegal unless it is proved that ready leg transactions and forward leg transactions are not severable in the case of the appellant. Therefore, having regard to the contentions of the appellant's learned counsel, I am of the view that the Explanation to Section 37(1) is not applicable in the case of the appellant because the deduction has not been claimed on account of any expenditure made as mentioned in Explanation to Section 37 or any such similar expenditure. Therefore, this provision does not appear to be applicable."
52. As regards this aspect of the matter (which is also taken as 2nd cross-objection in cross-objection filed by the Revenue) the learned standing counsel submitted that the entire claim for deduction of Rs. 243.21 crores was not allowable since part of the same is penal in nature and tainted with illegality and fraud.
53. The contention of the learned counsel for the assessee, on the other hand, is that the Explanation is clarificatory in nature and it states that any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business and shall not be deductible as an expenditure. The Explanation merely tries to further limit the scope of applicability of provisions of Section 37 but, in no event it can override the main provision of Section 37. It is further submitted that the assessee had not incurred any expenditure much less any claim having been made for deduction which is prohibited by law and even assuming for the sake of argument that the claim of loss would be treated as expenditure, it is not for any purpose which is an offence or which is prohibited by law.
54. We have heard the parties and considered their rival submissions. We find ourselves in agreement with the CIT(A) on this issue. The Explanation which is the core of this dispute in this case reads as under :
"Explanation--For the removal of doubt, it is hereby declared that 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 or allowance shall be made in respect of such expenditure."
55. On a bare reading of this Explanation, it is evident that it prohibits deduction of expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law. Only in that case such an expenditure is deemed to have been incurred for the purpose of business or profession and deduction or allowance is prohibited for such an expenditure. Incurring of the loss and claiming the same is not for any purpose which is an offence or which is prohibited by law. Even the Special Court acting under (Trial of Offence relating to Security Transactions) Act, 1992, has also not declared the transaction as illegal. It only directed the assessee to make the delivery of the securities to PNB as per the contract entered into by them and that was for breach of the contract, which was enforceable as per the Contract Act. It is true that the report of Jankiraman Committee has pointed out certain irregularities by the banks in relation to several transactions but that has also not said that the transactions were illegal. The CIT(A) has referred to the decision of BOI Finance Ltd. (supra) in allowing the claim of the assessee. In this, the Supreme Court observed that a "Transaction consists of two interconnected legs, namely, the first or the ready leg, consisting of purchase or sale of certain securities at a specified price, and the second or forward leg, consisting of the sale or purchase of the same or similar securities at a latter date at a price determined on the first date. Such ready forward transactions have, in most cases, been entered into either by execution of a single document or by execution of two documents contemporaneously, one representing the first or ready leg and other the forward or second leg. On such contracts being entered into the ready leg of the transactions were completed with the appellants having the agreed price and receiving the delivery of the securities which were agreed to be purchased". It was further observed that Banking Regulation Act (10 of 1949), Section 36--Reserve bank of India--Confidential circular issued to banking companies prohibiting them from entering into buy back arrangement--bank entering into such arrangement with third party despite prohibition--Contract entered is not rendered void--bank however is liable for penalty." Referring to the Securities Contracts (Regulation) Act (42 of 1956) Section 16 and the Contract Act (9 of 1872), Section 57, Prohibition to forward contract to securities and the effect on ready-forward transaction, it was also observed that such transaction is severable and where the ready leg which is valid is separable from forward leg which is prohibited, the ready leg remains valid. The Court concluded from the above that (a) infringements of the instructions issued by the RBI under the Banking Regulations Act prohibiting the banks from entering into buy back arrangements do not invalidate such contracts entered into between the banks and its customers; (b) that the ready forward contract is severable into two parts, namely, the ready leg and the forward leg. The ready leg of the transaction having been completed, the forward leg, which alone is illegal, has to be ignored; (c) that with the ready leg having been performed the illegality of the forward leg contained in the agreements cannot affect the transfers which had already taken place." We are in agreement with order of CIT(A) and it does not call for any interference at our end. We accordingly uphold the same.
56. The next ground in the assessee's appeal is against levy of interest under Section 234B of the Act. The assessee submitted that it is a legal ground and it is entitled to challenge the levy of interest along with the other grounds of appeal. It is further submitted that in assessment order the AO has merely stated "Charge interest under Section 234B". He further submitted that there is no application of mind and an opportunity of hearing was not given to the assessee. He also relied upon the decision of the Supreme Court in the case of CIT v. Ranchi Club Ltd. (2001) 247 ITR 209 (SC). He further submitted that the levy of interest under Section 234B bears the imprint of penalty and, therefore, without hearing the assessee the same should not have been levied. He further submitted that though the provisions of Section 234B are mandatory the same is not compulsory or universally applicable to all cases without any distinction. He further submitted that the assessee can legitimately/bona fidely believe that the particular item is not assessable as his income, and, therefore, no advance tax was paid nor the assessee could have anticipated the disallowance of certain claims converting into positive income, and, therefore, it is a penalty for not doing impossible. He also submitted that it must be construed as a substantive law and not adjectival law. We have heard the parties and considered their rival submissions. This ground has been raised by the assessee before the CIT(A) as ground No. 5 but there is no discussion on this issue in his order. In these circumstances we set aside the order of CIT(A) for this limited purpose and direct him to decide the ground of chargeability of interest under Section 234B of the Act.
57. The first ground in the Revenue's appeal is against allowance of claim of depreciation of Rs. 33,06,56,000 on securities treating the same as stock-in-trade. The AO held that the securities were not depreciable assets and, therefore, depreciation at any fixed rate cannot be allowed upon the same from year to year. According to him, the claim of depreciation was notional claim which does not form part of any allowance under the Act. He also noted that a similar claim was disallowed in earlier years asst. yrs. 1985-86, 1992-93 to 1995-96 and the CIT(A) has allowed the claim of the assessee and that though similar claim allowed by the AO for asst. yrs. 1987-88 and 1988-89 but has been withdrawn by the CIT under Section 263. The Tribunal had also dismissed the Revenue's appeal by taking aid from the provisions under Section 32AB.
58. Before the CIT(A) the assessee submitted that under the provisions of banking Regulation Act, 1949, the bank is required to invest and to keep invested certain specified percentage of its demand and time liabilities prescribed by the RBI from time-to-time, in certain approved securities. Since such investments in securities are closely and intimately connected with the business of banking and are vital and essential requirement stipulated by law, securities in which such investment is made are trading assets of the bank. Reliance was placed on the decision of the Punjab & Haryana High Court in the case of State Bank of Patiala wherein the claim of depreciation was allowed in similar circumstances. The CIT(A) allowed the claim of the assessee by following his decision in the appeal for earlier years for asst. yrs. 1992-93 and 1993-94 and after referring to the Board Circular No. 665, dt. 5th Oct., 1993, which reads : "The question whether a particular item of investment in securities constitutes stock-in-trade or a capital asset is a question of fact. In fact, the banks are generally governed by instructions of the RBI from time-to-time with regard to the clarification of assets and also accounting standards for investments." He, therefore, allowed the claim of the assessee subject to verification about the accuracy of the computation made by the assessee.
59. The learned standing counsel submitted that the securities held by the assessee were investments and it was so held in asst. yr. 1985-86 by observing that if it was stock-in-trade it would have been reflected in trading account as loss and not depreciation. He also referred to the decision of the Supreme Court in the case of CIT v. British Paints India Ltd. (1991) 188 ITR 44 (SC). Referring to the provisions of Section 10(33)(i) r/w Section 115-0, he submitted that deduction was not allowable because of 14A also the dividend income is chargeable under the head 'income from other sources' under Section 56 and hence shares held by the assessee cannot be treated as business assets and no depreciation is allowable. In any case it was submitted that it is a notional loss inasmuch as no trading activities have been undertaken by the assessee.
60. The learned counsel for the assessee relied upon the decision of the CIT(A) in the appeals for asst. yrs. 1992-93 and 1993-94 wherein similar claim was accepted by the CIT(A). It is further submitted that since 1977-78 the assessee-bank is consistently and regularly following the basis of valuation from year to year and the income arisen from the sale of securities are being taxed year after year on the basis of profit and not capital gains. He referred to a chart right from asst. yrs. 1977-78 to 2001-02 which reads as under :
Sr. No. Asst. yr.
Depreciation on investment claimed in its return Depreciation on investment allowed by the AO Remarks 1 1977-78 31,66,676.80 31,66,676,80 2 1978-79 12,42,541,25
--
Appreciation taxed as such by the AO 3 1979-80 69,452.50 -- Appreciation taxed as such by the AO 4 1980-81 17,43,623.00 17,43,623.00 -- 5 1981-82 94,54,042.00 75,99,359.00 Rs. 18,54,883 claimed more due to inadvertent arithmetical error, to that extent claim given up in the course of assessment proceedings. 6 1982-83 1,37,68,861.50 1,37,68,861.50 -- 7 1983-84 1,81,32,327.00 1,81,32,327.00 -- 8 1984-85 2,74,74,101.90 2,74,74,101.90 -- 9 1985-86 1,23,75,000.00 Nil CIT(A) Rajkot-1 upheld and allowed bank's claim. department's second appeal before Tribunal dismissed as not maintainable 10 1986-87 4,57,00,244.60 4,57,00,244.00 Allowed vide order under Section 143(1) 11 1987-88 3,25,65,423.00 3,25,65,423,00 Allowed vide order under Section 143(1) 12 1988-89 36,17,624.00 Nil (not allowed) CIT(A) Rajkot-1 upheld and allowed bank's claim. Department's second appeal before Tribunal dismissed as not maintainable 13 1989-90 34,17,3 .00 Nil (not allowed) CIT(A) Rajkot-1 upheld and allowed bank's claim. Department's second appeal before Tribunal dismissed as not maintainable 14 1990-91 82,72,101.00 Nil (not allowed) CIT(A) Rajkot-1 upheld and allowed bank's claim. Departments second appeal before Tribunal dismissed as not maintainable. 15 1991-92 58,83,461.00 Nil (not allowed) bank's appeal before CIT(A), Rajkot, fully upheld and allowed. It is not known whether second appeal there-against is preferred to the Tribunal by the IT Department 16 1992-93 15,69,32,402.00 Nil (not allowed) bank's appeal fully allowed and upheld by CIT(A) Rajkot-II. Second appeal preferred by the Department to the Tribunal pending for disposal 17 1993-94 10,82,40,797.00 Nil (not allowed) bank's appeal fully allowed and upheld by CIT(A), Rajkot-II Second appeal preferred by the Department to the Tribunal pending for disposal 18 1994-95 2,63,63,000.00 Nil (not allowed) bank's appeal fully allowed and upheld by CIT(A), Rajkot-n. Second appeal preferred by the Department to the Tribunal pending for disposal 19 1995-96. 14,63,07,704.00 Nil (not allowed) bank's appeal fully allowed and upheld by CIT(A), Rajkot-II. Second appeal preferred by the Department to the Tribunal pending for disposal 20 1996-97 33,06,56,000.00 Nil (not allowed) bank's appeal fully allowed and upheld by CIT(A), Rajkot-n. Second appeal preferred by the Department to the Tribunal pending for disposal 21 1997-98 37,16,17,718.00 Appreciation taxed as such by the AO. bank's first appeal pending before CIT(A), Ahmedabad. 22 1998-99 48,27,67,914.00 Nil (not allowed) bank's appeal fully allowed and upheld by CIT(A), Rajkot-II, Second appeal preferred by the Department to the Tribunal pending for disposal. 23 1999-00 3,41,08,548.00 Nil (not allowed) bank's appeal pending with CIT(A), Ahmedabad. 24 2000-01 2,31,54,604.00 Appreciation taxed as such by the AO on protective basis 25 2001-02 1,18,11,795.00 Nil (not allowed) bank's appeal pending with CIT(A), Ahemdabad
61. From the aforesaid chart it is clear that for asst. yrs. 1985-86, 1988-89, 1989-90 and 1990-91, the second appeal filed by the Department, against the order of the CIT(A) has been dismissed by the Tribunal as not maintainable. He further submitted that the dividend from securities is assessable under Section 57 because of the specific provisions of the IT Act and not because of investments held by the assessee were not stock-in-trade. Even if the investments held by the assessee are stock-in-trade, the dividend is assessable under Section 56 and, therefore, the contention of the Departmental Representative that it is investment and no depreciation could be allowed, is uncalled for. It is further submitted that the loss calculated on the basis of market value of the securities which is recognized method of valuation of stock-in-trade at cost or market price whichever is lower and, therefore, the decision in the case of British Paints India Ltd. (supra) relied upon the assessee's counsel would be of no help to the Revenue.
62. We have heard the parties and considered their rival submissions. It is an admitted fact that the bank is required to invest and to keep invested certain specified percentage of its demand and time liabilities as prescribed by the RBI from time-to-time, in certain approved securities and, therefore, such investments in securities has to be closely and intimately connected with the business of the assessee. The issue has been concluded in favour of the assessee in earlier years and the matter has not been allowed to be proceeded further and the appeal failed for want of permission of COD. The securities are required in the normal course of banking business which requires keeping of enough cash and easily realizable securities to meet any possible demand of the depositors. They are so required as per guidelines of RBI. The Circular No. 599, dt. 24th April, 1991also declared such securities as stock-in-trade of the banks, though the later circular has left it open for the decision of the AO to decide whether they are stock-in-trade or not. The assessee is following the system of valuation regularly from asst. yr. 1977-78 and claiming depreciation in its IT return and same are being accepted by the Department--in some cases by the ITO and in some other cases by the CIT(A). Therefore, the attempt to file further appeal to the Tribunal has failed because even COD has not permitted to proceed with the matter. In these circumstances, in our opinion, the CIT(A) was justified in allowing the claim of the assessee. We accordingly reject the ground of appeal of the Revenue on this point.
63. The next dispute is with regard to disallowance of interest of Rs. 20.20 crores on the ground that the interest bearing funds have been transferred to non-business purpose. This addition is related to sham transactions and, therefore, it was disallowed by the AO. This amount related to the transactions during financial year 1991-92 wherein the bank undertook certain transactions on back to back basis. The loss on these securities has been claimed by the assessee and has been dealt with by us in the assessee's appeal aforesaid wherein we have partly allowed the claim of the assessee by holding that the securities were bought and sold by the assessee in the normal course of business and they were not tainted with any illegality. Therefore, the amount invested by the assessee in those securities could not be said to be for non-business purpose. Consequently the addition was rightly deleted by the CIT(A). In this connection we may refer to the discussion of the CIT(A) in paras 48 and 49 :
"48. The CIT(A) in his order for asst. yrs. 1992-93 and 1993-94 has held that the AO neither made any inquiry nor cited evidence to substantiate his conclusion that the appellant-bank was responsible for diverting funds of the bank to the account of Shri Harshad S. Mehta even in respect of the transactions of the SBI. The AO has not challenged the claim of the appellant that the cheques issued by the appellant were non-negotiable account payee cheques favouring SBI. When the scam was noticed, the bank after discovery of these facts set up an internal inquiry, took up the matter with SBI, lodged FIR with CBI and filed a civil suit for recovery from both Shri H.S. Mehta and SBI. The civil suit included claim of loss of interest credited to the account of Shri H.S. Mehta. It was also held by the CIT(A) that out of five transactions, in the case of transaction with NHB, the money was in fact credited in the account of NHB. He has also made reference to the Jankiraman Committee report which says that at the relevant time large public sector undertaking having investible funds, and deprived of Budgetary support, were keen to augment their incomes, and as stock markets were booming public sector banks, whose yield on investment in Government securities was much below prevailing market rates on long-term debt instruments, were presented with arbitrage opportunities, which they exploited by trading in securities though the mechanism of ready forward transactions, often circumventing regulations regarding issue of BRs, etc. The dominant intention behind trading in securities through ready forward transactions was to boost the profits of the banks. It is another matter that in the process some of these banks left themselves open to fraud by unscrupulous brokers and employees. This was at worst, an incidental business hazard, but cannot become a non-business activity. The CIT(A) in view of this observation, held that those transactions in respect of which the appellant-bank had not received BRs from counter party banks cannot be denied the status of normal course business. He further held that there is no loss of interest to the bank because its civil suits before the Special Court against Shri H.S. Mehta and SBI also include the interest element on the funds misappropriated by Shri H.S. Mehta and these claims are still pending before the Special Court. The CIT(A) also held that the AO failed to establish any direct nexus between the appellant's borrowed funds and the funds utilized in these five transactions. It was also held by him in his order that the appellant-bank was having interest-free deposits of Rs. 221 crores and Rs. 292 crores in its current deposit accounts besides share capital and reserve account. The CIT(A) accepted the contentions of the appellant on the ground that these transactions were entered into in the normal course of business and also the AO had not established any nexus between the funds borrowed by the appellant and the funds utilized for the security transactions.
49. The facts of the case in this year are not different from earlier years. The disallowances appear to have been made on the facts narrated by the AO in asst. yr. 1992-93. Therefore, having regard to the reasoning given by any predecessor in allowing the appeal of the appellant on this issue. I also allow the appeal and direct the AO not to disallow the interest of Rs. 20.20 crores as made by him."
64. We are in agreement with the CIT(A) and more particularly for the reasons given for earlier part of our order. The ground is accordingly rejected.
65. The cross-objection is filed by the Revenue against the order of the CIT(A) after a long delay of more than three years. The reason that it was filed later on advice, cannot in our opinion be a ground for condoning the delay. In any case no separate permission of COD has been taken by the Revenue for the cross-objection on this issue. That would also be a ground for not allowing the cross-objection to be proceeded with. Be that as it may, we have already held while dealing with the assessee's appeal that the transactions are not speculative nor they are tainted with any illegality which could be disallowed by virtue of Explanation below Section 73(1) of the Act. It is accordingly rejected.
66. In the result, the assessee's appeal is partly allowed. The appeal and cross-objection filed by Revenue are dismissed.