Abn Amro Bank NV Vs Joint Commissioner of Income Tax On 17 June 2005

Abn Amro Bank Nv vs Joint Commissioner Of Income Tax on 17 June, 2005
Income Tax Appellate Tribunal - Kolkata

Equivalent citations: (2005) 96 TTJ Kol 1041
Bench: R Garg, M Bakshi, S Vice, P Kumar
JUDGMENT M.A. Bakshi, Vice President
1. These 4 appeals of the assessee relating to asst. yrs. 1992-93, 1993-94, 1994-95 and 1995-96
involving some common issues are disposed of by this consolidated order.
2. The appellant is a branch of ABN AMRO Bank NV incorporated in Netherlands, with limited
liability having its original office at Singapore. In India, the appellant is registered as a scheduled
bank in terms of Schedule II of the Reserve Bank of India (RBI) Act, 1934. The main activities of the
appellant in India comprise of accepting deposits, giving loans, discounting/collection of bills, issue
of letters of credit/guarantees, executing forward transaction in foreign currencies for
importers/exporters, money market lending/borrowings, investment in securities, etc., in terms of
the existing rules and regulations governing such transactions. In the years under consideration, the
appellant had three branches in India at Mumbai, Kolkata and New Delhi. There is an agreement
between India and Netherlands for Avoidance of Double Taxation and Prevention of Fiscal Evasion
(hereinafter called as DTAA). Article 7 of the DTAA provides for taxation in India of a foreign
enterprise in respect of profits attributable to its permanent establishment (hereinafter referred to
as PE) in India. Since the ABN AMRO Bank NV was having a PE in India, the appellant is liable to
tax in respect of income attributable to the PE.
3. One of the common issues involved in all the four assessment years is relating to deduction on
account of remuneration paid to the expatriate employees outside India for the services rendered in
India. Tax deducted at source and paid in previous year relevant to asst. yr. 1995-96 is also claimed
as a deduction in the respective assessment years. Interest under Section 201(1A) for delayed
payment of TDS paid in 1995-96 is subject-matter of dispute in the appeal for asst. yr. 1995-96 only.
By way of additional ground of appeal and as an alternative claim, the appellant has claimed
deduction of entire remuneration and TDS pertaining to asst. yrs. 1990-91 to 1995-96 in asst. yr.
1995-96.
4. The relevant grounds of appeal for the respective assessment years are reproduced hereunder :
Asst. yr. 1992-93 :
"1. That, on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming
the disallowance of Rs. 23,87,325, being the offshore remuneration paid by the head office in the
current financial year to the expatriate employees rendering services in India, on the basis of the
reasons stated in his order for the asst. yr. 1995-96, without considering the submissions made by
the appellant.
(2) That, on the facts and in the circumstances of the case, the learned CIT(A), on the basis of the
reasons stated in his earlier order for the asst. yr. 1995-96, erred in confirming the disallowance of
Indian Kanoon - http://indiankanoon.org/doc/1170182/ 1

Rs. 29,86,963, being that part of the remuneration of the expatriate employees rendering service in
India paid by the appellant and representing the tax deducted at source after grossing up the
expatriate's total income taxable in India as per the terms of employment."
Asst yr. 1993-94 :
the disallowance of Rs. 61,90,206 under Section 40(a)(i) of the IT Act, 1961 (the Act), representing
offshore remuneration paid by the head office to the expatriate employees rendering services in
India.
2. That, on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the
disallowance of Rs. 49,44,312 under Section 40(a)(i) of the Act, representing that part of the
remuneration of the expatriate employees rendering service in India paid by the appellant and
representing the tax deducted at source after grossing up the expatriate's total income taxable in
India as per the terms of employment."
Asst. yr. 1994-95 :
the disallowance of Rs. 47,16,025, being the offshore remuneration paid by the head office in the
current financial year to the expatriate employees rendering services in India, on the basis of the
reasons stated in his order for the asst. yr. 1996-97, without controverting the submissions made by
the appellant.
2. That, on the facts and in the circumstances of the case, the learned CIT(A), on the basis of the
reasons stated in his earlier order for the asst. yr. 1996-97, erred in confirming the disallowance of
Rs. 35,86,781, being that part of the remuneration of the expatriate employees rendering service in
India paid by the appellant and representing the tax deducted at source after grossing up the
expatriate's total income taxable in India as per the terms of employment."
Asst. yr. 1995-96 :
"On the facts and in the circumstances of the case the CIT(A) erred in confirming disallowance of
Rs. 89,04,276 being the remuneration, tax and interest paid in the current financial year in respect
of the expatriate employees. The CIT(A) erred in not appreciating that all the details and
explanations called for by the AO had duly been filed during the course of the assessment
proceedings, but, which were not taken note of by the AO in his assessment order. The CIT(A),
therefore, erred in not giving cognizance to the appellant's submissions made during the course of
the assessment while adjudicating upon this issue.
The CIT(A) erred in rejecting the alternative claim made by the appellant on deduction of the entire
amount of Rs. 2,06,54,499, being tax and interest in respect of offshore remuneration of the
expatriate employees for all the assessment years including the current assessment year paid in the

current assessment year. The CIT(A) erred in holding that the said expenditure is not a revenue
expenditure of the appellant on the ground that the taxes have been paid purely on behalf of the
expatriate employees and if there is any liability for payment of the same, it rests on those expatriate
employees. The CIT(A) failed to appreciate that, once the appellant undertook to discharge the tax
liability of the expatriates, it became the obligation of the appellant to pay the necessary taxes to the
Government, much in the same way as is the case where an employer undertakes to pay salary net of
tax to an employee. The CIT(A), therefore, should have allowed the entire amount of expenditure as
revenue expenditure of the appellant."
5. Following additional ground of appeal has been raised for asst. yr. 1995-96 :
"In determining the business profits of the appellant, the sum of Rs. 1,45,31,635 being the offshore
remuneration paid by the appellant to its expatriate employees in the asst. yrs. 1990-91 to 1994-95 is
(in addition to the sum of Rs. 2,06,54,499, being the tax and interest thereon, already claimed) also
allowable as a deduction in the asst. yr. 1995-96, being the year in which the appellant paid the taxes
on the said offshore remuneration.
In the asst. yr. 1995-96, the appellant is entitled to a deduction for the aggregate amount of Rs.
4,04,21,356, (i.e., Rs. 1,97,66,857 on account of the offshore remuneration of expatriate employees
and Rs. 2,06,54,499 on account of tax and interest thereon)."
Since the additional ground "of appeal is purely legal in nature and no investigation of facts is
required, we admit the same for consideration.
6. We now proceed to dispose of the above grounds simultaneously. Under Section 192 of the IT Act
1961, the assessee was required to deduct tax from the salary paid to their expatriate employees.
Some of the expatriate employees having rendered services in India, had received their
remuneration outside India. It is not disputed that the income derived by such expatriate employees
from the services rendered in India is liable to tax in India notwithstanding the fact that they
received their remuneration outside India. The assessee had failed to deduct tax from the
remuneration paid to the said expatriate employees. Whereas the remuneration paid to the
expatriate employees in India had been taken into account in the books of account of the assessee
relevant to the PE, the remuneration paid to the offshore employees who had rendered services in
India but whose remuneration was paid abroad, had been debited in the books of account of head
office. As pointed out earlier, the assessee-bank had failed to deduct taxes under Section 192 in
respect of remuneration of such employees paid outside India for services rendered in India. The
CBDT, in order to encourage the compliance in respect of TDS, issued Circular No. 685, dt. 20th
June, 1994 providing exemption from penalty and prosecution to those employers who paid the tax
deducted/deductible at source by the specified date in the circular. The said circular is quoted for
ready reference :
"1. It has come to the notice of the Board that some of the employers, including foreign companies
operating in India, have been defaulting in deducting tax at source as required under Section 192, on
the salaries and allowances paid abroad or perquisites provided abroad, to their employees for

services rendered in India. In some cases, tax might have been deducted at source, but not remitted
to the Government. All payments and perquisites to employees for services rendered in India are
taxable in India irrespective of the place where the payment occurs. The employers are, therefore,
liable to deduct tax at source even on payment of salary, allowance and perquisites paid or provided
abroad to their employees who have rendered service in India. They are also required to remit such
deducted tax to the Government. Failure to comply with these requirements would render the
employer an assessee-in-default and would attract interest under Section 201(1A). Penalties under
Sections 221 (assessee-in-default) and 271C (failure to deduct tax) are then leviable and prosecution
proceedings under Section 276B can also be initiated in such cases.
2. To encourage immediate voluntary compliance, the Board has decided that proceedings under
Sections 221 and 271C for levy of penalties and proceedings under Section 276B for prosecution
need not be initiated in cases where an employer voluntarily comes forward and pays the whole of
the tax due under Section 192, along with interest liability under Section 201(1A) on or before 31st
July, 1994.
3. Employers (Indian and foreign), who committed default in the past are advised to make use of
this opportunity to pay up arrears of TDS (tax deductible at source) together with interest on or
before 31st July, 1994 and avoid penalty and prosecution proceedings."
This was followed by another circular being Circular No. 686, dt. 12th Aug., 1994, which reads as
under :
"1. Reference is invited to Board's Circular No. 685, dt. 20th June, 1994 (File No. 275/69/94-ITB),
providing for non-initiation of proceedings under Section 221/276B/271C of the IT Act, 1961, in
respect of employers defaulting in deducting tax at source on the salaries and allowances paid
abroad or perquisites provided abroad to their employees for services rendered in India. Doubts
have been raised in some quarters as to whether, due to the disclosure of the excess salary payments
by the employers, any consequential action will be taken in the hands of the employees.
2. The Board has considered the matter. The spirit behind issue of Circular No. 685, dt. 20th June,
1994, was to encourage immediate voluntary compliance on the part of the employers defaulting in
tax deduction. In order that this intention is fully achieved, the Board has decided that the
assessments of the employees, in respect of whom payments of short deduction and interest thereon
are made by the employers in pursuance of Circular No. 685, dt. 20th June, 1994, will not be
reopened or otherwise disturbed merely on account of the excess salary payments now disclosed by
the employers."
7. The assessee took advantage of the circular and paid a sum of Rs. 2,06,54,499 detailed below as
tax deducted at source and interest under Section 201(1A) for asst. yrs. 1990-91 to 1995-96. The net
offshore remuneration in respect of expatriate employees is also indicated in the statement as
under:
Details Asst. yr. Asst yr. Asst yr. Asst yr. Asst. yr. Asst yr. Tot
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96

Tax (As TDS 3,61,635 10,54,924 29,86,963 49,44,312 35,86,781 36,15,895 1,65,50
arrears)
Int.u/s. 201 2,45,859 5,80,300 12,19,063 13,24,577 6,81,031 53,159 41,03
_________ _________ __________ __________ _________ _________ ______
Sub Total 6,07,494 16,35,224 42,06,026 62,68,889 42,67,812 36,69,054 2,06,5
Net offshore 3,27,276 9,10,803 23,87,325 61,90,206 47,16,025 52,35,222 1,97,6

remuneration paid
in Netherlands
__________ __________ _________ __________ _________ _________ ______
Total 9,34,770 25,46,027 65,93,351 124,59,095 89,83,837 89,04,276 4,04,2
8. For asst. yr. 1995-96, the assessee had charged the total amount of Rs. 2,06,54,499 t
9. For asst. yrs. 1992-93 to 1994-95, the appellant had not made any claim for remuneration or tax
component in the returns of income. So, however, for asst. yr. 1992-93, the assessee made claim
before the AO in regard to the remuneration and tax deducted at source in respect of expatriate
employees having rendered services in India for which the payment had been made abroad, vide
letter dt. 13th Jan., 1995. The AO rejected the claim while making the assessment. The relevant
portion of the assessment order is reproduced hereunder :
"Our head office has paid remuneration to expatriates offshore who have rendered services in our
branches in India. Such remuneration was not debited in the books of account of the branch. We
had not claimed the deduction of such remuneration to expatriates offshore in our original
computation of total income.
We wish to submit that such remuneration to expatriates offshore is expenditure incurred wholly
and exclusively for our business purposes in India and as such is allowable deduction from our
taxable income in India. We wish to further submit that the fact that such remuneration was not
debited in our books of account in India, would not come in the way of our claiming the said
deduction. In this connection we place reliance on the Supreme Court decision in the case of
Kedarnath Jute Mfg. Co. Ltd. v. CIT .
Accordingly, we now wish to claim the said deduction to the extent of amount of such remuneration
pertaining to fiscal year 1991-92 (relevant to the asst. yr. 1992-93) amounting to Rs. 23,87,325.
(iii) Tax on remuneration paid to expatriates offshore :
The assessee has further stated in the said letter of 13th January as under :
We have paid tax in fiscal year 1994-95 on remuneration to expatriates offshore pertaining to the
period under the Amnesty Scheme announced by the CBDT vide Circular No. 685, dt. 17/20th June,
1994.

To the extent such tax pertained to fiscal year 1991-92 (relevant to. asst. yr. 1992-93) we now wish to
claim the deduction of tax paid by us in fiscal year 1994-95 in pursuance of the Amnesty Scheme
amounting to Rs. 29,86,963.
The break-up of the figures filed by the assessee are as under :
Name of the Net offshore Additional tax Total offshore Tax thereon
expatriates remuneration borne by the remuneration (Rs.)
offshore staff (Rs.) bank (Rs.) (Rs.)
Mr. Moulder 14,00,121 17,81,972 31,82,093 17,81,972

Mr. Merckx 7,98,546 10,16,333 18,14,879 10,16,333
Mr. Koster 1,88,658 1,88,658 3,77,316 1,88,658
___________ ____________ ___________ __________
23,87,325 29,86,953 53,74,288 29,86,963"
10. For asst. yr. 1993-94, the assessee had filed a letter dt. 21st April, 1995, during
"7. By a letter dt. 21st April, 1995, the assessee-bank has claimed the following in the
(i) Remuneration paid to expatriate offshore Rs. 61,90,206
'Our head office has paid remuneration to expatriates offshore who had rendered services
We wish to submit that such remuneration to expatriates offshore is expenditure incurred wholly
and exclusively for our business purposes in India and as such is allowable deduction from our
taxable income in India. We wish to further submit that the fact that such remuneration was not
debited in our books of account in India, would not come in the way of our claiming the said
deduction. In this connection, we place reliance on the Supreme Court decision in the case of
Kedarnath Jute Mfg. Co. Ltd. v. CIT . Accordingly, we have now claimed the said deduction in the
revised computation of total income to the extent of amount of such remuneration pertaining to
fiscal year 1992-93 (relevant to the asst. yr. 1993-94) amounting to Rs. 23,87,325.'
(ii) Additional remuneration paid to expatriates towards taxes--Rs. 49,44,312 :
The assessee has further stated in the said letter dt. 21st April, 1995 that--
In fiscal year 1994-95, additional payment for the period 1989-90 to 1994-95 were made to
expatriates to cover the tax payable by them under Amnesty Scheme introduced by the CBDT vide
Circular No. 685, dt. 17/20th June, 1994. Payments to the extent they relate to the previous year
relevant to this assessment year are now claimed as a deduction. We have accordingly, revised the

computation of total income.' I have carefully considered the submissions of the assessee. I,
however, find that the facts of the case relied upon by the Authorised Representative are not all for
the present case and as such the decision in the case of Kedarnath Jute Manufacturing Co. Ltd.
(supra) is not applicable to this case. Salary was paid to the expatriates rendered services in India by
the head office of the bank and the same has not been debited to the accounts of the bank in India.
In the circumstances, the claim for deduction of Rs. 61,90,206 cannot be accepted. As regards the
claim for deduction of Rs. 49,44,312 being tax borne by the bank as salary paid to the expatriates
offshore, it is to be noted that the payments have been made only in fiscal year 1994-95. In the
circumstances, the assessee's claim for deduction of Rs. 49,44,312 in the assessment for the asst. yr.
1993-94 cannot be entertained.
Hence, the assessee's claim for deduction of Rs. 61,90,206 on account of salary paid to expatriates
offshore and Rs. 49,44,312 being tax paid on salaries to expatriates are disallowed in the assessment
year but will be considered in the assessment for the asst. yr. 1995-96 relevant to the fiscal year
1994-95."
11. For asst. yr. 1994-95, the assessee vide letter dt. 8th Oct., 1996, claimed a deduction in respect of
offshore remuneration and the tax paid in respect of such remuneration. The claim of the assessee
was rejected by the AO vide para 8 of the assessment order, which is reproduced hereunder :
"8. Offshore payments (gross) made to expats : Rs. 83,02,812 :
The assessee-bank vide its letter of 8th Oct., 1996 has given the break-up of the above figure which
is as under :
(i) Net offshore remuneration paid by the head office in Amsterdam 47,16,025
(ii) Tax perquisite--being tax borne by the bank in India 36,86,781
___________
84,02.806
___________
This aspect has been discussed in detail by my predecessor in his order dt. 25th March,
12. For asst. yr. 1995-96, in the assessment order, the AO has mentioned that the assess
"(i) TDS paid for earlier years is not covered under Section 43B as it is not regular pa
(ii) Remuneration and TDS paid by the assessee for the earlier years have not been inclu
(iii) Interest on TDS is not a business expenditure and it does not pertain to the year

13. In regard to the disallowance of Rs. 89,04,296 pertaining to the asst. yr. 1995-96,
"(a) Assessee has not given detail as to how much amount out of such remuneration has al
(b) Assessee has not given details of services rendered, place of services rendered and
(c) The said remuneration has not been included in the income of concerned employees for
(d) The payment has been made under Amnesty Scheme and it is not a regular payment. Ther
(e) Assessee is allowed head office expenses @ 5 per cent of taxable income in India. Th
The AO has further observed in the assessment order as under :

"The above said reasons for not allowing offshore expatriates remuneration applies to i
14. The CIT(A) has confirmed the disallowance. The relevant portion of the order being p
"8. Ground No. 4(a) of appeal relates to disallowance of a sum of Rs. 89,04,276 being th
(a) the payment has been made under Amnesty Scheme and it is not a regular payment, ther
(b) the said remuneration has not been included in the income of concerned employees for
(c) Assessee has not given details of services rendered, place of services rendered and
(d) Assessee has not given detail as to how much amount out of such remuneration has alr
(e) Assessee is allowed head office expenses @ 5 per cent of taxable income in India. Th
9. Keeping in view the detailed reasons given by the AO and also after carefully examini
10. Ground No. 4(b) of appeal relates to the AO rejecting the claim of the appellant for deduction of
the entire amount of Rs. 2,06,54,499 being tax and interest on offshore remuneration of the
expatriate employees for all the assessment years including the current assessment year paid in the
current assessment year. The facts are that CBDT had launched a scheme whereby defaulters of TDS
in terms of salary and remuneration paid to expatriate employees abroad tax could be paid by the

employer. The appellant-company took advantage of this scheme and paid tax and interest due
thereupon for several assessment years with respect to payment made to its expatriate employees to
save itself from the rigour of prosecution, although in other sense of the term, these taxes were due
and collectable from the expatriate employees from whom the appellant-company in earlier years
had failed to collect taxes in accordance with the Indian law and pay the same. Even now, I will say
that these taxes have been paid purely on behalf of the expatriate employees and if there is any
liability for payment of the same to the bank it rests on those expatriate employees. The appellant
cannot say that this should be treated as revenue expenditure. Therefore for the detailed reasons
given above, I am of the opinion that the taxes paid by the appellant-company because of its own
fault in not collecting taxes from its expatriate employees in time and depositing the same with the
Government of India cannot be allowed as a revenue expenditure. The AO was perfectly justified in
disallowing the same and, therefore, the addition of Rs. 2,06,54,499 is sustained."
15. The learned counsel for the assessee contended that the assessee is entitled to deduction on
account of remuneration paid to expatriate employees outside India for the services rendered in
India. Since the expenditure is directly related to PE in India, deduction is allowable as expenses
pertaining to the PE. It was pointed out that the salary paid to the employees does not fall within the
ambit of Section 44C as head office expenses. The learned counsel pointed out that the 'head office
expenditure' is defined to mean executive and general administration expenditure incurred by the
assessee outside India, including specified expenses referred to in the definition under Expln. (iv) to
Section 44C of the IT Act. It was further pointed out that similar issue had come up for
consideration of the Tribunal in the assessee's own case for the asst. yr. 1996-97 in ITA No.
692/Cal/2000, dt. 30th March, 2001 and the same has been decided in favour of the assessee. It
was, accordingly, pleaded that the deduction may be allowed to the assessee either in the year to
which the remuneration, etc., pertains to or in the year the tax has been deducted and paid to the
Government of India. In this connection our attention was invited to Section 40(a) which prohibits
the allowance on account of fee for technical services or other sums chargeable which is payable
outside India on which tax has not been paid or deducted under Chapter XVII-B. The learned
counsel pointed out that the proviso to the said section provides for a deduction in the year in which
such tax has been paid or deducted. It was," accordingly, pleaded that the deduction for the entire
amount may be allowed to the assessee in the asst. yr. 1995-96 as the tax has been deducted and
paid in the previous year relevant to the said assessment year.
16. The learned Departmental Representative, on the other hand, relied upon the orders of the
Revenue authorities. Our attention was invited particularly to the reasons given by the AO in asst.
yr. 1995-96 for making the disallowance.
17. We have given our careful consideration to the rival contentions. We propose to consider the
dispute separately under three heads, viz., (a) remuneration; (b) tax deducted at source; and (3)
interest. First we take up the issue relating to remuneration.
Remuneration :

18. The assessee had failed to deduct tax in respect of the remuneration paid to the expatriate
employees outside India and after taking advantage of the amnesty granted by the Government of
India in respect of penalty and prosecution, had deposited the tax deductible from such expatriate
employees. For asst. yrs. 1992-93 to 1994-95, no deduction, either in respect of remuneration or tax
payment, was claimed in the original returns. So, however, after having paid the tax, deduction was
claimed in course of the assessment proceedings for the respective assessment years. Article 7 of the
DTAA between India and Netherlands provides for taxation of income of the PE. The said article
also provides certain guidelines for determination of the profits of PE for the purpose of taxation in
India. It will be useful to reproduce paras 2 and 3(a) of Article 7 of the DTAA :
"2. Subject to the provisions of para 3, where an enterprise of one of the States carries on business in
the other State through a permanent establishment situated therein, there shall in each State be
attributed to that permanent establishment the profits which it might be expected to make if it were
a distinct and separate enterprise engaged in the same or similar activities under the same or similar
conditions and dealing wholly independently with the enterprise of which it is permanent
establishment. In any case, where the correct amount of profits attributable to a permanent
establishment is incapable of determination or the determination thereof presents exceptional
difficulties, the profits attributable to the permanent establishment may be estimated on the basis of
an apportionment of the total profits of the enterprise to its various parts, provided, however, that
the result shall be in accordance with the principles contained in this article.
3.(a) In determining the profits of a permanent establishment, there shall be allowed as deduction,
expenses which are incurred for the purposes of the permanent establishment, including executive
and general administrative expenses so incurred, whether in the State in which the permanent
establishment is situated or elsewhere, in accordance with the provisions of and subject to the
limitations of the taxation laws of that State. Provided that where the law of the State in which the
permanent establishment is situated imposes a restriction on the amount of the executive and
general administrative expenses which may be allowed, and that restriction is relaxed or overridden
by any Convention between that State and a third State which enters into force after the date of
entry into force of this Convention, the competent authority of that State shall notify the competent
authority of the other State of the terms of the corresponding paragraph in the Convention with that
third State immediately after the entry into force of that Convention and, if the competent authority
of the other State or requests, the provision of this sub-para shall be amended by protocol to reflect
such terms."
19. It is evident from above that para 2 of Article 7 provides that where an enterprise of one of the
States carries on business in the other State through a PE situated therein, there shall in each State
be attributed to that PE the profits which it might be expected to make if it were a distinct and
separate enterprise engaged in the same or similar activities under the same or similar conditions
and dealing wholly independently with the enterprise of which it is PE.
20. Para 3(a) of Article 7 provides that in determining the profits of a PE, there shall be allowed as
deductions, expenses which are incurred for the purposes of the PE including executive and general
administrative expenses so incurred, whether in the State in which the PE is situated or elsewhere,

in accordance with the provisions of and subject to the limitations of the taxation laws of that State.
Thus, it is evident from the above quoted article of the DTAA that any expenditure which is
attributable to PE is to be taken into consideration for the purpose of computation of profits of the
PE. We have, therefore, no doubt in our minds that the assessee is entitled to deduction in respect of
the remuneration paid to the expatriate employees having rendered services in India
notwithstanding the fact that the payment for such remuneration was paid to them outside India.
This view has also been taken by the co-ordinate Bench in the assessee's own case for the asst. yr.
1996-97 and the issue has been decided vide paras 12 and 13 of the order in ITA No. 692/Cal/2000,
dt. 30th March, 2001. The relevant portion of the said order of the Tribunal is reproduced
hereunder :
"12. When the undisputed facts are that the employees concerned rendered wholetime services in
India throughout the accounting year under consideration, any salary paid to them, whatever the
same may be, will have to be allowed as expenses pertaining to the business of the assessee in India.
It is also the case of the assessee that even taxes were deducted at source from those components of
salary payment to the three expatriate employees in Netherlands and that the said taxes were duly
deposited with the Government of India. If that be the case, we do not find any reason to disallow
the claim of the assessee. In principle, therefore, we hold that the claim of the assessee towards
offshore payment to the expatriate employees in India will have to be allowed.
However, it is found that the assessee charged Rs. 2.55 crores as head office charges on accrual basis
in the books of account which was ultimately allowed in the assessment under Section 44C. The
assessee also claimed in ground No. 7(b), before the CIT(A), alternatively that the remuneration to
the expatriate employees rendering services in India should be included with the head office
expenses for the purpose of allowing deduction under Section 44C. The CIT(A) has accepted the
contention of the assessee and directed the AO to include the amount, if not already included, for
the purpose of allowing deduction under Section 44C. In such a case, a separate claim of the
assessee perhaps in respect of the same expenditure is certainly unwarranted. Even the learned
counsel for the assessee also did not draw our attention to the allowance of the same amount under
Section 44C as directed by the CIT(A). We feel that although the amount under consideration is
required to be allowed in principle, the said allowance should, however, be allowed only once, i.e.,
either by way of salary payment to the expatriate employees or as a part of head office expenses
under Section 44C. Since we have held that the amount should be allowed as salary payment to the
expatriate employees, we specifically direct that the same amount should not be allowed as a part of
head office expenses under Section 44C. The direction given by the CIT(A) in this regard at para 8 of
his appellate order is, therefore, reversed as a corollary to our order with regard to the ground taken
up by the assessee in this regard."
21. It is evident from the above order of the Tribunal that the claim of the assessee in regard to the
payment of remuneration to the expatriate employees rendering whole time services in India
throughout the accounting year has been accepted in principle as allowable deduction in computing
the profits of the PE. This is, however, with the rider that such payment is not taken into account in
working out the deduction under Section 44C. We adopt the above direction in regard to the
remuneration paid to the expatriate employees for the whole time services rendered in India, subject

to further rider placed under provisions of Section 40(a) of the IT Act, 1961. We direct the AO to
consider the claim of the assessee for asst. yrs. 1992-93, 1993-94 and 1994-95 as under :
In principle, the remuneration paid to expatriate employees for the services rendered in India is to
be accepted as allowable deduction in computing the profits attributable to PE. So, however, the AO
is required to verify that the assessee has not taken such remuneration into account in working out
the head office expenses under Section 44C. Section 44C reads as under :
"44C. Notwithstanding anything to the contrary contained in Sections 28 to 43A, in the case of an
assessee, being a non-resident, no allowance shall be made, in computing the income chargeable
under the head "Profits and gains of business or profession", in respect of so much of the
expenditure in the nature of head office expenditure as is in excess of the amount computed as
hereunder, namely :
(a) an amount equal to five per cent of the adjusted total income; or
(b) ...
(c) the amount of so much of the expenditure in the nature of head office expenditure incurred by
the assessee as is attributable to the business or profession of the assessee in India, whichever is the
least."
Once the AO is satisfied that the assessee is entitled to deduction in respect of remuneration, the
claim of the assessee shall have to be dealt with in accordance with Section 40. Relevant portion of
Section 40(a) is reproduced hereunder :
"40. Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not
be deducted in computing the income chargeable under the head "Profits and gains of business or
profession",
(a) in the case of any assessee--
(i) any interest (not being interest on a loan issued for public subscription before the 1st day of April,
1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable
outside India, on which tax has not been paid or deducted under Chapter XVII-B :
Provided that, where in respect of any such sum, tax has been paid or deducted under Chapter
XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income
of the previous year in which such tax has been paid or deducted.
Explanation--For the purposes of this sub-clause,--
(A) "royalty" shall have the same meaning as in Expln. 2 to Clause (vi) of Sub-section (1) of Section
9;

(B) "fees for technical services" shall have the same meaning as in Expln. 2 to Clause (vii) of
Sub-section (1) of Section 9."
It may be pointed but that Section 44C provides for restriction for the allowance of head office
expenses. The maximum deduction permissible is 5 per cent of the adjusted total income. The AO
has allowed straightway deduction of 5 per cent and there is no reference of the computation of head
office expenses which presumably are more than 5 per cent of the adjusted total income. The AO
shall accordingly, verify the claim in accordance with the provisions of Section 44C for taking a
decision in the light of the directions of the Tribunal in assessee's own case for asst. yr. 1996-97
(supra) which we have adopted for the years under appeal.
22. The aforementioned direction is valid for the offshore remuneration pertaining to asst. yrs.
1992-93, 1993-94, 1994-95 and 1995-96. In case after verification the AO comes to the conclusion
that the assessee has not taken the amount of remuneration into consideration in working out the
deduction under Section 44C, the claim would in principle be permissible in the respective
assessment years. So, however, deduction has got to be allowed, as already pointed out, in
accordance with Section 40(a) read with proviso. The tax not having been deducted at source in the
respective assessment years but having been paid in asst. yr. 1995-96, the deduction in respect of
remuneration is allowable in the year of payment, i.e., asst. yr. 1995-96. This takes care of part of the
additional ground raised by the assessee before us in asst. yr. 1995-96, whereby the deduction in
respect of the remuneration and tax component pertaining to asst. yrs. 1992-93 to 1994-95 is
claimed as deduction in asst. yr. 1995-96. For asst. yr. 1995-96, tax has been paid by the assessee in
the same assessment year. Therefore, the prohibition under Section 40(a) is not attracted. The claim
of the assessee shall be considered accordingly. We direct accordingly.
23. Tax deducted at source in respect of remuneration paid outside India to the expatriate
employees :
As pointed out earlier, the assessee had neither deducted nor paid any tax in respect of the
remuneration paid to the expatriate employees. It is the claim of the assessee that expatriate
employees are paid remuneration net of taxes all over the world. The assessee has taken into
account the tax perquisite while working out the tax deductible in respect of remuneration paid to
expatriate employees. In asst. yr. 1994-95 in the written submissions filed before the CIT(A),
reproduced by him in the appellate order, we find a reference to the policy of the assessee in regard
to the payment of remuneration to its employees working in all branches around the world. Since it
is relevant for deciding the issue on hand, it will be worthwhile to reproduce the same :
"For the year under consideration the appellant paid Rs. 35,86,781 (Pl. refer attachment 1 for
details) as the tax deductible at source from the total remuneration of the expatriate employees
taxable in India under the Amnesty Scheme announced by the CBDT vide Circular No. 685, dt.
17/20th June, 1994. This amount has been separately claimed as deductible expenses vide letter
filed in the course of assessment. A brief background of the appellant's policy in regard to taxation of
expatriate employee's income is given hereunder :

Expatriate employees all over the world cannot be transferred from one country to another country
if there is not a continuity and consistency in their remuneration. Therefore, the bank has a
worldwide salary policy for its expatriate staff. This policy is laid down in the Bank's Guide
Expatriate Staff and Guide International Career Bankers.
'Guide Expatriate Staff'--Principle Expatriate employees all over the world cannot be transferred
from one country to another if there is not a certain continuity and consistency in their
remuneration. Therefore, the bank has a worldwide salary policy for its expatriate staff. In order to
ensure that changes in local taxes and social security regulations do not influence the application of
this policy, a net salary system is effective for all expatriates.
Net salary package--The net salary allowance and benefits to which the employees is entitled are
determined by head office. Both the expatriate staff member and the local management will be duly
informed by International Human Resources of the actual amounts to be paid.
Gross up : Once an employee's net salary, allowance and benefits are determined, his/her gross
income for (a part of) the current fiscal year should be calculated by or in consultation with the
bank's external tax adviser.
Payment of taxes and social security Taxes and social security premiums (employer's as well as
employee's share) should, if possible be paid by the bank direct to the respective authorities as soon
as these are due.
Guide International Career Bankers (ICB) Expatriate salary--System--General.
In order to ensure that changes in local taxes and social security regulations do not influence the
application of this policy a net salary system is effective for all ICBs.
The net base salary is defined as a base salary less tax, social security, schooling and housing
expenses. It includes typical expatriate allowances.
Net Guarantee/Gross up The ICB's salary is a net salary which means that tax, social security
premiums, etc., related to the employment income will be for account of the bank. Exception is
made for the Line of Business Bonus. Tax and social security premiums from other personal income
are not for account of the bank.
We, thus, submit that it is the bank's responsibility and obligation to bear the Indian taxes on
offshore remuneration of expatriate employees rendering services in India.
In the computation of remuneration and tax of the expatriate employees (for the purpose of
deduction of tax at source) apart from salary also included is the local taxable remuneration being
inter alia the perquisite value on account of rent-free accommodation, utilities and the additional
remuneration/benefit of the tax borne. In effect, the total taxable remuneration is thus increased/
grossed up to include the tax deductible on the offshore remuneration. This methodology of

increasing/grossing up the amount of tax has been done in accordance with the provisions of
Section 195A of the Act. The amount by which the income is thus grossed up is in the nature of a
taxable perquisite under Section 17(2) in the hands of the employee and thereby an allowable
expenditure in the hands of the appellant.
To summarise we wish to state as under with regard to the local remuneration and perquisites.
Without prejudice to our contention that offshore remuneration is an allowable deduction, we wish
to distinguish the fact that the local remuneration paid to the expatriate employees stands on a
completely different footing as compared to the offshore remuneration.
The local remuneration is paid in India.
The tax borne by the appellant on the offshore remuneration is part and parcel of the local
remuneration and is grossed up for the purpose of calculation of taxable income. In fact, the tax on
the total income is only a measure for calculating the additional remuneration/benefit for inclusion
in the total income as such the result (is the additional remuneration) does not partake the character
of tax. Reference is drawn to the Supreme Court judgment in the case of Senairam Doongarmall v.
CIT .
From the above reasons the local remuneration (which includes, inter alia, the gross up of the tax) is
an allowable expense. We enclose a copy of letter from International Human Resource Department
of the bank at Amsterdam confirming that the tax in respect of the offshore remuneration payable to
the expatriate employees is to be borne by the bank.
In view of the above submission made we urge that the claim of the appellant for Rs. 35,86,781 on
account of the local remuneration being the tax paid in India on the expatriate employees taxable
income should be allowed as deductible expense."
24. It is evident from above that the salary paid to the expatriate employees is net of taxes. The
assessee had neither paid nor deducted taxes in asst. yrs. 1992-93 to 1994-95. However, in asst. yr.
1995-96, the assessee has paid the tax deductible at source. Therefore, in principle the assessee
would be entitled to deduction in respect of the tax component of the salary also if the salary is
found to be deductible as per the directions of the Tribunal for asst. yr. 1996-97 (supra), which has
also been adopted by us. So, however, no deduction will be permissible in asst. yrs. 1992-93 to
1994-95 by operation of Section 40(a)(i) of the IT Act, 1961. The claim for the said assessment years
shall have to be disallowed for the reason of non-deduction of tax. So, however, the deduction shall
have to be considered for asst. yr. 1995-96 as per proviso to Section 40(a)(i).
25. Thus, subject to verification that the claim of remuneration and tax deductible has not been
taken into account under Section 44C in regard to the expatriate employees, the deduction relating
to asst. yrs. 1992-93 to 1994-95 would be permissible in asst. yr. 1995-96 as per proviso to Section
40(a)(i). For asst. yr. 1995-96, the assessee has paid the tax and, therefore, Section 40(a) is not
attracted. The assessee shall be entitled to deduction in respect of remuneration as well as the tax

paid pertaining to asst. yr. 1995-96. It is pertinent to mention that the objection raised by the
Revenue about the assessee having failed to establish as to whether the services have been rendered
by the expatriate employees in regard to the PE of the assessee in India, we find, is uncalled for. If
the employees have not rendered services in India, for which the remuneration had been received
abroad, then how is it that the assessee was under an obligation to deduct tax from their
remuneration. The very fact that the assessee has accepted its obligation to deduct taxes from the
salary paid to the expatriate employees is, in our view, sufficient to infer that the services had been
rendered by them in India.
26. The second objection raised by the Revenue is that the assessee has only paid the tax deducted at
source and not the tax on behalf of the expatriate employees. This objection is also, in our view,
unfounded. Section 199 provides that any deduction made in accordance with provisions of Section
192 and paid to the Central Government shall be treated as a payment of tax on behalf of the person
from whose income deduction is made. Under Section 205 of the IT Act, 1961, there is a bar for the
Revenue to demand tax from the assessee to the extent the amount has been deducted from his
income. Thus, the tax deducted at source by the assessee and paid to the Government is treated as
the tax paid on behalf of the expatriate employees. It is true that the expatriate employees have a
right to demand refund of the tax deducted at source if not found chargeable in the assessment in
their hands. However, in this case the assessee has paid remuneration net of tax. Therefore, refund,
if any, claimed on behalf of the expatriate employees would be assessable to tax in the year of refund
in the hands of the appellant. Therefore, the objection of the Revenue is overruled. We, accordingly,
direct the AO to consider the claim of the assessee in regard to the remuneration and the taxes paid
relating to asst. yrs. 1992-93 to 1995-96 in asst. yr. 1995-96 in accordance with the directions
contained in this order.
27. In asst. yr. 1995-96, the assessee has also claimed a deduction for remuneration and tax paid in
regard to the asst. yrs. 1990-91 and 1991-92. No evidence has been placed on record to establish that
the assessee had at any stage made the claim for deduction in the said assessment years. In
principle, the claim of the assessee has got to be considered in the assessment year to which the
claim pertains to. It is only when the claim is considered and found allowable but for provisions of
Section 40(a) that the same can be allowed in the year of payment. Since the claim for asst. yrs.
1990-91 and 1991-92 is not established to have been made and considered in earlier years, the
benefit is not permissible in asst. yr. 1995-96 merely because the tax has been paid in the year under
appeal. The benefit of the proviso to Section 40(a)(i) is thus not available to the assessee for which
no claim is made in the respective assessment years. Therefore, the claim of the assessee does not
fall for consideration in asst. yr. 1995-96 on the basis of provisions of Section 40(a) read with
proviso. The disallowance pertaining to asst. yrs. 1990-91 and 1991-92 in regard to the remuneration
and the tax component in asst. yr. 1995-96 is upheld.
28. Interest :
That leaves us to consider the interest paid by the assessee under Section 201(1A). Before
proceeding to consider this issue, we would like to make it clear that for asst. yrs. 1992-93 to
1994-95, interest paid by the assessee was neither claimed in the course of assessment proceedings

nor in the grounds of appeal before the CIT(A) or before us. The claim was however, made in asst.
yr. 1995-96. Thus, at the very outset the claim of interest pertaining to the period falling in asst. yrs.
1990-91 to 1994-95 is disallowable in any case for the reason that no such claim has ever been made
for the relevant years.
29. We now proceed to consider if the claim is otherwise allowable. At the cost of repetition, it is
stated that the assessee had not deducted tax in respect of remuneration paid to expatriate
employees for the services rendered in India, for which the payment was made abroad by the head
office. The interest was paid under Section 201 of the IT Act on account of non-deduction and
non-payment of the tax deducted at source. The deduction was claimed in asst. yr. 1995-96 which
has been disallowed. The learned counsel for the assessee contended that the assessee is entitled to
deduction in respect of interest paid under Section 201(1A) for delayed payment of TDS as the same
is compensatory and not penal in character. In this connection reliance is placed on the decisions of
the Supreme Court in the cases of Mahalakshmi Sugar Mills Co. Ltd. v. CIT , Prakash Cotton Mills
(P) Ltd. v. CIT and CIT v. Ahmedabad Cotton Mfg. Co. Ltd. and Ors. . The learned counsel
contended that Section 221 provides for payment of penalty in the event of default for non-payment
of TDS. Section 271C provides for penalty for non-deduction of tax. Section 201(1A) provides for
payment of interest. According to the learned counsel, it is evident from the aforesaid provisions of
the Act that the interest under Section 201(1A) is purely compensatory and not penal in character.
According to him, since the interest has been paid in the year under appeal, the same is allowable as
a deduction in the year of payment by virtue of Section 40(a)(i) as part of remuneration. The learned
counsel contended that the deduction may be considered under Section 37 for the expenditure
having been incurred for the purposes of business.
30. The learned Departmental Representative, on the other hand, contended that the assessee is not
entitled to deduction on account of interest for non-deduction of tax and non-payment of the same
as it is neither part of remuneration nor as an expenditure incurred for purposes of business.
31. We have given our careful consideration to the rival contentions. The issue relating to the claim
of interest is peculiar in this case insofar as the interest is on account of income-tax, which the
assessee was required to deduct at source and pay to the Government. We have dealt with this issue
relating to the remuneration and tax component on the remuneration and in principle agreed that
the assessee would be entitled to deduction subject to the verification as laid down in the order. It
would appear that when the assessee is entitled to deduction on account of income-tax, the same
principle would apply to the interest charged for non-payment of tax--the interest being
compensatory in nature.
32. For appreciation of the issue in proper perspective, it would be relevant to consider as to
whether the income-tax is allowable as a deduction. If income-tax is allowable as a deduction, the
interest payable on such tax being compensatory in nature may qualify for deduction. Interest on
sales-tax of compensatory nature is allowable as a deduction not merely because it is not penal in
character but because the sales-tax is chargeable on the commodities sold by the assessee as an
incidence of business. The interest is thus allowable as part of tax. In this case the assessee has paid
remuneration to the expatriate employees. The assessee as an employer has undertaken to pay taxes

on their behalf. Since the income of the expatriate employees is liable to tax, the assessee would be
obliged to file the returns of income and discharge the obligations which, but for the agreement of
employment with the assessee, the expatriate employees had to discharge. The monetary
consequence of failure to discharge the obligation on behalf of the expatriate employees may, in
certain circumstances, qualify for deduction as an incidence of business. Section 17(2)(iv) treats any
sum paid by the employer in respect of any obligation which, but for such payment, would have been
payable by the employee as perquisite assessable in the hands of the employee. So, however, it is
interesting to note that in this case the assessee has not discharged the obligation on behalf of the
expatriate employees insofar as taxes have not been paid as an obligation on behalf of the
employees. The assessee has neither filed the returns nor has any assessment made. No interest has
been charged by the Revenue for non-payment of taxes by the employees. That is one aspect of the
matter.
33. The other side of the matter is that the assessee was under a statutory obligation to deduct tax
from the remuneration paid/payable to the nonresident expatriate employees and pay the same to
the Government. This is an independent statutory obligation imposed upon the assessee. The tax
deducted at source by the assessee and payment thereof to the Government does not by itself qualify
for deduction as business expenditure by reason of the compliance of statutory obligation made by
the assessee. It is important to bear in mind that the deduction of tax claimed by the assessee is as
part of the agreement for payment of remuneration net of salary and not as part of the fulfillment of
the statutory obligation. For better appreciation of this issue, relevant sections may be quoted
hereunder :
"192(1). Any person responsible for paying any income chargeable under the head "Salaries" shall, at
the time of payment, deduct income-tax on the amount payable at the average rate of income-tax
computed on the basis of the rates in force for the financial year in which the payment is made, on
the estimated income of the assessee under this head for that financial year.
195A. Where, under an agreement or other arrangement, the tax chargeable on any income referred
to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is
payable, then, for the purposes of deduction of tax under those provisions, such income shall be
increased to such amount as would, after deduction of tax thereon at the rates in force for the
financial year in which such income is payable, be equal to the net amount payable under such
agreement or arrangement.
200. Any person deducting any sum in accordance with the provisions of Sections 192 to 194,
Section 194A, Section 194B, Section 194BB, Section 194C, Section 194D, Section 194E, Section
194EE, Section 194F, Section 194G, Section 194H, Section 194-I, Section 194J, Section 194K, Section
194L, Section 195, Section 196A, Section 196B, Section 196C and Section 196D shall pay within the
prescribed time, the sum so deducted to the credit of the Central Government or as the Board
directs.
201(1). If any such person and in the cases referred to in Section 194, the principal officer and the
company of which he is the principal officer does not deduct or after deducting fails to pay the tax as

required by or under this Act, he or it shall, without prejudice to any other consequences which he
or it may incur, be deemed to be an assessee-in-default in respect of the tax :
Provided that no penalty shall be charged under Section 221 from such person, principal officer or
company unless the AO is satisfied that such person or principal officer or company, as the case may
be, has without good and sufficient reasons failed to deduct and pay the tax.
(1A) Without prejudice to the provisions of Sub-section (1), if any such person, principal officer or
company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax
as required by or under this Act, he or it shall be liable to pay simple Interest at eighteen per cent
per annum on the amount of such tax from the date on which such tax was deductible to the date on
which such tax is actually paid.
(2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together
with the amount of simple interest thereon referred to in Sub-section (1A) shall be a charge upon all
the assets of the person, or the company, as the case may be, referred to in Sub-section (1)."
34. It is noteworthy from abovementioned provisions of the Act that the interest levied by the
Department is for the assessee having been treated as the "assessee-in-default" for the payment of
tax deductible at source. This obligation is independent of the obligation of the assessee as an agent
of the expatriate employees. Therefore, the payment of interest does not partake the character of the
part of the remuneration package in respect of the expatriate employees. As already pointed out, the
interest has been paid as the assessee-in-default. Since the assessee is not entitled to deduction in
respect of the tax deducted at source per se, as such the interest paid for the default in payment of
tax deducted/deductible at source also does not qualify for deduction. Reference may be useful to
the decision of the Calcutta High Court in the case of Jubilee Investments & Industries Ltd. v. Asstt.
CIT and Ors. . Their Lordships observed as under :
"The Asstt. CIT has rightly pointed out that once the TDS is deducted from the income of somebody,
the assessee is merely a custodian of the TDS amount. He cannot touch the amount. That amount is
to be deposited within the time prescribed in the Central Government account and any loss or profit
in the business of the assessee has nothing to do with deposit of the TDS amount."
Reference may be made to the definition of tax under the DTAA. Article 3(d) reads as under :
"(d) the term "tax" means Indian tax or Netherlands tax as the context requires, but shall not
include any amount which is payable in respect of any default or omission in relation to the taxes to
which this Convention applies or which represents a penalty imposed relating to those taxes;"
It is evident from the above definition that even DTAA does not cover such a levy. It may also be
pertinent to mention that income-tax paid by the assessee does not qualify for deduction as such.
This view is supported by the decision of the Supreme Court in the case of Smt. Padmavati
Jaikrishna v. Addl. CIT . In the case of East India Pharmaceutical Works Ltd. v. CIT their Lordships
of the Supreme Court held that the interest paid on the overdraft utilized for payment of income-tax

is also not allowable as a deduction as it is not an expenditure laid out wholly and exclusively for the
purposes of business as contemplated by Sub-section (1) of Section 37 of the IT Act, 1961. On the
basis of the above principle of law, the interest paid by the assessee as "an assessee-in-default of the
tax" is not eligible for deduction as expenses incurred for purposes of business. The decisions relied
upon by the learned counsel for the assessee are accordingly inapplicable to the facts of this case.
35. We now deal with the remaining grounds of appeal for respective assessment years.
Asst. yr. 1995-96 :
For asst. yr. 1995-96, the first ground of appeal raised by the assessee is as under :
"1. Loss on revaluation of securities/investments On the facts and in the circumstances of the case
and in law, the learned Commissioner of Income-tax (Appeal) [CIT(A)] erred in setting aside the
assessment in part as regards disallowance of Rs. 2,00,81,000 made by the AO in respect of loss on
revaluation of securities/investments held by the appellant instead of deleting the disallowance
made by the AO.
The appellant submits that the CIT(A) while fairly conceding that in valuing the securities at market
price, if the value of the appellant's stock gets reduced, the appellant should be allowed relief
thereon, erred in concluding that the appellant should file all the details regarding each and every
security along with nature of securities whether it is current or permanent with the AO so that the
AO can decide the issue afresh and set aside the assessment to this limited extent. The CIT(A)
should have appreciated that all the details have already been filed with the AO and treatment of the
securities as current securities in terms of the RBI guidelines has also been explained to the AO."
The above ground has not been pressed before us and the same is, accordingly, dismissed as not
pressed.
36. The second ground of appeal raised by the assessee is as under :
"2. Expenditure on food and beverages provided to the staff On the facts and in the circumstances of
the case, the CIT(A) erred in confirming the disallowance of Rs. 9,72,446 [erroneously mentioned as
Rs. 9,77,446 in the CIT(A) order] made by the AO. The CIT(A) failed to appreciate that the
appellant's staff would invariably accompany the guest during the course of which the said
entertainment expenses were incurred. The CIT(A), therefore, should have first allowed 50 per cent
of the total entertainment expenditure as a fully allowable deduction. Without prejudice to this
contention and in any event of the matter, the CIT(A) erred in confirming the additional
disallowance made by the AO to the extent of Rs. 70,000 on this account. The CIT(A) failed to
appreciate that having confirmed the entire amount of entertainment as falling within provisions of
Section 37(2), there was no need to confirm any additional ad hoc amount of disallowance."
The assessee had incurred an expenditure of Rs. 19,54,892 on account of entertainment. 50 per cent
of the said expenditure was treated as attributable to employees and the balance of Rs. 9,72,446 was

offered for taxation in the return of income. However, during the course of assessment proceedings,
the assessee claimed that, keeping in view the fact that the employees of the assessee accompanied
the customers, deduction to the extent of 50 per cent may be allowed as attributable to employee not
amounting to entertainment expenses. The AO did not accept this claim of the assessee as according
to him there was no evidence as to how many persons were entertained and how many employees
accompanied them and what was the expenditure incurred by employees on guests separately. The
AO further held that the guests having been entertained outside the work place, no allowance could
be made under Clause (iii) to Explanation to Section 37(2). Therefore, no deduction was allowed out
of Rs. 9,72,466 offered for taxation in the return of income. The AO also made a disallowance of Rs.
1,00,000 out of the remaining of Rs. 9,72,446 treated as entertainment expenses pertaining to the
employees exclusively as per the past history of the case. The CIT(A) has confirmed the disallowance
of Rs. 9,72,446 (wrongly mentioned as Rs. 9,77,446). However, in respect of the estimated expenses
of Rs. 1 lakh, a relief of Rs. 30,000 has been allowed and disallowance of Rs. 70,000 sustained.
Thus, the total disallowance under the head 'entertainment expenses' after the order of the CIT(A) is
of Rs. 10,42,446.
37. It has been brought to our notice that similar issue had come up for consideration of the
Tribunal in an appeal of the assessee for asst. yr. 1996-97 in ITA No. 692/Cal/2000 and vide order
dt. 30th March, 2001, the Tribunal has accepted 25 per cent of the expenses as attributable to
employees participation. Respectfully following the aforementioned decision of the Tribunal in the
assessee's own case for asst. yr. 1996-97, we hold that 25 per cent of the entertainment expenses are
attributable to the employees participation in entertaining the guests and by virtue of Section 37(2)
read with Expln. (iii), the said amount is outside the purview of entertainment expenses. Learned
counsel for the assessee pleaded that it may be clarified as to whether 25 per cent disallowance is
with reference to Rs. 19,53,892 or 25 per cent of the disallowed portion of entertainment expenses.
We hereby clarify that the relief allowable to the assessee is 25 per cent of Rs. 10,42,446 and not 25
per cent of Rs. 19,54,892. It may be pointed out that out of the total amount of Rs. 19,54,892 debited
under the head 'entertainment expenses', the assessee has taken out a sum of Rs. 9,72,446 as
entertainment expenses exclusively pertaining to the employees. The CIT(A) has sustained a
disallowance of Rs. 70,000 out of the said amount. Thus, the total entertainment expenses
disallowed under Section 37(2) would work out to Rs. 9,72,446 + Rs. 70,000, aggregating to Rs.
10,42,446. This amount pertains to the entertainment expenses of customers. The claim of the
assessee that employees have also participated in entertaining the customers has been accepted to
the extent of 25 per cent by the Tribunal. Therefore, the assessee would be entitled to the deduction
to the extent of 25 per cent out of the amount treated as entertainment expenses pertaining to
customers. This is how the direction to allow 25 per cent of Rs. 10,42,446 is justified. We, therefore,
direct the AO to allow relief of Rs. 2,60,610 to the assessee. The ground relating to disallowance of
Rs. 70,000 also stands disposed of by respectfully following the order of the co-ordinate Bench for
asst. yr. 1996-97 (supra) subject to 25 per cent relief as indicated above.
Asst. yrs. 1992-93. 1993-94 and 1994-95 :
38. The following common grounds of appeal relating to rate of tax applicable in the case of the
appellant-company have been raised :

"(1). That, on the facts and in the circumstances of the case, the action of the learned CIT(A) in
enhancing the rate of tax applicable to the appellant on the basis of his earlier order for asst. yr.
1996-97, relying on the ruling of the Hon'ble Authority for Advance Ruling in the case of Societe
Generate, reported as ABC, In re given under the DTAA between India and France, is bad in law in
view of the express provisions of Section 245S and, therefore, void ab initio.
(2). That, without prejudice to ground No. 3(a) above, the learned CIT(A), without considering the
elaborate submissions made in the. course of hearing of the appeal, erred in directing the AO to
apply the tax rate applicable to foreign companies against the express provisions of Article 24 of the
DTAA between India and Netherlands dt. 27th March, 1989 [(1989) 177 ITR (St) 72] read with
Section 90 of the Act and Circular No. 333. dt. 2nd April, 1982 [(1982) 137 ITR (St) 1] issued by the
CBDT.
(3) That, in any view of the matter, and without prejudice to grounds 3(a) and 3(b) above, the
learned CIT(A) completely disregarded the specific direction given by the Hon'ble CBDT in the
appellant's own case that the appellant shall be taxed at the rates applicable to domestic companies
for the concerned assessment years read with the provisions of Article 25 of the DTAA between
India and Netherlands.
(4) That, in view of the impugned issue decided in favour of the appellant's own case for asst. yr.
1996-97 by the Hon'ble Tribunal in its order dt. 30th March, 2001, the learned CIT(A) erred in
taking a contrary view overruling the Tribunal decision considering the Explanation to Section 90(2)
of the Act, inserted by the Finance Act, 2001."
39. The relevant facts relating to this issue are that the AO had levied tax in this case at the rates
applicable to domestic companies. However, in course of appellate proceedings before the CIT(A)
against the assessments made by the AO, it was felt that the rate of tax applicable in the case of the
assessee was as applicable to foreign companies. The CIT(A) had accordingly issued a show-cause
notice for enhancement to the assessee. Objections were filed by the assessee to the proposed action.
It was claimed by the assessee that the issue had been considered by the Tribunal in assessee's own
case in ITA No. 692/Cal/2000, dt. 30th March, 2001, and that for asst. yr. 1991-92, the rate of tax
was charged as applicable to domestic companies. The CIT(A) has referred to the decision of the
Tribunal in favour of the assessee, but has pointed out that after the decision of the Tribunal, there
has been amendment by the Finance Act of 2001, in Section 90 of the IT Act, 1961, by virtue of
which an Explanation to Section 90(2) was added. The CIT(A) has on the basis of the said
Explanation, which is applicable retrospectively with retrospective effect from 1st April, 1962, held
that the assessee was liable to tax at the rates applicable to foreign companies.
40. The learned counsel for the assessee contended that the CIT(A) was not justified in invoking his
powers under Section 251 insofar as the issue was covered by the CBDT Instruction No.
500/45/94-FTD, dt. 21st Nov., 1994 and also the decision of the Tribunal in the assessee's own case
for the asst. yr. 1996-97 (supra). It was contended that the appeal of the assessee before the CIT(A)
was in regard to the income assessed and, therefore, he had no power to disturb the rate of tax levied
by the AO. The learned counsel invited our attention to Article 24 of the DTAA which provides for

non-discrimination of taxation on PE with the taxation on enterprises of that State. Since the Indian
banks were paying tax at the rates applicable to domestic companies, the appellant could not be
subjected to tax at a higher rate than applicable to Indian companies, it was contended. In this
connection reference was made to the decision of the Tribunal in the assessee's own case for asst. yr.
1996-97 (supra) where the issue has been decided in favour of the assessee.
41. Our attention was also invited to D.O. No. 500/45/94-FTD, dt. 21st. Nov., 1994, issued by the
CBDT addressing the Chief CIT-II, whereby the Board expressed the view that the assessee-bank
was liable to tax at the same rate as applicable to Indian companies. The learned counsel further
pointed out that the said letter has been modified by the Board vide subsequent letter dt. 24th
March, 2000. It has been clarified therein that action could be taken by the AO for application of
higher rate of tax in respect of the respective assessment years barring the years covered by the
aforementioned letter dt. 21st. Nov., 1994. Our attention was invited to Article 25 of DTAA which
provides for mutual agreement procedure in the event of any dispute relating to taxation contrary to
the provisions of the Convention. Sri Dastur pointed out that the D.O. No. 500/45/94-FTD, dt. 21st
Nov., 1994, was issued by the Board in response to reference from Embassy of Netherlands and,
therefore, by virtue of the provisions of DTAA Article 25, any decision reached after following the
procedure is binding upon both the parties and in the event of any conflict with the domestic law of
the State, such an agreement would prevail. The learned counsel pointed out that reference for
mutual agreement is required to be made to the competent authority and the competent authority is
defined to mean the Central Government or any authorized representative of the Central
Government. Since the CBDT is authorized to issue instructions, the circular issued by it relating to
the rate of tax applicable in the case of the appellant has the effect of mutual agreement within the
meaning of Article 25 of the DTAA, it was contended.
42. Sri Dastur, as an alternative to the aforementioned argument, contended that in any case the
circulars of the Board are binding upon the Revenue authorities working under their jurisdiction.
Relying upon the decision of the Supreme Court in the case of Ellerman Lines Ltd. v. CIT , it was
contended that even the letters issued by the Board are considered as circulars having a binding
force under Section 119 of the IT Act, 1961. It was further contended that the withdrawal of the
circular issued by the Board is effective prospectively and not retrospectively. In this connection
reliance was placed on the decision of Bombay High Court in the case of Unit Trust of India and Anr.
v. P.K. Unny, ITO and Ors. . The learned counsel further invited our attention to the decision of the
Supreme Court in the case of UCO Bank v. CIT in support of the contention that the CBDT has the
power to issue circulars having effect of relaxing the rigour of law and also providing of uniform
application of law consonant with concept of income. Such circulars are not to be treated as
inconsistent with provisions of the statute. Their Lordships have further held that the circulars
issued by the Board are binding on the parties. Reference was also made to Circular No. 333, dt. 2nd
April, 1982, by virtue of which the CBDT has clarified that in the event of conflict between the
provisions of the IT Act, 1961, and the provisions of DTAA, the provisions of DTAA would prevail
over the provisions of the IT Act. According to the learned counsel for the assesses, Explanation to
Section 90 incorporated by the Finance Act, 2001, with retrospective effect from 1st April, 1962, is
inapplicable in view of the clarification of the CBDT relating to the rate of tax chargeable in the case
of the appellant.

43. Sri Dastur further contended that, assuming that the Explanation to Section 90 is applicable in
contrast to the circulars of the Board, the said Explanation is inapplicable in view of the fact that the
foreign company cannot fulfill the condition of making prescribed arrangement for declaration and
payment within India, of the dividends payable out of its income in India. Our attention was also
invited to Rule 27 of IT Rules, 1962, in support of the above submission. The learned counsel
contended that the Explanation does not make any sense insofar as the prescribed arrangement for
declaration and payment within India of the dividends payable out of its income in India cannot be
fulfilled. Sri Dastur contended that the CIT(A) has enhanced the rate of tax without the aid of the
Explanation when the Tribunal in assessee's own case for asst. yr. 1996-97 (supra) had decided the
issue in favour of the assessee. Sri Dastur further contended that the reference to the decision of the
Authority for Advance Ruling was misplaced as the said decision has been set aside by the Hon'ble
Supreme Court in the case of Societe Generale v. CIT . It was pointed out that the Tribunal in
assessee's own case has decided the issue in favour of the Revenue in respect of Article 24(1) of the
DTAA. So, however, the claim of the assessee under Article 24(2) has been upheld. It was,
accordingly, pleaded that the decision of the CIT(A) in regard to the application of higher rate of tax
in the case of appellant may be quashed.
44. The learned Departmental Representative, on the other hand, contended that the issue relating
to the rate of tax is to be decided in the light of the Explanation to Section 90(2) inserted by Finance
Act, 2001, with retrospective effect from 1st April, 1962. It is well settled law, according to the
learned Departmental Representative, that in the event of conflict between a treaty and the statutory
law, the statutory law will prevail. It was further contended that Section 90 is an enabling provision
for entering into agreements with other countries for double taxation avoidance, etc. It was
contended that the CIT(A) exercises his powers co-terminus with the AO, as held by their Lordships
of the Supreme Court in the case of CIT v. Kanpur Coal Syndicate and, therefore, the CIT(A) had the
power to enhance the rate of tax applicable in the case of the assessee. Referring to the contention
on behalf of the assessee that the taxation of the appellant was governed by the CBDT circulars, it
was contended that the letters issued by the Board do not partake the character of circulars. In this
connection, reliance was placed on the decision of the Supreme Court in the case of CIT v. Anjum
M.H. Ghaswala and Ors. and that of the Delhi High Court in the case of Geep Industrial Syndicate
Ltd. v. CBDT . It was further contended that the circulars of the Board generally indicate the source
of power. But in the letters issued by the CBDT expressing an opinion, no source is mentioned and
as such these letters do not have the force of circulars issued by the Board. Reliance has been placed
on the decision of the Supreme Court in the case of Kerala Financial Corporation v. CIT . It was
pointed out that the decision of the Bombay High Court in the case of Unit Trust of India and Anr. v.
P.K. Unny, ITO and Ors. (supra) was relating to a different issue and the observations at best can be
taken as obiter and not ratio decidendi. In any case, the decision of the Supreme Court in the case of
CIT v. Anjum M.H. Ghaswala and Ors. (supra) prevail over the decision of the Bombay High Court.
Referring to the non-discriminative clause under Article 24 of DTAA, it was contended that
non-discriminative clause applies amongst the equals. In regard to Article 25, the learned
Departmental Representative contended that the mutual agreement has got to be arrived at by
following a procedure and reference has got to be made with competent authorities. Mere letter of
the CBDT seeking opinion about the applicability of the rate of tax does not take the character of
mutual agreement.

45. In counter-reply, the learned counsel for the assessee relied upon the decision of the Calcutta
Bench of the Tribunal in the case of Dy. CIT v. ITC Ltd. (2002) 76 TTJ (Cal) 323 : (2002) 82 ITD
239 (Cal) at p. 245 in support of the contention that in the event of conflict between the provisions
of DTAA and the IT Act, the provisions of the DTAA shall prevail. Reference was also made to
Section 90(2) of the IT Act, 1961, which was inserted by the Finance (No. 2) Act, 1991, w.e.f. 1st
April, 1972, which clearly provides that in the event of conflict between the provisions of the Act and
the DTAA, the provisions more beneficial to the assessee shall apply. The learned counsel also relied
upon the decision of the Andhra Pradesh High Court in the case of CIT v. Visakhapatnam Port Trust
in support of the contention that the mutual agreements under the DTAA have a binding force.
Reliance was also placed on the decision of the Supreme Court in the case of CIT v. Elphinstone Spg.
& Wvg. Mills Co. Ltd. in support of the contention that if the legislature uses inappropriate language
in a Statute, such provisions of law are ineffective. The decisions cited on behalf of the Revenue,
according to the learned counsel, are distinguishable on facts. It was, accordingly, pleaded that the
appeal of the appellant on this ground may be accepted.
46. We have given our careful consideration to the rival contentions. The issue relating to the
applicability of rate of tax in the case of the assessee had come up for consideration of the Tribunal
in the assessee's own case for asst. yr. 1996-97 (supra). The Tribunal vide order, dt. 30th March,
2001, in para 23 relating to applicability of Article 24(1) held--"We are of the opinion (as discussed
above) that the assessee-company cannot be considered to be in the same circumstances as an
Indian company in view of the fact that the scope of taxation of the Indian company is wider enough
than that of a non-resident company like the assessee." However, the contention on behalf of the
assessee was accepted to be covered under Article 24(2) of DTAA. Para 28 of the order of the
Tribunal is quoted as under :
"28. Taking into consideration the different aspects of the case, we are finally of the opinion that by
virtue of Article 24(2) of the DTAA between India and Netherlands, the assessee-company cannot be
subjected to taxation in a less favourable manner than an Indian banking company. We have already
noted above that at least some of the private Indian banks are subjected to the lower rate of tax (@
46 per cent) applicable to the domestic companies. Furthermore, the assessee-company itself is
being subjected to this lower rate of tax by virtue of the non-discrimination provision in the DTAA
right from the asst. yr. 1991-92 onwards. There is no plausible reason to depart from this accepted
position when no new facts in this regard have been discovered. The AO himself allowed the lower
rate in the assessment order. We feel that the CIT(A) did not have any occasion to disturb the same
by directing to apply the higher rate and in disturbing the position accepted even by the CBDT in
that way. Finally, therefore, we knock down the enhancement, as directed by the CIT(A) in this case
and, on the other hand, order that the rate of tax as considered in the assessment be adopted."
47. The decision of the Tribunal has been arrived at after consideration of the detailed arguments
advanced on behalf of the assessee which have been reiterated before us. We would have no
difficulty in following the elaborate decision of our co-ordinate Bench, but for the amendment in
Section 90 of the IT Act, 1961, by the Finance Act, 2001, with retrospective effect from 1st April,
1962. We, therefore, do not consider it necessary to deal with the contentions advanced on behalf of
the assessee without taking into account the above amendment in Section 90. We consider it

necessary to examine the effect of the amendment of Section 90 in regard to the application of rate
of tax.
48. It will be useful to quote Section 90 as under :
"90(1). The Central Government may enter into an agreement with the Government of any country
outside India -
(a) for the granting of relief in respect of income on which have been paid both income-tax under
this Act and income-tax in that country, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law
in force in that country, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable
under this Act or under the corresponding law in force in that country, or investigation of cases of
such evasion of avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that
country, and may, by notification in the official gazette, make such provisions as may be necessary
for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any
country outside India under Sub-section (1) for granting relief of tax, or as the case may be,
avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the
provisions of this Act shall apply to the extent they are more beneficial to that assessee."
The following Explanation was inserted by the Finance Act, 2001, with retrospective effect from 1st
April, 1962 :
"Explanation : For the removal of doubts, it is hereby declared that the charge of tax in respect of a
foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not
be regarded as less favourable charge or levy of tax in respect of such foreign company, where such
foreign company has not made the prescribed arrangement for declaration and payment within
India, of the dividends (including dividends on preference shares) payable out of its income in
India."
49. Before considering the claim of the assessee in the light of the amendment of Section 90, with
retrospective effect from. 1st April, 1962, we consider it useful to keep in mind the applicability of
the Indian tax laws vis-a-vis DTAA with the foreign country. In this connection reference to the
decision of the Hon'ble Supreme Court in the case of Gramophone Co. of India Ltd. v. Birendra
Bahadur Pandey and Ors. is relevant. In this case, their Lordships of the Supreme Court held that in
the event of conflict between international law, the Court must follow municipal law. The relevant
para 5 is quoted hereunder for the sake of reference :

"5. There can be no question that nations must march with the international community and the
municipal law must respect rules of international law even as nations respect international opinion.
The comity of nations requires that rules of international law may be accommodated in the
municipal law even without express legislative sanction provided they do not run into conflict with
Acts of Parliament. But when they do run into such conflict, the sovereignty and the integrity of the
Republic and the supremacy of the constituted legislature in making the laws may not be subjected
to external rules except to the extent legitimately accepted by the constituted legislatures
themselves. The doctrine of incorporation also recognizes the position that the rules of international
law are incorporated into national law and considered to be part of the national law, unless they are
in conflict with an Act of Parliament. Comity of nations or no, municipal law must prevail in case of
conflict. National Courts cannot say "yes" if Parliament has said "no" to a principle of international
law. National Courts will endorse international law but not if it conflicts with national law. National
Courts being organs of the National State and not organs of international law must perforce apply
national law if international law conflicts with it. But the Courts are under an obligation within
legitimate limits, to so interpret the municipal statute as to avoid confrontation with the comity of
nations or the well established principles of international law. But if conflict is inevitable, the latter
must yield,"
50. Section 90 of the IT Act empowers the Central Government to enter into an agreement with the
Government of any country outside India for granting of relief or for avoidance of double taxation of
income, etc. Thus, the source of DTAA with Netherlands is Section 90 of the IT Act, 1961. Section 90
has been quoted in para 48 above.
51. It is noteworthy that Sub-section (2) of Section 90 provides for application of beneficial
provisions of the agreement in contrast to the contrary provisions of the IT Act, 1961. It has,
however, to be borne in mind that in the event of there being no conflict between the provisions of
the DTAA and the IT Act, 1961, the effect shall have to be given to the provisions of the IT Act, 1961.
It is only when there is a conflict between the provisions of the agreements in contrast with the
provisions of the IT Act, 1961, that the beneficial treatment is to be given as per Section 90(2) of the
IT Act, 1961. In this connection, circular of the CBDT, being No. 333, dt. 2nd April, 1982, also
clarifies the position of law, which is quoted hereunder :
"Subject : Conflict between the provisions of the IT Act, 1961, and the provisions of the
DTAA--Clarification.
It has come to the notice of the Board that sometimes effect to the provisions of DTAA is not given
by the AOs when they find that the provisions of the agreement are not in conformity with the
provisions of the IT Act, 1961.
2. The correct legal position is that where a specific provision is made in the DTAA, that provision
will prevail over the general provisions contained in the IT Act, 1961. In fact the DTAAs which have
been entered into by the Central Government under Section 90 of the IT Act, 1961, also provide that
the laws in force in either country will continue to govern the assessment and taxation of income in
the respective country except where provisions to the contrary have been made in the Agreement.

3. Thus, where a DTAA provides for a particular mode of computation of income, the same should
be followed, irrespective of the provisions in the IT Act. Where there is no specific provision in the
agreement, it is the basic law, i.e., the IT Act, that will govern the taxation of income."
52. As already pointed out, an agreement for avoidance of double taxation and prevention of fiscal
evasion with Netherlands was executed between the Republic of India and the Kingdom of
Netherlands which was notified vide Notification No. 382(E), dt. 27th March 1989, and amended by
Notification No. SO 693(E), dt. 30th Aug., 1999. This agreement is available in (1989) 177 ITR (St)
72. The Notification gives the source of the agreement, i.e., Section 90 of the IT Act, 1961, and
similar provision under the Companies Profits (Surtax) Act and WT Act. Thus, it is evident that the
DTAA derives its source from the IT Act, 1961, itself. It overrides the provisions of the IT Act, 1961,
within the limits provided under the said Act. The limit provided under the Act, as pointed out
earlier, is that in the event of conflict between the provisions of the DTAA and the provisions of the
IT Act, the beneficial provision of the Act shall prevail in regard to the taxation of the subjects. It
thus becomes abundantly clear that when there is no conflict between the DTAA and the IT Act,
1961, in regard to any aspect of the matter, the provisions of the IT Act, 1961, shall have to be
implemented with full force. Section 90 was amended, as pointed out earlier, by the Finance Act,
2001 with retrospective effect from 1st April, 1962, by incorporation of the Explanation which has
been quoted in para 48 above.
At this stage it will be relevant to refer to Article 24 of the DTAA, which reads as under :
"Article 24-Non-discrimination - 1. Nationals of one of the States shall not be subjected in the other
State to any taxation or any requirement connected therewith, which is other or more burdensome
than the taxation and connected requirements to which nationals of that other State in the same
circumstances are or may be subjected. These provisions shall, notwithstanding the provisions of
Article 1, also apply to persons who are not residents of one or both of the States.
2. Except where the provisions of para 3 of Article 7 apply, the taxation on a permanent
establishment which an enterprise of one of the States has in the other State shall not be less
favourably levied in that other State than the taxation levied on enterprises of that other State
carrying on the same activities.
3. The provisions of para 2 shall not be construed as obliging one of the States to grant to residents
of the other State any personal allowances, reliefs and reductions for taxation purposes on account
of civil status or family responsibilities which it grants to its own residents.
4. Except where the provisions of para 1 of Article 9, para 9 of Article 11, or para 9 of Article 12 apply,
interest, royalties and other disbursements paid by an enterprise of one of the States to a resident of
the other State shall, for the purpose of determining the taxable profits of such enterprise, be
deductible under the same conditions as if they had been paid to a resident of the first-mentioned
State. Similarly, any debts of an enterprise of one of the States to a resident of the other State shall,
for the purpose of determining the taxable capital of such enterprise, be deductible under the same
conditions as if they had been contracted to a resident of the first-mentioned State.

5. Enterprises of one of the States, the capital of which is wholly or partly owned, controlled, directly
or indirectly, by one or more residents of the other State, shall not be subjected in the
first-mentioned State to any taxation or any requirement connected therewith which is other or
more burdensome than the taxation and connected requirements to which other similar enterprises
of the first-mentioned State are or may be subjected."
53. The Tribunal in the assessee's own case for asst. yr. 1996-97 (supra) has held that Article 24,
para 1 is not applicable in the case of the appellant. However, the Tribunal has expressed the view
that Article 24(2) applies in the case of the appellant. However, Explanation to Section 90
specifically provides that the charge of tax in respect of the foreign company at the rate higher than
the rate at which a domestic company is chargeable shall not be regarded as less favourable charge.
In the DTAA, there is no definition of "less favourable charge". Therefore, the Explanation to Section
90 cannot be said to be in conflict with the provisions of the DTAA. On the facts and in the
circumstances of this case, there is no escape from the conclusion that there is no conflict between
the provisions of the DTAA and the IT Act, 1961, in regard to the non-discrimination.
54. As has been pointed out earlier, in the provisions of DTAA, incorporation of specific provisions
contrary to the provisions of the IT Act, 1961, are to prevail insofar as such incorporation is
authorized under the IT Act, 1961 itself. However, in regard to the subsequent amendments, the
only requirement is to notify the; amendments to the respective countries and in the event of there
being no conflict, the amended provisions shall have to be given effect to. In this connection, it will
be relevant to refer to Article 2, para 4 of the DTAA which reads as under :
"4. The Convention shall apply also to any identical or substantially similar taxes which are imposed
after the date of signature of the Convention in addition to, or in place of, the existing taxes. The
competent authorities of the States shall notify to each other any substantial changes which have
been made in their respective taxation laws."
(Emphasis, italicised in print, supplied)
55. It is thus evident that even the DTAA recognizes the fact that the amendments effected by the
respective legislatures after the execution of the DTAA are not affected insofar as they are not
repugnant to the specific provisions of the DTAA. In this view of the matter, the amendment in
Section 90 is applicable in this case with retrospective effect insofar as it is not in conflict with the
provisions of DTAA.
56. The contention advanced on behalf of the assessee that the said Explanation to Section 90 is
unimplementable because of inappropriate language, does not appeal to us. The Explanation in our
view provides for two eventualities. One is the charge of tax in respect of a foreign company vis-a-vis
an Indian company, (i.e., a domestic company). The second category as per Explanation is the
foreign company vis-a-vis the domestic company other than Indian company. It is noteworthy that
the domestic company is defined under the Finance Act. For the sake of reference we may quote the
definition of the 'domestic company' as per the Finance (No. 2) Act, 1996.

"'domestic company' means an Indian company, or any other company which, in respect of its
income liable to income-tax under the IT Act for the assessment year commencing on the 1st April,
1996, has made the prescribed arrangements for the declaration and payment within, India of the
dividends (including dividends on preference shares) payable out of such income in accordance with
the provisions of Section 194 of the Act."
(Emphasis, italicised in print, supplied) Thus, even under the Finance Act the domestic company is
recognized as Indian company and any other company having made arrangement for declaration of
dividends payable on such income. We, therefore, do not find the language of the Explanation to
Section 90 as inappropriate. Moreover, insofar as there is no doubt about the category of the foreign
company vis-a-vis the Indian company having been specified in the Explanation, one need not
ascertain as to whether in any case the second category of the companies would at all exist. We,
therefore, do not find merit in the contentions advanced on behalf of the assessee in this regard.
57. The contention advanced on behalf of the assessee that the CIT(A) was not justified in ignoring
the decision of the Tribunal for asst. yr. 1996-97 (supra) is also not well-founded. The CIT(A) has
decided this issue in asst. yr. 1993-94, and this order has been followed in other years. The relevant
portion of the order is reproduced hereunder :
"4. I have considered the submissions of the appellant. The Hon'ble Tribunal Calcutta, in their order
in ITA No. 692/Cal/2000, dt. 30th March, 2001, have decided that the remuneration payable to
expatriate offshore as well as the amount of income-tax paid (TDS) in respect of the remuneration
paid to the expatriates, is an allowable deduction under Section 37(1) of the IT Act. However, it is a
common ground that the net offshore remuneration has not been booked in Indian books of account
maintained by the appellant for the previous year relevant to asst. yr. 1993-94, and that, nor the
amount of tax payable on the remuneration to the expatriates offshore has been paid or deducted
during the relevant previous year as required under Chapter XVII-B of IT Act. In fact, admittedly the
amount of tax (TDS) has been paid in the subsequent previous year ended 31st March, 1995,
relevant to asst. yr. 1995-96. As per the provision of Section 40(a)(i) and proviso thereto, any sum
chargeable under the IT Act which is payable outside India on which tax has not been paid or
deducted under Chapter XVII-B, shall not be deducted in computing the income chargeable under
the head "Profits and gains of business or profession". It is further provided that "where in respect of
any such sum, tax has been paid or deducted under Chapter XVII-B in any subsequent year, such
sum shall be allowed as deduction in computing the total income of the previous year in which such
tax has been paid or deducted". In view of the express provision of Section 40(a)(i), restricting the
allowance for deduction under certain circumstances, which are applicable to the facts of the
appellant's case, the claim for deduction in respect of remuneration paid to the expatriates offshore
and TDS thereof, cannot be allowed in the asst. yr. 1993-94. The order of the AO disallowing the
aforesaid amount is, therefore, confirmed and the appellant's grounds of appeal in this regard are
dismissed.
5. During the course of examination of the order of the AO, it was found that the appellant's total
income was charged to tax at the rate applicable to a domestic company instead of applying higher
rate of tax since the appellant was a foreign company and being assessed as such. Therefore, vide

letter No. 79/A-ii/96-97/608, dt. 19th July, 2000, the appellant was asked to show cause as to why
the assessee-bank should not be taxed at a higher rate as is applicable to a foreign company. The
appellant in response to the show cause dt. 19th July, 2000, filed a written submissions through
letter dt. 24th July, 2000. The submission so made are reiteration of the detailed submissions made
before CIT(A) during appeal proceedings for the year 1996-97 with regard to a similar show-cause
notice issued to the appellant. The CIT(A) rejected the appellant's contention raised in the aforesaid
submission and held in his order in appeal No. 88/A-ii/1999-2000 for the asst. yr. 1996-97 that
"while giving effect to this order, the AO is directed to recalculate the tax in accordance with the
provision of the Finance Bill relating to the asst. yr. 1996-97 at the rate chargeable to foreign
companies". This order of the CIT(A) was set aside by Hon'ble Tribunal in ITA No. 692/Cal/2000,
dt. 30th March, 2001, on the following grounds :
Taking into consideration the different aspects of the case, we are finally of the opinion that by
virtue of Article 24(2) of the DTAA between India and Netherlands the assessee-company cannot be
subjected to taxation in a less favourable manner than an Indian banking company. We have already
noted above that at least some of the private Indian banks are subjected to the lower rate of tax (@
46 per cent) applicable to the domestic companies. Furthermore, the assessee-company itself is
being subjected to this lower rate of tax by virtue of non-discrimination provision in the DTAA right
from the asst. yr. 1991-92 onwards. There is no plausible reason to depart from this accepted
position when no new facts in this regard have been discovered. The AO himself allowed the lower
rate in the assessment order. We feel that the CIT(A) did not have any occasion to disturb the same
by directing to apply the higher rate and in disturbing the position accepted even by the CBDT in
that way. Finally, therefore, we knock down the enhancement, as directed by the CIT(A) in this case
and, on the other hand, order that the rate of tax as considered in the assessment be adopted.'
6. However, the Finance Act, 2001, has inserted an Explanation to Section 90(2) of the Act, with
retrospective effect from 1st April, 1962. The said Explanation is produced below :
"For the removal of doubts, it is hereby declared, that the charge of tax in respect of foreign
companies at a rate higher than the rate at which a domestic company is chargeable, shall not be
regarded as less favourable charge or levy of tax in respect of such foreign companies, where such
foreign companies has not made prescribed arrangement for declaration and payment within India
of dividends (including the dividends on preference share) payable out of its income in India."
It is evident that the Explanation effectively seeks to override non-discrimination article of the
DTAA with retrospective effect. The Explanation inserted is clarificatory in nature and retrospective
in operation and in view thereof, the decision of Tribunal (supra) relied upon by the appellant on
this issue is no longer valid. Accordingly, relying on the order of the CIT(A) for the asst. yr. 1996-97
and on consideration of the Explanation to Section 90(2) of the IT Act as discussed above, I direct
the AO to recalculate the tax in accordance with the provisions of Finance Act relating to the asst. yr.
1993-94 at the rate chargeable to foreign companies,"
It is evident from the above decision of the CIT(A) that he has decided the issue on the basis of the
amendment of Section 90 and after taking into account the decision of the Tribunal in the assessee's

own case for the asst. yr. 1996-97 (supra).
58. That leaves us to consider the effect of the letters issued by the CBDT in regard to the taxation of
the appellants. The CBDT had issued the two letters, one dt. 21st Nov., 1994 and another dt. 24th
March, 2000. These are reproduced hereunder :
Letter dt. 21st Nov., 1994 :
"Sub : Taxation of ABN--AMRO Bank-Ref. From Embassy of Netherlands.
Please refer to your letter D.O. No. CC-11/HQ Asstt. 4 Misc./93-94/Vol-IV/504, dt. 29th July, 1994,
on the above subject. The matter has been looked into and the Board is of the opinion that the tax
rate applicable in the case of ABN AMRO Bank would be the same as for an Indian company, at the
relevant tax rates applicable for the concerned assessment years."
Letter dt. 24th March, 2000 :
"Subject : Taxation of M/s ABN Amro Bank at the rates as applicable to nonresident companies as
per letter No. F.No. 500/5/99-FTD, dt. March 1999-Matter reg.
I am directed to refer to your letter No. CC/HQ-II/Asstt. 4/Misc/1999-2000/35, dt. 7th April, 1999.
It is clarified that M/s ABN Amro Bank should be taxed at the rates applicable to foreign companies
under the respective Finance Acts. The AOs may be instructed to take action accordingly except for
the years covered by Board's letter dt. 21st Nov., 1994."
59. It is evident from the letter dt. 24th Nov, 1994, that the CBDT was of the view that the tax rate
applicable in the case of the appellants would be the same as applicable to Indian companies.
However, this opinion was changed before the law was amended vide letter dt. 24th March, 2000
referred to above. We have referred to the contentions advanced on behalf of the assessee in regard
to these two letters issued by the CBDT. It is evident from the contents of the letters that the opinion
of the Board is expressed in the aforementioned letters. If the law were not amended, perhaps we
would have no difficulty in holding that the AO could not have overlooked the opinion of the Board
in regard to the taxation of the appellants. So, however, the law has been amended retrospectively.
Therefore, the only issue that requires to be considered is as to whether the circular of the CBDT
prevails over the statutory law passed by the, supreme legislature. The CBDT is the creation of
statute. The instructions issued under Section 119 of the IT Act, 1961, is under the delegated power
by the Parliament. Therefore, it is futile to suggest that the CBDT circulars would prevail over the
conscious amendment of the law by the legislature which overrides the law prevalent before the
amendment including the CBDT circulars. Their Lordships of the Supreme Court in the case of State
Bank of Travancore v. CIT held that the circulars issued by the Board would be binding on all
officers and persons employed in the execution of the Act, but no instructions or circular can go
against the provisions of the Act. In the case of State of Madhya Pradesh and Anr. v. G.S. Dall &
Flour Mills , their lordships of the Supreme Court held that executive instructions can supplement a
statute or cover areas to which the statute does not extend. But they cannot run contrary to the

statutory provisions or whittle down their effect. In the case of Kerala Financial Corporation v. CIT
(supra), their Lordships of the Supreme Court held that the circular of the Board issued under
Section 119 cannot override or be detracted from the Act, inasmuch as what Section 119 has
empowered is to issue orders, instructions or directions for the proper administration of the Act or
for such other purposes specified in Sub-section (2) of that section. Such an order, instruction or
direction cannot override the provision of the Act; that would be destructive of all the known
principles of law as the same would really amount to giving power to a delegated authority to even
amend the provision of law enacted by Parliament. This principle has been further reiterated in the
case of Shanmuga Traders v. State of Tamil Nadu . In the case of Union of India v. M. Bhaskar, ,
their Lordships held that there is no dispute in law that statutory provision cannot be changed by
administrative instructions.
60. Thus, from the decisions of the Supreme Court referred to above, it becomes abundantly clear
that when the law is amended, any circular issued earlier automatically gets superseded. Since in
this case the law was amended retrospectively, the letters issued by the Board, even assuming that
they have the effect of circulars issued under Section 119 of the IT Act, 1961, are ineffective and they
have to give way to the law passed by the supreme legislature. It may be pertinent to mention that
their Lordships of the Delhi High Court in the case of National Thermal Power Corporation Ltd. v.
Union of India and Ors. held that the opinion of the Board expressed in its administrative capacity
can under no circumstances be binding on the appellate authorities or the High Courts on a
reference.
61. In the case of CIT v. Swedish East Asia Co. Ltd. , their Lordships of the Calcutta High Court held
that when the section is clear, one cannot take aid of the circulars to interpret the law. This view is in
consonance with the view expressed by their Lordships of the Supreme Court in the case of State
Bank of Travancore (supra).
62. We may further refer to the observations of Sri K. Srinivasan, author of the book on DTAA
contained in para 7.2 of the book as under :
"7.2. While a treaty may supersede the existing law insofar as its specific terms are concerned, its
scope cannot be obviously widened by provisions covering future enactments, for no sovereign
legislature will ever agree to be eternally bound by such executive stipulations. There is nothing in
law preventing the legislature from revising its own views and amending the existing enactments. A
treaty cannot afford protection against such subsequent changes in law. However, all that is
required for revision of a treaty is the prescribed notice. Whenever the law undergoes any
modification that may affect the terms of a treaty, the administration may have to give due notice to
the concerned countries immediately to avoid giving any cause for a grievance. Courts have held in
the UK that any unilateral legislation enacted after a treaty has come into force will override the
treaty, whereas if it had been enacted earlier, its effect would have been limited by the treaty
provisions--CIR v. Collco Dealings Ltd. (1960) 39 Tax Cases 509, concerning UK anti-avoidance
legislation conflicting with the earlier Irish double tax avoidance agreement and Woodend Rubber
Co. v. CIR (1970) 2 WLR 10, concerning discriminatory legislation in Ceylon (Sri Lanka) conflicting
with the earlier UK-Ceylon treaty."

63. In the light of the above position of law, we are of the view that the Explanation to Section 90 is
attracted in this case and the letters issued by the CBDT have been superseded by the said
Explanation w.e.f. 1st April, 1962. We, accordingly, uphold the decision of the CIT(A) in regard to
the applicability of the rate of tax as applicable in the case of foreign companies in the case of the
appellant. Before parting with this issue we would like to point out that Article 25 of the DTAA is not
attracted in this. The said article is reproduced hereunder :
"Article 25 - Mutual agreement procedure 1. Where a person considers that the actions of one or
both of the States result or will result for him in taxation not in accordance with the provisions of
this Convention, he may, irrespective of the remedies provided by the domestic law of those States,
present his case to the competent authority of the State of which he is a resident or, if his case comes
under para 1 of Article 24, to that of the State of which he is a national. The case must be presented
within three years from the first notification of the action resulting in taxation not in accordance
with the provisions of the Convention.
2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is
not itself able to arrive at a satisfactory solution, to resolve the case by mutual agreement with the
competent authority of the other State, with a view to the avoidance of taxation which is not in
accordance with the Convention. Any agreement reached shall be implemented notwithstanding any
time limits in the domestic law of the States.
3. The competent authorities of the States shall endeavour to resolve by mutual agreement any
difficulties or doubts arising as to the interpretation or application of the Convention. They may also
consult together for the elimination of double taxation in cases not provided for in the Convention.
4. The competent authorities of the States may communicate with each other directly for the
purpose of reaching an agreement in the sense of the preceding paras. When it seems advisable in
order to reach agreement to have an oral exchange of opinions, such exchange may take place
through a Commission consisting of representatives of the competent authorities of the two States."
We admit our failure to appreciate as to how a letter written to the CBDT seeking opinion about the
rate of tax chargeable in the case of the appellant fits in within the framework of reference under
Article 25 of the DTAA. We find no merit in the contention in this regard advanced on behalf of the
appellants.
64. For asst. yrs. 1997-98 and 1998-99, the common grounds of appeal relating to rate of tax are as
under :
"1a. That, on the facts and in the circumstances of the case, the learned CIT(A) erred in upholding
the action of the AO of charging tax at a higher rate (55 per cent) applicable to foreign companies
instead of the tax rate applicable to domestic companies (43 per cent) as claimed by the appellant.
1b. That, without prejudice to ground la above, the learned CIT(A) without considering the elaborate
submissions made in course of hearing of the appeal, erred in confirming the action of the AO in

applying the tax rate applicable to foreign companies against the express provisions of Article 24 of
the DTAA between India and Netherlands, Notification No. G.S.R. 382(E), dt. 27 March 1989,
[(1989) 177 ITR (St) 72] read with Section 90 of the Act and Circular 333, dt. 2nd April 1982, [(1982)
137 ITR (St) 1] issued by the CBDT.
1c. That, in any view of the matter, and without prejudice to grounds 1a and 1b above, the learned
CIT(A) completely disregarded the specific direction given by the Hon'ble CBDT in the appellant's
own case that the appellant shall be taxed at the rates applicable to domestic companies for the
concerned assessment years read with the provisions of Article 25 of the DTAA between India and
Netherlands.
1d. That, in view of the impugned issue decided in favour of the appellant's own case for asst. yr.
1996-97 by the Hon'ble Tribunal in its order, dt. 30th March 2001, the learned CIT(A) erred in
taking a contrary view overruling the Tribunal decision considering the Explanation to Section 90(2)
of the Act inserted by the Finance Act, 2001."
65. Our decision in regard to the issue of rate of tax for asst. yrs. 1992-93, 1993-94 and 1994-95 shall
apply to asst. yrs. 1997-98 and 1998-99 mutatis mutandis.
Asst. yr. 1994-95 :
66. The only other ground that remains to be considered for asst. yr. 1994-95 is ground No. 3 which
reads as under :
"3. That, on the facts and in the circumstances of the case, the learned CIT(A) erred in enhancing the
assessment by an amount of Rs. 9,57,58,904 representing the operational loss arising to the
appellant on account of transactions in securities merely for the reasons that appellant was pursuing
the matter in suit which was pending disposal before the Court, disregarding the appellant's
submissions, inter alia, that pendency of the suit was not relevant for disallowance of the claim."
67. The relevant facts relating to this issue are that the assessee had received a sum of Rs. 10 crores
from Punjab Housing Board (in short 'PHB') for investments in bonds generating agreed rate of
return at 17 per cent The assessee had issued a cheque for Rs. 9.76 crores dt. 9th March, 1992 in
favour of Andhra Bank, Fort Branch, Mumbai, purportedly for investment in the purchase of NPC
Bonds. The said cheque was encashed by the bank on the same day. Sri N.K. Agarwal, the broker,
through whom the investment was made, failed to deliver the 17 per cent NPC Bonds in spite of
repeated reminders. On 18th March, 1992, Sri N.K. Agarwal delivered original letter of allotment
covering 1 lakh 9 per cent tax-free secured redeemable non-convertible bonds of Rs. 1,000 each fully
paid-up (6th 'A' series) Railway Bond 1991-92 issued by the Indian Railway Finance Corporation
Ltd. (IRFC). It is the claim of the assessee that the delivery of IRFC Bonds was accepted from Sri
N.K. Agarwal on the understanding that the same would be held as alternate security pending
delivery of 17 per cent NPC Bonds. The assessee sought information from Andhra Bank about the
non-delivery of NPC Bonds vide letter dt. 18th June, 1992. The Andhra Bank vide letter, dt. 22nd
June, 1992 informed the assessee that the amount received from Sri N.K. Agarwal was credited in

the account of Sri Hitendra Dalal, the broker, as per the instructions of Sri N.K. Agarwal. The
assessee had lodged the IRFC Bonds with Indian Railway Financial Corporation Ltd. to register the
same in the name of the assessee. However, IRFC refused to register the bonds in favour of the
appellant on the ground that the said bonds have already been registered in the name of Standard
Chartered Bank. The assessee filed an appeal to the Company Law Board against the refusal of the
IRFC for registering the IRFC Bonds. The appeal of the assessee was dismissed by the Company Law
Board vide order dt. 25th Aug., 1994. The assessee appealed to the Delhi High Court. However, the
appeal was transferred to the Special Court and the said Court also dismissed the appeal of the
assessee on 31st March, 1998.
68. In the previous year relevant to the asst. yr. 1994-95, the assessee settled the claim of the PHB
by returning the principal along with 17 per cent interest. It may be pertinent to mention that the
assessee had returned a sum of Rs. 24,41,096 to PHB out of Rs. 10 crores at the time of issuing the
cheque in favour of the Andhra Bank for Rs. 9,75,58,904. Subsequently, in March, 1992, a sum of
Rs. 18 lakhs received from Sri N.K. Agarwal was also refunded to PHB. The balance of Rs.
9,57,58,904 and the interest @ 17 per cent for six months was refunded to the PHB on 7th July,
1993. Whereas the interest paid to the PHB was claimed as a deduction separately as interest under
the head "Business income", the sum of Rs. 9,57,58,904 paid to the PHB was claimed as "loss in
business". The AO denied the claim of the assessee. The CIT(A) has also confirmed the disallowance.
69. The learned counsel for the assessee contended that the assessee had suffered business loss and
as such was entitled to deduction in respect of the same. It was pointed out that the assessee had
also written letter to the RBI sometime in April, 1993, but they had refused to interfere vide its letter
dt. 11th May, 1993. The assessee was also refused the permission to open a branch till the dispute
with Andhra Bank was settled. In March, 1995, the assessee instituted a suit against the Andhra
Bank and Sri N.K. Agarwal for the recovery of the principal amount along with interest. The suit has
been transferred to the Special Court. According to the learned counsel, since the settlement with
the PHB was made on 7th July, 1993, i.e., in the previous year relevant to asst. yr. 1994-95, the loss
suffered by the assessee falls within the previous year and, accordingly, allowable as a business loss.
It was stated by the learned counsel that the interest paid to PHB has been allowed as a deduction.
The learned counsel pointed out that in order to avoid adverse publicity, the assessee in the business
interests considered it prudent to settle the claim with the PHB. Our attention was invited to the
decision of the Supreme Court in the case of CIT v. Nainital Bank Ltd. where the jewellery pledged
with the bank had been stolen. Though the bank was not legally bound to compensate the borrowers
for the loss of jewellery, it was decided to do so in the interests of business. Such expenditure
incurred by the assessee was held to be allowable as business loss. Reference was also made to the
CBDT Circular No. 35D, dt. 24th Nov., 1965 in support of the contention that the loss incidental to
business is to be allowed in the year in which it was discovered. Reference was also made to the
decision of the Gujarat High Court in the case of Dinesh Mills Ltd. v. CIT in support of the
contention that the loss suffered by the assessee in the course of business was allowable. It was,
accordingly, pleaded that the deduction for a sum of Rs. 9,57,58,904 may be allowed.
70. The learned Departmental Representative, on the other hand, contended that the assessee was
not entitled to deduction insofar as the claim of the assessee was sub judice. There might be a

possibility of loss to the assessee. But deduction is not allowable on mere possibility. It was further
contended that the decisions relied upon by the learned counsel for the assessee are distinguishable
on facts. The facts and circumstances of this case clearly reveal that the assessee had not suffered the
loss in the year under appeal and, therefore, no deduction was permissible.
71. We have given our careful consideration to the rival submissions. The assessee is engaged in the
business of accepting deposits, giving loans, discounting/collection of bills, issue of letter of credit,
guarantee, executing forward transaction in foreign currencies for importers/exporters, money
market lending/borrowings, investment in securities, etc. The assessee received a sum of Rs. 10
crores from PHB in the course of business for purposes of investment with assured return of interest
at 17 per cent. Sum of Rs. 42,41,096 (Rs. 24,41,096 + Rs. 18,00,000) had been returned to PHB out
of 10 crores investment. The assessee had made investment in the course of its business with
Andhra Bank through Sri N.K. Agarwal, a broker. It is the claim of the Andhra Bank that the amount
received from Sri N.K. Agarwal on behalf of the appellant was credited in the account of Sri
Hitendra Dalai as per instructions of Sri N.K. Agarwal. However, it is the claim of the assessee that
no such instructions were issued and that the cheque paid in the name of Andhra Bank was issued
for the purchase of NPC Bonds on behalf of PHB. This fact is disputed by the Andhra Bank. Even on
the basis of the disputed facts it is evident from the material available on record that the assessee
could not retrieve the investment of Rs. 9,57,58,904. The Revenue is not disputing this fact. The
dispute, however, is only as to whether the non-receipt of NPC Bonds for the amount of Rs.
9,57,58,904 amounts to loss incurred by the appellant and if so, which is the relevant year for
allowance of deduction. There are two aspects of the issue involved. One aspect is whether the
assessee has suffered the loss. Second aspect is, in any case, whether the loss has been incurred in
the year under appeal by reason of refund of principal and interest to the investor, PHB. We first
propose to deal with the second aspect. As is evident from the facts, the assessee had received the
amount from PHB on 28th Feb., 1992. The assessee had received IRFC Bonds from Sri N.K. Agarwal
in March, 1992, as indicated in the decision of the Company Law Board, Northern Region, New
Delhi, placed on record. These bonds had been lodged with IRFC. It was in June, 1992, that the
assessee was informed that the original bonds had already been transferred in favour of the
Standard Chartered Bank. So, if at all the assessee can be said to have lost the investment made
through Sri N.K. Agarwal, its discovery could be said to be on receiving the information from IRFC
in June, 1992. The said date falls in asst. yr. 1993-94. We are dealing with asst. yr. 1994-95. In asst.
yr. 1994-95, the assessee has settled the claim with PHB by repaying the investment along with 17
per cent interest on such investment. The claim of the assessee is that the investment had been
made on behalf of the PHB and that it had no legal obligation to refund the investment to the PHB.
However, the refund was made as a matter of business prudence and, accordingly, the expenditure
so incurred was allowable as a deduction for computing the business profits, it was contended.
72. In our considered view, the assessee had received the amount from PHB for the purpose of
investment in specific bonds, not necessarily NPC Bonds. The assessee had made investments in the
course of its business. Though the investment made by PHB with appellants and the investment
made by the appellant with Andhra Bank are related, yet they are not part of the same transaction.
The assessee has received money for the purpose of investment which is the business of the
assessee. The investor had been assured the return of 17 per cent per annum. In turn, the assessee

made investment in the course of its business. The possibility of loss of investment is part of the
business of the assessee. The assessee had accepted IRFC Bonds from Shri N.K. Agarwal. However,
PHB was not a party to such transaction or acceptance of the bonds. In the petition filed with the
Company Law Board regarding transfer of IRFC Bonds, PHB is not a party. It thus becomes
abundantly clear that the investment made by the assessee with the Andhra Bank was not as agent
of PHB but as an independent business investment. Andhra Bank has claimed that the cheque was
issued with clear instructions to be credited to the account of Sri Hitendra Dalai. In view of the
disputed facts one cannot come to the conclusion that the assessee has lost the money. In any case,
even if it is assumed that the assessee has suffered any loss, it is not on account of refund of money
to the PHB but on account of investment made by the assessee-bank. As already pointed out, the
fact that Sri N.K. Agarwal had not made investment for the purchase of NPC Bonds as per the
purported instruction by the assessee was known to the assessee in the preceding year, i.e., in the
asst. yr. 1993-94. The assessee had pursued the matter with Sri N.K. Agarwal and Andhra Bank and
finally a suit was instituted against Andhra Bank and Sri N.K. Agarwal sometime in 1995. Therefore,
it cannot be said with certain amount of certainty that the assessee has suffered the loss as yet. In
any case, the claim does not fall in the year under appeal. Even if the loss is to be taken at the time of
its discovery, that is when Shri N.K. Agarwal did not deliver the NPC Bonds or when IRFC Bonds
were refused to be registered in the name of the assessee, even then the loss falls in asst. yr. 1993-94.
However, assessee is to claim the loss only after losing the reasonable hope of recovery, the loss can
be considered only in the event of the decision in the suit instituted against Sri N.K. Agarwal and
Andhra Bank. This may be explained with an example. In the case of a trader, the assessee supplying
goods to party 'A' may find it difficult to make recovery on account of the sale price of the goods. The
assessee without making any efforts for recovering the amount cannot be said to have suffered the
loss unless all reasonable means are exhausted for the recovery of the sale price. In this case, Sri
N.K. Agarwal is stated to be the agent for Andhra Bank and the receipt of money has been pursued
through Sri N.K. Agarwal, as admitted by Andhra Bank. The dispute is about the nature of the
instructions received from the assessee regarding the investments. The suit has been instituted and
there is still reasonable hope of recovery of the amount. The loss in the year under appeal cannot be
said to have been incurred by the assessee notwithstanding the fact that there is a possibility of loss.
Mere possibility of the loss may not be equivalent to the actual lose of money. Taking the totality of
the facts and circumstances of the case into consideration, we are of the view that the refund of
money to the investor, viz., PHB, of Rs. 9,58,57,904 is refund of the investment in the course of
business and it does not amount to a loss suffered by the assessee in the course of business. This
view gets further strength from the fact that the assessee paid interest of 17 per cent to the PHB
along with the refund of the principal. It is unimaginable that the assessee-bank would have agreed
not only to refund the principal amount to PHB but had also agreed to pay interest @ 17 per cent to
the said Board as a matter of business prudence when according to the assessee they were not
obliged to even return the investment to PHB. Facts and circumstances of this case clearly indicate
that the refund to PHB was of their investment with the appellants and payment of interest on such
investment was rightly allowed as expenditure incurred for purposes of business. It is like purchases
being made from 'A' and the goods having been sold to 'B'. If B' does not pay the price of the goods,
it may amount to loss suffered by the assessee. But the payment to 'A' for the goods supplied will not
amount to loss to the assessee though the loss to the assessee on account of B's refusal to pay relates
to the goods supplied by 'A'. Similarly, in this case, PHB made investment with the appellants. If at

all the assessee has suffered a loss in the course of its business of making the investment, refund of
money belonging to PHB plus interest cannot be said to be loss to the assessee. The event of refund
to PHB is not the occasion of loss. We, accordingly, hold that the loss, if any, suffered by the
appellants on account of investments does not relate to the year under appeal. We, accordingly, hold
that in view of the disputed facts, it cannot be said that the assessee has suffered the loss. The refund
of principal and interest to the investor-PHB in any case is not the event of loss. We also hold that,
in any case, the loss does not pertain to the year under appeal. We, however, make it clear that our
decision for the year under appeal relating to the disallowance of loss of Rs. 9,57,58,904 is without
prejudice to the right of the assessee to claim the loss, if any, in which it can be said to have been
incurred.
73. Before parting, we may point out that the assessee had filed application dt. 10th March, 2003 on
11th March, 2003 with the Registry raising the following additional ground of appeal for asst. yr.
1993-94 :
"In the event of the appellant's claim for operational loss on securities amounting to Rs. 9,57,58,904
is not allowed in the asst. yr. 1994-95, the same ought to be considered and allowed in the asst. yr.
1993-94."
The hearing of appeal for asst. yr. 1993-94 was concluded on 6th March, 2003, along with appeals
for asst. yrs. 1992-93 and 1995-96. The filing of additional ground of appeal after concluding the
hearing and subsequent to the date of hearing is inconsequential and, accordingly, does not require
any consideration. It may also be pertinent to mention that the assessee has filed a suit against
Andhra Bank and Sri N.K. Agarwal and facts stated by the assessee are disputed. Therefore, whether
the assessee has incurred the loss or not is dependent on the outcome of the suit. In such
circumstances the claim of the assessee that the loss should be considered in asst. yr. 1993-94 is
premature in any case.
74. In the result, the appeals of the assessee for asst. yrs. 1992-93 to 1995-96 are partly allowed.
Pramod Kumar, A.M.
75. I have carefully gone through the order proposed by the learned Vice President but as I am
unable to persuade myself to agree with certain conclusions arrived at therein I proceed to place on
record my dissenting views.
76. The facts of this case and the developments giving rise to this litigation have been rather
comprehensively set out in the learned Vice President's draft, and, for the sake of brevity I need not
repeat the same. I would, therefore, come directly to the areas of disagreement which are primarily
on the legal principles.
A: On the scope of proviso to Section 40(a)(i) :
77. In paras 24 and 27 of his draft, the learned Vice President has, inter alia, observed as follows :

"It is evident from the above that the salary paid to expatriate employees is net of taxes. The assessee
had neither paid nor deducted taxes in asst. yrs. 1992-93 to 1994-95. However, in the asst. yr.
1995-96, the assessee has paid the tax deductible at source. Therefore, in principle the assessee
would be entitled to deduction in respect of the tax component of the salary also if the salary is
found to be deductible as per directions of the Tribunal for the asst. yr. 1996-97 (supra) which has
been adopted by us. So however, no deduction will be permissible in asst. yr. 1992-93 to 1994-95 by
operation of Section 40(a)(i) of the IT Act, 1961. The claim for the said assessment years shall have
to be disallowed for the reasons of non-deduction of tax. So, however, the deduction shall have to be
considered for the asst. yr. 1995-96 as per proviso to Section 40(a)(i)"
"In principle, the claim of the assessee has got to be considered in the assessment year to which the
claim pertains to. It is only when the claim is considered and found allowable but for provisions of
Section 40(a) that the same can be allowed in the year of payment. Since the claim for asst. yrs.
1990-91 and 1991-92 is not established to have been made and considered in earlier years, the
benefit is not permissible in asst. yr. 1995-96 merely because the tax has been paid in the year under
appeal. The benefit of the proviso to Section 40(a)(i) is thus not available to the assessee for which
no claim is made in the respective assessment years."
78. In my considered view, however, in cases where deduction in respect of sums paid to
non-residents is claimed in the year in which the relevant tax deduction at source obligations are
discharged, and such an year is subsequent to the year to which relevant expenses pertain, it is not
sine qua non that the assessee should have first claimed the deduction in the year to which it
pertains and the deduction should have been rejected by the AO under Section 40(a)(i). I am,
therefore, unable to subscribe to the aforesaid proposition laid down in learned Vice President's
proposed draft.
79. I may reproduce the contents of Section 40(a)(i) for ready reference :
"Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be
deducted in computing the income chargeable under the head 'Profits and gains of business or
profession',--
(a) in the case of any assessee
1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable
outside India, on which tax has not been paid or deducted under Chapter XVII-B :
Provided that where in respect of any such sum, tax has been paid or deducted under Chapter
XVII-B in any subsequent year, such sum shall be allowed as a deduction in computing the income
of the previous year in which such tax has been paid or deducted...."
80. A plain reading of the above legal provision makes it clear that so far as payments outside India
are concerned, these payments are not allowed as a deduction unless the tax deduction at source

obligations, if any, in respect of the same, are duly discharged by the assessee. It further provides
that in cases in which such tax deduction at source obligations are discharged in a year subsequent
to the year to which the payments pertain to, the related payments are allowable as deductions in
the year in which the tax deduction at source obligations are so discharged. There is no suggestion,
however, to the effect that the proviso to Section 40(a)(i) will only come to the play when the
assessee has claimed the deduction in the year to which the expense pertains and such a claim was
rejected under Section 40(a)(i). In the absence of any such limitation having been specifically placed
on the scope of proviso to Section 40(a), in my considered view, it is not open to us to infer or
assume such restrictions which are not supported by the words of the statute. Even if these
restrictions be said to be desirable for proper working of the section, it is not open to us to supply
the casus omissus. In the case of Tata Tea Limited v. Jt. CIT (2003) 78 TTJ (Cal) 646 : (2003) 87
ITD 351 (Cal), to which both of us were parties, it was observed that "casus omissus, which broadly
refers to the principle that a matter which has not been provided in the statute but should have been
there, cannot be supplied by us, as, to do so will be clearly beyond the call and scope of our duty
which is only to interpret the law as it exists." As Rowlatt, J. has said, in Cape Brandy Syndicate v.
IRC (1921) 1 KB 64, "In a taxing statute, one has to look merely at what is clearly said; there is no
room for any intendment...". The temptation of resorting to a rather creative process of an
aggressive interpretation of statutes, which allows us to read between the lines, therefore, must be
resisted. Even as I say so, I am also of the view that, in any event, there is nothing between the lines
to justify such an interpretation either. I am of the considered view that, in any event, it can be
nothing short of a meaningless ritual for an assessee to claim a deduction knowing well that the
same is specifically inadmissible in view of the provisions of Section 40(a)(i), or, for that purpose,
for the AO or the appellate authorities to adjudicate on the academic questions of allowability of
such a deduction on merits when the same is clearly not admissible in view of specific provisions of
Section 40(a)(i). By the virtue of Section 40(a)(i), in my considered view, deductions in respect of
payments made outside India, involving tax deduction at source obligations by the payee, are
admissible in the year in which such tax deduction at source obligations have been discharged, and
this principle operates de hors the method of accounting employed by the assessee. For all these
reasons, in my considered view, it is not a condition precedent for admissibility of deduction under
proviso to Section 40(a)(i) that the assessee should have first claimed the deduction in the year to
which it pertains and that deduction should have been rejected by the AO only on the ground that
the tax deduction at source obligations in respect of the same have not been discharged by the
assessee.
81. It is interesting to note that the provisions of Section 40(a)(i) are disabling provisions as well as
enabling provisions. While Section 40(a) lays down the restrictions on deductibility of certain
expenses, proviso to Section 40(a)(i) lays down the conditions in which such an expense is to be
allowed.
82. Normally, proviso to a section sets out an exception to the scope of section. It carves out an area,
out of the area covered by the scope of the section, and takes it away from applicability thereof. As
Lush J said, "When one finds a proviso to a section, the natural presumption is that, but for the
proviso, the enacting part of section would have included the subject-matter of the proviso." As Lord
Macnaghaten observed, 'the proviso may be a qualification of the preceding enactment which is

expressed in terms too general to be accurate'. No doubt that, more often than not, it is somewhat
alien to the proper function of a proviso to read it as providing something by way of an addendum or
dealing with a subject which is not directly relevant to the section of which it is a proviso. In other
words, normally a proviso operates as an exception, rather than as a substantive provision.
However, as was observed by the Hon'ble Supreme Court in the case of CIT v. Jagannath Mahadeo
Prasad "where the language is quite clear and no other view is possible, it is futile to go into the
question whether the proviso to Section 24(1) operates as a substantive provision or only by way of
an exception to Section 24(1)". The words of proviso to Section 40(a)(i) also being clear and being
free from any ambiguity, and in view of the principle so laid down by the Hon'ble Supreme Court in
the case of Jagannath Mahadeo Prasad (supra), this proviso is to be viewed as a substantive
provision and as, to repeat my words in the preceding para, an enabling provision.
83. In the light of the above discussions and in view of the fact that the learned Vice President has
confirmed the disallowance of remuneration and tax in respect of 1990-91 and 1991-92 only on the
ground that the assessee had not made claim for deduction thereof in the respective years, I
dissociate myself from this conclusion arrived at by the learned Vice President. In my considered
view, therefore, the deduction of remuneration and tax in respect of 1990-91 and 1991-92 is to be
allowed in the asst. yr. 1995-96, i.e., the year in which the assessee has duly discharged the tax
deduction at source obligation in respect of the same.
B : Deductibility of interest under Section 201(1A)
84. In para 28 of the proposed draft, learned Vice President has observed as follows :
"That leaves us to consider the interest paid by the assessee under Section 201(1A). Before
proceeding to consider this issue, we would make it clear that for asst. yrs. 1992-93 to 1994-95
interest paid by the assessee was neither claimed in the course of assessment proceedings nor in the
grounds of appeal before the CIT(A) or before us. The claim has, however, been made in the asst. yr.
1995-96. Thus, at the very outset the claim of interest pertaining to period falling in 1990-91 to
1994-95 is disallowable in any case for the reason that no such claim has been made for the relevant
years."
In my considered view, however, since the aforesaid interest was in the nature of employee cost and
since it was paid in the previous year relevant to the asst. yr. 1995-96, the same should be allowed as
a deduction in the asst. yr. 1995-96. It is also to be noted that the liability to pay even the
remuneration was not debited in the books of account in India, as evident from the contents of para
9 of learned Vice President's draft, and yet the same was held to be allowable as a deduction in
computing income attributable to Indian PE. By the same logic, merely because relevant interest
expenses were not claimed as a deduction by showing the same in the books of account for the
relevant years, cannot come in the way of allowing interest expenses as a deduction for the present
year. On the facts of the present case, interest levy under Section 201(1A) is an integral part of the
remuneration paid to expatriates, since such remuneration is paid on 'net of tax basis' and interest
under Section 201(1A) will have the same character as the tax paid on such salaries which is
undoubtedly the character of salaries or cost of employment. As a corollary to the remuneration

itself having been held to be an allowable deduction, the tax paid in connection with such
remuneration as also interest paid in connection with such taxes is also required to be treated as an
'allowable deduction'.
85. In para 34 of the proposed order, learned Vice President has further observed that :
"...It may also be pertinent to mention that income-tax paid by the assessee does not qualify for
deduction as such. This view is supported by the decision of the Supreme Court in the case of Smt.
Padmavati Jaikrishna v. Addl. CIT . In the case of East India Pharmaceutical Works Ltd v. CIT ,
Their Lordships of the Supreme Court held that the interest paid on the overdrafts utilized for
payment of income-tax is also not allowable as a deduction as it is not an expenditure laid down
wholly and exclusively for the purposes of business as contemplated by Sub-section (1) of Section 37
of the IT Act, 1961. On the basis of the above principles of law, the interest paid by the assessee as
'an assessee-in-default' of tax is not exigible for deduction as expense incurred for purposes of
business. The decisions relied upon by the learned counsel for the assessee are accordingly
inapplicable to the facts of this case." [The expression "interest paid by the assesses as 'an
assessee-in-default' of tax" refers to interest paid by the assesses under Section 201(1A) of the Act]
However, in my considered view, interest paid by the assessee on the facts of this case is in the
nature of a compensatory levy and part of the employee cost. I am also of the view that since the
interest in question is not in respect of taxes on income of the assessee, but in respect of employee
tax liability which is in the nature of 'employee cost' for the assessee, Hon'ble Supreme Court's
judgments in the cases of Smt Padmavati Jaikrishna v. Addl. CIT and East India Pharmaceutical
Works Ltd v. CIT are not relevant in the present context.
86. In the proposed order, the learned Vice President has declined the claim by observing that
income-tax does not constitute an admissible deduction and since interest in question is paid in
connection with income-tax, the interest paid on account of delay in deposit of tax deducted at
source also cannot be allowed as a deduction. Interestingly, however, in the proposed order, the
learned Vice President himself has allowed the deduction on account of tax deductible at source
from salaries to expatriates. In doing so, in paras 24 to 26 of the learned Vice President's draft, it has
been observed that :
"It is evident from above that the salary paid to expatriate employees is net of taxes.... We... direct
the AO to consider the claim of the assessee in regard to remuneration and the taxes paid relating to
the asst. yrs. 1992-93 to 1995-96 in the asst. yr. 1995-96 in accordance with the directions contained
in this order."
Once we hold that the taxes deducted at source, which were borne by the assessee as an employee
cost and on account of expatriate salaries being on 'net on tax basis', constituted admissible
deduction, it cannot be open to us to hold that interest payable in connection with such taxes
deductible at source will not be deductible on the ground that tax itself is not an allowable
deduction. To me, there appears to be an inherent contradiction in this stand; either income-tax
deductible at source is an allowable deduction or it is not, but once on the facts of a case, it is held
that it is an allowable deduction, and rightly so, the interest on delayed deposit of such tax cannot be

declined deduction on the ground that income-tax deductible at source is not an allowable
deduction. In any case, income-tax paid by the assessee, in discharge of tax liability of the employees
and on account of assessee paying salaries to related employees on 'net of tax basis', is nothing but
an expense in the nature of, what is usually termed as, 'employee cost'. Such an expense is incurred
to earn the income, and is, therefore, an admissible deduction.
87. In Smt. Padmavati Jaikrishna's case (supra) relied upon by the learned Vice President, Hon'ble
Supreme Court had, inter alia, observed that "we are inclined to agree with the High Court that so
far as the meeting of the liability of income-tax and wealth-tax is concerned it was indeed a personal
one and payment thereof cannot at all be said to be expenditure laid out or expended wholly and
exclusively for the purpose of the earning the income" and that "the test to apply is that the
expenditure should be wholly and exclusively for the purpose of earning the income". In coming to
the conclusion that the interest paid on overdraft to pay income-tax dues does not constitute an
admissible deduction under Section 57(iii), Their Lordships took note of the legal position that "the
expenditure to be deductible ... must be laid out or expended wholly and exclusively for the purpose
of making or earning such income..." as also the finding that "the expenditure in this case was to
meet the personal liability of payment of income-tax and wealth-tax" which was obviously not to
earn income. To my understanding, the principle that could be said to emerge from this judgment is
that only such expenses can be allowed as a deduction which are incurred to earn that income, but
then income-tax is certainly not 'to earn an income', and, therefore, rightly inadmissible as a
deduction. In the case of East India Pharmaceutical Works (supra) relied upon by the learned Vice
President, Hon'ble Supreme Court has simply followed this principle and observed that "as has been
already noticed in Smt. Padmawati's case (supra), this Court had affirmatively held that, meeting the
liability for income-tax was a personal liability and such expenditure can never be held to be wholly
and exclusively for the purpose of earning income." . On the facts of the present case, however, none
of these judgments have any application. It is not in dispute that the assessee has paid the salaries to
expatriates on net of tax basis, and, therefore, tax paid on behalf of such employees is an integral
part of the employee cost which cannot but be said to be in the nature of expenses, to use the
terminology employed by the Hon'ble Supreme Court, "wholly and exclusively for the purpose of
earning income". On the present set of facts, therefore, interest paid on account of delay in
depositing the taxes deductible at source is an admissible deduction, and learned Vice President's
reliance on Hon'ble Supreme Court's judgments in the cases of Smt. Padmavati Jaikrishna (supra)
and East India Pharmaceutical Works (supra) does not appear to be wholly justified.
88. In his proposed order, learned Vice President has stated that "Since the income of the expatriate
employees is liable to tax, the assessee would be obliged to file the returns of income and discharge
the obligations which, but for the agreement of employment with the assessee, expatriate employees
had to discharge." In my view, we have no basis for arriving at this conclusion, nor is it anyway
relevant in deciding the deductibility of interest paid on delayed deposit of taxes deductible at
source.
89. It cannot also be in dispute that the interest under Section 201(1A) is compensatory, and not
penal in nature. Articulating the views of Kolkata 'C' Bench in the case of ITO v. Titagarh Steels Ltd.
(2001) 73 TTJ (Cal) 297 : (2001) 79 ITD 532 (Cal), and dealing with a case in which the assessee

had, inter alia, paid interest under Section 201(1A) for delayed deposit of taxes deducted at source, I
had observed as follows :
"... the first and foremost consequence is that the tax deductor has to make good the shortfall in tax
deduction and the tax deductor also has to compensate the Revenue by way of interest for the period
of late realization of this tax to the Revenue authorities. These provisions, contained in Section
201(1) and Section 201(1 A), are set out in Chapter XVII-B titled as 'Collection and Recovery of Tax'.
The next set of consequences are contained in Section 271C and Section 276B, covered by Chapter
XXI--'Penalties Imposable' and Chapter XXII--'Offences and Prosecutions' respectively....".
90. In the case of Mahalakshmi Sugar Mills Co. Ltd. v. CIT , Hon'ble Supreme Court has, while
dealing with the levy of interest on cess, observed that "In truth, the interest provided for under
Section 3(3) is in the nature of compensation paid to the Government for delay in the payment of
cess. It is not by way of penalty. The provision for penalty as a civil liability has been made under
Section 3(5) and for penalty as a criminal offence under Section 4." Their Lordships were thus of the
opinion that a compensatory levy of interest is a deductible expenditure. In view of Tribunal's
decision in the case of Titagarh Steels Limited (supra), interest levy under Section 201(1) is a
compensatory levy, and, therefore, the same constitutes an admissible deduction. The circumstances
leading to this levy may be such as to invite a penal action but then what is material in the present
context is the precise nature of deduction being claimed, and no further. It may be recalled that in
Mahalakshmi Sugar Mills Co Ltd's. case (supra), Their Lordships had further observed as follows :
"In our opinion, the interest paid under Section 3(3) of the Cess Act cannot be described as a penalty
paid for an infringement of the law. As that is the only ground on which the Revenue resists the
claim of the assessee to a deduction of the interest under Section 10(2)(xv) of the Indian IT Act,
1922, the assessee is entitled to succeed. There is no dispute that the payment of interest represents
expenditure laid out wholly or exclusively for the purpose of the business. There is also no dispute
that it is in the nature of revenue expenditure."
In the case of Prakash Cotton Mills (P) Ltd. v. CIT , Their Lordships of Hon'ble Supreme Court have
observed that "The decision of this Court in Mahalakshmi Sugar Mills Co. Ltd. and the decision of
the Division Bench of the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd.
with the view of which we are in complete agreement, are in our opinion, decisions which settle the
law on the question as to when an amount paid by an assessee as interest or damages or penalty
could be regarded as compensatory (reparatory) in character as would entitle such assessee to claim
it as an allowable expenditure under Section 37(1) of the IT Act".
91. In view of the reasons stated above, I am unable to concur with the learned Vice President that
the interest paid by the assessee under Section 201(1A) of the Act is not eligible for deduction as
expenses incurred for the purposes of business. In my view and on the facts of this case, the interest
paid under Section 201(1A), being an integral part of the cost of employees--as payment on account
of compensatory levy for delayed deposit of taxes which the assessee was under an obligation to pay
on behalf of the employees--, is in the nature of expenses incurred for the purposes of the business
and for earning the income, and, is, therefore, admissible as a deduction under Section 37(1) of the

Act.
C : Deducibility of operational loss
92. As far as this claim of deduction of Rs. 9,57,58,904 is concerned, this claim was originally
allowed by the AO but, in the course of first appellate proceedings and vide para 8 of the impugned
order, CIT(A) made this disallowance by observing as under :
"I find that this claim of loss relates to the transactions with regard to scam period in respect of
shares and securities and the matter is at present sub judice and is pending with Special Court set up
by the Government to decide scam related issues.
Keeping in view the fact that the matter is still sub judice and the Court is yet to give finding with
regard to this scam and the loss incurred was not business loss, this loss of Rs 9,57,58,904 cannot be
allowed to the appellant. The AO is directed to give effect to this order enhancing the income of the
appellant to this extent"
Aggrieved by the enhancement so made by the first appellate authority, assessee is in appeal before
us.
93. In order to appreciate the nature of this loss in correct perspective, it may also be useful to
understand the nature of transaction as also modus operandi of the broker.
94. As evident from the document placed before us at p. 47 of the paper book, the assessee received
a sum of Rs. 10 crores from Punjab Housing Board (PHB, in short), for investment by the assessee,
for a period of 180 days subject to the condition that the money is to be invested in Government
securities, UTI or tax-free bonds, that a return of 17 per cent minimum will be guaranteed, that all
services were to be rendered in Chandigarh, and that in case of emergency, money may be made
available to PHB with whatever returns that becomes due at that time. It was in the course of
investment of money so received by the assessee that on 9th March, 1992, it issued a cheque of Rs.
9,75,58,904 to Andhra Bank for purchase of 17 per cent NPC Bonds @ 'Rs 97 per bond plus accrued
interest' and handed over a payment advice and the cheque, cheque forming part of the payment
advice, to a broker by the name of Shri. N.K Agarwal. At this stage, I must clarify as to the present
practice of issuance of 'payment advice-cum-cheque'. With the changes in the Indian banking
practices brought about mainly by the multinational banks, it is no longer a cheque book which is
used by the large corporate account holders, involving issuance of large number of cheques, or the
banks. These cheque books are now replaced by packets of perforated computer friendly forms, used
as a continuous computer stationery, issued by the banker to its important clients and, of course, for
its own purposes. These pre-numbered advices are in two parts and can be separated by tearing off
at the perforated points. The top portion contains the kind of details of the person issuing the
cheques as a letter-head would contain, and has columns for the name and address of the person to
whom cheque is issued, details of payment, and details of purposes for which it is issued. The
bottom portion is a form for the cheque itself. These forms are computer friendly and, while
processing the payment, while details of payment are printed on the top portion, the details

necessary for cheque are printed on the bottom portion. Upon signing, the top portion is used as a
payment advice, while bottom portion, on being removed from the aforesaid advice, works as a
cheque itself. A typical example of such a practice is reflected by the copy of payment
advice-cum-cheque in question issued to Andhra Bank, a copy of which is placed before us at p. 49
of the paper book. Even a cursory look of the above payment advice-cum-cheque clearly
demonstrates the fact that the payment advice and the cheque are composite instruments in this
case, although, for banking purposes, one has to tear off the cheque and process it for payment. The
cheque portion appears to be in favour of Andhra Bank, but then it's a fairly well-known fact that the
modus operandi of many security scams was that cheques issued in the name of banks were used, as
a part of normally acceptable practice, to credit the accounts of certain brokers as maintained in
those banks. It was, inter alia, this vulnerable practice in the banking industry which proved to be a
fertile ground for ingenious and unscrupulous scamsters.
95. It is not in dispute in the present case that it was this payment advice-cum-cheque which was
handed over by the assessee to the broker, and this fact is also evident from acknowledgment on
copy of the payment advice-cum-cheque placed before us at p. 49 of the paper book. What has
apparently been done by someone in this case is that he removed the top portion of payment
advice-cum-cheque, ignored its contents altogether, and used the bottom portion, i.e., the cheque,
for affording credit to the account of one Hiten Dalal, one of the central characters in several cases
of security scams in this country. This exercise, in our considered view, is nothing short of a fraud
within meanings of Section 17 of the Indian Contracts Act, 1872, which describes fraud as, inter alia,
active concealment of a fact by one having knowledge or belief of the fact. Now, it cannot be in
dispute that the person who received the payment advice-cum-cheque was aware that the cheque in
the name of Andhra Bank was specifically for the purpose of purchase of NPC Bonds in the name of
PHB, but he actively conceals this fact by removing the top portion of 'payment advice-cum-cheque'
and uses only the cheque portion for an unauthorized credit to the account of Hiten Dalai. As an
agent of the PHB, which the assessee clearly was while making investment specifically on behalf of
this principal, the assessee was bound to conduct the business of the principal as per directions
given by the principal, or, in the absence of such instructions, according to the normal usage.
Subsequent to this transaction, the assessee has been able to realize IRFC Bonds valued at Rs.
9,57,58,904 as also a sum representing the difference in value of NPC Bonds vis-a-vis the IRFC
Bonds, on 18th March, 1992, but even the IRFC Bonds could not be transferred to the assessee-bank
as the same were already sold to Standard Chartered Bank. The assessee carried the matter before
the Company Law Board but without any success. As evident from p. 1 of CLB's order, dt. 25th Aug.,
1994, marking attendance of Shri Manmohan and Shri C.M. Oberoi, Advocates representing PHB,
PHB was also represented before the CLB. This CLB order, at p. 2, specifically observes as follows :
"In accordance with the instructions of NKA (i.e., the broker), ABN Amro Bank, (i.e., appellant
before us) issued an account-payee cheque/pay order in favour of Andhra Bank, Fort Branch,
Bombay, for the above said amount, with an attached memorandum stating that it represents the
cost of 17 per cent NPC Bonds purchased on behalf of petitioner's customer, PHB."
In my view, receipt of Rs. 10 crores from PHB and issuance of cheque for purchase of 17 per cent
NPC Bonds are integral parts of the same transaction. It is also important to bear in mind the fact

that the amount that the assessee-bank was unable to invest in the NPC Bonds was duly refunded to
the PHB. In case receipt of Rs. 10 crores from PHB and Investment in 17 per cent NPC Bonds are to
be treated as unconnected transactions, the refund of Rs. 24,41,096 to PHB remains unexplained,
which represents the difference of amount received for investment minus the amount invested in 17
per cent NPC Bonds. The assessee-bank had also refunded Rs. 18 lakhs to PHB and this amount was
received from N.K. Agarwal, being difference between the market value of NFC Bonds and IRFC
Bonds, at the time of handing over IRFC Bonds in substitution of NPC Bonds. All these factors
indicate that receipt of Rs. 10 crores from PHB, and investment in NFC Bonds are interconnected
and integral part of the transaction entered into by the assessee-bank. While making this purchase
of 17 per cent NPC Bonds, assessee was not making an investment in the course of its business, but
making an investment specifically on behalf of the constituent, i.e., PHB as an agent. It would also
appear to us that the assessee acted in the manner in which a normal prudent person would have
acted by issuing the cheque in the name of Andhra Bank with specific instructions to use the
proceeds of this cheque for buying the securities in question. The loss suffered by the assessee in
such a situation, i.e., acting as an agent of PHB and while conducting the business in a bona fide
manner, prima facie is on account of the principal, i.e., PHB. In our considered view, therefore, no
loss was incurred by the assessee as such on his account, but on account of its client, i.e., PHB,
specifically on whose behalf and specifically in whose name, the assessee was trying to acquire
securities. Yet the assessee agreed to bear this loss by making good the loss caused to PHB, not
because the assessee had a legal duty to do so but, as I find, because of commercial expediency. One
important factor contributing to this commercial expediency appears to be that the RBI declined to
issue a licence for opening a new branch office at Chennai. The RBI in its letter dt. 16th June, 1993, a
copy of which was placed before us at p. 58 of the paper book, stated that "issue of a licence to your
bank for opening a branch in Madras has again been decided to be kept in abeyance till such time as
the dispute on securities transactions between your bank and Andhra Bank is resolved". Within
three weeks of this communication, the assessee-bank entering into settlement with PHB, also, in a
way, indicates the factors influencing the assessee-bank's decision to bear the loss. Let us see this
from the point of view of a large multinational bank that this assessee admittedly is. In case such an
assessee has to choose between bearing a loss of Rs. 9.57 crores or losing the opportunity to operate
business in a major Indian metropolitan city like Chennai, the odds are that the commercial
expediency may persuade the assessee to opt for losing only Rs. 9.57 crores. In other words,
commercial expediency of bearing this loss, which is surely best judged by the assessee himself,
cannot be simply rejected as improbable. In this view of the matter, I am of the considered opinion
that there is no material to reject assessee's claim that the payment made to PHB was justified on
the grounds of commercial expediency.
96. There is one more aspect to the matter, and, that is pertaining to the importance of assessee's
credibility in its customers and prospective customers. There are occasions when, to protect its
reputation and credibility, a bank has to bear a loss which, strictly speaking, is not even its loss. One
such situation was dealt by with Their Lordships of Hon'ble Supreme Court in the case of CIT v.
Nainital Bank Ltd . Their Lordships were in seisin of a case in which certain amount of cash and 'a
large quantity of jewellery pledged with the bank by its constituents' were stolen by dacoits on 11th
June, 1951, from the premises of the bank. As far as loss of jewellery belonging to the customers was
concerned, the bank has settled these claims with the customers. The loss was thus borne by the

assessee-bank, even though the bank was not under any legal or contractual obligation to bear such
loss. The amount so paid was, however, disallowed by the Revenue on the ground that the
assessee-bank did not have any liability to settle the claim. When the matter finally reached the
Hon'ble Supreme Court, Revenue contended that the loss incurred by the bank was under no legal
liability to pay to the constituents the value of the jewellery pledged. Revenue also pointed out that
the bank was, as a pledgee, a bailee of the jewellery and was in law required to take as much care of
the pledged jewellery as a person of ordinary prudence would take under similar circumstances of
his own jewellery of the same bulk, quantity and value, and the bank having provided an adequate
number of watchmen, it was not liable for the loss of the property pledged. It was in this backdrop
that Their Lordships observed that, "Granting that, on proof that it had taken as much care of the
jewellery pledged with it as it would have taken if it belonged to it, the bank could enforce its rights
and recover the full amount due from the constituents, the question still remains whether in
admitting liability for the purpose of the business." and thus answered the question posed to
themselves :
"... The credit of a banking business is very sensitive : it largely thrives upon the confidence which its
constituents have in its management. To maintain that confidence the management has often to
make concessions and thereby to preserve the goodwill of the business and its relations with the
clientele. The bank could have, if so advised, taken its stand strictly on its legal obligations, and
could have recovered the amounts due by the constituents at the same time denying liability to make
any compensation for the loss of jewellery pledged with it. But such a stand might very well have
ruined its business, especially in the rural areas in which it operated. The bank had evidently two
courses open : to enforce its light strictly according to law, and thereby to lose the goodwill it had
built up among the constituents, or to compensate the constituents for loss of their jewellery, and
maintain its business connections and goodwill. In choosing the second alternative, in our
judgment, the bank laid out expenditure for the purpose of its business. Paying to the constituents
the price of the jewellery stolen in a robbery or a burglary was, therefore, expenditure for the
purpose of the business. There can be no doubt that the expenditure was wholly and exclusively in
the interest of the business. The expenditure was laid out for no other purpose."
(emphasis by underlining, italicised in print, supplied by me)
97. Applying the principle laid down by the Hon'ble Supreme Court in the case of Nainital Bank
(supra), it would appear that the assessee-bank had evidently two courses open : to enforce its right
strictly according to law, and thereby to lose the goodwill it had built up among the constituents, or
to compensate the constituent for the loss suffered in the securities scam, and maintain its business
connections and goodwill. In choosing the second alternative, as held by the Hon'ble Supreme
Court, the assessee-bank laid out expenditure for the purpose of its business. Accordingly, the
payment of Rs. 9,57,58,904 made by the assessee-bank to the PHB is, in my considered view, bona
fide business expenditure eligible for deduction under Section 37(1) of the Act.
98. As for the Revenue's contention that the loss is not yet final and there is still a possibility of
assessee-bank's being able to recover the disputed amount from Andhra Bank, N.K. Agarwal or
Hiten Dalai, I find no substance in this contention either. First of all, this argument proceeds on the

fallacy that it is the loss incurred on behalf of PHB which is being claimed as deduction, whereas, in
my view, it is the payment to PHB, which is a payment warranted on account of commercial
expediency rather than contractual obligations, which is being claimed as a deduction. Secondly,
assuming that such a possibility may have any relevance in this matter, even the 'possibility' of
recovery has to be a reasonable possibility, i.e., what a reasonable person would expect in the given
circumstances. The material on record, in my understanding, indicates that the assessee-bank has
been taken for a ride by unscrupulous operators, misusing the loopholes in the system, and
exploiting the fact that transactions involving such huge amounts were entered into, perhaps as a
normal course in the banking industry, without taking highest degree of safety measures and
incorporating checks and balances as such, and but for this laxity inherent in the normal banking
practices, scams of the kind which have become somewhat common in the recent past could not
have taken place. Learned CIT(A) has made this enhancement merely on the basis that the matter is
still pending before the Special Courts set up for dealing with security scam cases. But then this fact,
by itself, cannot imply that there are reasonable prospects of recouping the loss, because, it is also a
well-known fact, perhaps as equally well known as the fact about existence of these special Courts
itself, that the claims on these scamsters are several times the value of their known assets. This
money does not also appear to be recoverable from Andhra Bank also as in response of RBI's letter
dt. 16th June, 1993, a copy of which was placed before us at p. 58 of the paper book, stating "issue of
a licence to your bank for opening a branch in Madras has again been decided to be kept in abeyance
till such time as the dispute on securities transactions between your bank and Andhra Bank is
resolved", the assessee-bank has clearly given more importance to the licence for Chennai branch
rather than claim, whatever be its merits, on Andhra Bank. Keeping all these factors in mind, I am
inclined to share the assessee's perception that there is no reasonable hope of recovery of this
amount. There is no material before us to doubt or dispute the assessee's perception that the money
so refunded to PHB constitutes a loss, and is, accordingly, booked as an expenditure, that the same
is beyond reasonable hope of recovery, and that the chances of recouping the loss are too remote to
affect the accounting treatment of the loss. The objection raised by the Revenue is thus, in my
considered view, not maintainable.
99. For the reasons set out above, I am of the considered view that the CIT(A) indeed erred in
making enhancement of Rs. 9,57,58,904 on account of operational loss. The appellant, therefore,
deserves to succeed on this issue as well.
100. Save as otherwise specified hereinabove, I am in considered agreement with the conclusions
arrived at by the learned Vice President and, I respectfully, endorse the same.
REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961 Pramod Kumar, A.M.
101 A consolidated order in the case of above four appeals for the asst. yrs. 1992-93 to 1995-96 was
proposed by the Vice President. However, the AM has expressed his reservations on some of the
issues relating to the asst. yr. 1995-96. The AM has agreed with the proposed order in respect of
which no specific reservations have been expressed in the dissenting order. Therefore, whereas the
appeals for the asst. yrs. 1992-93 to 1994-95 are disposed of by way of the consolidated order, a
reference is made to the Hon'ble President for nomination of Third Member in order to resolve the

points of difference amongst the members of the Bench for the asst. yr. 1995-96. The points of
difference are as under:
(a) Whether or not, on the facts and in the circumstances of the case, the assessee is entitled to
deduction of tax component of salary of expatriate employees, relating to asst. yrs. 1990-91 and
1991-92, in the asst. yr. 1995-96 i.e. the year in which the tax has been paid by the assessee.
(b) Whether or not, on the facts and in the circumstances of the case, the assessee was entitled to
deduction of interest levied under Section 201(1A).
(c) Whether or not, on the particular facts and in the particular circumstances of this case, the
assessee was entitled to deduction on account of operational loss of Rs. 9,57,58,904.
102. It is, therefore, requested that the Hon'ble President may kindly nominate a Third Member for
a decision in regard to the points of difference referred to above.
M.A. Bakshi, Vice President
103. A consolidated order in the case of all the above four appeals for asst. yrs. 1992-93 to 1995-96
was proposed by the Vice President. However, the AM has expressed his reservations in respect of
some of the issues all relating to asst. yr. 1995-96. The AM has agreed with the proposed order in
respect of which no specific reservation has been expressed in the dissenting order. Therefore,
whereas the appeals of the assessee for asst. yrs. 1992-93 to 1994-95 are disposed of by the
consolidated order, a reference is made to the Hon'ble President for nomination of the Third
Member in order to resolve the points of difference amongst the members of the Bench for asst. yr.
1995-96. The points of difference are identified as under:
104. Tax component in respect of expatriate employees for asst. yrs. 1990-91 and 1991-92 :
In paras 24 to 27, the Vice President in his proposed order has held that in principle the assessee is
entitled to deduction of tax component of salary relating to expatriate employees in asst. yrs.
1992-93 to 1994-95 but for the operation of the provisions of Section 40(a)(i) the deduction is not
permissible in such year the tax not having been paid by the assessee. However, since the payment
of tax has been made in asst. yr. 1995-96, the Vice President has, accordingly, allowed the deduction
of the entire claim pertaining to asst. yrs. 1992-93 to 1995-96 in asst. yr. 1995-96.
104.1 In asst. yr. 1995-96, the assessee had also claimed deduction in respect of tax component of
salary of the expatriate employees pertaining to assessments for 1990-91 and 1991-92. The said
assessment years were not in appeal before the Tribunal. The Vice President in para 27 of the order
has held that the assessee not having claimed any deduction in respect of the tax component of
salary in the asst. yrs. 1990-91 and 1991-92 either before the AO or before any other authority, the
mere fact that the tax has been paid in asst. yr. 1995-96 does not entitle the assessee to claim
deduction in the year of payment, i.e. in asst. yr. 1995-96 when the assessee is following the
mercantile system of accounting.

104.2 On the other hand, the AM in the dissenting order has held that the assessee would be entitled
to deduction in respect of tax component of the salary for asst. yrs. 1990-91 and 1991-92 paid in asst.
yr. 1995-96 notwithstanding the fact that no claim was either made in asst. yrs. 1990-91 or 1991-92
by the assessee before any authority. According to the AM, Section 40(a)(i) permits deduction in the
year of payment. Therefore, the omission of the claim in relevant years, i.e. in asst. yrs. 1990-91 and
1991-92 is of no consequence. Hence the point of difference :
"Whether the assessee is entitled to deduction of tax component of salary of expatriate employees
relating to asst. yrs. 1990-91 and 1991-92 in asst. yr. 1995-96 in which the tax has been paid by the
assessee, not claimed in the respective assessment years before any authority."
105. Interest paid by the assessee as a defaulter of non-payment of tax deductible at source :
In the order proposed by the Vice President, the assessee has been held to be entitled to deduction
on account of remuneration paid to the expatriate employees including the taxes payable on such
remuneration. The assessee had committed a default in discharging its obligation of deduction of tax
and payment to the Government in respect of the salaries paid to expatriate employees. As a result
of the default committed by the assessee of non-deduction and non-payment of TDS, the assessee
had to pay interest under Section 201(1A) of the IT Act, 1961. The interest was paid in the previous
year relevant to the asst. yr. 1995-96 and the assessee claimed deduction in respect of such interest
paid as an expenditure incurred for purposes of business. The Vice President has drawn a
distinction between the cost of employment which includes the remuneration, taxes, interest etc. on
behalf of the employees on the one hand and the assessee's statutory obligation to deduct and pay
taxes on the other hand. The Vice President has expressed the view that, whereas the assessee is
entitled to deduction on account of remuneration as well as taxes and interest in respect of such
taxes as cost of employment, no deduction would be permissible to the assessee in respect of the
interest payable as an assessee-in-default for its failure to discharge the statutory obligation of
non-deduction of tax and payment of the same to the Government in contrast to the obligation of
the assessee as an employer.
105.1 The AM in his dissenting order has expressed the view that the interest charged under Section
201(1A) is part of the cost of employment to the assessee and, accordingly, is permissible as a
deduction. Hence the dispute is identified as under :
"Whether interest paid by the assessee as an assessee-in-default qualifies for deduction as cost of
employment to the assessee."
106. Business loss :
The assessee had claimed deduction on account of sum of Rs. 9,57,58,904 refunded to the Punjab
Housing Board (PHB) on account of the investment made by them. Deduction of interest @ 17 per
cent was also separately claimed. The AO had allowed both the deductions. The CIT(A) had
enhanced the income of the assessee by disallowing the deduction on account, of refund to PHB of
Rs. 9,57,58,904. On appeal, the Vice President expressed the view that the assessee is not entitled to

deduction on account of refund to PHB as that was not the event of loss. The Vice President has also
pointed out that facts relating to the loss are disputed by the parties and the matter is sub-judice.
The Vice President in his proposed order has given liberty to the assessee to claim the loss as and
when it is established to have been incurred.
106.1 The AM in his dissenting order has disagreed with the view and on the reasons recorded in the
order held that the assessee is entitled to deduction. Hence the difference on the following point :
"Whether the assessee is entitled to deduction of Rs. 9,57,58,904 on account of payment to Punjab
Housing Board in respect of investment made by them with the assessee notwithstanding the fact
that facts relating to loss of investment are disputed and the issue is sub-judice."
107. It is, therefore, requested that Hon'ble President may nominate a Third Member for a decision
in regard to the points of difference referred to above.
R.P. Garg, Vice President A reference under Section 255(4) of the IT Act, 1961, was made by the
President, Tribunal, for my opinion as Third Member on the following points of difference arising
out of the appeal for the asst. yr. 1995-96 :
"(a) Whether or not, on the facts and in the circumstances of the case, the assessee is entitled to
deduction of tax component of salary of expatriate employees, relating to asst. yrs. 1990-91 and
1991-92, in the asst. yr. 1995-96, i.e., the year in which the tax has been paid by the assessee.
deduction of interest levied under Section 201(1A).
(c) Whether or not, on the particular facts and in the particular circumstances of this case, the
assessee was entitled to deduction on account of operational loss of Rs. 9,57,58,904."
108. The questions referred were not depicting the real controversy and there was also confusion
about the assessment year of reference. As regards question (a) above, the reference was only for
allowability of the tax component on the salary of expatriate employees deducted at source, whereas
the difference between the two Members was covering both the tax component as well as salary
payment to the expatriate employees, and question (c) was arising out of the appeal proceedings for
the asst. yr. 1994-95 whereas in the reference it is stated to be arising out of asst. yr. 1995-96.
Therefore, a revised reference was directed by the President with the following questions :
Asst yr. 1995-96 "(a) Whether or not, on the facts and in the circumstances of the case, the assessee
is entitled to deduction of tax component and salary of the expatriate employees relating to asst. yrs.
1990-91 and 1991-92, in the asst. yr. 1995-96, namely, the year in which the tax has been paid by the
assessee.
deduction of interest levied under Section 201(1A)."

Asst. yr. 1994-95 "(c) Whether or not, on the particular facts and in the particular circumstances of
this case, the assessee was entitled to deduction on account of operational loss of Rs. 9,57,58,904."
109. The assessee is a bank, incorporated in Netherlands with limited liabilities having its original
office at Singapore. It has branches in India at Mumbai, Kolkata and New Delhi and is registered as
a Scheduled Bank in terms of Schedule II of the Reserve Bank of India (RBI) Act, 1934. Its main
activity comprised of accepting deposits, giving loans, discounting of the collection of bills, issue of
letter of credit/guarantees, executing forward transactions in foreign currencies for
importers/exporters, money market lendings/borrowings, investment in securities, etc., in terms of
existing rules and regulations governing such transactions.
110. There exists an agreement for Avoidance of Double Taxation between India and Netherlands
(DTA in short), Article 7 of which provides for taxation in India on a foreign enterprise in respect of
profit attributable to its permanent establishments (PE in short) and since ABN AMRO was having a
PE in India, it is being subjected to tax in India.
111. Four years' appeals for asst. yrs. 1992-93, 1993-94, 1994-95 and 1995-96 came up before the
Tribunal simultaneously and there struck a difference of opinion between the two Members while
disposing of the appeals for asst. yr. 1994-95 in ITA No. 106/Kol/2001 and asst. yr. 199.5-96 in ITA
No. 496/Cal/1999 and the point of difference is referred to above in para 2.
112. The assessee has not deducted tax in. respect of the remuneration paid to its expatriate
employees on the prescribed dates as required under Section 192 of the Act. The CBDT, in order to
encourage the compliance in respect of TDS, issued Circular No. 685, dt. 20th June, 1994, providing
exemption from penalty and prosecution to those employers who paid the tax deducted/deductible
at source at a specified date. By another Circular No. 686, dt. 12th Aug., 1994, the Board has also
clarified that the assessments of the employees in respect of whom payments of short deduction and
interest thereon are made by the employer in pursurance of Circular No. 685, dt. 20th June, 1994,
will not be responsible or otherwise disturbed merely on account of the excess salary payment now
disclosed by the employer. The assessee took shelter under the said circular and paid a sum of Rs.
2,06,54,499 for previous years starting from asst. yr. 1990-91 to asst. yr. 1995-96. The P&L a/c of
the assessee for asst. yr. 1995-96 was debited with the sum of Rs. 2,06,54,499. It was, however,
added back and a deduction of only of Rs. 89,04,276 was claimed on account of remuneration
including Rs. 52,35,222 paid in Netherland, TDS and interest pertaining to the asst. yr. 1995-96.
113. For asst. yrs. 1990-91 and 1991-92, it seems that the remuneration has not been claimed as a
deduction and seemingly no reasons are on record as to why it was not claimed in those years. In the
asst. yr. 1992-93, the assessee made claim before the AO for remuneration and tax deducted at
source in respect of expatriate employees having rendered services in India for which the payment
has been made abroad amounting to Rs. 23,87,325. By another letter, the assessee claimed the tax
deducted at source paid in pursuance to the Board's Circular amounting to Rs. 29,86,963. A similar
claim was made for asst. yrs. 1993-94 and 1994-95. During the assessment proceedings for asst. year
1995-96, the assessee also claimed deduction of entire amount of Rs. 2,06,54,499 being the tax and
interest for all the years starting from asst. yr. 1990-91 to 1995-96. The position of payment of TDS,

interest and offshore remuneration paid in Netherlands and claimed as deduction is as under :
Details Asst. yr. Asst. yr. Asst. yr. Asst. yr. Asst yr. Asst. yr. Total
90-91 91-92 92-93 93-94 94-95 95-96
Tax (As TDS 3,61,635 10,54,924 29,86,963 49,44,312 35,86,312 36,15,895 1,65,50,5
arrears)
Int. U/S 201 2.45,859 5,80.300 12.19,063 13,24,577 6,81.031 53,159 41,03,9
Sub Total 6,07,494 16,35,224 42,06,026 62,68,889 42,67,812 36,69,054 2,06,54,4
Net Offshore 3,27,276 9,10,803 23,87,325 61,90,206 47,16,025 52,35,222 1,97,66,8
remuneration paid
in Netherlands
Total 934,770 2.546,027 6,593,351 12.459.095 89.83,837 89,04,276 4,04,21,3
114. The AO, however, disallowed the claim of the assessee for offshore remuneration in asst. yrs.
1992-93 to 1994-95 by observing that the decision of Supreme Court in the case of Kedarnath Jute
Mfg. Co. Ltd. v. CIT was not applicable; that the salary was paid to the expatriate employees
rendering services in India by the head office of the bank and the same has not been debited to the
accounts of the bank in India and that the tax borne by the assessee-bank on salary paid to the
expatriate offshore the payment has been made only in the subsequent year. He, therefore,
disallowed both the payment of salary by the head office as well as the tax deducted at source and
interest thereon and paid in the asst. yr. 1995-96 by stating that TDS for earlier years was not
covered by Section 43B as if was not a regular payment of tax or Government dues, that the amount
has been paid under Amnesty Scheme and, therefore, it is not allowable and that the amount does
not pertain to the year under consideration and further that the remuneration and TDS paid by the
assessee for the earlier years have not been included in the income of the concerned employees for
their income-tax purpose in India for which the assessee is liable and also that the interest on TDS is
not a business expenditure and it does not pertain to the year of assessment.
115. The claim of Rs. 89,04,296 in asst. yr. 1995-96 being remuneration, TDS and interest pertaining
to the (sic) was also disallowed by the AO by further observing that the assessee has not given the
details as to how much of such remuneration has already been claimed as expenditure by any other
office of the assessee because the assessee cannot be allowed the same expenditure twice, once in
another country and again in India. The assessee has not given details of services rendered, place of
service rendered and terms of agreement regarding such employees/offshore expatriates and that
the assessee was allowed head office expenses @ 5 per cent of taxable income in India and,
therefore, such expenditure including the remuneration under consideration has merged with head
office expenses and, therefore, it is treated as allowed by way of head office expenses. He also stated
that the aforesaid reasons for not allowing offshore expatriates remuneration applies to interest,
TDS and remuneration paid for earlier years as well.
116. The CIT(A) confirmed the disallowances by agreeing with the AO for the disallowance of Rs.
89,04,296 in asst. yr. 1995-96, he also agreed with the AO for the disallowance of the entire
deduction of tax of Rs. 2,06,54,499 being the tax and interest on offshore remuneration of the
expatriate employees for all the assessment years including the current assessment year. He

observed that the CBDT had launched a scheme whereby TDS by defaulters for not deducting tax in
respect of salary and remuneration paid to expatriate employees abroad could be paid by the
employer and the assessee had taken advantage of this scheme and paid tax and interest due
thereupon for several assessment years with respect to payment made to its expatriate employees to
save itself from the rigour of prosecution, although in other sense of the term, these taxes were due
and collectible from the expatriate employees from whom the assessee-company in earlier years had
failed to collect taxes in accordance with the Indian law and pay the same. He further observed that
even now these taxes have been paid purely on behalf of the expatriate employees and if there is any
liability for payment of the same to the bank it rests on those expatriate employees and, therefore,
the assessee cannot say that this should be treated as revenue expenditure. He further held that the
taxes paid by the assessee-company because of their own fault in not collecting taxes from its
expatriate employees in time and depositing the same with the Government of India, cannot be
allowed as a revenue expenditure.
117. The matter came up before the Tribunal. Insofar as the claim for remuneration in the appeals
for asst. yrs. 1992-93 to 1994-95 is concerned, both the members agreed that the remuneration paid
to the expatriate employees rendering whole-time service in India throughout the accounting year
has to be accepted as allowable deduction in computing the profits of the PE subject however with a
rider that such payment is not taken into account in working out the deduction under Section 44C
and once the AO is satisfied that the assessee is entitled to deduction in respect of remuneration, the
claim of the assessee shall have to be dealt with in accordance with Section 40 of the Act. The
aforesaid directions were also stated to be valid for offshore remuneration pertaining to the asst. yrs.
1992-93, 1993-94, 1994-95 and 1995-96 with a direction that if after verification the AO comes to
the conclusion that the assessee has not taken the amount of remuneration in respective assessment
years into consideration in working out the deduction under Section 44C, the claim would in
principle be permissible in the respective assessment years. So, however, deduction has got to be
allowed as already pointed out in accordance with Section 40(a) read with the proviso. The tax not
having been deducted at source in the respective assessment years but having been paid in asst. yr.
1995-96, the deduction in respect of remuneration is allowable in the year of payment, i.e., asst. yr.
1995-96. This would take care of part of the additional ground raised before the Tribunal by the
assessee in asst. yr. 1995-96 whereby the deduction in respect of the offshore remuneration and tax
component pertaining to asst. yrs. 1992-93 to 1994-95 is claimed as deduction in asst. yr. 1995-96.
For asst. yr. 1995-96, tax has been paid by the assessee in the same assessment year and, therefore,
the prohibition under Section 40(a) is not attracted. The claim of the assessee was directed to be
considered accordingly.
118. The objection of the Revenue about the assessee having failed to establish as to whether the
services have been rendered by the expatriate employees in regard to the PE of the assessee in India
was found untenable with the observation that if the employees have not rendered services in India
for which the remuneration had been received abroad, then how was it that the assessee was under
an obligation to deduct tax from their remuneration and that the very fact that the assessee has
accepted its obligation to deduct taxes from salary paid to the expatriate employees was sufficient to
infer that services had been rendered in India. Similarly, the objection of the Revenue that the taxes
have been paid on behalf of the expatriate employees and not as tax deducted at source was also

found untenable in view of the provisions of Section 199 providing that any deduction made in
accordance with the provisions of Section 192 and paid to the Central Government is to be treated as
a payment of tax on behalf of the person from whose income deduction is made under Section 205
of the IT Act. There is a bar for the Revenue to demand tax from the assessee to the extent the
amount has been deducted from the income. It was, therefore, observed that the tax deducted at
source by the assessee and paid to the Government is to be treated as fine paid on behalf of the
expatriate employees.
119. As regards tax deducted at source in respect of remuneration paid outside India to expatriate
employees, the Tribunal held that in principle, the assessee would be entitled to deduction in respect
of tax component of the salary also if the salary is found to be deductible as per the directions of the
Tribunal for asst. yr. 1996-97 and, accordingly, no deduction would be permissible in asst. yrs.
1992-93 to 1994-95 by operation of Section 40(a)(i) of the IT Act and the claim for the said
assessment year, shall have to be disallowed for the reason of non-deduction of tax but allowed the
same in asst. yr. 1995-96. Both the Members, therefore, held that subject to verification, the claim of
remuneration and tax deducted has not been taken into account under Section 44C in regard to
expatriate employees, the deduction relating to asst. yrs. 1992-93 to 1994-95 would be permissible
in asst. yr. 1995-96 as per the proviso to Section 40(a)(i) of the Act.
120. In Asst. yr. 1995-96, the assessee had also claimed a deduction for remuneration and tax paid
for asst. yrs. 1990-91 and 1991-92. The Vice President (JM) held that no evidence has been placed on
record to establish that the assessee at any stage made the claim for deduction in the said
assessment year and in principle, the claim of the assessee has got to be considered in assessment
year to which the claim pertains. It is also observed that it is only when the claim is considered and
found allowable but for provisions of Section 40(a) that the same cannot be allowed in the year of
payment and since the claim for asst. yrs. 1990-91 and 1991-92 is not established to have been made
or considered in earlier year, the benefit according to him, is not permissible in asst. yr. 1995-96
merely because tax has been paid in the year under appeal. According to him, the benefit of the
proviso to Section 40(a)(i) is not available in the absence of claim made in the respective assessment
years. He, accordingly, upheld the disallowance pertaining to asst. yrs. 1990-91 and 1991-92 in
regard to the remuneration and tax component in asst. yr. 1995-96. The AM, on the other hand, held
that the assessee would be entitled to deduction in respect of the tax component and the salary for
asst. yrs. 1990-91 and 1991-92 in asst. yr. 1995-96 notwithstanding the fact that no claim was ever
made in asst. yrs. 1990-91 or 1991-92 by the assessee before the AO. According to him, Section
40(a)(i) permits deduction in the year of payment and, therefore, the omission to claim in the
relevant year is of no consequence. This is the first point of difference between the two Members.
121. The learned counsel of the assessee submitted that there is no warrant in imposing the
restriction for the allowability of remuneration and tax deducted at source on the ground that it was
not claimed in the respective assessment years as a deduction. He referred to the proviso to Section
40(a)(i) and submitted that, where the tax has been deducted or paid in the subsequent year, then
such sum shall be allowed as a deduction in computing the income of the previous year, such tax has
been paid and since the tax has been paid in the year under consideration, the deduction is to be
allowed and it is so held by both the JM and the AM insofar as the claim for asst. yrs. 1992-93 to

1994-95 is concerned. The learned Departmental Representative, however, supported the orders of
the Departmental Authorities and the view taken by the JM.
122. I have heard the parties and considered their rival submissions. There is no dispute as to the
allowability of the remuneration and tax deducted/deductible at source as revenue expenditure.
Both the Members have agreed on this point and in fact, as aforesaid have allowed similar deduction
for payment of remuneration relating to asst. yrs. 1992-93 to 1994-95. A sum chargeable under this
Act (remuneration in this case) which is payable either outside India or in India to a non-resident, is
not allowable as a deduction because of the provisions of Section 40(a)(i) if the tax has not been
deducted or after deduction has not been paid before the expiry of the time prescribed under
Sub-section (1) of Section 200 and in accordance with the other provisions of Chapter XVII-B of the
Act. When a deduction is not allowable because of the statutory provisions, it would make no
difference whether the same was claimed or not by the assessee. Because of the proviso to Section
40(a)(i) such sum has to be allowed as a deduction in computing the income of the previous year in
which such tax deducted at source has been paid in subsequent year.
123. Section 40(a)(i) reads as under :
"40. Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not
be deducted in computing the income chargeable under the head "Profits and gains of business or
profession",--
(a) in the case of any assessee :
1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable,--
(A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company, on
which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after
deduction has not been paid during the previous year, or in the subsequent year before the expiry of
the time prescribed under Sub-section (1) of Section 200 :
Provided that where in respect of any such sum, tax has been deducted in any subsequent year or,
has been deducted in the previous year but paid in any subsequent year after the expiry of the time
prescribed under Sub-section (1) of Section 200 such sum shall be allowed as a deduction in
computing the income of the previous year in which such tax has been paid."
124. On a bare reading of the aforesaid provision, it is evident such sum shall be allowed as a
deduction in computing the income of the previous year in which such tax has been paid if tax has
been deducted in any subsequent year or, has been deducted in the previous year but paid in any
subsequent year after the expiry of the time prescribed under Sub-section (1) of Section 200. No
restriction is placed for allowability of deduction of the remuneration paid in the subsequent year
that it should have been claimed in the earlier year. As aforesaid, it will also not stand to logic that
when a deduction is not allowable under a particular provision of the Act, in this case Section 40 of

the Act, that the assessee should make a claim and that should be rejected at the first instance in the
relevant year. The proviso does not contemplate any such restriction. On the contrary it would be
futile rather exposing the assessee to penal consequences if he made a wrong claim which is not
allowable due to specific prohibition. Such a restriction, therefore, cannot be read in the language of
Section 40(a)(i) of the Act nor could it be inferred so. The deduction for asst. yrs. 1990-91 and
1991-92 has also to be allowed similarly as an admissible deduction with similar direction as were
given for allowing the claim for asst. yrs. 1992-93 to 1994-95.
125. Second difference is with regard to allowability of interest paid under Section 201(1A). As
aforesaid, the assessee had also claimed interest paid by the assessee as a defaulter of non-payment
of tax deductible at source. Here, the Vice President (JM) held that the assessee had committed a
default in discharge of its obligation of deduction of tax and payment to the Government in respect
of salary paid to expatriate employees as a result of which it had to pay interest under Section
201(1A) of the Act. No deduction according to him, would be permissible to the assessee in respect
of interest payable as an assessee-in-default for its failure to discharge its statutory obligation of
non-deduction of tax and non-payment thereof to the Government in contrast to the obligation of
the assessee as an employer. The AM, on the other hand, expressed an opinion that interest charged
under Section 201(1A) is part of the cost of employment to the assessee and, accordingly, on the
same parity of reasoning of allowability of the remuneration and taxes, the interest, would also be
permissible deduction.
126. As regards this claim, the assessee's contention is that interest for the late payment of TDS
imposed under Section 201(1A) relating to the deduction for all the asst. yrs. 1990-91 to 1994-95, is
part of the remuneration, that it is therefore, an additional cost and would be allowable on the same
reasoning as a salary payment is allowable. The learned counsel of the assessee also submitted that
it is compensatory in nature and should be allowed as a deduction. Interest, according to him, would
partake the character of the original sum which is paid late and when the tax deducted at source
itself is an allowable deduction, the interest cannot be disallowed. The liability for the interest has
arisen in asst. yr. 1995-96 and, therefore, it should be allowed as a deduction. He also referred to the
decision of the Tribunal in the case of ITO v. Titagarh Steels Ltd. (2001) 73 TTJ (Cal) 297 : (2001) 79
ITD 532 (Cal) wherein it is held that interest is compensatory and not penal in nature. The decision
of the Supreme Court in the case of Harshad Shantilal Mehta v. Custodian and Ors. is also relied
upon. The learned Departmental Representative, on the other hand, supported the orders of the
Revenue authorities and submitted that interest is for the delay in discharging the statutory
obligation of the assessee for payment of tax and, therefore, would not be an allowable deduction.
127. The parties were heard and their arguments were considered. The term 'tax' has been defined in
the DTA vide Article 3(d) of the DTA to mean Indian tax or Netherlands tax as the context requires,
but does not include any amount which is payable in respect of any default or omission in relation to
the taxes to which this convention applies or which represents a penalty imposed relating to this tax.
By this definition, the interest paid cannot be treated or equated to a tax payment. Tax deducted at
source is the liability of the assessee under Section 192/195 of the Act. It was to be deducted by it at
the time of payment of salary to the expatriate employees. The assessee committed a default and an
omission in relation to the tax by not deducting the same within the prescribed time under the IT

Act. The interest was thus payable for that default or omission in relation to the tax deducted at
source. Therefore, on a combined reading of the definition of tax in Article 3(d) of the DTA in
conjunction with the provisions of Sections 192 and 195 of the Act, the interest, in my opinion,
would not be an allowable deduction. It has nothing to do with carrying on the business of the
assessee. It may be that the tax was deducted for and on behalf of the employees but it was an
obligation of the assessee itself under the IT Act, 1961, to deduct the tax within the prescribed time
and, therefore, it was a personal liability of the assessee-bank. In the decision of Jubilee Investments
& Industries Ltd. v. Asstt. CIT and Ors. , the Calcutta High Court dealt with the scope of levy of
penalty under Section 221 of the Act for failure to deposit the tax deducted at source in time and in
that connection, the Calcutta High Court observed that when the assessee is found to be in default in
depositing the amount of TDS within the time prescribed, he is liable to pay interest as well as he is
liable to pay penalty and the fact that he has suffered loss or financial stringency and, therefore,
could not deposit the amount in time has nothing to do with the liability to deposit TDS.
128. Besides the statutory obligation to deduct tax from the remuneration and pay to the
Government, the assessee in the present case has undertaken to pay the tax on behalf of the
employees and having not paid it failed to discharge the obligation it had which but for such an
agreement of employment the expatriate employees had to discharge. The assessee has not
discharged its obligation on behalf of the expatriate employees insofar as the taxes have not been
paid as it had neither filed the return nor was there any assessment made. The interest liability in
any case is not upon the employees. It was on the assessee itself for not complying with the statutory
obligation to deduct the tax which was its own liability under the Act because of the provisions of
Sections 192 and 195. This obligation is independent of the obligation of the assessee as an agent of
the expatriate employees. Therefore, in my opinion, the payment of interest does not partake the
character of the remuneration package in respect of the expatriate employees. The decisions referred
to in the case of Mahalaxmi Sugar Mills Co. Ltd. v. CIT and in the case of Prakash Cotton Mills (P)
Ltd. v. CIT , in the case of CIT v. Ahmedabad Cotton Mfg. Co. Ltd. and Ors. would have no
application as these cases were under a different statute dealing with payment of cess and assessee's
liability under contractual obligations. Allowability of interest for non-payment of income-tax came
for consideration in cases under the income-tax and non-allowability of interest as a deduction gets
support from the two decisions of the Supreme Court in the case of Smt. Padmavati Jaikrishna v.
Addl. CIT . In the case of Padmavati Jaykrishna (supra), the payment of interest was to the
Department on late payment of tax and annuity deposit and in that context the Supreme Court held
that in the case where the interest was paid on the amount borrowed to pay taxes and annuity
deposit the assessee was meeting the liability for income-tax and annuity deposit, it was a personal
one and the dominant purpose for paying annuity deposit was not to earn income but to meet the
statutory liability for making the deposit. The expenditure was not, therefore, wholly and exclusively
for the purpose of earning income. Similarly, in this case, the liability to deduct tax and pay the same
to the Government was personal one imposed under the IT Act on the payer of the salary and,
therefore, interest paid by the assessee for the delayed payment thereof would also be a personal
liability of the assessee-bank and failure to discharge that liability in time would not entitle the
assessee to claim the deduction for such interest payment.

129. In the case of East India Pharmaceutical Ltd. v. CIT , the interest was paid on the overdraft
which was utilized for payment of income-tax and it was held to be not allowable as an expenditure
wholly and exclusively laid out for the purpose of business. Again in the case of Bharat Commerce &
Industries Ltd. v. CIT , the Supreme Court held that when interest is paid for committing the default
in respect of statutory liability to pay advance tax, the amount paid and expenditure incurred in that
connection is in no way connected with the preserving or promoting the business of the assessee.
Their Lordships held that interest levied on the assessee under Section 139 of the IT Act, 1961, for
delay in filing the return and under Section 215 for the failure to pay advance tax upto the statutory
percentage are not allowable deduction as business expenditure under Section 37 of the Act.
130. It might be true that the payment of salary and the liability for payment of tax thereon are part
of the pay package or employment cost of the assessee and that they are in the nature of expenses
wholly and exclusively for the purpose of business of the assessee but a part of that liability has
partaken a character of a statutory liability. That part is, that as an employer the assessee was under
an obligation under Sections 192 and 195 of the Act to deduct the tax and deposit the same with the
Government of India. This statutory liability was a personal liability of the assessee and on failure to
deduct that tax, the assessee becomes an assessee-in-default. Interest is paid for the failure of
discharging that liability under the Act. The interest, therefore, was levied upon the assessee for the
failure in discharging a personal liability and, therefore, cannot be allowed as a deduction. The fact
that such tax deducted at source would ultimately be adjusted against the liability of the payee in
computing its income-tax liabilities does not, in my opinion, convert the liability of the assessee and
consequently, in my opinion, the payment of interest under Section 201(1A) cannot be allowed as a
deduction.
131. The third difference is regarding the allowability of an amount of Rs. 9,57,58,904 being the
operational loss claimed to have arisen on account of transaction in securities and is arising in the
appeal for asst. yr. 1994-95. The assessee had claimed deduction of Rs. 9,57,58,904 being the
amount refunded to the Punjab Housing Board (PHB) on account of the investment made by them.
The payment of interest at the rate of 17 per cent was also claimed separately. The AO allowed both
the deductions but the CIT(A) enhanced the income of the assessee by disallowing the deduction for
the refund of Rs. 9,57,58,904. The facts of the case are that the assessee received a sum of Rs. 10
crores from PHB, for investment by the assessee, for a period of 180 days subject to the condition
that the money was to be invested in any Government securities, UTI or tax-free bonds which can
give with a minimum guaranteed return of 17 per cent and that in case of emergency, money be
available to PHB with whatever returns that becomes due at that time. No specific directions were
there to invest the money in specific securities. It was in the course of investment of this money
received, the assessee issued a cheque of Rs. 9,75,58,904 on 9th March, 1992, to Andhra Bank for
purchase of 17 per cent NPC Bonds @ Rs. 97 per bond plus accrued interest and handed over a
payment advice and the cheque, to a broker Shri N.K. Agarwal. As Shri. N.K. Agarwal failed to
deliver the said 17 per cent NPC Bonds, the assessee sought information from Andhra Bank who
vide their letter dt. 2nd June, 1992 informed that the amount received was credited in the account of
Shri Hiten Dalai, as per the instructions of Shri. N.K. Agarwal.

132. With the advent of 'payment advice-cum-cheque' in the Indian banking, it is no longer a cheque
book which is used by the large corporate account-holders. These cheque books are now replaced by
packets of perforated computer friendly forms, used as a continuous computer stationery. These are
numbered advices. These are in two parts and can be separated by tearing off at the perforated
points--the top portion containing the details of the person issuing the cheques like a letterhead,
with columns for the name and address of the person to whom cheque is issued, details of payment,
and details of purposes for which it is issued; the bottom portion being a form for the cheque itself.
These forms are computer friendly and, while processing the payment, the details of payment are
printed on the top portion, and the details necessary for cheque are printed on the bottom portion.
The top portion is used as a payment advice, while bottom portion, on being removed from the
aforesaid advice, works as a cheque itself. This was the system for the transaction with Andhra Bank.
The cheque portion appeared to be in favour of Andhra Bank but the top portion was used, as a part
of normally acceptable practice, to credit the accounts of Hiten Dalai, one of the central characters
in several cases of security scams in this country.
133. Thereafter it seems that the alternative security in the form of original letter of allotment
covering 1 lakh 9 per cent tax-free secured redeemable non-convertible bonds of Rs. 1,000 each fully
paid-up (6A series) Railway Bonds 1991-92 issued by Indian Railway Finance Corporation Ltd.
(IRFC in short) were offered by the said Shri N.K. Agarwal. The assessee accepted the delivery
though on the understanding that the same would be held as a security pending delivery of the
originally contemplated purchase of 17 per cent NPC Bonds. When sent for the registration of these
1 lakh IRFC Bonds in favour of the assessee it was, however, refused on the ground that the said
bonds have already been registered in the name of Standard Chartered Bank. The assessee made an
appeal against the refusal but the same was dismissed by the Company Law Board vide order dt.
25th Aug., 1994. The assessee thereafter filed an appeal to the Delhi High Court and that was
transferred to Special Court and there also it was dismissed on 31st March, 1998. In the meantime,
the assessee, it seems, settled the claim of PHB by returning the balance principal of Rs. 9,57,58,904
on 7th July, 1993 along with 17 per cent interest in the year under consideration, i.e., after adjusting
the sum of Rs. 24,41,096 returned at the time when it issued a cheque in favour of Andhra Bank for
the purchase of NPC Bonds for Rs. 9,57,58,904 in March, 1992, and a sum of Rs. 18 lakhs received
from Shri N.K. Agrawal refunded to PHB thereafter. This payment of Rs. 9,57,58,904 and 17 per
cent interest payment was claimed as a loss.
134. The Vice President (JM) held that the assessee had made the investment in the course of its
business with Andhra Bank through the broker Shri N.K. Agarwal. Andhra Bank credited the
amount received through Shri N.K. Agarwal in the account of Shri Hiten Dalai as per the
instructions of Shri N.K. Agarwal. The claim of the assessee, on the other hand, is that no such
instructions were issued by the assessee and the cheques paid in the name of Andhra Bank were
issued for the purchase of NPC Bonds on behalf of the PHB. This fact is disputed by Andhra Bank.
According to him, if at all the assessee can be said to have lost the investment made through Shri
N.K. Agarwal, its discovery was on receiving the information from IRFC in June, 1992, informing
that IRFC Bonds have already been transferred in the name of Standard Chartered Bank. The said
date, according to him, fell in asst. yr. 1993-94. The Vice President (JM) held that refund to PHB
was of their investment with the assessee and the payment of interest on such investment was

rightly allowed as an expenditure incurred for the purpose of business. It is, according to him, like
purchases being made from A and goods having been sold to B and if B does not pay the price of the
goods, it may amount to loss suffered by the assessee but the payment to A for the goods supplied
will not amount to loss to the assessee though the loss to the assessee on account of B's refusal to
pay relates to the goods supplied by A. According to him, in view of the disputed facts, it cannot be
said that the assessee had suffered a loss. He further observed that the refund of principal and
interest to the investor, PHB, in any case is not an event of loss. He, therefore, held that loss does
not pertain to the year under appeal. He, however, made it clear that this decision is without
prejudice to the right of the assessee to claim the loss, if any, (in the year) in which it can be said to
have been incurred.
135. The AM, however, held that the assessee is entitled to deduction and, according to him, the
decision of the Supreme Court in the case of CIT v. Nainital Bank under which the assessee had two
options--(i) to enforce its right strictly in accordance with law and thereby to lose the goodwill it had
built up among the constituents, and (ii) to compensate the constituent for the loss suffered in the
securities scam, and maintain its business connections and goodwill. In choosing the second
alternative, as held by the Supreme Court, the assessee-bank, according to the AM, laid out
expenditure for the purpose of its business and consequently, it would be a bona fide business
expenditure eligible for deduction under Section 37(1) of the Act. As regards the finality of the
dispute pending with Andhra Bank, N.K. Agarwal and Hiten Dalai, he observed that firstly there is a
fallacy that it was the loss incurred on behalf of PHB which is being claimed as deduction. According
to him it was the payment to PHB, which was warranted on account of commercial expediency
rather than contractual obligations, which is being claimed as a deduction. Secondly, on assuming
that such a possibility may have any relevance in this matter, he observed that even the 'possibility'
of recovery has to be a reasonable possibility, i.e., what a reasonable person would expect in the
given circumstances. The material on record, in his understanding, indicates that the assessee-bank
has been taken for a ride by unscrupulous operators, misusing the loopholes in the system, and
exploiting the fact that transactions involving such huge amounts were entered into, perhaps as a
normal course in the banking industry, without taking highest degree of safety measures and
incorporating checks and balances as such, and but for this laxity inherent in the normal banking
practices, scams of the kind which have become somewhat common in the recent past could not
have taken place. The fact that the matter is still pending before the Special Courts set up for dealing
with security scam cases, by itself, cannot imply that there are reasonable prospects of recouping the
loss, because, it is also a well-known fact, perhaps as equally well-known as the fact about existence
of these Special Courts itself, that the claims on these scamsters are several times the value of their
own assets. This money does not also appear to be recoverable from Andhra Bank also as in
response of RBI's letter dt. 16th June, 1993, stating "issue of a licence to assessee-bank for opening a
branch in Madras had again been decided to be kept in abeyance till such time as the dispute on
securities transactions between assessee-bank and Andhra Bank is resolved", the assessee-bank has
clearly given more importance to the licence for Chennai branch rather than claim, whatever were
its merits, on Andhra Bank. The assessee's perception, according to him, was that there was no
reasonable hope of recovery of this amount and there is no material to doubt or dispute that the
money so refunded to PHB, according to him, constitutes a loss, and is, accordingly, booked as an
expenditure, that the same is beyond reasonable hope of recovery, and that the chances of recouping

the loss are too remote to affect the accounting treatment of the loss.
136. The assessee's contention is that it was a business loss. It approached the RBI in April, 1993,
but they refused to interfere in the matter. The assessee was also refused permission vide RBI letter
dt. 16th June, 1993, to open a branch until the dispute with Andhra Bank was settled. The assessee's
main claim is that the matter was settled with PHB on 7th July, 1993 and that date falls within the
previous year relevant to the asst. yr. 1994-95 and, therefore, it is allowable as a deduction. It was
also submitted that in order to avoid adverse publicity, the assessee in the business interests
considered it prudent to settle the claim and, therefore, in view of the decision of Supreme Court in
the case of Nainital Bank (supra), it is an allowable business loss. Reference was also made to CBDT
Circular No. 35D wherein the loss incidental to business is advised to be allowed in the year in which
it was discovered. Reference was also invited to the decision of Gujarat High Court in the case of
Dinesh Mills Ltd. v. CIT . He also referred to the decision of the Tribunal in the case of Cama Motors
(P) Ltd. v. IAC (1987) 29 TTJ (Ahd) 452 : (1987) 21 ITD 640 (Ahd) allowing the claim of the assessee
after taking into consideration the decision of Punjab and Haryana High Court in the case of Laxmi
Ginning & Oil Mills v. CIT (1971) 82 ITR 958 (P&H). In this case, it is held that the claim should be
allowed in the year of theft and if any amount is recovered therefrom, it would be offered to tax. The
Revenue's case is that the claim of the assessee was sub judice and it was not allowable on mere
possibility of its non-recovery. According to the Revenue, the assessee has not suffered any loss in
the year under appeal and, therefore, the deduction was not permissible.
137. The assessee is in the business of arranging investment for its clients. It is true that the assessee
was making investment specifically on behalf of PHB and it was bound to conduct the business of
the customer as per directions given by him, or, in the absence of such instructions, according to the
normal usage. The assessee received a sum of Rs. 10 crores from PHB, for investment by the
assessee, for a period of 180 days not necessarily and specifically in the investment of these 17 per
cent NPC Bonds but with an understanding and subject to the condition that the money was to be
invested in any Government securities, UTI or tax-free bonds with a minimum guaranteed return of
17 per cent. It was also with a further understanding that in case of emergency, money would be
made available to PHB with whatever returns that becomes due at that time. It was for the
investment of this money received that the assessee issued a cheque of Rs. 9,75,58,904 on 9th
March, 1992, to Andhra Bank. It was for the purchase of 17 per cent NPC Bonds @ Rs. 97 per bond
plus accrued interest. The assessee arranged investment. It however, fell down. The assessee made
another deal though stated to be as a security for the 1st deal in substitute in the form of IRFC Bonds
valued at Rs. 9,57,58,904 and also received a sum of Rs. 18 lakhs representing the difference in
value of NPC Bonds and the IRFC Bonds, on 18th March, 1992, but even these IRFC Bonds could
also not be transferred to the assessee-bank as the same were already sold to Standard Chattered
Bank. The assessee pursued both the matters further. The matter of registration was carried to CLB,
then to High Court from where it was transferred to Special Court dealing with scam matters and
lost finally in 1998 and the matter of N.K. Agarwal (is) stated to be still pending. By the end of
previous year relevant to asst. yr. 1994-95 both the matters (were) pending adjudication.
138. In my view, receipt of Rs. 10 crores from PHB and issuance of cheque for purchase of 17 per
cent NPC Bonds are two parts of the deal. These receipt of money and investment in bonds are two

independent different transactions. The other facts, i.e., refund of unused amount of Rs. 24,41,096
to PHB, receipt of Rs. 18 lakhs from N.K. Agarwal being difference between the market value of
IRFC Bonds and alternate investment in IRFC Bonds, though indicate a common thread, i.e., the
business of the assessee and its client PHB but all the transactions are independent, one after the
other but not as integral part of the same transaction. While making the purchase of 17 per cent NPC
Bonds, assessee was making an investment as a businessman though for and on behalf of the
customer, i.e., PHB. In my opinion, therefore, the loss was incurred by the assessee as such on its
own account, and not on account of its client PHB, on whose behalf and specifically in whose name,
the assessee was trying to acquire securities. The assessee stated to have agreed to bear this loss
because of commercial expediency and one important factor contributing to this commercial
expediency is stated to be that the RBI declined to issue a licence for opening a new branch office at
Chennai by its letter dt. 16th June, 1993. It might be a fact that within three weeks of this
communication, the assessee-bank entered into settlement with PHB but that does not have any
bearing or influencing factor for settling the issue with PHB. RBI's refusal or suspension of decision
to issue licence was for the reason that dispute in security investment with Andhra bank was to be
settled first. PHB was not in picture at all. Settlement for payment of Rs. 9.57 crores is with PHB
and not Andhra Bank. Nainital Bank's case, therefore, is of no help to the assessee, I, therefore, hold
that the refund of money to PHB was not a loss to the assessee. Loss, if any, which could be said to
have been suffered by the assessee was on account of the decision to invest in NPC Bonds through
Shri N.K. Agarwal. Here, the broker Shri N.K. Agarwal had played a mischief and consequently
taken that upon himself by offering another security in IRFC Bonds, Andhra Bank has transferred
the money on the instructions of Shri N.K. Agarwal, stated to be on behalf of the assessee. That fact
is disputed by the assessee. The assessee had not pursued the matter vis-a-vis Andhra Bank. It had
carried the matter further accepting the alternative security in the form of IRFC Bonds, the
registration for which was refused on the ground that they have already been registered in the name
of another bank. The matter of registration of alternative security ended in 1998 whereas the matter
vis-a-vis Shri N.K. Agarwal is pending even on date. In these circumstances, in my opinion, there
was no loss which can be said to have arisen to the assessee in the year under consideration.
139. In the case of Dinesh Mills Ltd. (supra), the assessee carried on business in textiles. It
maintained mercantile system of accounting. It had incurred loss of Rs. 13,40,000 on account of
embezzlement by its employee between 29th Jan., 1974, and 26th April, 1976. The assessee
discovered the loss during the asst. yr. 1977-78 and claimed the entire loss as deduction in that year.
The AO disallowed the claim on the ground that the extent of loss remained indeterminate or
unknown during the assessment year in question and the amount of actual loss could be known only
when the assessee entered into a compromise decree with the defaulter-employee in the calendar
year 1980. The CIT(A) considered the embezzlement in two parts-one which could reasonably be
estimated to be recoverable and the other which could not be reasonably expected to be recoverable
and ascertained the position at the end of the previous year, i.e., 31st Dec., 1976. He held that the
assessee had a reasonable hope of recovery for Rs. 7,20,000 while the balance Rs. 6,20,000 was lost
by the assessee for all time to come and granted deduction thereof. The Tribunal accepted that the
loss was incidental to the business and upheld the order of the CIT(A). On a reference, the High
Court held that in view of the statement made on behalf of the assessee to the effect that no
deduction had been allowed in any subsequent year, the assessee would be entitled to deduction of

loss during the assessment year in question as this was the year in which the loss on account of
embezzlement was, in fact, discovered. It set aside the matter to the Tribunal to ascertain the
allowability or otherwise of embezzlement loss in the light of the statement made on behalf of the
assessee.
140. In the case of Cama Motors (P) Ltd. (supra), the Ahmedabad Bench of the Tribunal was dealing
with a case of expenditure of Rs. 2,87,516 on the purchase of four jeeps, which had been handed
over to it on the basis of order placed by the executive engineer directly with the supplier. The
assessee claimed that on or about 1st May, 1981, these jeeps were stolen and that it suspected that its
sales manager was involved in the theft. On police investigation, the suspect was arrested and the
jeeps were recovered from him. The Magistrate, however, found that the jeeps were registered in the
names of outsiders, and hence ordered that they might be restored to the registered owners. On
appeal by the assessee, the High Court stayed the. Magistrate's order and directed that the jeeps be
placed in the custody of the assessee for safe keeping till the final decision by the Court. The High
Court also ordered that the vehicles must be kept unused and that the Magistrate should dispose of
the case before 31st Dec., 1982. The dispute about ownership remained unsolved even till
September, 1986. For the asst. yr. 1982-83, the assessee claimed the amount of Rs. 2,87,516 as a
business loss, but the claim was rejected by the IAC and the CIT(A). The High Court held that the
four jeeps lying with the company under orders of the Court were not the property of the company.
They were not reflected in the closing stock of the company and were undergoing continuous
deterioration being subjected to the elements day in and day out. As against this, a sum of Rs.
2,78,516 had gone out of the coffers of the company for purchase of four jeeps which had been
handed over to the executive engineer. It was not known as of today what the company would
recover as a result of the conclusion of the legal proceedings and when. The alleged accused was
absconding. The record did not state anything as to whether any money was recovered from him
when his arrest was effected. In case the company recovered anything by the sale of the four jeeps,
the amount might not be much because of the considerable erosion in their value after a lapse of
time. In these circumstances, the Tribunal held that the claim merited allowance not only on the
basis of system of accounting being followed by it, but also on the facts surrounding the claim.
141. In the case of Laxmi Ginning & Oil Mills (supra), a case before the Punjab and 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. 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 for 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 AO disallowed the loss on the ground that 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. CIT(A) and Tribunal upheld the contention of the AO. On a
reference, the High Court 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 year 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 relevant to the asst. yr. 1953-54
when the company did not take delivery and the assessee had sold the goods in the open market for
a lesser amount. All these cases could have helped the assessee in the present case if the claim was
made in the appeal for asst. yr. 1993-94 when the assessee got the information that the cheques
issued for investment in NPC Bonds were diverted to the account of Shri Hiten Dalal or when the
alternative security in IRFC Bonds was found to be registered in some other bank's name. Both
these dates were falling in asst. yr. 1993-94 and consequently, the assessee cannot claim the loss in
the year under consideration even on the basis of the three decisions referred to above. In view of
the above, in my opinion, the CIT(A) was right in disallowing the claim of the assessee.
142. The matter will now go to the Division Bench which heard the appeals for passing a majority
order.

Abn Amro Bank NV Vs Joint Commissioner of Income Tax On 17 June 2005

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Abn Amro Bank NV Vs Joint Commissioner of Income Tax On 17 June 2005

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Abn Amro Bank Nv vs Joint Commissioner Of Income Tax on 17 June, 2005

Income Tax Appellate Tribunal - Kolkata

Asst. yr. 1992-93 :

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Asst yr. 1993-94 :

Asst. yr. 1994-95 :

Asst. yr. 1995-96 :

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Net offshore 3,27,276 9,10,803 23,87,325 61,90,206 47,16,025 52,35,222 1,97,6

(iii) Tax on remuneration paid to expatriates offshore :

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The break-up of the figures filed by the assessee are as under :

Mr. Moulder 14,00,121 17,81,972 31,82,093 17,81,972

(i) Remuneration paid to expatriate offshore Rs. 61,90,206

(ii) Additional remuneration paid to expatriates towards taxes--Rs. 49,44,312 :

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"8. Offshore payments (gross) made to expats : Rs. 83,02,812 :

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The AO has further observed in the assessment order as under :

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(a) in the case of any assessee--

Explanation--For the purposes of this sub-clause,--

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Guide International Career Bankers (ICB) Expatriate salary--System--General.

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The local remuneration is paid in India.

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Asst. yr. 1995-96 :

36. The second ground of appeal raised by the assessee is as under :

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Asst. yrs. 1992-93. 1993-94 and 1994-95 :

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48. It will be useful to quote Section 90 as under :

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(Emphasis, italicised in print, supplied)

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own case for the asst. yr. 1996-97 (supra).

Letter dt. 21st Nov., 1994 :

"Sub : Taxation of ABN--AMRO Bank-Ref. From Embassy of Netherlands.

Letter dt. 24th March, 2000 :

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Asst. yr. 1994-95 :

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