M.A. BAKSHI, VICE PRESIDENT PRAMOD KUMAR, A.M. PRAMOD KUMAR, A.M. M.A. BAKSHI, VICE PRESIDENT R.P. GARG, VICE PRESIDENT (AS THIRD MEMBER) November, 2003 These 4 appeals of assessee relating to asst. yrs. 1992-93, 1993-9 4 , 199 4 -95 and 1995-96 involving some common issues are disposed of by this consolidated order. 2 . appellant is branch of ABN AMRO Bank NV incorporated in Netherlands, with limited liability having its original office at Singapore. In India, appellant is registered as scheduled bank in terms of Sch. II of Reserve Bank of India (RBI) Act, 193 4 . main activities of 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 existing rules and regulations governing such transactions. In years under consideration, appellant had three branches in India at Mumbai, Kolkata and New Delhi. There is agreement between India and Netherlands for Avoidance of Double Taxation and Prevention of Fiscal Evasion (hereinafter called as DTAA). Art. 7 of DTAA provides for taxation in India of foreign enterprise in respect of profits attributable to its permanent establishment (hereinafter referred to as PE) in India. Since ABN AMRO Bank NV was having PE in India, appellant is liable to tax in respect of income attributable to PE. 3. One of common issues involved in all four assessment years is relating to deduction on account of remuneration paid to expatriate employees outside India for services rendered in India. Tax deducted at source and paid in previous year relevant to asst. yr. 1995-96 is also claimed as deduction in respective assessment years. Interest under s. 201(1A) for delayed payment of TDS paid in 1995-96 is subject-matter of dispute in appeal for asst. yr. 1995-96 only. By way of additional ground of appeal and as alternative claim, appellant has claimed deduction of entire remuneration and TDS pertaining to asst. yrs. 1990-91 to 1995-96 in asst. yr. 1995-96. 4 . relevant grounds of appeal for respective assessment years are reproduced hereunder : Asst. yr. 1992-93 : "1. That, on facts and in circumstances of case, learned CIT(A) erred in confirming disallowance of Rs. 23,87,325, being offshore remuneration paid by head office in current financial year to expatriate employees rendering services in India, on basis of reasons stated in his order for asst. yr. 1995-96, without considering submissions made by appellant. (2) That, on facts and in circumstances of case, learned CIT(A), on basis of reasons stated in his earlier order for asst. yr. 1995-96, erred in confirming disallowance of Rs. 29,86,963, being that part of remuneration of expatriate employees rendering service in India paid by appellant and representing tax deducted at source after grossing up expatriate s total income taxable in India as per terms of employment." Asst. yr. 1993-9 4 : "1. That, on facts and in circumstances of case, learned CIT(A) erred in confirming disallowance of Rs. 61,90,206 under s. 4 (a)(i) of IT Act, 1961 (the Act), representing offshore remuneration paid by head office to expatriate employees rendering services in India. 2. That, on facts and in circumstances of case, learned CIT(A) erred in confirming disallowance of Rs. 4 9, 44 ,312 under s. 4 (a)(i) of Act, representing that part of remuneration of expatriate employees rendering service in India paid by appellant and representing tax deducted at source after grossing up expatriate s total income taxable in India as per terms of employment." Asst. yr. 199 4 -95 : "1. That, on facts and in circumstances of case, learned CIT(A) erred in confirming disallowance of Rs. 4 7,16,025, being offshore remuneration paid by head office in current financial year to expatriate employees rendering services in India, on basis of reasons stated in his order for asst. yr. 1996-97, without controverting submissions made by appellant. 2. That, on facts and in circumstances of case, learned CIT(A), on basis of reasons stated in his earlier order for asst. yr. 1996-97, erred in confirming disallowance of Rs. 35,86,781, being that part of remuneration of expatriate employees rendering service in India paid by appellant and representing tax deducted at source after grossing up expatriate s total income taxable in India as per terms of employment." Asst. yr. 1995-96 : "On facts and in circumstances of case CIT(A) erred in confirming disallowance of Rs. 89,0 4 ,276 being remuneration, tax and interest paid in current financial year in respect of expatriate employees. CIT(A) erred in not appreciating that all details and explanations called for by AO had duly been filed during course of assessment proceedings, but, which were not taken note of by AO in his assessment order. CIT(A), therefore, erred in not giving cognizance to appellant s submissions made during course of assessment while adjudicating upon this issue. CIT(A) erred in rejecting alternative claim made by appellant on deduction of entire amount of Rs. 2,06,5 4 , 4 99, being tax and interest in respect of offshore remuneration of expatriate employees for all assessment years including current assessment year paid in current assessment year. CIT(A) erred in holding that said expenditure is not revenue expenditure of appellant on ground that taxes have been paid purely on behalf of expatriate employees and if there is any liability for payment of same, it rests on those expatriate employees. CIT(A) failed to appreciate that, once appellant undertook to discharge tax liability of expatriates, it became obligation of appellant to pay necessary taxes to Government, much in same way as is case where employer undertakes to pay salary net of tax to employee. CIT(A), therefore, should have allowed entire amount of expenditure as revenue expenditure of appellant." 5. Following additional ground of appeal has been raised for asst. yr. 1995- 96 : "In determining business profits of appellant, sum of Rs. 1, 4 5,31,635 being offshore remuneration paid by appellant to its expatriate employees in asst. yrs. 1990-91 to 199 4 -95 is (in addition to sum of Rs. 2,06,5 4 , 4 99, being tax and interest thereon, already claimed) also allowable as deduction in asst. yr. 1995-96, being year in which appellant paid taxes on said offshore remuneration. In asst. yr. 1995-96, appellant is entitled to deduction for aggregate amount of Rs. 4 ,0 4 ,21,356, (i.e., Rs. 1,97,66,857 on account of offshore remuneration of expatriate employees and Rs. 2,06,5 4 , 4 99 on account of tax and interest thereon)." Since additional ground of appeal is purely legal in nature and no investigation of facts is required, we admit same for consideration. 6. We now proceed to dispose of above grounds simultaneously. Under s. 192 of IT Act 1961, assessee was required to deduct tax from salary paid to their expatriate employees. Some of expatriate employees having rendered services in India, had received their remuneration outside India. It is not disputed that income derived by such expatriate employees from services rendered in India is liable to tax in India notwithstanding fact that they received their remuneration outside India. assessee had failed to deduct tax from remuneration paid to said expatriate employees. Whereas remuneration paid to expatriate employees in India had been taken into account in books of account of assessee relevant to PE, remuneration paid to offshore employees who had rendered services in India but whose remuneration was paid abroad, had been debited in books of account of head office. As pointed out earlier, assessee-bank had failed to deduct taxes under s. 192 in respect of remuneration of such employees paid outside India for services rendered in India. CBDT, in order to encourage compliance in respect of TDS, issued Circular No. 685, dt. 20th June, 199 4 [reported at(199 4 ) 119 CTR (St) 61 Ed.] providing exemption from penalty and prosecution to those employers who paid tax deducted/deductible at source by specified date in circular. said circular is quoted for ready reference : "1. It has come to notice of Board that some of employers, including foreign companies operating in India, have been defaulting in deducting tax at source as required under s. 192, on 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 Government. All payments and perquisites to employees for services rendered in India are taxable in India irrespective of place where payment occurs. 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 Government. Failure to comply with these requirements would render employer assessee-in-default and would attract interest under s. 201(1A). Penalties under ss. 221 (assessee-in-default) and 271C (failure to deduct tax) are then leviable and prosecution proceedings under s. 276B can also be initiated in such cases. 2. To encourage immediate voluntary compliance, Board has decided that proceedings under ss. 221 and 271C for levy of penalties and proceedings under s. 276B for prosecution need not be initiated in cases where employer voluntarily comes forward and pays whole of tax due under s. 192, along with interest liability under s. 201(1A) on or before 31st July, 199 4 . 3. Employers (Indian and foreign), who committed default in 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, 199 4 and avoid penalty and prosecution proceedings." This was followed by another circular being Circular No. 686, dt. 12th Aug., 199 4 [reported at(199 4 ) 120 CTR (St) 25 Ed.], which reads as under : "1. Reference is invited to Board s Circular No. 685, dt. 20th June, 199 4 (File No. 275/69/9 4 -ITB), providing for non-initiation of proceedings under s. 221/276B/271C of IT Act, 1961, in respect of employers defaulting in deducting tax at source on 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 disclosure o f excess salary payments by employers, any consequential action will be taken in hands of employees. 2. Board has considered matter. spirit behind issue of Circular No. 685, dt. 20th June, 199 4 , was to encourage immediate voluntary compliance on part of employers defaulting in tax deduction. In order that this intention is fully achieved, Board has decided that assessments of employees, in respect of whom payments of short deduction and interest thereon are made by employers in pursuance of Circular No. 685, dt. 20th June, 199 4 , will not be reopened or otherwise disturbed merely on account of excess salary payments now disclosed by employers." 7 . assessee took advantage of circular and paid sum of Rs. 2,06,5 4 , 4 99 detailed below as tax deducted at source and interest under s. 201(1A) for asst. yrs. 1990-91 to 1995-96. net offshore remuneration in respect of expatriate employees is also indicated in statement as under : Asst. yr. Asst. yr. Asst. yr. Asst. yr. Asst. yr. Asst. yr. Details Total 1990-91 1991-92 1992-93 1993-9 4 199 4 -95 1995-96 Tax 10,5 4 4 9, 44 (As TDS 3,61,635 29,86,963 35,86,781 36,15,895 1,65,50,510 ,92 4 ,312 arrears) Interest 2, 4 13,2 4 5,80,300 12,19,063 6,81,031 53,159 4 1,03,989 u/s. 201 5,859 ,577 Sub 6,07, 4 9 16,35,22 4 4 36,69,05 2,06,5 4 , 4 62,68,889 Total 4 4 2,06,026 2,67,812 4 99 Net offshore 4 remuneration 3,27,276 9,10,803 23,87,325 61,90,206 52,35,222 1,97,66,857 7,16,025 paid in Netherlands 9,3 4 25, 4 12 4 89,0 4 4 ,0 4 Total 65,93,351 89,83,837 ,770 6,027 ,59,095 ,276 ,21,356 8. For asst. yr. 1995-96, assessee had charged total amount of Rs. 2,06,5 4 , 4 99 to P&L a/c. However, said amount was added back in statement of income. deduction of Rs. 89,0 4 ,276 was claimed on account of remuneration, TDS and interest pertaining to asst. yr. 1995-96 in statement of account. 9 . For asst. yrs. 1992-93 to 199 4 -95, appellant had not made any claim for remuneration or tax component in returns of income. So, however, for asst. yr. 1992-93, assessee made claim before AO in regard to remuneration and tax deducted at source in respect of expatriate employees having rendered services in India for which payment had been made abroad, vide letter dt. 13th Jan., 1995. AO rejected claim while making assessment. relevant portion of 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 books of account of branch. We had not claimed 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 fact that such remuneration was not debited in our books of account in India, would not come in way of our claiming said deduction. In this connection we place reliance on Supreme Court decision in case ofKedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC). Accordingly, we now wish to claim said deduction to extent of amount of such remuneration pertaining to fiscal year 1991-92 (relevant to asst. yr. 1992-93) amounting to Rs. 23,87,325. (iii)Tax on remuneration paid to expatriates offshore : assessee has further stated in said letter of 13th January as under : We have paid tax in fiscal year 199 4 -95 on remuneration to expatriates offshore pertaining to period under Amnesty Scheme announced by CBDT vide Circular No. 685, dt. 17/20th June, 199 4 . To extent such tax pertained to fiscal year 1991-92 (relevant to. asst. yr. 1992-93) we now wish to claim deduction of tax paid by us in fiscal year 199 4 -95 in pursuance of Amnesty Scheme amounting to Rs. 29,86,963. break-up of figures filed by assessee are as under : Name Net Total of Additional Tax offshore offshore expatriates tax borne by thereon remuneration remuneration offshore bank (Rs.) (Rs.) (Rs.) (Rs.) staff Mr. 1 4 17,81,972 31,82,093 17,81,972 Moulder ,00,121 Mr. 18,1 4 7,98,5 4 6 10,16,333 10,16,333 Merckx ,879 Mr. 1,88,658 1,88,658 3,77,316 1,88,658 Koster 53,7 23,87,325 29,86,953 29,86,963" 23,87,325 29,86,953 29,86,963" 4 ,288 10. For asst. yr. 1993-9 4 , assessee had filed letter dt. 21st April, 1995, during course of assessment proceedings making claim for deduction for remuneration and tax paid in respect of expatriate employees who had rendered services in India but had received payment abroad. AO rejected claim for reasons recorded in para 7 of assessment order which is reproduced hereunder : "7. By letter dt. 21st April, 1995, assessee-bank has claimed following in revised computation of income : (i)Remuneration paid to expatriate offshore Rs. 61,90,206 Our head office has paid remuneration to expatriates offshore who had rendered services in our branches in India. Such remuneration was not debited i n books of account of branch. We had, therefore, inadvertently not claimed deduction of such remuneration to expatriate 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 fact that such remuneration was not debited in our books of account in India, would not come in way of our claiming said deduction. In this connection, we place reliance on Supreme Court decision in case ofKedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC). Accordingly, we have now claimed said deduction in revised computation of total income to extent of amount of such remuneration pertaining to fiscal year 1992-93 (relevant to asst. yr. 1993-9 4 ) amounting to Rs. 23,87,325. (ii)Additional remuneration paid to expatriates towards taxes Rs. 4 9, 44 ,312: assessee has further stated in said letter dt. 21st April, 1995 that In fiscal year 199 4 -95, additional payment for period 1989-90 to 199 4 -95 were made to expatriates to cover tax payable by them under Amnesty Scheme introduced by CBDT vide Circular No. 685, dt. 17/20th June, 199 4 . Payments to extent they relate to previous year relevant to this assessment year are now claimed as deduction. We have accordingly, revised computation of total income. I have carefully considered submissions of assessee. I, however, find that facts of case relied upon by Authorised Representative are not all for present case and as such decision in case ofKedarnath Jute Manufacturing Co. Ltd.(supra) is not applicable to this case. Salary was paid to expatriates rendered services in India by head office of bank and same has not been debited to accounts of bank in India. In circumstances, claim for deduction of Rs. 61,90,206 cannot be accepted. As regards claim for deduction of Rs. 4 9, 44 ,312 being tax borne by bank as salary paid to expatriates offshore, it is to be noted that payments have been made only in fiscal year 199 4 -95. In circumstances, assessee s claim for deduction of Rs. 4 9, 44 ,312 in assessment for asst. yr. 1993-9 4 cannot be entertained. Hence, assessee s claim for deduction of Rs. 61,90,206 on account of salary paid to expatriates offshore and Rs. 4 9, 44 ,312 being tax paid on salaries to expatriates are disallowed in assessment year but will be considered in assessment for asst. yr. 1995-96 relevant to fiscal year 199 4 -95." 11. For asst. yr. 199 4 -95, assessee vide letter dt. 8th Oct., 1996, claimed deduction in respect of offshore remuneration and tax paid in respect of such remuneration. claim of assessee was rejected by AO vide para 8 of assessment order, which is reproduced hereunder : "8.Offshore payments (gross) made to expats : Rs. 83,02,812 : assessee-bank vide its letter of 8th Oct., 1996 has given break-up of above figure which is as under : (i) Net offshore remuneration paid by head 4 office in Amsterdam 7,16,025 (ii) Tax perquisite being tax borne by bank in 36,86,781 India 8 4 ,02,806 This aspect has been discussed in detail by my predecessor in his order dt. 25th March, 1996 (p. 3, para 7 of said order) passed under s. 1 4 3(3) of IT Act for asst. yr. 1993-9 4 , and in view of reasons stated therein, aforesaid amount of Rs. 83,02,812 disallowed in this assessment and same will be considered in asst. year 1995-96." 12. For asst. yr. 1995-96, in assessment order, AO has mentioned that assessee had in course of assessment proceedings claimed deduction of entire amount of Rs. 2,06,5 4 , 4 99 on basis of s. 4 3B of IT Act, 1961. However, AO disallowed claim of assessee relating to earlier years for following reasons : "(i) TDS paid for earlier years is not covered under s. 4 3B as it is not regular payment of tax or Government dues. amount has been paid under Amnesty Scheme and, therefore, it is not allowable. Moreover, amount does not pertain to year under consideration. (ii) Remuneration and TDS paid by assessee for earlier years have not been included by concerned employees for their income-tax purposes in India for which assessee is liable. (iii) Interest on TDS is not business expenditure and it does not pertain to year of assessment, i.e., asst. yr. 1995-96." 13. In regard to disallowance of Rs. 89,0 4 ,296 pertaining to asst. yr. 1995-96, AO disallowed claim for following reasons : "(a) Assessee has not given detail as to how much amount out of such remuneration has already been claimed as expenditure by any other office of assessee, particularly because assessee is not allowed to claim same expenditure twice, once in other country and again in India. (b) Assessee has not given details of services rendered, place of services rendered and terms of agreement regarding such employees/offshore expatriates. (c) said remuneration has not been included in income of concerned employees for taxation in India for which assessee is, therefore, liable. (d) payment has been made under Amnesty Scheme and it is not regular payment. Therefore, not allowable under regular provisions. (e) Assessee is allowed head office expenses @ 5 per cent of taxable income in India. Therefore in such expenditure including remuneration under consideration has merged with head office expenses and, therefore, it is treated as allowed by way of head office expenses." AO has further observed in assessment order as under : "The above said reasons for not allowing offshore expatriates remuneration applies to interest, TDS and remuneration paid for earlier years also. Therefore, in view of above discussion and reasons, claim of assessee relating to interest, TDS and remuneration for earlier years and for year under consideration is disallowed." 1 4 . CIT(A) has confirmed disallowance. relevant portion of order being paras 8, 9 and 10 are reproduced hereunder : "8. Ground No. 4 (a) of appeal relates to disallowance of sum of Rs. 89,0 4 ,276 being remuneration, tax and interest paid in current financial year to expatriate employees. While disallowing, AO has given following reasons : (a) payment has been made under Amnesty Scheme and it is not regular payment, therefore, not allowable under regular provisions. (b) said remuneration has not been included in income of concerned employees for taxation in India for which assessee is, therefore, liable. (c) Assessee has not given details of services rendered, place of services rendered and terms of agreement regarding such employees/offshore expatriates. (d) Assessee has not given detail as to how much amount out of such remuneration has already been claimed as expenditure by any other office of assessee. Particularly because assessee is not all to claim same expenditure twice, once in other country and again in India. (e) Assessee is allowed head office expenses @ 5 per cent of taxable income in India. Therefore, in such expenditure including remuneration under consideration has merged with head office expenses and, therefore, it is treated as allowed by way of head office expenses. 9. Keeping in view detailed reasons given by AO and also after carefully examining arguments put forward by appellant-company, I am o f opinion that AO was perfectly justified in disallowing sum of Rs. 89,0 4 ,276. addition made by AO is, therefore, confirmed. 10. Ground No. 4 (b) of appeal relates to AO rejecting claim of appellant for deduction of entire amount of Rs. 2,06,5 4 , 4 99 being tax and interest on offshore remuneration of expatriate employees for all assessment years including current assessment year paid in current assessment year. facts are that CBDT had launched scheme whereby defaulters of TDS in terms of salary and remuneration paid to expatriate employees abroad tax could be paid by employer. 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 rigour of prosecution, although in other sense of term, these taxes were due and collectable from expatriate employees from whom appellant-company in earlier years had failed to collect taxes in accordance with Indian law and pay same. Even now, I will say that these taxes have been paid purely on behalf of expatriate employees and if there is any liability for payment of same to bank it rests on those expatriate employees. appellant cannot say that this should be treated as revenue expenditure. Therefore, for detailed reasons given above, I am of opinion that taxes paid by appellant-company because of its own fault in not collecting taxes from its expatriate employees in time and depositing same with Government of India cannot be allowed as revenue expenditure. AO was perfectly justified in disallowing same and, therefore, addition of Rs. 2,06,5 4 , 4 99 is sustained." 15. learned counsel for assessee contended that assessee is entitled to deduction on account of remuneration paid to expatriate employees outside India for services rendered in India. Since expenditure is directly related to PE in India, deduction is allowable as expenses pertaining to PE. It was pointed out that salary paid to employees does not fall within ambit of s. 44 C as head office expenses. learned counsel pointed out that head office expenditure is defined to mean executive and general administration expenditure incurred by assessee outside India, including specified expenses referred to in definition under Expln. (iv) to s. 44 C of IT Act. It was further pointed out that similar issue had come up for consideration of Tribunal in assessee s own case for asst. yr. 1996-97 in ITA No. 692/Cal/2000, dt. 30th March, 2001 and same has been decided in favour of assessee. It was, accordingly, pleaded that deduction may be allowed to assessee either in year to which remuneration, etc., pertains to or in year tax has been deducted and paid to Government of India. In this connection our attention was invited to s. 4 (a) which prohibits 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. learned counsel pointed out that proviso to said section provides for deduction in year in which such tax has been paid or deducted. It was, accordingly, pleaded that deduction for entire amount may be allowed to assessee in asst. yr. 1995-96 as tax has been deducted and paid in previous year relevant to said assessment year. 16. learned Departmental Representative, on other hand, relied upon orders of Revenue authorities. Our attention was invited particularly to reasons given by AO in asst. yr. 1995-96 for making disallowance. 17. We have given our careful consideration to rival contentions. We propose to consider dispute separately under three heads, viz., (a) remuneration; (b) tax deducted at source; and (3) interest. First we take up issue relating to remuneration. Remuneration : 18. assessee had failed to deduct tax in respect of remuneration paid to expatriate employees outside India and after taking advantage of amnesty granted by Government of India in respect of penalty and prosecution, had deposited tax deductible from such expatriate employees. For asst. yrs. 1992-93 to 199 4 -95, no deduction, either in respect of remuneration or tax payment, was claimed in original returns. So, however, after having paid tax, deduction was claimed in course of assessment proceedings for respective assessment years. Article 7 of DTAA between India and Netherlands provides for taxation of income of PE. said article also provides certain guidelines for determination of profits of PE for purpose of taxation in India. It will be useful to reproduce paras 2 and 3(a) of art. 7 of DTAA : "2. Subject to provisions of para 3, where enterprise of one of States carries on business in other State through permanent establishment situated therein, there shall in each State be attributed to that permanent establishment profits which it might be expected to make if it were distinct and separate enterprise engaged in same or similar activities under same or similar conditions and dealing wholly independently with enterprise of which it is permanent establishment. In any case, where correct amount of profits attributable to permanent establishment is incapable of determination or determination thereof presents exceptional difficulties, profits attributable to permanent establishment may be estimated on basis of apportionment of total profits of enterprise to its various parts, provided, however, that result shall be in accordance with principles contained in this article. 3.(a) In determining profits of permanent establishment, there shall b e allowed as deduction, expenses which are incurred for purposes of permanent establishment, including executive and general administrative expenses so incurred, whether in State in which permanent establishment is situated or elsewhere, in accordance with provisions of and subject to limitations of taxation laws of that State. Provided that where law of State in which permanent establishment is situated imposes restriction on amount of executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention between that State and third State which enters into force after date of entry into force of this Convention, competent authority of that State shall notify competent authority of other State of terms of corresponding paragraph in Convention with that third State immediately after entry into force of that Convention and, if competent authority of other State or requests, provision of this sub-para shall be amended by protocol to reflect such terms." 19. It is evident from above that para 2 of art. 7 provides that where enterprise of one of States carries on business in other State through PE situated therein, there shall in each State be attributed to that PE profits which it might be expected to make if it were distinct and separate enterprise engaged in same or similar activities under same or similar conditions and dealing wholly independently with enterprise of which it is PE. 20. Para 3(a) of art. 7 provides that in determining profits of PE, there shall be allowed as deductions, expenses which are incurred for purposes of PE including executive and general administrative expenses so incurred, whether in State in which PE is situated or elsewhere, in accordance with provisions of and subject to limitations of taxation laws of that State. Thus, it is evident from above quoted article of DTAA that any expenditure which is attributable to PE is to be taken into consideration for purpose of computation of profits of PE. We have, therefore, no doubt in our minds that assessee is entitled to deduction in respect of remuneration paid to expatriate employees having rendered services in India notwithstanding fact that payment for such remuneration was paid to them outside India. This view has also been taken by co-ordinate Bench in assessee s own case for asst. yr. 1996-97 and issue has been decided vide paras 12 and 13 of order in ITA No. 692/Cal/2000, dt. 30th March, 2001. relevant portion of said order of Tribunal is reproduced hereunder : "12. When undisputed facts are that employees concerned rendered wholetime services in India throughout accounting year under consideration, any salary paid to them, whatever same may be, will have to be allowed as expenses pertaining to business of assessee in India. It is also case of assessee that even taxes were deducted at source from those components of salary payment to three expatriate employees in Netherlands and that said taxes were duly deposited with Government of India. If that be case, we do not find any reason to disallow claim of assessee. In principle, therefore, we hold that claim of assessee towards offshore payment to expatriate employees in India will have to be allowed. However, it is found that assessee charged Rs. 2.55 crores as head office charges on accrual basis in books of account which was ultimately allowed in assessment under s. 44 C. assessee also claimed in ground No. 7(b), before CIT(A), alternatively that remuneration to expatriate employees rendering services in India should be included with head office expenses for purpose of allowing deduction under s. 44 C. CIT(A) has accepted contention of assessee and directed AO to include amount, if not already included, for purpose of allowing deduction under s. 44 C. In such case, separate claim of assessee perhaps in respect of same expenditure is certainly unwarranted. Even learned counsel for assessee also did not draw our attention to allowance of same amount under s. 44 C as directed by CIT(A). We feel that although amount under consideration is required to be allowed in principle, said allowance should, however, be allowed only once, i.e., either by way of salary payment to expatriate employees or as part of head office expenses under s. 44 C. Since we have held that amount should be allowed as salary payment to expatriate employees, we specifically direct that same amount should not be allowed as part of head office expenses under s. 44 C. direction given by CIT(A) in this regard at para 8 of his appellate order is, therefore, reversed as corollary to our order with regard to ground taken up by assessee in this regard." 21. It is evident from above order of Tribunal that claim of assessee in regard to payment of remuneration to expatriate employees rendering whole time services in India throughout accounting year has been accepted in principle as allowable deduction in computing profits of PE. This is, however, with rider that such payment is not taken into account in working out deduction under s. 44 C. We adopt above direction in regard to remuneration paid to expatriate employees for whole time services rendered in India, subject to further rider placed under provisions of s. 4 (a) of IT Act, 1961. We direct AO to consider claim of assessee for asst. yrs. 1992-93, 1993-9 4 and 199 4 -95 as under : In principle, remuneration paid to expatriate employees for services rendered in India is to be accepted as allowable deduction in computing profits attributable to PE. So, however, AO is required to verify that assessee has not taken such remuneration into account in working out head office expenses under s. 44 C. Sec. 44 C reads as under : " 44 C. Notwithstanding anything to contrary contained in ss. 28 to 4 3A, in case of assessee, being non-resident, no allowance shall be made, in computing income chargeable under head "Profits and gains of business or profession", in respect of so much of expenditure in nature of head office expenditure as is in excess of amount computed as hereunder, namely : (a) amount equal to five per cent of adjusted total income; or (b).................................. (c) amount of so much of expenditure in nature of head office expenditure incurred by assessee as is attributable to business or profession of assessee in India, whichever is least." Once AO is satisfied that assessee is entitled to deduction in respect of remuneration, claim of assessee shall have to be dealt with in accordance with s. 4 . Relevant portion of s. 4 (a) is reproduced hereunder : " 4 . Notwithstanding anything to contrary in ss. 30 to 38, following amounts shall not be deducted in computing income chargeable under head "Profits and gains of business or profession", (a) in case of any assessee (i) any interest (not being interest on loan issued for public subscription before 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 deduction in computing income of previous year in which such tax has been paid or deducted. Explanation For purposes of this sub-clause, (A) "royalty" shall have same meaning as in Expln. 2 to cl. (vi) of sub-s. (1) of s. 9; (B) "fees for technical services" shall have same meaning as in Expln. 2 to cl. (vii) of sub-s. (1) of s. 9." It may be pointed out that s. 44 C provides for restriction for allowance of head office expenses. maximum deduction permissible is 5 per cent of adjusted total income. AO has allowed straightway deduction of 5 per cent and there is no reference of computation of head office expenses which presumably are more than 5 per cent of adjusted total income. AO shall accordingly, verify claim in accordance with provisions of s. 44 C for taking decision in light of directions of Tribunal in assessee s own case for asst. yr. 1996-97 (supra) which we have adopted for years under appeal. 2 2 . aforementioned direction is valid for offshore remuneration pertaining to asst. yrs. 1992-93, 1993-9 4 , 199 4 -95 and 1995-96. In case after verification AO comes to conclusion that assessee has not taken amount of remuneration into consideration in working out deduction under s. 44 C, claim would in principle be permissible in respective assessment years. So, however, deduction has got to be allowed, as already pointed out, in accordance with s. 4 (a) read with proviso. tax not having been deducted at source in respective assessment years but having been paid in asst. yr. 1995-96, deduction in respect of remuneration is allowable in year of payment, i.e., asst. yr. 1995-96. This takes care of part of additional ground raised by assessee before us in asst. yr. 1995-96, whereby deduction in respect of remuneration and tax component pertaining to asst. yrs. 1992-93 to 199 4 -95 is claimed as deduction in asst. yr. 1995-96. For asst. yr. 1995-96, tax has been paid by assessee in same assessment year. Therefore, prohibition under s. 4 (a) is not attracted. claim of assessee shall be considered accordingly. We direct accordingly. 23. Tax deducted at source in respect of remuneration paid outside India to expatriate employees : As pointed out earlier, assessee had neither deducted nor paid any tax in respect of remuneration paid to expatriate employees. It is claim of assessee that expatriate employees are paid remuneration net of taxes all over world. assessee has taken into account tax perquisite while working out tax deductible in respect of remuneration paid to expatriate employees. In asst. yr. 199 4 -95 in written submissions filed before CIT(A), reproduced by him in appellate order, we find reference to policy of assessee in regard to payment of remuneration to its employees working in all branches around world. Since it is relevant for deciding issue on hand, it will be worthwhile to reproduce same : "For year under consideration appellant paid Rs. 35,86,781 (Pl. refer attachment 1 for details) as tax deductible at source from total remuneration of expatriate employees taxable in India under Amnesty Scheme announced by CBDT vide Circular No. 685, dt. 17/20th June, 199 4 . This amount has been separately claimed as deductible expenses vide letter filed in course of assessment. brief background of appellant s policy in regard to taxation of expatriate employee s income is given hereunder : Expatriate employees all over world cannot be transferred from one country to another country if there is not continuity and consistency in their remuneration. Therefore, bank has worldwide salary policy for its expatriate staff. This policy is laid down in theBank s Guide Expatriate Staff and Guide International Career Bankers. Guide Expatriate Staff Principle Expatriate employees all over world cannot be transferred from one country to another if there is not certain continuity and consistency in their remuneration. Therefore, bank has worldwide salary policy for its expatriate staff. In order to ensure that changes in local taxes and social security regulations do not influence application of this policy, net salary system is effective for all expatriates. Net salary package net salary allowance and benefits to which employees is entitled are determined by head office. Both expatriate staff member and local management will be duly informed by International Human Resources of actual amounts to be paid. Gross up : Once employee s net salary, allowance and benefits are determined, his/her gross income for (a part of) current fiscal year should be calculated by or in consultation with 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 bank direct to 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 application of this policy net salary system is effective for all ICBs. net base salary is defined as base salary less tax, social security, schooling and housing expenses. It includes typical expatriate allowances. Net Guarantee/Gross up ICB s salary is net salary which means that tax, social security premiums, etc., related to employment income will be for account of bank. Exception is made for Line of Business Bonus. Tax and social security premiums from other personal income are not for account of bank. We, thus, submit that it is bank s responsibility and obligation to bear Indian taxes on offshore remuneration of expatriate employees rendering services in India. In computation of remuneration and tax of expatriate employees (for purpose of deduction of tax at source) apart from salary also included is local taxable remuneration beinginter aliathe perquisite value on account of rent-free accommodation, utilities and additional remuneration/benefit of tax borne. In effect, total taxable remuneration is thus increased/ grossed up to include tax deductible on offshore remuneration. This methodology of increasing/grossing up amount of tax has been done in accordance with provisions of s. 195A of Act. amount by which income is thus grossed up is in nature of taxable perquisite under s. 17(2) in hands of employee and thereby allowable expenditure in hands of appellant. To summarise we wish to state as under with regard to local remuneration and perquisites. Without prejudice to our contention that offshore remuneration is allowable deduction, we wish to distinguish fact that local remuneration paid to expatriate employees stands on completely different footing as compared to offshore remuneration. local remuneration is paid in India. tax borne by appellant on offshore remuneration is part and parcel of local remuneration and is grossed up for purpose of calculation of taxable income. In fact, tax on total income is only measure for calculating additional remuneration/benefit for inclusion in total income as such result (is additional remuneration) does not partake character of tax. Reference is drawn to Supreme Court judgment in case ofSenairam Doongarmall vs. CIT (1961) 4 2 ITR 392, 397 (SC). From above reasons local remuneration (which includes,inter alia,the gross up of tax) is allowable expense. We enclose copy of letter from International Human Resource Department of bank at Amsterdam confirming that tax in respect of offshore remuneration payable to expatriate employees is to be borne by bank. In view of above submission made we urge that claim of appellant for Rs. 35,86,781 on account of local remuneration being tax paid in India on expatriate employees taxable income should be allowed as deductible expense." 2 4 . It is evident from above that salary paid to expatriate employees is net of taxes. assessee had neither paid nor deducted taxes in asst. yrs. 1992-93 to 199 4 -95. However, in asst. yr. 1995-96, assessee has paid tax deductible at source. Therefore, in principle assessee would be entitled to deduction in respect of tax component of salary also if salary is found to be deductible as per directions of 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 199 4 -95 by operation of s. 4 (a)(i) of IT Act, 1961. claim for said assessment years shall have to be disallowed for reason of non-deduction of tax. So, however, deduction shall have to be considered for asst. yr. 1995-96 as per proviso to s. 4 (a)(i). 2 5 . Thus, subject to verification that claim of remuneration and tax deductible has not been taken into account under s. 44 C in regard to expatriate employees, deduction relating to asst. yrs. 1992-93 to 199 4 -95 would be permissible in asst. yr. 1995-96 as per proviso to s. 4 (a)(i). For asst. yr. 1995-96, assessee has paid tax and, therefore, s. 4 (a) is not attracted. assessee shall be entitled to deduction in respect of remuneration as well as tax paid pertaining to asst. yr. 1995-96. It is pertinent to mention that objection raised by Revenue about assessee having failed to establish as to whether services have been rendered by expatriate employees in regard to PE of assessee in India, we find, is uncalled for. If employees have not rendered services in India, for which remuneration had been received abroad, then how is it that assessee was under obligation to deduct tax from their remuneration. very fact that assessee has accepted its obligation to deduct taxes from salary paid to expatriate employees is, in our view, sufficient to infer that services had been rendered by them in India. 26. second objection raised by Revenue is that assessee has only paid tax deducted at source and not tax on behalf of expatriate employees. This objection is also, in our view, unfounded. Sec. 199 provides that any deduction made in accordance with provisions of s. 192 and paid to Central Government shall be treated as payment of tax on behalf of person from whose income deduction is made. Under s. 205 of IT Act, 1961, there is bar for Revenue to demand tax from assessee to extent amount has been deducted from his income. Thus, tax deducted at source by assessee and paid to Government is treated as tax paid on behalf of expatriate employees. It is true that expatriate employees have right to demand refund of tax deducted at source if not found chargeable in assessment in their hands. However, in this case assessee has paid remuneration net of tax. Therefore, refund, if any, claimed on behalf of expatriate employees would be assessable to tax in year of refund in hands of appellant. Therefore, objection of Revenue is overruled. We, accordingly, direct AO to consider claim of assessee in regard to remuneration and taxes paid relating to asst. yrs. 1992-93 to 1995-96 in asst. yr. 1995-96 in accordance with directions contained in this order. 27. In asst. yr. 1995-96, assessee has also claimed deduction for remuneration and tax paid in regard to asst. yrs. 1990-91 and 1991-92. No evidence has been placed on record to establish that assessee had at any stage made claim for deduction in said assessment years. In principle, claim of assessee has got to be considered in assessment year to which claim pertains to. It is only when claim is considered and found allowable but for provisions of s. 4 (a) that same can be allowed in year of payment. Since claim for asst. yrs. 1990-91 and 1991-92 is not established to have been made and considered in earlier years, benefit is not permissible in asst. yr. 1995-96 merely because tax has been paid in year under appeal. benefit of proviso to s. 4 (a)(i) is thus not available to assessee for which no claim is made in respective assessment years. Therefore, claim of assessee does not fall for consideration in asst. yr. 1995-96 on basis of provisions of s. 4 (a) read with proviso. disallowance pertaining to asst. yrs. 1990-91 and 1991-92 in regard to remuneration and tax component in asst. yr. 1995-96 is upheld. 28. Interest : That leaves us to consider interest paid by assessee under s. 201(1A). Before proceeding to consider this issue, we would like to make it clear that for asst. yrs. 1992-93 to 199 4 -95, interest paid by assessee was neither claimed in course of assessment proceedings nor in grounds of appeal before CIT(A) or before us. claim was however, made in asst. yr. 1995-96. Thus, at very outset claim of interest pertaining to period falling in asst. yrs. 1990-91 to 199 4 -95 is disallowable in any case for reason that no such claim has ever been made for relevant years. 29. We now proceed to consider if claim is otherwise allowable. At cost of repetition, it is stated that assessee had not deducted tax in respect of remuneration paid to expatriate employees for services rendered in India, for which payment was made abroad by head office. interest was paid under s. 201 of IT Act on account of non-deduction and non-payment of tax deducted at source. deduction was claimed in asst. yr. 1995-96 which has been disallowed. learned counsel for assessee contended that assessee is entitled to deduction in respect of interest paid under s. 201(1A) for delayed payment of TDS as same is compensatory and not penal in character. In this connection reliance is placed on decisions of Supreme Court in cases ofMahalakshmi Sugar Mills Co. Ltd. vs. CIT (1980) 16 CTR (SC) 198 : (1980) 123 ITR 4 29 (SC),Prakash Cotton Mills (P) Ltd. vs. CIT (1993) 111 CTR (SC) 389 : (1993) 201 ITR 68 4 (SC)andCIT vs. Ahmedabad Cotton Mfg. Co. Ltd. & Ors. (1993) 115 CTR (SC) 4 1 : (199 4 ) 205 ITR 163 (SC). learned counsel contended that s. 221 provides for payment of penalty in event of default for non-payment of TDS. Sec. 271C provides for penalty for non-deduction of tax. Sec. 201(1A) provides for payment of interest. According to learned counsel, it is evident from aforesaid provisions of Act that interest under s. 201(1A) is purely compensatory and not penal in character. According to him, since interest has been paid in year under appeal, same is allowable as deduction in year of payment by virtue of s. 4 (a)(i) as part of remuneration. learned counsel contended that deduction may be considered under s. 37 for expenditure having been incurred for purposes of business. 3 0 . learned Departmental Representative, on other hand, contended that assessee is not entitled to deduction on account of interest for non-deduction of tax and non-payment of same as it is neither part of remuneration nor as expenditure incurred for purposes of business. 31. We have given our careful consideration to rival contentions. issue relating to claim of interest is peculiar in this case insofar as interest is on account of income-tax, which assessee was required to deduct at source and pay to Government. We have dealt with this issue relating to remuneration and tax component on remuneration and in principle agreed that assessee would be entitled to deduction subject to verification as laid down in order. It would appear that when assessee is entitled to deduction on account of income-tax, same principle would apply to interest charged for non-payment of tax interest being compensatory in nature. 32. For appreciation of issue in proper perspective, it would be relevant to consider as to whether income-tax is allowable as deduction. If income- tax is allowable as deduction, interest payable on such tax being compensatory in nature may qualify for deduction. Interest on sales-tax of compensatory nature is allowable as deduction not merely because it is not penal in character but because sales-tax is chargeable on commodities sold by assessee as incidence of business. interest is thus allowable as part of tax. In this case assessee has paid remuneration to expatriate employees. assessee as employer has undertaken to pay taxes on their behalf. Since income of expatriate employees is liable to tax, assessee would be obliged to file returns of income and discharge obligations which, but for agreement of employment with assessee, expatriate employees had to discharge. monetary consequence of failure to discharge obligation on behalf of expatriate employees may, in certain circumstances, qualify for deduction as incidence of business. Sec. 17(2)(iv) treats any sum paid by employer in respect of any obligation which, but for such payment, would have been payable by employee as perquisite assessable in hands of employee. So, however, it is interesting to note that in this case assessee has not discharged obligation on behalf of expatriate employees insofar as taxes have not been paid as obligation on behalf of employees. assessee has neither filed returns nor has any assessment made. No interest has been charged by Revenue for non- payment of taxes by employees. That is one aspect of matter. 33. other side of matter is that assessee was under statutory obligation to deduct tax from remuneration paid/payable to non-resident expatriate employees and pay same to Government. This is independent statutory obligation imposed upon assessee. tax deducted at source by assessee and payment thereof to Government does not by itself qualify for deduction as business expenditure by reason of compliance of statutory obligation made by assessee. It is important to bear in mind that deduction of tax claimed by assessee is as part of agreement for payment of remuneration net of salary and not as part of fulfillment of 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 t h e head "Salaries" shall, at time of payment, deduct income-tax on amount payable at average rate of income-tax computed on basis of rates in force for financial year in which payment is made, on estimated income of assessee under this head for that financial year. 195A. Where, under agreement or other arrangement, tax chargeable on any income referred to in foregoing provisions of this Chapter is to be borne by person by whom income is payable, then, for purposes of deduction of tax under those provisions, such income shall be increased to such amount as would, after deduction of tax thereon at rates in force for financial year in which such income is payable, be equal to net amount payable under such agreement or arrangement. 200. Any person deducting any sum in accordance with provisions of ss. 192 to 19 4 , s. 19 4 A, s. 19 4 B, s. 19 4 BB, s 19 4 C, s. 19 4 D, s. 19 4 E, s. 19 4 EE, s. 19 4 F, s. 19 4 G, s. 19 4 H, s. 19 4 -I, s. 19 4 J, s. 19 4 K, s. 19 4 L, s. 195, s. 196A, s. 196B, s. 196C and s. 196D shall pay within prescribed time, sum so deducted to credit of Central Government or as Board directs. 201(1). If any such person and in cases referred to in s. 19 4 , principal officer and company of which he is principal officer does not deduct or after deducting fails to pay 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 assessee-in-default in respect of tax : Provided that no penalty shall be charged under s. 221 from such person, principal officer or company unless AO is satisfied that such person or principal officer or company, as case may be, has without good and sufficient reasons failed to deduct and pay tax. (1A) Without prejudice to provisions of sub-s. (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 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 amount of such tax from date on which such tax was deductible to date on which such tax is actually paid. (2) Where tax has not been paid as aforesaid after it is deducted, amount of tax together with amount of simple interest thereon referred to in sub-s. (1A) shall be charge upon all assets of person, or company, as case may be, referred to in sub-s. (1)." 3 4 . It is noteworthy from abovementioned provisions of Act that interest levied by Department is for assessee having been treated as "assessee-in-default" for payment of tax deductible at source. This obligation is independent of obligation of assessee as agent of expatriate employees. Therefore, payment of interest does not partake character of part of remuneration package in respect of expatriate employees. As already pointed out, interest has been paid as assessee-in-default. Since assessee is not entitled to deduction in respect of tax deducted at sourceper se, as such interest paid for default in payment of tax deducted/deductible at source also does not qualify for deduction. Reference may be useful to decision of Calcutta High Court in case ofJubilee Investments & Industries Ltd. vs. Asstt. CIT & Ors. (1999) 155 CTR (Cal) 397 : (1999) 238 ITR 6 4 8 (Cal)at p. 652. Their Lordships observed as under : "The Asstt. CIT has rightly pointed out that once TDS is deducted from income of somebody, assessee is merely custodian of TDS amount. He cannot touch amount. That amount is to be deposited within time prescribed in Central Government account and any loss or profit in business of assessee has nothing to do with deposit of TDS amount." Reference may be made to definition of tax under DTAA. Article 3(d) reads as under : "(d) term "tax" means Indian tax or Netherlands tax as context requires, but shall not include any amount which is payable in respect of any default or omission in relation to taxes to which this Convention applies or which represents penalty imposed relating to those taxes;" It is evident from above definition that even DTAA does not cover such levy. It may also be pertinent to mention that income-tax paid by assessee does not qualify for deduction as such. This view is supported by decision of Supreme Court in case ofSmt. Padmavati Jaikrishna vs. Addl. CIT (1987) 62 CTR (SC) 1 4 : (1987) 166 ITR 176 (SC). In case ofEast India Pharmaceutical Works Ltd. vs. CIT (1997) 139 CTR (SC) 372 : (1997) 22 4 ITR 627 (SC), their Lordships of Supreme Court held that interest paid on overdraft utilized for payment of income-tax is also not allowable as deduction as it is not expenditure laid out wholly and exclusively for purposes of business as contemplated by sub-s. (1) of s. 37 of IT Act, 1961. On basis of above principle of law, interest paid by assessee as "an assessee- in-default of tax" is not eligible for deduction as expenses incurred for purposes of business. decisions relied upon by learned counsel for assessee are accordingly inapplicable to facts of this case. 3 5 . We now deal with remaining grounds of appeal for respective assessment years. Asst. yr. 1995-96 : For asst. yr. 1995-96, first ground of appeal raised by assessee is as under : "1. Loss on revaluation of securities/investments On facts and in circumstances of case and in law, learned Commissioner of Income-tax (Appeal) [CIT(A)] erred in setting aside assessment in part as regards disallowance of Rs. 2,00,81,000 made by AO in respect of loss on revaluation of securities/investments held by appellant instead of deleting disallowance made by AO. appellant submits that CIT(A) while fairly conceding that in valuing securities at market price, if value of appellant s stock gets reduced, appellant should be allowed relief thereon, erred in concluding that appellant should file all details regarding each and every security along with nature of securities whether it is current or permanent with AO so that AO can decide issue afresh and set aside assessment to this limited extent. CIT(A) should have appreciated that all details have already been filed with AO and treatment of securities as current securities in terms of RBI guidelines has also been explained to AO." above ground has not been pressed before us and same is, accordingly, dismissed as not pressed. 36. second ground of appeal raised by assessee is as under : "2. Expenditure on food and beverages provided to staff On facts and in circumstances of case, CIT(A) erred in confirming disallowance of Rs. 9,72, 44 6 [erroneously mentioned as Rs. 9,77, 44 6 in CIT(A) order] made by AO. CIT(A) failed to appreciate that appellant s staff would invariably accompany guest during course of which said entertainment expenses were incurred. CIT(A), therefore, should have first allowed 50 per cent of total entertainment expenditure as fully allowable deduction. Without prejudice to this contention and in any event of matter, CIT(A) erred in confirming additional disallowance made by AO to extent of Rs. 70,000 on this account. CIT(A) failed to appreciate that having confirmed entire amount of entertainment as falling within provisions of s. 37(2), there was no need to confirm any additionalad hocamount of disallowance." assessee had incurred expenditure of Rs. 19,5 4 ,892 on account of entertainment. 50 per cent of said expenditure was treated as attributable to employees and balance of Rs. 9,72, 44 6 was offered for taxation in return of income. However, during course of assessment proceedings, assessee claimed that, keeping in view fact that employees of assessee accompanied customers, deduction to extent of 50 per cent m y be allowed as attributable to employee not amounting to entertainment expenses. AO did not accept this claim of 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 expenditure incurred by employees on guests separately. AO further held that guests having been entertained outside work place, no allowance could be made under cl. (iii) to Explanation to s. 37(2). Therefore, no deduction was allowed out of Rs. 9,72, 4 66 offered for taxation in return of income. AO also made disallowance of Rs. 1,00,000 out of remaining of Rs. 9,72, 44 6 treated as entertainment expenses pertaining to employees exclusively as per past history of case. CIT(A) has confirmed disallowance of Rs. 9,72, 44 6 (wrongly mentioned as Rs. 9,77, 44 6). However, in respect of estimated expenses of Rs. 1 lakh, relief of Rs. 30,000 has been allowed and disallowance of Rs. 70,000 sustained. Thus, total disallowance under head entertainment expenses after order of CIT(A) is of Rs. 10, 4 2, 44 6. 37. It has been brought to our notice that similar issue had come up for consideration of Tribunal in appeal of assessee for asst. yr. 1996-97 in ITA No. 692/Cal/2000 and vide order dt. 30th March, 2001, Tribunal has accepted 25 per cent of expenses as attributable to employees participation. Respectfully following aforementioned decision of Tribunal in assessee s own case for asst. yr. 1996-97, we hold that 25 per cent of entertainment expenses are attributable to employees participation in entertaining guests and by virtue of s. 37(2) r/w Expln. (iii), said amount is outside purview of entertainment expenses. Learned counsel for 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 disallowed portion of entertainment expenses. We hereby clarify that relief allowable to assessee is 25 per cent of Rs. 10, 4 2, 44 6 and not 25 per cent of Rs. 19,5 4 ,892. It may be pointed out that out of total amount of Rs. 19,5 4 ,892 debited under head entertainment expenses , assessee has taken out sum of Rs. 9,72, 44 6 as entertainment expenses exclusively pertaining to employees. CIT(A) has sustained disallowance of Rs. 70,000 out of said amount. Thus, total entertainment expenses disallowed under s. 37(2) would work out to Rs. 9,72, 44 6 + Rs. 70,000, aggregating to Rs. 10, 4 2, 44 6. This amount pertains to entertainment expenses of customers. claim of assessee that employees have also participated in entertaining customers has been accepted to extent of 25 per cent by Tribunal. Therefore, assessee would be entitled to deduction to extent of 25 per cent out of amount treated as entertainment expenses pertaining to customers. This is how direction to allow 25 per cent of Rs. 10, 4 2, 44 6 is justified. We, therefore, direct AO to allow relief of Rs. 2,60,610 to assessee. ground relating to disallowance of Rs. 70,000 also stands disposed of by respectfully following order of co-ordinate Bench for asst. yr. 1996-97 (supra) subject to 25 per cent relief as indicated above. Asst. yrs. 1992-93. 1993-9 4 and 199 4 -95 : 3 8 . following common grounds of appeal relating to rate of tax applicable in case of appellant-company have been raised : "(1). That, on facts and in circumstances of case, action of learned CIT(A) in enhancing rate of tax applicable to appellant on basis of his earlier order for asst. yr. 1996-97, relying on ruling of Hon ble Authority for Advance Ruling in case of Societe Generale, reported asABC, In re (1999) 151 CTR (AAR) 35given under DTAA between India and France, is bad in law in view of express provisions of s. 2 4 5S and, therefore, voidab initio. (2). That, without prejudice to ground No. 3(a) above, learned CIT(A), without considering elaborate submissions made in the. course of hearing of appeal, erred in directing AO to apply tax rate applicable to foreign companies against express provisions of art. 2 4 of DTAA between India and Netherlands dt. 27th March, 1989 [(1989) 77 CTR (St) 80 : (1989) 177 ITR (St) 72] r/w s. 90 of Act and Circular No. 333. dt. 2nd April, 1982 [(1982) 81 CTR (TLT) 18 : (1982) 137 ITR (St) 1]issued by CBDT. (3) That, in any view of matter, and without prejudice to grounds 3(a) and 3(b) above, learned CIT(A) completely disregarded specific direction given by Hon ble CBDT in appellant s own case that appellant shall be taxed at rates applicable to domestic companies for concerned assessment years read with provisions of art. 25 of DTAA between India and Netherlands. ( 4 ) That, in view of impugned issue decided in favour of appellant s own case for asst. yr. 1996-97 by Hon ble Tribunal in its order dt. 30th March, 2001, learned CIT(A) erred in taking contrary view overruling Tribunal decision considering Explanation to s. 90(2) of Act, inserted by Finance Act, 2001." 39. relevant facts relating to this issue are that AO had levied tax in this case at rates applicable to domestic companies. However, in course of appellate proceedings before CIT(A) against assessments made by AO, it was felt that rate of tax applicable in case of assessee was as applicable to foreign companies. CIT(A) had accordingly issued show- cause notice for enhancement to assessee. Objections were filed by assessee to proposed action. It was claimed by assessee that issue had been considered by Tribunal in assessee s own case in ITA No. 692/Cal/2000, dt. 30th March, 2001, and that for asst. yr. 1991-92, rate of tax was charged as applicable to domestic companies. CIT(A) has referred to decision of Tribunal in favour of assessee, but has pointed out that after decision of Tribunal, there has been amendment by Finance Act of 2001, in s. 90 of IT Act, 1961, by virtue of which Explanation to s. 90(2) was added. CIT(A) has on basis of said Explanation, which is applicable retrospectively with retrospective effect from 1st April, 1962, held that assessee was liable to tax at rates applicable to foreign companies. 4 . learned counsel for assessee contended that CIT(A) was not justified in invoking his powers under s. 251 insofar as issue was covered by CBDT Instruction No. 500/ 4 5/9 4 -FTD, dt. 21st Nov., 199 4 and also decision of Tribunal in assessee s own case for asst. yr. 1996-97 (supra). It was contended that appeal of assessee before CIT(A) was in regard to income assessed and, therefore, he had no power to disturb rate of tax levied by AO. learned counsel invited our attention to art. 2 4 of DTAA which provides for non-discrimination of taxation on PE with taxation on enterprises of that State. Since Indian banks were paying tax at rates applicable to domestic companies, appellant could not be subjected to tax at higher rate than applicable to Indian companies, it was contended. In this connection reference was made to decision of Tribunal in assessee s own case for asst. yr. 1996-97 (supra) where issue has been decided in favour of assessee. 4 1. Our attention was also invited to D.O. No. 500/ 4 5/9 4 -FTD, dt. 21st. Nov., 199 4 , issued by CBDT addressing Chief CIT-II, whereby Board expressed view that assessee-bank was liable to tax at same rate as applicable to Indian companies. learned counsel further pointed out that said letter has been modified by Board vide subsequent letter dt. 2 4 th March, 2000. It has been clarified therein that action could be taken by AO for application of higher rate of tax in respect of respective assessment years barring years covered by aforementioned letter dt. 21st. Nov., 199 4 . Our attention was invited to art. 25 of DTAA which provides for mutual agreement procedure in event of any dispute relating to taxation contrary to provisions of Convention. Sri Dastur pointed out that D.O. No. 500/ 4 5/9 4 -FTD, dt. 21st Nov., 199 4 , was issued by Board in response to reference from Embassy of Netherlands and, therefore, by virtue of provisions of DTAA art. 25, any decision reached after following procedure is binding upon both parties and in event of any conflict with domestic law of State, such agreement would prevail. learned counsel pointed out that reference for mutual agreement is required to be made to competent authority and competent authority is defined to mean Central Government or any authorized representative of Central Government. Since CBDT is authorized to issue instructions, circular issued by it relating to rate of tax applicable in case of appellant has effect of mutual agreement within meaning of art. 25 of DTAA, it was contended. 4 2 . Sri Dastur, as alternative to aforementioned argument, contended that in any case circulars of Board are binding upon Revenue authorities working under their jurisdiction. Relying upon decision of Supreme Court in case ofEllerman Lines Ltd. vs. CIT 1972 CTR (SC) 71 : (1971) 82 ITR 913 (SC),it was contended that even letters issued by Board are considered as circulars having binding force under s. 119 of IT Act, 1961. It was further contended that withdrawal of circular issued by Board is effective prospectively and not retrospectively. In this connection reliance was placed on decision of Bombay High Court in case ofUnit Trust of India & Anr. vs. P.K. Unny, ITO & Ors. (2001) 168 CTR (Bom) 99 : (2001) 2 4 9 ITR 612 (Bom). learned counsel further invited our attention to decision of Supreme Court in case ofUCO Bank vs. CIT (1999) 15 4 CTR (SC) 88 : (1999) 237 ITR 889 (SC)in support of contention that CBDT has power to issue circulars having effect of relaxing 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 statute. Their Lordships have further held that circulars issued by Board are binding on parties. Reference was also made to Circular No. 333, dt. 2nd April, 1982, by virtue of which CBDT has clarified that in event of conflict between provisions of IT Act, 1961, and provisions of DTAA, provisions of DTAA would prevail over provisions of IT Act. According to learned counsel for assessee, Explanation to s. 90 incorporated by Finance Act, 2001, with retrospective effect from 1st April, 1962, is inapplicable in view of clarification of CBDT relating to rate of tax chargeable in case of appellant. 4 3. Sri Dastur further contended that, assuming that Explanation to s. 90 is applicable in contrast to circulars of Board, said Explanation is inapplicable in view of fact that foreign company cannot fulfill condition of making prescribed arrangement for declaration and payment within India, of dividends payable out of its income in India. Our attention was also invited to r. 27 of IT Rules, 1962, in support of above submission. learned counsel contended that Explanation does not make any sense insofar as prescribed arrangement for declaration and payment within India of dividends payable out of its income in India cannot be fulfilled. Sri Dastur contended that CIT(A) has enhanced rate of tax without aid of Explanation when Tribunal in assessee s own case for asst. yr. 1996-97 (supra) had decided issue in favour of assessee. Sri Dastur further contended that reference to decision of Authority for Advance Ruling was misplaced as said decision has been set aside by Hon ble Supreme Court in case ofSociete Generale vs. CIT (2001) 171 CTR (SC) 281 : (2001) 251 ITR 657 (SC). It was pointed out that Tribunal in assessee s own case has decided issue in favour of Revenue in respect of art. 2 4 (1) of DTAA. So, however, claim of assessee under art. 2 4 (2) has been upheld. It was, accordingly, pleaded that decision of CIT(A) in regard to application of higher rate of tax in case of appellant may be quashed. 4 4 . learned Departmental Representative, on other hand, contended that issue relating to rate of tax is to be decided in light of Explanation to s. 90(2) inserted by Finance Act, 2001, with retrospective effect from. 1st April, 1962. It is well settled law, according to learned Departmental Representative, that in event of conflict between treaty and statutory law, statutory law will prevail. It was further contended that s. 90 is enabling provision for entering into agreements with other countries for double taxation avoidance, etc. It was contended that CIT(A) exercises his powers co-terminus with AO, as held by their Lordships of Supreme Court in case ofCIT vs. Kanpur Coal Syndicate (196 4 ) 53 ITR 225 (SC)and, therefore, CIT(A) had power to enhance rate of tax applicable in case of assessee. Referring to contention on behalf of assessee that taxation of appellant was governed by CBDT circulars, it was contended that letters issued by Board do not partake character of circulars. In this connection, reliance was placed on decision of Supreme Court in case ofCIT vs. Anjum M.H. Ghaswala & Ors. (2001) 171 CTR (SC) 1 : (2001) 252 ITR 1 (SC), at p. 15 and that of Delhi High Court in case ofGeep Industrial Syndicate Ltd. vs. CBDT (1987) 63 CTR (Del) 1 : (1987) 166 ITR 88 (Del). It was further contended that circulars of Board generally indicate source of power. But in letters issued by CBDT expressing opinion, no source is mentioned and as such these letters do not have force of circulars issued by Board. Reliance has been placed on decision of Supreme Court in case ofKerala Financial Corpn. vs. CIT (199 4 ) 119 CTR (SC) 16 4 : (199 4 ) 210 ITR 129 (SC). It was pointed out that decision of Bombay High Court in case ofUnit Trust of India & Anr. vs. P.K. Unny, ITO & Ors.(supra) was relating to different issue and observations at best can be taken asobiterand notratio decidendi. In any case, decision of Supreme Court in case ofCIT vs. Anjum M.H. Ghaswala & Ors.(supra) prevail over decision of Bombay High Court. Referring to non- discriminative clause under art. 2 4 of DTAA, it was contended that non- discriminative clause applies amongst equals. In regard to art. 25, learned Departmental Representative contended that mutual agreement has got to be arrived at by following procedure and reference has got to be made with competent authorities. Mere letter of CBDT seeking opinion about applicability of rate of tax does not take character of mutual agreement. 4 5. In counter-reply, learned counsel for assessee relied upon decision of Calcutta Bench of Tribunal in case ofDy. CIT vs. ITC Ltd. (2002) 76 TTJ (Cal) 323 : (2002) 82 ITD 239 (Cal)at p. 2 4 5 in support of contention that in event of conflict between provisions of DTAA and IT Act, provisions of DTAA shall prevail. Reference was also made to s. 90(2) of IT Act, 1961, which was inserted by Finance (No. 2) Act, 1991, w.e.f. 1st April, 1972, which clearly provides that in event of conflict between provisions of Act and DTAA, provisions more beneficial to assessee shall apply. learned counsel also relied upon decision of Andhra Pradesh High Court in case ofCIT vs. Visakhapatnam Port Trust (198 4 ) 38 CTR (AP) 1 : (1983) 1 44 ITR 1 4 6 (AP)in support of contention that mutual agreements under DTAA have binding force. Reliance was also placed on decision of Supreme Court in case ofCIT vs. Elphinstone Spg. & Wvg. Mills Co. Ltd. (1960) 4ITR 1 4 2 (SC)in support of contention that if legislature uses inappropriate language in Statute, such provisions of law are ineffective. decisions cited on behalf of Revenue, according to learned counsel, are distinguishable on facts. It was, accordingly, pleaded that appeal of appellant on this ground may be accepted. 4 6. We have given our careful consideration to rival contentions. issue relating to applicability of rate of tax in case of assessee had come up for consideration of Tribunal in assessee s own case for asst. yr. 1996-97 (supra). Tribunal vide order, dt. 30th March, 2001, in para 23 relating to applicability of art. 2 4 (1) held "We are of opinion (as discussed above) that assessee-company cannot be considered to be in same circumstances as Indian company in view of fact that scope of taxation of Indian company is wider enough than that of non-resident company like assessee." However, contention on behalf of assessee was accepted to be covered under art. 2 4 (2) of DTAA. Para 28 of order of Tribunal is quoted as under : "28. Taking into consideration different aspects of case, we are finally of opinion that by virtue of art. 2 4 (2) of DTAA between India and Netherlands, assessee-company cannot be subjected to taxation in less favourable manner than Indian banking company. We have already noted above that at least some of private Indian banks are subjected to lower rate of tax (@ 4 6 per cent) applicable to domestic companies. Furthermore, assessee-company itself is being subjected to this lower rate of tax by virtue of non-discrimination provision in DTAA right from 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. AO himself allowed lower rate in assessment order. We feel that CIT(A) did not have any occasion to disturb same by directing to apply higher rate and in disturbing position accepted even by CBDT in that way. Finally, therefore, we knock down enhancement, as directed by CIT(A) in this case and, on other hand, order that rate of tax as considered in assessment be adopted." 4 7. decision of Tribunal has been arrived at after consideration of detailed arguments advanced on behalf of assessee which have been reiterated before us. We would have no difficulty in following elaborate decision of our co-ordinate Bench, but for amendment in s. 90 of IT Act, 1961, by Finance Act, 2001, with retrospective effect from 1st April, 1962. We, therefore, do not consider it necessary to deal with contentions advanced on behalf of assessee without taking into account above amendment in s. 90. We consider it necessary to examine effect of amendment of s. 90 in regard to application of rate of tax. 4 8. It will be useful to quote s. 90 as under : "90(1). Central Government may enter into agreement with Government of any country outside India - (a) for 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 avoidance of double taxation of income under this Act and under corresponding law in force in that country, or (c) for exchange of information for prevention of evasion or avoidance of income-tax chargeable under this Act or under 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 corresponding law in force in that country, and may, by notification in official gazette, make such provisions as may be necessary for implementing agreement. (2) Where Central Government has entered into agreement with Government of any country outside India under sub-s. (1) for granting relief of tax, or as case may be, avoidance of double taxation, then, in relation to assessee to whom such agreement applies, provisions of this Act shall apply to extent they are more beneficial to that assessee." following Explanation was inserted by Finance Act, 2001, with retrospective effect from 1st April, 1962 : "Explanation : For removal of doubts, it is hereby declared that charge of tax in respect of foreign company at rate higher than rate at which 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 prescribed arrangement for declaration and payment within India, of dividends (including dividends on preference shares) payable out of its income in India." 4 9 . Before considering claim of assessee in light of amendment of s. 90, with retrospective effect from. 1st April, 1962, we consider it useful to keep in mind applicability of Indian tax laws vis-a-vis DTAA with foreign country. In this connection reference to decision of Hon ble Supreme Court in case ofGramophone Co. of India Ltd. vs. Birendra Bahadur Pandey & Ors. AIR 198 4 SC 667is relevant. In this case, their Lordships of Supreme Court held that in event of conflict between international law, Court must follow municipal law. relevant para 5 is quoted hereunder for sake of reference : "5. There can be no question that nations must march with international community and municipal law must respect rules of international law even as nations respect international opinion. comity of nations requires that rules of international law may be accommodated in 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, sovereignty and integrity of Republic and supremacy of constituted legislature in making laws may not be subjected to external rules except to extent legitimately accepted by constituted legislatures themselves. doctrine of incorporation also recognizes position that rules of international law are incorporated into national law and considered to be part of national law, unless they are in conflict with 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 principle of international law. National Courts will endorse international law but not if it conflicts with national law. National Courts being organs of National State and not organs of international law must perforce apply national law if international law conflicts with it. But Courts are under obligation within legitimate limits, to so interpret municipal statute as to avoid confrontation with comity of nations or well established principles of international law. But if conflict is inevitable, latter must yield," 50. Sec. 90 of IT Act empowers Central Government to enter into agreement with Government of any country outside India for granting of relief or for avoidance of double taxation of income, etc. Thus, source of DTAA with Netherlands is s. 90 of IT Act, 1961. Sec. 90 has been quoted in para 4 8 above. 5 1 . It is noteworthy that sub-s. (2) of s. 90 provides for application of beneficial provisions of agreement in contrast to contrary provisions of IT Act, 1961. It has, however, to be borne in mind that in event of there being no conflict between provisions of DTAA and IT Act, 1961, effect shall have to be given to provisions of IT Act, 1961. It is only when there is conflict between provisions of agreements in contrast with provisions of IT Act, 1961, that beneficial treatment is to be given as per s. 90(2) of IT Act, 1961. In this connection, circular of CBDT, being No. 333, dt. 2nd April, 1982, also clarifies position of law, which is quoted hereunder : "Subject : Conflict between provisions of IT Act, 1961, and provisions of DTAA Clarification. It has come to notice of Board that sometimes effect to provisions of DTAA is not given by AOs when they find that provisions of agreement are not in conformity with provisions of IT Act, 1961. 2. correct legal position is that where specific provision is made in DTAA, that provision will prevail over general provisions contained in IT Act, 1961. In fact DTAAs which have been entered into by Central Government under s. 90 of IT Act, 1961, also provide that laws in force in either country will continue to govern assessment and taxation of income in respective countryexceptwhere provisions to contrary have been made in Agreement. 3. Thus, where DTAA provides for particular mode of computation of income, same should be followed, irrespective of provisions in IT Act. Where there is no specific provision in agreement, it is basic law, i.e., IT Act, that will govern taxation of income." 52. As already pointed out, agreement for avoidance of double taxation and prevention of fiscal evasion with Netherlands was executed between Republic of India and Kingdom of Netherlands which was notified vide Notification No. 382(E), dt. 27th March 1989, and amended by Notification No. S O 693(E), dt. 30th Aug., 1999. This agreement is available in(1989) 177 ITR (St) 72. Notification gives source of agreement, i.e., s. 90 of IT Act, 1961, and similar provision under Companies Profits (Surtax) Act and W T Act. Thus, it is evident that DTAA derives its source from IT Act, 1961, itself. It overrides provisions of IT Act, 1961, within limits provided under said Act. limit provided under Act, as pointed out earlier, is that in event of conflict between provisions of DTAA and provisions of IT Act, beneficial provision of Act shall prevail in regard to taxation of subjects. It thus becomes abundantly clear that when there is no conflict between DTAA and IT Act, 1961, in regard to any aspect of matter, provisions of IT Act, 1961, shall have to be implemented with full force. Sec. 90 was amended, as pointed out earlier, by Finance Act, 2001 with retrospective effect from 1st April, 1962, by incorporation of Explanation which has been quoted in para 4 8 above. At this stage it will be relevant to refer to art. 2 4 of DTAA, which reads as under : "Article 2 4 -Non-discrimination- 1. Nationals of one of States shall not be subjected in other State to any taxation or any requirement connected therewith, which is other or more burdensome than taxation and connected requirements to which nationals of that other State in same circumstances are or may be subjected. These provisions shall, notwithstanding provisions of art. 1, also apply to persons who are not residents of one or both of States. 2. Except where provisions of para 3 of art. 7 apply, taxation on permanent establishment which enterprise of one of States has in other State shall not be less favourably levied in that other State than taxation levied on enterprises of that other State carrying on same activities. 3. provisions of para 2 shall not be construed as obliging one of States to grant to residents of 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 provisions of para 1 of art. 9, para 9 of art. 11, or para 9 of art. 12 apply, interest, royalties and other disbursements paid by enterprise of one of States to resident of other State shall, for purpose of determining taxable profits of such enterprise, be deductible under same conditions as if they had been paid to resident of first- mentioned State. Similarly, any debts of enterprise of one of States to resident of other State shall, for purpose of determining taxable capital of such enterprise, be deductible under same conditions as if they had been contracted to resident of first-mentioned State. 5. Enterprises of one of States, capital of which is wholly or partly owned, controlled, directly or indirectly, by one or more residents of other State, shall not be subjected in first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than taxation and connected requirements to which other similar enterprises of first-mentioned State are or may be subjected." 53. Tribunal in assessee s own case for asst. yr. 1996-97 (supra) has held that art. 2 4 , para 1 is not applicable in case of appellant. However, Tribunal has expressed view that art. 2 4 (2) applies in case of appellant. However, Explanation to s. 90 specifically provides that charge of tax in respect of foreign company at rate higher than rate at which domestic company is chargeable shall not be regarded as less favourable charge. In DTAA, there is no definition of "less favourable charge". Therefore, Explanation to s. 90 cannot be said to be in conflict with provisions of DTAA. On facts and in circumstances of this case, there is no escape from conclusion that there is no conflict between provisions of DTAA and IT Act, 1961, in regard to non-discrimination. 5 4 . As has been pointed out earlier, in provisions of DTAA, incorporation of specific provisions contrary to provisions of IT Act, 1961, are to prevail insofar as such incorporation is authorized under IT Act, 1961 itself. However, in regard to subsequent amendments, only requirement is to notify amendments to respective countries and in event of there being no conflict, amended provisions shall have to be given effect to. In this connection, it will be relevant to refer to art. 2, para 4 of DTAA which reads as under : " 4 . Convention shall apply also to any identical or substantially similar taxes which are imposed after date of signature of Convention in addition to, or in place of, existing taxes.The competent authorities of States shall notify to each other any substantial changes which have been made in their respective taxation laws." (Emphasis, italicised in print, supplied) 5 5 . It is thus evident that even DTAA recognizes fact that amendments effected by respective legislatures after execution of DTAA are not affected insofar as they are not repugnant to specific provisions of DTAA. In this view of matter, amendment in s. 90 is applicable in this case with retrospective effect insofar as it is not in conflict with provisions of DTAA. 5 6 . contention advanced on behalf of assessee that said Explanation to s. 90 is unimplementable because of inappropriate language, d o e s not appeal to us. Explanation in our view provides for two eventualities. One is charge of tax in respect of foreign company vis-a-vis Indian company, (i.e., domestic company). second category as per Explanation is foreign company vis-a-vis domestic company other than Indian company. It is noteworthy that domestic company is defined under Finance Act. For sake of reference we may quote definition of domestic company as per Finance (No. 2) Act, 1996. "'domestic company means Indian company,or any other companywhich, in respect of its income liable to income-tax under IT Act for assessment year commencing on 1st April, 1996, has made prescribed arrangements for declaration and payment within India of dividends (including dividends on preference shares) payable out of such income in accordance with provisions of s. 19 4 of Act." (Emphasis, italicised in print, supplied) Thus, even under Finance Act domestic company is recognized as I n d i n company and any other company having made arrangement for declaration of dividends payable on such income. We, therefore, do not find language of Explanation to s. 90 as inappropriate. Moreover, insofar as there is no doubt about category of foreign company vis-a-vis Indian company having been specified in Explanation, one need not ascertain as to whether in any case second category of companies would at all exist. We, therefore, do not find merit in contentions advanced on behalf of assessee in this regard. 57. contention advanced on behalf of assessee that CIT(A) was not justified in ignoring decision of Tribunal for asst. yr. 1996-97 (supra) is also not well-founded. CIT(A) has decided this issue in asst. yr. 1993-9 4 , and this order has been followed in other years. relevant portion of order is reproduced hereunder : " 4 . I have considered submissions of appellant. Hon ble Tribunal Calcutta, in their order in ITA No. 692/Cal/2000, dt. 30th March, 2001, have decided that remuneration payable to expatriate offshore as well as amount of income-tax paid (TDS) in respect of remuneration paid to expatriates, is allowable deduction under s. 37(1) of IT Act. However, it is common ground that net offshore remuneration has not been booked in Indian books of account maintained by appellant for previous year relevant to asst. yr. 1993-9 4 , and that, nor amount of tax payable on remuneration to expatriates offshore has been paid or deducted during relevant previous year as required under Chapter XVII-B of IT Act. In fact, admittedly amount of tax (TDS) has been paid in subsequent previous year ended 31st March, 1995, relevant to asst. yr. 1995-96. As per provision of s. 4 (a)(i) and proviso thereto, any sum chargeable under 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 income chargeable under 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 total income of previous year in which such tax has been paid or deducted". In view of express provision of s. 4 (a)(i), restricting allowance for deduction under certain circumstances, which are applicable to facts of appellant s case, claim for deduction in respect of remuneration paid to expatriates offshore and TDS thereof, cannot be allowed in asst. yr. 1993-9 4 . order of AO disallowing aforesaid amount is, therefore, confirmed and appellant s grounds of appeal in this regard are dismissed. 5. During course of examination of order of AO, it was found that appellant s total income was charged to tax at rate applicable to domestic company instead of applying higher rate of tax since appellant was foreign company and being assessed as such. Therefore, vide letter No. 79/A- ii/96-97/608, dt. 19th July, 2000, appellant was asked to show cause as to why assessee-bank should not be taxed at higher rate as is applicable to foreign company. appellant in response to show cause dt. 19th July, 2000, filed written submissions through letter dt. 2 4 th July, 2000. submission so made are reiteration of detailed submissions made before CIT(A) during appeal proceedings for year 1996-97 with regard to similar show-cause notice issued to appellant. CIT(A) rejected appellant s contention raised in aforesaid submission and held in his order in appeal No. 88/A-ii/1999-2000 for asst. yr. 1996-97 that "while giving effect to this order, AO is directed to recalculate tax in accordance with provision of Finance Bill relating to asst. yr. 1996-97 at rate chargeable to foreign companies". This order of CIT(A) was set aside by Hon ble Tribunal in ITA No. 692/Cal/2000, dt. 30th March, 2001, on following grounds : 'Taking into consideration different aspects of case, we are finally of opinion that by virtue of art. 2 4 (2) of DTAA between India and Netherlands assessee-company cannot be subjected to taxation in less favourable manner than Indian banking company. We have already noted above that at least some of private Indian banks are subjected to lower rate of tax (@ 4 6 per cent) applicable to domestic companies. Furthermore, assessee-company itself is being subjected to this lower rate of tax by virtue of non-discrimination provision in DTAA right from 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. AO himself allowed lower rate in assessment order. We feel that CIT(A) did not have any occasion to disturb same by directing to apply higher rate and in disturbing position accepted even by CBDT in that way. Finally, therefore, we knock down enhancement, as directed by CIT(A) in this case and, on other hand, order that rate of tax as considered in assessment be adopted. 6. However, Finance Act, 2001, has inserted Explanation to s. 90(2) of Act, with retrospective effect from 1st April, 1962. said Explanation is produced below : "For removal of doubts, it is hereby declared, that charge of tax in respect of foreign companies at rate higher than rate at which 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 dividends on preference share) payable out of its income in India." It is evident that Explanation effectively seeks to override non- discrimination article of DTAA with retrospective effect. Explanation inserted is clarificatory in nature and retrospective in operation and in view thereof, decision of Tribunal (supra) relied upon by appellant on this issue is no longer valid. Accordingly, relying on order of CIT(A) for asst. yr. 1996-97 and on consideration of Explanation to s. 90(2) of IT Act as discussed above, I direct AO to recalculate tax in accordance with provisions of Finance Act relating to asst. yr. 1993-9 4 at rate chargeable to foreign companies," It is evident from above decision of CIT(A) that he has decided issue on basis of amendment of s. 90 and after taking into account decision of Tribunal in assessee s own case for asst. yr. 1996-97 (supra). 58. That leaves us to consider effect of letters issued by CBDT in regard to taxation of appellants. CBDT had issued two letters, one dt. 21st Nov., 199 4 and another dt. 2 4 th March, 2000. These are reproduced hereunder : Letter dt. 21st Nov., 199 4 : "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./93-9 4 /Vol- IV/50 4 , dt. 29th July, 199 4 , on above subject. matter has been looked into and Board is of opinion that tax rate applicable in case of ABN AMRO Bank would be same as for Indian company, at relevant tax rates applicable for concerned assessment years." Letter dt. 2 4 th March, 2000 : "Subject : Taxation of M/s ABN Amro Bank at rates as applicable to non-resident 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 rates applicable to foreign companies under respective Finance Acts. AOs may be instructed to take action accordingly except for years covered by Board s letter dt. 21st Nov., 199 4 ." 59. It is evident from letter dt. 2 4 th Nov, 199 4 , that CBDT was of view that tax rate applicable in case of appellants would be same as applicable to Indian companies. However, this opinion was changed before law was amended vide letter dt. 2 4 th March, 2000 referred to above. We have referred to contentions advanced on behalf of assessee in regard to these two letters issued by CBDT. It is evident from contents of letters that opinion of Board is expressed in aforementioned letters. If law were not amended, perhaps we would have no difficulty in holding that AO could not have overlooked opinion of Board in regard to taxation of appellants. So, however, law has been amended retrospectively. Therefore, only issue that requires to be considered is as to whether circular of CBDT prevails over statutory law passed by supreme legislature. CBDT is creation of statute. instructions issued under s. 119 of IT Act, 1961, is under delegated power by Parliament. Therefore, it is futileto suggest that CBDT circulars would prevail over conscious amendment of law by legislature which overrides law prevalent before amendment including CBDT circulars. Their Lordships of Supreme Court in case ofState Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC)held that circulars issued by Board would be binding on all officers and persons employed in execution of Act, but no instructions or circular can go against provisions of Act. In case ofState of Madhya Pradesh & Anr. vs. G.S. Dall & Flour Mills (1991) 187 ITR 4 78 (SC), their lordships of Supreme Court held that executive instructions can supplement statute or cover areas to which statute does not extend. But they cannot run contrary to statutory provisions or whittle down their effect. In case ofKerala Financial Corpn. vs. CIT(supra), their Lordships of Supreme Court held that circular of Board issued under s. 119 cannot override or be detracted from Act, inasmuch as what s. 119 has empowered is to issue orders, instructions or directions for proper administration of Act or for such other purposes specified in sub-s. (2) of that section. Such order, instruction or direction cannot override provision of Act; that would be destructive of all known principles of law as same would really amount to giving power to delegated authority to even amend provision of law enacted by Parliament. This principle has been further reiterated in case ofShanmuga Traders vs. State of Tamil Nadu (1998) 5 SCC 3 4 9at p. 35 4 . In case ofUnion of India vs. M. Bhaskar, JT 1996 (5) SC 500at p. 503, their Lordships held that there is no dispute in law that statutory provision cannot be changed by administrative instructions. 60. Thus, from decisions of Supreme Court referred to above, it becomes abundantly clear that when law is amended, any circular issued earlier automatically gets superseded. Since in this case law was amended retrospectively, letters issued by Board, even assuming that they have effect of circulars issued under s. 119 of IT Act, 1961, are ineffective and they have to give way to law passed by supreme legislature. It may be pertinent to mention that their Lordships of Delhi High Court in case ofNational Thermal Power Corpn. Ltd. vs. Union of India & Ors. (1991) 96 CTR (Del) 1 4: (1991) 192 ITR 187 (Del)atp. 189 held that opinion of Board expressed in its administrative capacity can under no circumstances be binding on appellate authorities or High Courts on reference. 61. In case ofCIT vs. Swedish East Asia Co. Ltd. (1980) 19 CTR (Cal) 10 : (1981) 127 ITR 1 4 8 (Cal), at p. 165, their Lordships of Calcutta High Court held that when section is clear, one cannot take aid of circulars to interpret law. This view is in consonance with view expressed by their Lordships of Supreme Court in case ofState Bank of Travancore(supra). 62. We may further refer to observations of Sri K. Srinivasan, author of book on DTAA contained in para 7.2 of book as under : "7.2. While treaty may supersede 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 legislature from revising its own views and amending existing enactments. treaty cannot afford protection against such subsequent changes i n law. However, all that is required for revision of treaty is prescribed notice. Whenever law undergoes any modification that may affect terms o f treaty, administration may have to give due notice to concerned countries immediately to avoid giving any cause for grievance. Courts have held in UK that any unilateral legislation enacted after treaty has come into force will override treaty, whereas if it had been enacted earlier, its effect would have been limited by treaty provisions CIR vs. Collco Dealings Ltd. (1960) 39 Tax Cases 509, concerning UK anti-avoidance legislation conflicting with earlier Irish double tax avoidance agreement andWoodend Rubber Co. vs. CIR (1970) 2 WLR 10, concerning discriminatory legislation in Ceylon (Sri Lanka) conflicting with earlier UK-Ceylon treaty." 63. In light of above position of law, we are of view that Explanation to s. 90 is attracted in this case and letters issued by CBDT have been superseded by said Explanation w.e.f. 1st April, 1962. We, accordingly, uphold decision of CIT(A) in regard to applicability of rate of tax as applicable in case of foreign companies in case of appellant. Before parting with this issue we would like to point out that art. 25 of DTAA is not attracted in this. said article is reproduced hereunder : "Article 25- Mutual agreement procedure1. Where person considers that actions of one or both of States result or will result for him in taxation not in accordance with provisions of this Convention, he may, irrespective of remedies provided by domestic law of those States, present his case to competent authority of State of which he is resident or, if his case comes under para 1 of art. 2 4 , to that of State of which he is national. case must be presented within three years from first notification of action resulting in taxation not in accordance with provisions of Convention. 2. competent authority shall endeavour, if objection appears to it to be justified and if it is not itself able to arrive at satisfactory solution, to resolve case by mutual agreement with competent authority of other State, with view to avoidance of taxation which is not in accordance with Convention. Any agreement reached shall be implemented notwithstanding any time limits in domestic law of States. 3. competent authorities of States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to interpretation or application of Convention. They may also consult together for elimination of double taxation in cases not provided for in Convention. 4 . competent authorities of States may communicate with each other directly for purpose of reaching agreement in sense of preceding paras. When it seems advisable in order to reach agreement to have oral exchange of opinions, such exchange may take place through Commission consisting of representatives of competent authorities of two States." We admit our failure to appreciate as to how letter written to CBDT seeking opinion about rate of tax chargeable in case of appellant fits in within framework of reference under art. 25 of DTAA. We find no merit in contention in this regard advanced on behalf of appellants. 6 4 . For asst. yrs. 1997-98 and 1998-99, common grounds of appeal relating to rate of tax are as under : "1a. That, on facts and in circumstances of case, learned CIT(A) erred in upholding action of AO of charging tax at higher rate (55 per cent) applicable to foreign companies instead of tax rate applicable to domestic companies ( 4 3 per cent) as claimed by appellant. 1b. That, without prejudice to ground 1a above, learned CIT(A) without considering elaborate submissions made in course of hearing of appeal, erred in confirming action of AO in applying tax rate applicable to foreign companies against express provisions of art. 2 4 of DTAA between India and Netherlands, Notification No. G.S.R. 382(E), dt. 27 March 1989, [(1989) 77 CTR (St) 80 : (1989) 177 ITR (St) 72] r/w s. 90 of Act and Circular 333, dt. 2nd April 1982, [(1982) 81 CTR (TLT) 18 : (1982) 137 ITR (St) 1] issued by CBDT. 1c. That, in any view of matter, and without prejudice to grounds 1a and 1b above, learned CIT(A) completely disregarded specific direction given by Hon ble CBDT in appellant s own case that appellant shall b e taxed at rates applicable to domestic companies for concerned assessment years read with provisions of art. 25 of DTAA between India and Netherlands. 1d. That, in view of impugned issue decided in favour of appellant s own case for asst. yr. 1996-97 by Hon ble Tribunal in its order, dt. 30th March 2001, learned CIT(A) erred in taking contrary view overruling Tribunal decision considering Explanation to s. 90(2) of Act inserted by Finance Act, 2001." 65. Our decision in regard to issue of rate of tax for asst. yrs. 1992-93, 1993-9 4 and 199 4 -95 shall apply to asst. yrs. 1997-98 and 1998-99mutatis mutandis. Asst. yr. 199 4 -95 : 66. only other ground that remains to be considered for asst. yr. 199 4 -95 is ground No. 3 which reads as under : "3. That, on facts and in circumstances of case, learned CIT(A) erred in enhancing assessment by amount of Rs. 9,57,58,90 4 representing operational loss arising to appellant on account of transactions in securities merely for reasons that appellant was pursuing matter in suit which was pending disposal before Court, disregarding appellant s submissions,inter alia,that pendency of suit was not relevant for disallowance of claim." 6 7 . relevant facts relating to this issue are that assessee had received 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 assessee had issued cheque for Rs. 9.76 crores dt. 9th March, 1992 in favour of Andhra Bank, Fort Branch, Mumbai, purportedly for investment in purchase of NPC Bonds. said cheque was encashed by bank on same day. Sri N.K. Agarwal, broker, through whom investment was made, failed to deliver 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 series) Railway Bond 1991-92 issued by Indian Railway Finance Corporation Ltd. (IRFC). It is claim of assessee that delivery of IRFC Bonds was accepted from Sri N.K. Agarwal on understanding that same would be held as alternate security pending delivery of 17 per cent NPC Bonds. assessee sought information from Andhra Bank about non-delivery of NPC Bonds vide letter dt. 18th June, 1992. Andhra Bank vide letter, dt. 22nd June, 1992 informed assessee that amount received from Sri N.K. Agarwal was credited in account of Sri Hitendra Dalal, broker, as per instructions of Sri N.K. Agarwal. assessee had lodged IRFC Bonds with Indian Railway Financial Corporation Ltd. to register same in name of assessee. However, IRFC refused to register bonds in favour of appellant on ground that said bonds have already been registered in name of Standard Chartered Bank. assessee filed appeal to Company Law Board against refusal of IRFC for registering IRFC Bonds. appeal of assessee was dismissed by Company Law Board vide order dt. 25th Aug., 199 4 . assessee appealed to Delhi High Court. However, appeal was transferred to Special Court and said Court also dismissed appeal of assessee on 31st March, 1998. 68. In previous year relevant to asst. yr. 199 4 -95, assessee settled claim of PHB by returning principal along with 17 per cent interest. It may be pertinent to mention that assessee had returned sum of Rs. 2 4 , 4 1,096 to PHB out of Rs. 10 crores at time of issuing cheque in favour of Andhra Bank for Rs. 9,75,58,90 4 . Subsequently, in March, 1992, sum of Rs. 18 lakhs received from Sri N.K. Agarwal was also refunded to PHB. balance of Rs. 9,57,58,90 4 and interest @ 17 per cent for six months was refunded to PHB on 7th July, 1993. Whereas interest paid to PHB was claimed as deduction separately as interest under head "Business income", sum of Rs. 9,57,58,90 4 paid to PHB was claimed as "loss in business". AO denied claim of assessee. CIT(A) has also confirmed disallowance. 69. learned counsel for assessee contended that assessee had suffered business loss and as such was entitled to deduction in respect of same. It was pointed out that assessee had also written letter to RBI sometime in April, 1993, but they had refused to interfere vide its letter dt. 11th May, 1993. assessee was also refused permission to open branch till dispute with Andhra Bank was settled. In March, 1995, assessee instituted suit against Andhra Bank and Sri N.K. Agarwal for recovery of principal amount along with interest. suit has been transferred to Special Court. According to learned counsel, since settlement with PHB was made on 7th July, 1993, i.e., in previous year relevant to asst. yr. 199 4 -95, loss suffered by assessee falls within previous year and, accordingly, allowable as business loss. It was stated by learned counsel that interest paid to PHB has been allowed as deduction. learned counsel pointed out that in order to avoid adverse publicity, assessee in business interests considered it prudent to settle claim with PHB. Our attention was invited to decision of Supreme Court in case ofCIT vs. Nainital Bank Ltd. (1966) 62 ITR 638 (SC)where jewellery pledged with bank had been stolen. Though bank was not legally bound to compensate borrowers for loss of jewellery, it was decided to do so in interests of business. Such expenditure incurred by assessee was held to be allowable as business loss. Reference was also made to CBDT Circular No. 35D, dt. 2 4 th Nov., 1965 in support of contention that loss incidental to business is to be allowed in year in which it was discovered. Reference was also made to decision of Gujarat High Court in case ofDinesh Mills Ltd. vs. CIT (2002) 17 4 CTR (Guj) 4 78 : (2002) 25 4 ITR 673 (Guj)in support of contention that loss suffered by assessee in course of business was allowable. It was, accordingly, pleaded that deduction for sum of Rs. 9,57,58,90 4 may be allowed. 7 0 . learned Departmental Representative, on other hand, contended that assessee was not entitled to deduction insofar as claim of assessee wassub judice. There might be possibility of loss to assessee. But deduction is not allowable on mere possibility. It was further contended that decisions relied upon by learned counsel for assessee are distinguishable on facts. facts and circumstances of this case clearly reveal that assessee had not suffered loss in year under appeal and, therefore, no deduction was permissible. 71. We have given our careful consideration to rival submissions. assessee is engaged in 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. assessee received sum of Rs. 10 crores from PHB in course of business for purposes of investment with assured return of interest at 17 per cent. Sum of Rs. 4 2, 4 1,096 (Rs. 2 4 , 4 1,096 + Rs. 18,00,000) had been returned to PHB out of 10 crores investment. assessee had made investment in course of its business with Andhra Bank through Sri N.K. Agarwal, broker. It is claim of Andhra Bank that t h e amount received from Sri N.K. Agarwal on behalf of appellant was credited in account of Sri Hitendra Dalal as per instructions of Sri N.K. Agarwal. However, it is claim of assessee that no such instructions were issued and that cheque paid in name of Andhra Bank was issued for purchase of NPC Bonds on behalf of PHB. This fact is disputed by Andhra Bank. Even on basis of disputed facts it is evident from material available on record that assessee could not retrieve investment of Rs. 9,57,58,90 4 . Revenue is not disputing this fact. dispute, however, is only as to whether non-receipt of NPC Bonds for amount of Rs. 9,57,58,90 4 amounts to loss incurred by appellant and if so, which is relevant year for allowance of deduction. There are two aspects of issue involved. One aspect is whether assessee has suffered loss. Second aspect is, in any case, whether loss has been incurred in year under appeal by reason of refund of principal and interest to investor, PHB. We first propose to deal with second aspect. As is evident from facts, assessee had received amount from PHB on 28th Feb., 1992. assessee had received IRFC Bonds from Sri N.K. Agarwal in March, 1992, as indicated in decision of Company Law Board, Northern Region, New Delhi, placed on record. These bonds had been lodged with IRFC. It was in June, 1992, that assessee was informed that original bonds had already been transferred in favour of Standard Chartered Bank. So, if at all assessee can be said to have lost investment made through Sri N.K. Agarwal, its discovery could be said to be on receiving information from IRFC in June, 1992. said date falls in asst. yr. 1993-9 4 . We are dealing with asst. yr. 199 4 -95. In asst. yr. 199 4 -95, assessee has settled claim with PHB by repaying investment along with 17 per cent interest on such investment. claim of assessee is that investment had been made on behalf of PHB and that it had no legal obligation to refund investment to PHB. However, refund was made as matter of business prudence and, accordingly, expenditure so incurred was allowable as deduction for computing business profits, it was contended. 72. In our considered view, assessee had received amount from PHB for purpose of investment in specific bonds, not necessarily NPC Bonds. assessee had made investments in course of its business. Though investment made by PHB with appellants and investment made by appellant with Andhra Bank are related, yet they are not part of same transaction. assessee has received money for purpose of investment which is business of assessee. investor had been assured return of 17 per cent per annum. In turn, assessee made investment in course of its business. possibility of loss of investment is part of business of assessee. assessee had accepted IRFC Bonds from Shri N.K. Agarwal. However, PHB was not party to such transaction or acceptance of bonds. In petition filed with Company Law Board regarding transfer of IRFC Bonds, PHB is not party. It thus becomes abundantly clear that investment made by assessee with Andhra Bank was not as agent of PHB but as independent business investment. Andhra Bank has claimed that cheque was issued with clear instructions to be credited to account of Sri Hitendra Dalal. In view of disputed facts one cannot come to conclusion that assessee has lost money. In any case, even if it is assumed that assessee has suffered any loss, it is not on account of refund of money to PHB but on account of investment made by assessee-bank. As already pointed out, fact that Sri N.K. Agarwal had not made investment for purchase of NPC Bonds as per purported instruction by assessee was known to assessee in preceding year, i.e., in asst. yr. 1993-9 4 . assessee had pursued matter with Sri N.K. Agarwal and Andhra Bank and finally 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 assessee has suffered loss as yet. In any case, claim does not fall in year under appeal. Even if loss is to be taken at time of its discovery, that is when Shri N.K. Agarwal did not deliver NPC Bonds or when IRFC Bonds were refused to be registered in name of assessee, even then loss falls in asst. yr. 1993-9 4 . However, assessee is to claim loss only after losing reasonable hope of recovery, loss can be considered only in event of decision in suit instituted against Sri N.K. Agarwal and Andhra Bank. This may be explained with example. In case of trader, assessee supplying goods to party may find it difficult to make recovery on account of sale price of goods. assessee without making any efforts for recovering amount cannot be said to have suffered loss unless all reasonable means are exhausted for recovery of sale price. In this case, Sri N.K. Agarwal is stated to be agent for Andhra Bank and receipt of money has been pursued through Sri N.K. Agarwal, as admitted by Andhra Bank. dispute is about nature of instructions received from assessee regarding investments. suit has been instituted and there is still reasonable hope of recovery of amount. loss in year under appeal cannot be said to have been incurred by assessee notwithstanding fact that there is possibility of loss. Mere possibility of loss may not be equivalent to actual loss of money. Taking totality of facts and circumstances of case into consideration, we are of view that refund of money to investor, viz., PHB, of Rs. 9,58,57,90 4 is refund of investment in course of business and it does not amount to loss suffered by assessee in course of business. This view gets further strength from fact that assessee paid interest of 17 per cent to PHB along with refund of principal. It is unimaginable that assessee-bank would have agreed not only to refund principal amount to PHB but had also agreed to pay interest @ 17 per cent to said Board as matter of business prudence when according to assessee they were not obliged to even return investment to PHB. Facts and circumstances of this case clearly indicate that refund to PHB was of their investment with 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 and goods having been sold to B . If B does not pay price of goods, it may amount to loss suffered by assessee. But payment to for goods supplied will not amount to loss to assessee though loss to assessee on account of B s refusal to pay relates to goods supplied by . Similarly, in this case, PHB made investment with appellants. If at all assessee has suffered loss in course of its business of making investment, refund of money belonging to PHB plus interest cannot be said to be loss to assessee. event of refund to PHB is not occasion of loss. We, accordingly, hold that loss, if any, suffered by appellants on account of investments does not relate to year under appeal. We, accordingly, hold that in view of disputed facts, it cannot be said that assessee has suffered loss. refund of principal and interest to investor-PHB in anycase is not event of loss. We also hold that, in any case, loss does not pertain to year under appeal. We, however, make it clear that our decision for year under appeal relating to disallowance of loss of Rs. 9,57,58,90 4 is without prejudice to right of assessee to claim loss, if any, in which it can be said to have been incurred. 73. Before parting, we may point out that assessee had filed application dt. 10th March, 2003 on 11th March, 2003 with Registry raising following additional ground of appeal for asst. yr. 1993-9 4 : "In event of appellant s claim for operational loss on securities amounting to Rs. 9,57,58,90 4 is not allowed in asst. yr. 199 4 -95, same ought to be considered and allowed in asst. yr. 1993-9 4 ." hearing of appeal for asst. yr. 1993-9 4 was concluded on 6th March, 2003, along with appeals for asst. yrs. 1992-93 and 1995-96. filing of additional ground of appeal after concluding hearing and subsequent to date of hearing is inconsequential and, accordingly, does not require any consideration. It may also be pertinent to mention that assessee has filed suit against Andhra Bank and Sri N.K. Agarwal and facts stated by assessee are disputed. Therefore, whether assessee has incurred loss or not is dependent on outcome of suit. In such circumstances claim of assessee that loss should be considered in asst. yr. 1993-9 4 is premature in any case. 7 4 . In result, appeals of assessee for asst. yrs. 1992-93 to 1995-96 are partly allowed. 20th Nov., 2003 75. I have carefully gone through order proposed by 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. facts of this case and developments giving rise to this litigation have been rather comprehensively set out in learned Vice President s draft, and, for sake of brevity I need not repeat same. I would, therefore, come directly to areas of disagreement which are primarily on legal principles. A: On scope of proviso to s. 4 (a)(i) : 77. In paras 2 4 and 27 of his draft, learned Vice President has,inter alia,observed as follows : "It is evident from above that salary paid to expatriate employees is net of taxes. assessee had neither paid nor deducted taxes in asst. yrs. 1992-93 to 199 4 -95. However, in asst. yr. 1995-96, assessee has paid tax deductible at source. Therefore, in principle assessee would be entitled to deduction in respect of tax component of salary also if salary is found to be deductible as per directions of Tribunal for asst. yr. 1996-97 (supra) which has been adopted by us. So however, no deduction will be permissible in asst. yr. 1992-93 to 199 4 -95 by operation of s. 4 (a)(i) of IT Act, 1961. claim for said assessment years shall have to be disallowed for reasons of non-deduction of tax. So, however, deduction shall have to be considered for asst. yr. 1995-96 as per proviso to s. 4 (a)(i)" "In principle, claim of assessee has got to be considered in assessment year to which claim pertains to. It is only when claim is considered and found allowable but for provisions of s. 4 (a) that same can be allowed in year of payment. Since claim for asst. yrs. 1990-91 and 1991-92 is not established to have been made and considered in earlier years, benefit is not permissible in asst. yr. 1995-96 merely because tax has been paid in year under appeal. benefit of proviso to s. 4 (a)(i) is thus not available to assessee for which no claim is made in respective assessment years." 78. In my considered view, however, in cases where deduction in respect of sums paid to non-residents is claimed in year in which relevant tax deduction at source obligations are discharged, and such year is subsequent to year to which relevant expenses pertain, it is notsine qua nonthat assessee should have first claimed deduction in year to which it pertains and deduction should have been rejected by AO under s. 4 (a)(i). I am, therefore, unable to subscribe to aforesaid proposition laid down in learned Vice President s proposed draft. 79. I may reproduce contents of s. 4 (a)(i) for ready reference : "Notwithstanding anything to contrary in ss. 30 to 38, following amounts shall not be deducted in computing income chargeable under head Profits and gains of business or profession , (a) in case of any assessee (i) any interest (not being interest on loan issued for public subscription before 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 deduction in computing income of previous year in which such tax has been paid or deducted. ...." 80. plain reading of above legal provision makes it clear that so far as payments outside India are concerned, these payments are not allowed as deduction unless tax deduction at source obligations, if any, in respect of same, are duly discharged by assessee. It further provides that in cases in which such tax deduction at source obligations are discharged in year subsequent to year to which payments pertain to, related payments are allowable as deductions in year in which tax deduction at source obligations are so discharged. There is no suggestion, however, to effect that proviso to s. 4 (a)(i) will only come to play when assessee has claimed deduction in year to which expense pertains and such claim was rejected under s. 4 (a)(i). In absence of any such limitation having been specifically placed on scope of proviso to s. 4 (a), in my considered view, it is not open to us to infer or assume such restrictions which are not supported by words of statute. Even if these restrictions be said to be desirable for proper working of section, it is not open to us to supply thecasus omissus.In case ofTata Tea Limited vs. Jt. CIT (2003) 78 TTJ (Cal) 6 4 6 : (2003) 87 ITD 351 (Cal), to which both of us were parties, it was observed that "casus omissus, which broadly refers to principle that matter which has not been provided in statute but should have been there, cannot be supplied by us, as, to do so will be clearly beyond call and scope of our duty which is only to interpret law as it exists." As Rowlatt, J. has said, inCape Brandy Syndicate vs. IRC (1921) 1 KB 6 4 , "In taxing statute, one has to look merely at what is clearly said; there is no room for any intendment. ...". temptation of resorting to rather creative process of aggressive interpretation of statutes, which allows us to read between lines, therefore, must be resisted. Even as I say so, I am also of view that, in any event, there is nothing between lines to justify such interpretation either. I am of considered view that, in any event, it can be nothing short of meaningless ritual for assessee to claim deduction knowing well that same is specifically inadmissible in view of provisions of s. 4 (a)(i), or, for that purpose, for AO or appellate authorities to adjudicate on academic questions of allowability of such deduction on merits when same is clearly not admissible in view of specific provisions of s. 4 (a)(i). By virtue of s. 4 (a)(i), in my considered view, deductions in respect of payments made outside India, involving tax deduction at source obligations by payee, are admissible in year in which such tax deduction at source obligations have been discharged, and this principle operatesde horsthe method of accounting employed by assessee. For all these reasons, in my considered view, it is not condition precedent for admissibility of deduction under proviso to s. 4 (a)(i) that assessee should have first claimed deduction in year to which it pertains and that deduction should have been rejected by AO only on ground that tax deduction at source obligations in respect of same have not been discharged by assessee. 81. It is interesting to note that provisions of s. 4 (a)(i) are disabling provisions as well as enabling provisions. While s. 4 (a) lays down restrictions on deductibility of certain expenses, proviso to s. 4 (a)(i) lays down conditions in which such expense is to be allowed. 82. Normally, proviso to section sets out exception to scope of section. It carves out area, out of area covered by scope of section, and takes it away from applicability thereof. As Lush J said, "When one finds proviso to section, natural presumption is that, but for proviso, enacting part of section would have included subject-matter of proviso." As Lord Macnaghaten observed, proviso may be qualification of preceding enactment which is expressed in terms too general to be accurate . No doubt that, more often than not, it is somewhat alien to proper function of proviso to read it as providing something by way of addendum or dealing with subject which is not directly relevant to section of which it is proviso. In other words, normally proviso operates as exception, rather than as substantive provision. However, as was observed by Hon ble Supreme Court in case ofCIT vs. Jagannath Mahadeo Prasad (1969) 71 ITR 296 (SC)"where language is quite clear and no other view is possible, it is futile to go into question whether proviso to s. 2 4 (1) operates as substantive provision or only by way of exception to s. 2 4 (1)". words of proviso to s. 4 (a)(i) also being clear and being free from any ambiguity, and in view of principle so laid down by Hon ble Supreme Court in case ofJagannath Mahadeo Prasad(supra), this proviso is to be viewed as substantive provision and as, to repeat my words in preceding para, enabling provison. 83. In light of above discussions and in view of fact that learned Vice President has confirmed disallowance of remuneration and tax in respect of 1990-91 and 1991-92 only on ground that assessee had not made claim for deduction thereof in respective years, I dissociate myself from this conclusion arrived at by learned Vice President. In my considered view, therefore, deduction of remuneration and tax in respect of 1990-91 and 1991-92 is to be allowed in asst. yr. 1995-96, i.e., year in which assessee has duly discharged tax deduction at source obligation in respect of same. B : Deductibility of interest under s. 201(1A) 8 4 . In para 28 of proposed draft, learned Vice President has observed as follows : "That leaves us to consider interest paid by assessee under s. 201(1A). Before proceeding to consider this issue, we would make it clear that for asst. yrs. 1992-93 to 199 4 -95 interest paid by assessee was neither claimed in course of assessment proceedings nor in grounds of appeal before CIT(A) or before us. claim has, however, been made in asst. yr. 1995-96. Thus, at very outset claim of interest pertaining to period falling in 1990-91 to 199 4 -95 is disallowable in any case for reason that no such claim has been made for relevant years." In my considered view, however, since aforesaid interest was in nature of employee cost and since it was paid in previous year relevant to asst. yr. 1995-96, same should be allowed as deduction in asst. yr. 1995-96. It is also to be noted that liability to pay even remuneration was not debited in books of account in India, as evident from contents of para 9 of learned Vice President s draft, and yet same was held to be allowable as deduction in computing income attributable to Indian PE. By same logic, merely because relevant interest expenses were not claimed as deduction by showing same in books of account for relevant years, cannot come in way of allowing interest expenses as deduction for present year. On facts of present case, interest levy under s. 201(1A) is integral part of remuneration paid to expatriates, since such remuneration is paid on net of tax basis and interest under s. 201(1A) will have same character as tax paid on such salaries which is undoubtedly character of salaries or cost of employment. As corollary to remuneration itself having been held to be allowable deduction, tax paid in connection with such remuneration as also interest paid in connection with such taxes is also required to be treated as allowable deduction . 85. In para 3 4 of proposed order, learned Vice President has further observed that : "......... .It may also be pertinent to mention that income-tax paid by assessee does not qualify for deduction as such. This view is supported by decision of Supreme Court in case ofSmt. Padmavati Jaikrishna vs. Addl. CIT (1987) 62 CTR (SC) 1 4 : (1987) 166 ITR 176 (SC). In case ofEast India Pharmaceutical Works Ltd vs. CIT (1997) 139 CTR (SC) 372 : (1997) 22 4 ITR 627 (SC), Their Lordships of Supreme Court held that interest paid on t h e overdrafts utilized for payment of income-tax is also not allowable as deduction as it is not expenditure laid down wholly and exclusively for purposes of business as contemplated by sub-s. (1) of s. 37 of IT Act, 1961. On basis of above principles of law, interest paid by assessee as assessee-in-default of tax is not exigible for deduction as expense incurred for purposes of business. decisions relied upon by learned counsel for assessee are accordingly inapplicable to facts of this case." [The expression "interest paid by assessee as assessee-in-default of tax" refers to interest paid by assessee under s. 201(1A) of Act.] However, in my considered view, interest paid by assessee on facts o f this case is in nature of compensatory levy and part of employee cost. I am also of view that since interest in question is not in respect of taxes on income of assessee, but in respect of employee tax liability which is in nature of employee cost for assessee, Hon ble Supreme Court s judgments in cases ofSmt Padmavati Jaikrishnavs. Addl. CIT (1987) 62 CTR (SC) 1 4 : (1987) 166 ITR 176 (SC)andEast India Pharmaceutical Works Ltd vs. CIT (1997) 139 CTR (SC) 372 : (1997) 22 4 ITR 627 (SC)are not relevant in present context. 86. In proposed order, learned Vice President has declined claim by observing that income-tax does not constitute admissible deduction and since interest in question is paid in connection with income-tax, interest paid on account of delay in deposit of tax deducted at source also cannot be allowed as deduction. Interestingly, however, in proposed order, learned Vice President himself has allowed deduction on account of tax deductible at source from salaries to expatriates. In doing so, in paras 2 4 to 26 of learned Vice President s draft, it has been observed that : "It is evident from above that salary paid to expatriate employees is net of taxes............ We...... direct AO to consider claim of assessee in regard to remuneration and taxes paid relating to asst. yrs. 1992-93 to 1995-96 in asst. yr. 1995-96 in accordance with directions contained in this order." Once we hold that taxes deducted at source, which were borne by assessee as 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 ground that tax itself is not allowable deduction. To me, there appears to be inherent contradiction in this stand; either income-tax deductible at source is allowable deduction or it is not, but once on facts of case, it is held that it is allowable deduction, and rightly so, interest on delayed deposit of such tax cannot be declined deduction on ground that income-tax deductible at source is not allowable deduction. In any case, income-tax paid by assessee, in discharge of tax liability of employees and on account of assessee paying salaries to related employees on net of tax basis , is nothing but expense in nature of, what is usually termed as, employee cost . Such expense is incurred to earn income, and is, therefore, admissible deduction. 87. InSmt. Padmavati Jaikrishna scase (supra) relied upon by learned Vice President, Hon ble Supreme Court had,inter alia,observed that "we are inclined to agree with High Court that so far as meeting of liability of income-tax and wealth-tax is concerned it was indeed personal one and payment thereof cannot at all be said to be expenditure laid out or expended wholly and exclusively for purpose of earning income" and that "the test to apply is that expenditure should be wholly and exclusively for purpose of earning income". In coming to conclusion that interest paid on overdraft to pay income-tax dues does not constitute admissible deduction under s. 57(iii), Their Lordships took note of legal position that "the expenditure to be deductible ..... .must be laid out or expended wholly and exclusively for purpose of making or earning such income....." as also finding that "the expenditure in this case was to meet personal liability of payment of income-tax and wealth-tax" which was obviously not to earn income. T o my understanding, principle that could be said to emerge from this judgment is that only such expenses can be allowed as deduction which are incurred to earn that income, but then income-tax is certainly not to earn income , and, therefore, rightly inadmissible as deduction. In case ofEast India Pharmaceutical Works(supra) relied upon by learned Vice President, Hon ble Supreme Court has simply followed this principle and observed that "as has been already noticed inSmt. Padmawati scase (supra), this Court had affirmatively held that, meeting liability for income-tax was personal liability and such expenditure can never be held to be wholly and exclusively for purpose of earning income." . On facts of present case, however, none of these judgments have any application. It is not in dispute that assessee has paid salaries to expatriates on net of tax basis, and, therefore, tax paid on behalf of such employees is integral part of employee cost which cannot but be said to be in nature of expenses, to use terminology employed by Hon ble Supreme Court, "wholly and exclusively for purpose of earning income". On present set of facts, therefore, interest paid on account of delay in depositing taxes deductible at source is admissible deduction, and learned Vice President s reliance on Hon ble Supreme Court s judgments in cases ofSmt. Padmavati Jaikrishna(supra) andEast India Pharmaceutical Works(supra) does not appear to be wholly justified. 88. In his proposed order, learned Vice President has stated that "Since income of expatriate employees is liable to tax, assessee would be obliged to file returns of income and discharge obligations which, but for agreement of employment with 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 deductibility of interest paid on delayed deposit of taxes deductible at source. 8 9 . It cannot also be in dispute that interest under s. 201(1A) is compensatory, and not penal in nature. Articulating views of Kolkata C Bench in case ofITO vs. Titagarh Steels Ltd. (2001) 73 TTJ (Cal) 297 : (2001) 79 ITD 532 (Cal), and dealing with case in which assessee had,inter alia, paid interest under s. 201(1A) for delayed deposit of taxes deducted at source, I had observed as follows : "...............the first and foremost consequence is that tax deductor has to make good shortfall in tax deduction and tax deductor also has tocompensate Revenue by way of interest for period of late realization of this tax to Revenue authorities. These provisions, contained in s. 201(1) ands. 201(1A), are set out in Chapter XVII-B titled as Collection and Recovery of Tax . next set of consequences are contained in s. 271C and s. 276B, covered by Chapter XXI Penalties Imposable and Chapter XXII Offences and Prosecutions respectively........" (Emphasis, italicised in print, supplied by me). 90. In case ofMahalakshmi Sugar Mills Co. Ltd. vs. CIT (1980) 16 CTR (SC) 198 : (1980) 123 ITR 4 29 (SC), Hon ble Supreme Court has, while dealing with levy of interest on cess, observed that "In truth, interest provided for under s. 3(3) is in nature of compensation paid to Government for delay in payment of cess. It is not by way of penalty. provision for penalty as civil liability has been made under s. 3(5) and for penalty as criminal offence under s. 4 ." Their Lordships were thus of opinion that compensatory levy of interest is deductible expenditure. In view of Tribunal s decision in case ofTitagarh Steels Limited(supra), interest levy under s. 201(1) is compensatory levy, and, therefore, same constitutes admissible deduction. circumstances leading to this levy may be such as to invite penal action but then what is material in present context is precise nature of deduction being claimed, and no further. It may be recalled that inMahalakshmi Sugar Mills Co Ltd s.case (supra), Their Lordships had further observed as follows : "In our opinion, interest paid under s. 3(3) of Cess Act cannot be described as penalty paid for infringement of law. As that is only ground on which Revenue resists claim of assessee to deduction of interest under s. 10(2)(xv) of Indian IT Act, 1922, assessee is entitled to succeed. There is no dispute that payment of interest represents expenditure laid out wholly or exclusively for purpose of business. There is also no dispute that it is in nature of revenue expenditure." In case ofPrakash Cotton Mills (P) Ltd. vs. CIT (1993) 111 CTR (SC) 389 : (1993) 201 ITR 68 4 (SC), Their Lordships of Hon ble Supreme Court have observed that "The decision of this Court inMahalakshmi Sugar Mills Co. Ltd. (1980) 16 CTR (SC) 198 : (1980) 123 ITR 4 29 (SC)and decision of Division Bench of Andhra Pradesh High Court inCIT vs. Hyderabad Allwyn Metal Works Ltd. (1988) 72 CTR (AP) 2 : (1988) 172 ITR 113 (AP)with view of which we are in complete agreement, are in our opinion, decisions which settle law on question as to when amount paid by assessee as interest or damages or penalty could be regarded as compensatory (reparatory) in character as would entitle such assessee to claim it as allowable expenditure under s. 37(1) of IT Act". 91. In view of reasons stated above, I am unable to concur with learned Vice President that interest paid by assessee under s. 201(1A) of Act is not eligible for deduction as expenses incurred for purposes of business. In my view and on facts of this case, interest paid under s. 201(1A), being integral part of cost of employees as payment on account of compensatory levy for delayed deposit of taxes which assessee was under obligation to pay on behalf of employees , is in nature of expenses incurred for purposes of business and for earning income, and, is, therefore, admissible as deduction under s. 37(1) of Act. C : Deductibility of operational loss 92. As far as this claim of deduction of Rs. 9,57,58,90 4 is concerned, this claim was originally allowed by AO but, in course of first appellate proceedings and vide para 8 of impugned order, CIT(A) made this disallowance by observing as under : "I find that this claim of loss relates to transactions with regard to scam period in respect of shares and securities and matter is at presentsub judiceand is pending with Special Court set up by Government to decide scam related issues. Keeping in view fact that matter is stillsub judiceand Court is yet to give finding with regard to this scam and loss incurred was not business loss, this loss of Rs 9,57,58,90 4 cannot be allowed to appellant. AO is directed to give effect to this order enhancing income of appellant to this extent" Aggrieved by enhancement so made by first appellate authority, assessee is in appeal before us. 93. In order to appreciate nature of this loss in correct perspective, it may also be useful to understand nature of transaction as alsomodus operandiof broker. 9 4 . As evident from document placed before us at p. 4 7 of paper book, assessee received sum of Rs. 10 crores from Punjab Housing Board (PHB, in short), for investment by assessee, for period of 180 days subject to condition that money is to be invested in Government securities, UTI or tax-free bonds, that 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 course of investment of money so received by assessee that on 9th March, 1992, it issued cheque of Rs. 9,75,58,90 4 to Andhra Bank for purchase of 17 per cent NPC Bonds @ Rs 97 per bond plus accrued interest and handed over payment advice and cheque, cheque forming part of payment advice, to broker by name of Shri. N.K Agarwal. At this stage, I must clarify as to present practice of issuance of payment advice-cum-cheque . With changes in Indian banking practices brought about mainly by multinational banks, it is no longer cheque book which is used by large corporate account holders, involving issuance of large number of cheques, or banks. These cheque books are now replaced by packets of perforated computer friendly forms, used as continuous computer stationery, issued by 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 perforated points. top portion contains kind of details of person issuing cheques as letter-head would contain, and has columns for name and address of person to whom cheque is issued, details of payment, and details of purposes for which it is issued. bottom portion is form for cheque itself. These forms are computer friendly and, while processing payment, while details of payment are printed on top portion, details necessary for cheque are printed on bottom portion. Upon signing, top portion is used as payment advice, while bottom portion, on being removed from aforesaid advice, works as cheque itself. typical example of such practice is reflected by copy of payment advice-cum- cheque in question issued to Andhra Bank, copy of which is placed before us at p. 4 9 of paper book. Even cursory look of above payment advice- cum-cheque clearly demonstrates fact that payment advice and cheque are composite instruments in this case, although, for banking purposes, one has to tear off cheque and process it for payment. cheque portion appears to be in favour of Andhra Bank, but then it s fairly well-known fact that themodus operandiof many security scams was that cheques issued in name of banks were used, as part of normally acceptable practice, to credit accounts of certain brokers as maintained in those banks. It was,inter alia, this vulnerable practice in banking industry which proved to be fertile ground for ingenious and unscrupulous scamsters. 95. It is not in dispute in present case that it was this payment advice- cum-cheque which was handed over by assessee to broker, and this fact is also evident from acknowledgment on copy of payment advice-cum- cheque placed before us at p. 4 9 of paper book. What has apparently been done by someone in this case is that he removed top portion of payment advice-cum-cheque, ignored its contents altogether, and used bottom portion, i.e., cheque, for affording credit to account of one Hiten Dalal, one of central characters in several cases of security scams in this country. This exercise, in our considered view, is nothing short of fraud within meanings of s. 17 of Indian Contracts Act, 1872, which describes fraud as,inter alia,active concealment of fact by one having knowledge or belief of fact. Now, it cannot be in dispute that person who received payment advice- cum-cheque was aware that cheque in name of Andhra Bank was specifically for purpose of purchase of NPC Bonds in name of PHB, but he actively conceals this fact by removing top portion of payment advice- cum-cheque and uses only cheque portion for unauthorized credit to account of Hiten Dalal. As agent of PHB, which assessee clearly was while making investment specifically on behalf of this principal, assessee was bound to conduct business of principal as per directions given by principal, or, in absence of such instructions, according to normal usage. Subsequent to this transaction, assessee has been able to realize IRFC Bonds valued at Rs. 9,57,58,90 4 as also sum representing difference in value of NPC Bonds vis-a-vis IRFC Bonds, on 18th March, 1992, but even IRFC Bonds could not be transferred to assessee-bank as same were already sold to Standard Chartered Bank. assessee carried matter before Company Law Board but without any success. As evident from p. 1 of CLB s order, dt. 25th Aug., 199 4 , marking attendance of Shri Manmohan and Shri C.M. Oberoi, Advocates representing PHB, PHB was also represented before CLB. This CLB order, at p. 2, specifically observes as follows : "In accordance with instructions of NKA (i.e., broker), ABN Amro Bank, (i.e., appellant before us) issued account-payee cheque/pay order in favour of Andhra Bank, Fort Branch, Bombay, for above said amount, with attached memorandum stating that it represents 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 same transaction. It is also important to bear in mind fact that amount that assessee-bank was unable to invest in NPC Bonds was duly refunded to 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, refund of Rs. 2 4 , 4 1,096 to PHB remains unexplained, which represents difference of amount received for investmentminusthe amount invested in 17 per cent NPC Bonds. assessee-bank had also refunded Rs. 18 lakhs to PHB and this amount was received from N.K. Agarwal, being difference between market value of NFC Bonds and IRFC Bonds, at time of handing over IRFC Bonds in substitution of NPC Bonds. All these factors indicate that receipt of Rs. 10 crores from PHB, n d investment in NFC Bonds are interconnected and integral part of transaction entered into by assessee-bank. While making this purchase of 17 per cent NPC Bonds, assessee was not making investment in course of its business, but making investment specifically on behalf of constituent, i.e., PHB as agent. It would also appear to us that assessee acted in manner in which normal prudent person would have acted by issuing cheque in name of Andhra Bank with specific instructions to use proceeds of this cheque for buying securities in question. loss suffered by assessee in such situation, i.e., acting as agent of PHB and while conducting business in abona fidemanner,prima facieis on account of principal, i.e., PHB. In our considered view, therefore, no loss was incurred by assessee as such on his account, but on account of its client, i.e., PHB, specifically on whose behalf and specifically in whose name, assessee was trying to acquire securities. Yet assessee agreed to bear this loss by making good loss caused to PHB, not because assessee had 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 RBI declined to issue licence for opening new branch office at Chennai. RBI in its letter dt. 16th June, 1993, copy of which was placed before us at p. 58 of paper book, stated that "issue of licence to your bank for opening branch in Madras has again been decided to be kept in abeyance till such time as dispute on securities transactions between your bank and Andhra Bank is resolved". Within three weeks of this communication, assessee-bank entering into settlement with PHB, also, in way, indicates factors influencing assessee-bank s decision to bear loss. Let us see this from point of view of large multinational bank that this assessee admittedly is. In case such assessee has to choose between bearing loss of Rs. 9.57 crores or losing opportunity to operate business in major Indian metropolitan city like Chennai, odds are that commercial expediency may persuade 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 assessee himself, cannot be simply rejected as improbable. In this view of matter, I am of considered opinion that there is no material to reject assessee s claim that payment made to PHB was justified on grounds of commercial expediency. 96. There is one more aspect to matter, and, that is pertaining to importance of assessee s credibility in its customers and prospective customers. There are occasions when, to protect its reputation and credibility, bank has to bear loss which, strictly speaking, is not even its loss. One such situation was dealt by with Their Lordships of Hon ble Supreme Court in case ofCIT vs. Nainital Bank Ltd (1966) 62 ITR 638 (SC). Their Lordships were in seisin of case in which certain amount of cash and large quantity of jewellery pledged with bank by its constituents were stolen by dacoits on 11th June, 1951, from premises of bank. As far as loss of jewellery belonging to customers was concerned, bank has settled these claims with customers. loss was thus borne by assessee-bank, even though bank was not under any legal or contractual obligation to bear such loss. amount so paid was, however, disallowed by Revenue on ground that assessee-bank did not have any liability to settle claim. When matter finally reached Hon ble Supreme Court, Revenue contended that loss incurred by bank was under no legal liability to pay to constituents value of jewellery pledged. Revenue also pointed out that bank was, as pledgee, bailee of jewellery and was in law required to take as much care of pledged jewellery as person of ordinary prudence would take under similar circumstances of his own jewellery of same bulk, quantity and value, and bank having provided adequate number of watchmen, it was not liable for loss of property pledged. It was in this backdrop that Their Lordships observed that, "Granting that, on proof that it had taken as much care of jewellery pledged with it as it would have taken if it belonged to it, bank could enforce its rights and recover full amount due from constituents, question still remains whether in admitting liability for purpose of business." and thus answered question posed to themselves : "......... credit of banking business is very sensitive : it largely thrives upon confidence which its constituents have in its management. To maintain that confidence management has often to make concessions and thereby to preserve goodwill of business and its relations with clientele. bank could have, if so advised, taken its stand strictly on its legal obligations, and could have recovered amounts due by constituents at same time denying liability to make any compensation for loss of jewellery pledged with it. But such stand might very well have ruined its business, especially in rural areas in which it operated.The bank had evidently two courses open : to enforce its right strictly according to law, and thereby to lose goodwill it had built up among constituents, or to compensate constituents for loss of their jewellery, and maintain its business connections and goodwill. In choosing second alternative, in our judgment, bank laid out expenditure for purpose of its business.Paying to constituents price of jewellery stolen in robbery or burglary was, therefore, expenditure for purpose of business. There can be no doubt that expenditure was wholly and exclusively in interest of business. expenditure was laid out for no other purpose." (Emphasis by underlining, italicised in print, supplied by me) 97. Applying principle laid down by Hon ble Supreme Court in case ofNainital Bank(supra), it would appear that assessee-bank had evidently two courses open : to enforce its right strictly according to law, and thereby to lose goodwill it had built up among constituents, or to compensate constituent for loss suffered in securities scam, and maintain its business connections and goodwill. In choosing second alternative, as held by Hon ble Supreme Court, assessee-bank laid out expenditure for purpose of its business. Accordingly, payment of Rs. 9,57,58,90 4 made by assessee-bank to PHB is, in my considered view,bona fidebusiness expenditure eligible for deduction under s. 37(1) of Act. 98. As for Revenue s contention that loss is not yet final and there is still possibility of assessee-bank s being able to recover disputed amount from Andhra Bank, N.K. Agarwal or Hiten Dalal, I find no substance in this contention either. First of all, this argument proceeds on fallacy that it is loss incurred on behalf of PHB which is being claimed as deduction, whereas, in my view, it is payment to PHB, which is payment warranted on account of commercial expediency rather than contractual obligations, which is being claimed as deduction. Secondly, assuming that such possibility may have any relevance in this matter, even possibility of recovery has to be reasonable possibility, i.e., what reasonable person would expect in given circumstances. material on record, in my understanding, indicates that assessee-bank has been taken for ride by unscrupulous operators, misusing loopholes in system, and exploiting fact that transactions involving such huge amounts were entered into, perhaps as normal course in banking industry, without taking highest degree of safety measures and incorporating checks and balances as such, and but for this laxity inherent in normal banking practices, scams of kind which have become somewhat common in recent past could not have taken place. Learned CIT(A) has made this enhancement merely on basis that matter is still pending before 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 loss, because, it is also well-known fact, perhaps as equally well known as fact about existence of these special Courts itself, that claims on these scamsters are several times 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, copy of which was placed before us at p. 58 of paper book, stating "issue of licence to your bank for opening branch in Madras has again been decided to be kept in abeyance till such time as dispute on securities transactions between your bank and Andhra Bank is resolved", assessee-bank has clearly given more importance to 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 assessee s perception that there is no reasonable hope of recovery of this amount. There is no material before us to doubt or dispute assessee s perception that money so refunded to PHB constitutes loss, and is, accordingly, booked as expenditure, that same is beyond reasonable hope of recovery, and that chances of recouping loss are too remote to affect accounting treatment of loss. objection raised by Revenue is thus, in my considered view, not maintainable. 99. For reasons set out above, I am of considered view that CIT(A) indeed erred in making enhancement of Rs. 9,57,58,90 4 on account of operational loss. appellant, therefore, deserves to succeed on this issue as well. 1 0 0 . Save as otherwise specified hereinabove, I am in considered agreement with conclusions arrived at by learned Vice President and, I respectfully, endorse same. REFERENCE UNDER S. 255( 4 ) OF IT ACT, 1961 December, 2003 consolidated order in case of above four appeals for asst. yrs. 1992-93 to 1995-96 was proposed by Vice President. However, AM has expressed his reservations on some of issues relating to asst. yr. 1995- 96. AM has agreed with proposed order in respect of which no specific reservations have been expressed in dissenting order. Therefore, whereas appeals for asst. yrs. 1992-93 to 199 4 -95 are disposed of by way of consolidated order, reference is made to Hon ble President for nomination of Third Member in order to resolve points of difference amongst members of Bench for asst. yr. 1995-96. points of difference are as under: (a) Whether or not, on facts and in circumstances of case, 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 i.e. year in which tax has been paid by assessee. (b) Whether or not, on facts and in circumstances of case, assessee was entitled to deduction of interest levied under s. 201(1A). (c) Whether or not, on particular facts and in particular circumstances of this case, assessee was entitled to deduction on account of operational loss of Rs. 9,57,58,90 4 . 2 . It is, therefore, requested that Hon ble President may kindly nominate Third Member for decision in regard to points of difference referred to above. December, 2003 consolidated order in case of all above four appeals for asst. yrs. 1992-93 to 1995-96 was proposed by Vice President. However, AM has expressed his reservations in respect of some of issues all relating to asst. yr. 1995-96. AM has agreed with proposed order in respect of which no specific reservation has been expressed in dissenting order. Therefore, whereas appeals of assessee for asst. yrs. 1992-93 to 199 4 -95 are disposed of by consolidated order, reference is made to Hon ble President for nomination of Third Member in order to resolve points of difference amongst members of Bench for asst. yr. 1995-96. points of difference are identified as under: 2. Tax component in respect of expatriate employees for asst. yrs. 1990-91 and 1991-92 : In paras 2 4 to 27, Vice President in his proposed order has held that in principle assessee is entitled to deduction of tax component of salary relating to expatriate employees in asst. yrs. 1992-93 to 199 4 -95 but for operation of provisions of s. 4 (a)(i) deduction is not permissible in such year tax not having been paid by assessee. However, since payment of tax has been made in asst. yr. 1995-96, Vice President has, accordingly, allowed deduction of entire claim pertaining to asst. yrs. 1992-93 to 1995-96 in asst. yr. 1995-96. 2 . 1 In asst. yr. 1995-96, assessee had also claimed deduction in respect of tax component of salary of expatriate employees pertaining to assessments for 1990-91 and 1991-92. said assessment years were not in appeal before Tribunal. Vice President in para 27 of order has held that assessee not having claimed any deduction in respect of tax component of salary in asst. yrs. 1990-91 and 1991-92 either before AO or before any other authority, mere fact that tax has been paid in asst. yr. 1995-96 does not entitle assessee to claim deduction in year of payment, i.e. in asst. yr. 1995-96 when assessee is following mercantile system of accounting. 2.2 On other hand, AM in dissenting order has held that assessee would be entitled to deduction in respect of tax component of salary for asst. yrs. 1990-91 and 1991-92 paid in asst. yr. 1995-96 notwithstanding fact that no claim was either made in asst. yrs. 1990-91 or 1991-92 by assessee before any authority. According to AM, s. 4 (a)(i) permits deduction in year of payment. Therefore, omission of claim in relevant years, i.e. in asst. yrs. 1990-91 and 1991-92 is of no consequence. Hence point of difference : "Whether assessee is entitled to deduction of tax component of salary o f expatriate employees relating to asst. yrs. 1990-91 and 1991-92 in asst. yr. 1995-96 in which tax has been paid by assessee, not claimed in respective assessment years before any authority." 3 . Interest paid by assessee as defaulter of non-payment of tax deductible at source : In order proposed by Vice President, assessee has been held to be entitled to deduction on account of remuneration paid to expatriate employees including taxes payable on such remuneration. assessee had committed default in discharging its obligation of deduction of tax and payment to Government in respect of salaries paid to expatriate employees. As result of default committed by assessee of non- deduction and non-payment of TDS, assessee had to pay interest under s. 201(1A) of IT Act, 1961. interest was paid in previous year relevant to asst. yr. 1995-96 and assessee claimed deduction in respect of such interest paid as expenditure incurred for purposes of business. Vice President has drawn distinction between cost of employment which includes remuneration, taxes, interest etc. on behalf of employees on one hand and assessee s statutory obligation to deduct and pay taxes on other hand. Vice President has expressed view that, whereas 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 b e permissible to assessee in respect of interest payable as assessee-in-default for its failure to discharge statutory obligation of non- deduction of tax and payment of same to Government in contrast to obligation of assessee as employer. 3.1 AM in his dissenting order has expressed view that interest charged under s. 201(1A) is part of cost of employment to assessee and, accordingly, is permissible as deduction. Hence dispute is identified as under : "Whether interest paid by assessee as assessee-in-default qualifies for deduction as cost of employment to assessee." 4 . Business loss: assessee had claimed deduction on account of sum of Rs. 9,57,58,90 4 refunded to Punjab Housing Board (PHB) on account of investment made by them. Deduction of interest @ 17 per cent was also separately claimed. AO had allowed both deductions. CIT(A) had enhanced income of assessee by disallowing deduction on account of refund to PHB of Rs. 9,57,58,90 4 . On appeal, Vice President expressed view that assessee is not entitled to deduction on account of refund to PHB as that was not event of loss. Vice President has also pointed out that facts relating to loss are disputed by parties and matter is sub-judice. Vice President in his proposed order has given liberty to assessee to claim loss as and when it is established to have been incurred. 4 .1 AM in his dissenting order has disagreed with view and on reasons recorded in order held that assessee is entitled to deduction. Hence difference on following point : "Whether assessee is entitled to deduction of Rs. 9,57,58,90 4 on account of payment to Punjab Housing Board in respect of investment made by them with assessee notwithstanding fact that facts relating to loss of investment are disputed and issue issub-judice." 5. It is, therefore, requested that Hon ble President may nominate Third Member for decision in regard to points of difference referred to above. 17th June, 2005 reference under s. 255( 4 ) of IT Act, 1961, was made by President, Tribunal, for my opinion as Third Member on following points of difference arising out of appeal for asst. yr. 1995-96 : "(a) Whether or not, on facts and in circumstances of case, 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, i.e., year in which tax has been paid by assessee. (b) Whether or not, on facts and in circumstances of case, assessee was entitled to deduction of interest levied under s. 201(1A). (c) Whether or not, on particular facts and in particular circumstances of this case, assessee was entitled to deduction on account of operational loss of Rs. 9,57,58,90 4 ." 2. questions referred were not depicting real controversy and there was also confusion about assessment year of reference. As regards question (a) above, reference was only for allowability of tax component on salary of expatriate employees deducted at source, whereas difference between two Members was covering both tax component as well as salary payment to expatriate employees, and question (c) was arising out of appeal proceedings for asst. yr. 199 4 -95 whereas in reference it is stated to be arising out of asst. yr. 1995-96. Therefore, revised reference was directed by President with following questions : Asst. yr. 1995-96 "(a) Whether or not, on facts and in circumstances of case, assessee is entitled to deduction of tax component and salary of expatriate employees relating to asst. yrs. 1990-91 and 1991-92, in asst. yr. 1995-96, namely, year in which tax has been paid by assessee. (b) Whether or not, on facts and in circumstances of case, assessee was entitled to deduction of interest levied under s. 201(1A)." Asst. yr. 199 4 -95 "(c) Whether or not, on particular facts and in particular circumstances of this case, assessee was entitled to deduction on account of operational loss of Rs. 9,57,58,90 4 ." 3 . assessee is 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 Scheduled Bank in terms o f Sch. II of Reserve Bank of India (RBI) Act, 193 4 . Its main activity comprised of accepting deposits, giving loans, discounting of 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. 4 . There exists agreement for Avoidance of Double Taxation between India and Netherlands (DTA in short), art. 7 of which provides for taxation in India on foreign enterprise in respect of profit attributable to its permanent establishments (PE in short) and since ABN AMRO was having PE in India, it is being subjected to tax in India. 5 . Four years appeals for asst. yrs. 1992-93, 1993-9 4 , 199 4 -95 and 1995-96 came up before Tribunal simultaneously and there struck difference of opinion between two Members while disposing of appeals for asst. yr. 199 4 -95 in ITA No. 106/Kol/2001 and asst. yr. 1995-96 in ITA No. 4 96/Cal/1999 and point of difference is referred to above in para 2. 6. assessee has not deducted tax in respect of remuneration paid to its expatriate employees on prescribed dates as required under s. 192 of Act. CBDT, in order to encourage compliance in respect of TDS, issued Circular No. 685, dt. 20th June, 199 4 , providing exemption from penalty and prosecution to those employers who paid tax deducted/deductible at source at specified date. By another Circular No. 686, dt. 12th Aug., 199 4 , Board has also clarified that assessments of employees in respect of whom payments of short deduction and interest thereon are made by employer in pursurance of Circular No. 685, dt. 20th June, 199 4 , will not be responsible or otherwise disturbed merely on account of excess salary payment now disclosed by employer. assessee took shelter under said circular and paid sum of Rs. 2,06,5 4 , 4 99 for previous years starting from asst. yr. 1990-91 to asst. yr. 1995-96. P&L a/c of assessee for asst. yr.1995-96 was debited with sum of Rs. 2,06,5 4 , 4 99. It was, however, added back and deduction of only of Rs. 89,0 4 ,276 was claimed on account of remuneration including Rs. 52,35,222 paid in Netherland, TDS and interest pertaining to asst. yr. 1995-96. 7. For asst. yrs. 1990-91 and 1991-92, it seems that remuneration has not been claimed as deduction and seemingly no reasons are on record as to why it was not claimed in those years. In asst. yr. 1992-93, assessee made claim before AO for remuneration and tax deducted at source in respect of expatriate employees having rendered services in India for which payment has been made abroad amounting to Rs. 23,87,325. By another letter, assessee claimed tax deducted at source paid in pursuance to Board s Circular amounting to Rs. 29,86,963. similar claim was made for asst. yrs. 1993-9 4 and 199 4 -95. During assessment proceedings for asst. year 1995-96, assessee also claimed deduction of entire amount of Rs. 2,06,5 4 , 4 99 being tax and interest for all years starting from asst. yr. 1990-91 to 1995-96. position of payment of TDS, interest and offshore remuneration paid in Netherlands and claimed as deduction is as under : Asst. yr. Asst. yr. Asst. yr. Asst. yr. Asst. yr. 9 Asst. yr. Details Total 90-91 91-92 92-93 93-9 4 4 -95 95-96 Tax 10,5 4 4 9, 44 (As TDS 3,61,635 29,86,963 35,86,312 36,15,895 1,65,50,510 ,92 4 ,312 arrears) Interest 2, 4 13,2 4 5,80,300 12,19,063 6,81,031 53,159 4 1,03,989 u/s. 201 5,859 ,577 Sub 6,07, 4 9 16,35,22 4 4 36,69,05 2,06,5 4 , 4 62,68,889 Total 4 4 2,06,026 2,67,812 4 99 Net Offshore 4 remuneration 3,27,276 9,10,803 23,87,325 61,90,206 52,35,222 1,97,66,857 7,16,025 paid in Netherlands 93 4 2,5 4 12, 4 89,0 4 4 ,0 4 Total 6,593,351 89,83,837 ,770 6,027 59,095 ,276 ,21,356 8 . AO, however, disallowed claim of assessee for offshore remuneration in asst. yrs. 1992-93 to 199 4 -95 by observing that decision of Supreme Court in case ofKedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC)was not applicable; that salary was paid to expatriate employees rendering services in India by head office of bank and same has not been debited to accounts of bank in India and that tax borne by assessee-bank on salary paid to expatriate offshore payment has been made only in subsequent year. He, therefore, disallowed both payment of salary by head office as well as tax deducted at source and interest thereon and paid in asst. yr. 1995-96 by stating that TDS for earlier years was not covered by s. 4 3B as it was not regular payment of tax or Government dues, that amount has been paid under Amnesty Scheme and, therefore, it is not allowable and that amount does not pertain to year under consideration and further that remuneration and TDS paid by assessee for earlier years have not been included in income of concerned employees for their income-tax purpose in India for which assessee is liable and also that interest on TDS is not business expenditure and it does not pertain to year of assessment. 9 . claim of Rs. 89,0 4 ,296 in asst. yr. 1995-96 being remuneration, TDS and interest pertaining to (sic) was also disallowed by AO by further observing that assessee has not given details as to how much of such remuneration has already been claimed as expenditure by any other office of assessee because assessee cannot be allowed same expenditure twice, once in another country and again in India. assessee has not given details of services rendered, place of service rendered and terms of agreement regarding such employees/offshore expatriates and that assessee was allowed head office expenses @ 5 per cent of taxable income in India and, therefore, such expenditure including 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 aforesaid reasons for not allowing offshore expatriates remuneration applies to interest, TDS and remuneration paid for earlier years as well. 10. CIT(A) confirmed disallowances by agreeing with AO for disallowance of Rs. 89,0 4 ,296 in asst. yr. 1995-96, he also agreed with AO for thedisallowance of entire deduction of tax of Rs. 2,06,5 4 , 4 99 being tax and interest on offshore remuneration of expatriate employees for all assessment years including current assessment year. He observed that CBDT had launched scheme whereby TDS by defaulters for not deducting tax in respect of salary and remuneration paid to expatriate employees abroad could be paid by employer and 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 rigour of prosecution, although in other sense of term, these taxes were due and collectible from expatriate employees from whom assessee- company in earlier years had failed to collect taxes in accordance with Indian law and pay same. He further observed that even now these taxes have been paid purely on behalf of expatriate employees and if there is any liability for payment of same to bank it rests on those expatriate employees and, therefore, assessee cannot say that this should be treated as revenue expenditure. He further held that taxes paid by assessee-company because of their own fault in not collecting taxes from its expatriate employees in time and depositing same with Government of India, cannot be allowed as revenue expenditure. 1 1 . matter came up before Tribunal. Insofar as claim for remuneration in appeals for asst. yrs. 1992-93 to 199 4 -95 is concerned, both members agreed that remuneration paid to expatriate employees rendering whole-time service in India throughout accounting year has to be accepted as allowable deduction in computing profits of PE subject however with rider that such payment is not taken into account in working out deduction under s. 44 C and once AO is satisfied that assessee is entitled to deduction in respect of remuneration, claim of assessee shall have to be dealt with in accordance with s. 4of Act. aforesaid directions were also stated to be valid for offshore remuneration pertaining to asst. yrs. 1992-93, 1993-9 4 , 199 4 -95 and 1995-96 with direction that if after verification AO comes to conclusion that assessee has not taken amount of remuneration in respective assessment years into consideration in working out deduction under s. 44 C, claim would in principle be permissible in respective assessment years. So, however, deduction has got to be allowed as already pointed out in accordance with s. 4 (a) read with proviso. tax not having been deducted at source in respective assessment years but having been paid in asst. yr. 1995-96, deduction in respect of remuneration is allowable in year of payment, i.e., asst. yr. 1995-96. This would take care of part of additional ground raised before Tribunal by assessee in asst. yr. 1995-96 whereby deduction in respect of offshore remuneration and tax component pertaining to asst. yrs. 1992-93 to 199 4 -95 is claimed as deduction in asst. yr. 1995-96. For asst. yr. 1995-96, tax has been paid by assessee in same assessment year and, therefore, prohibition under s. 4 (a) is not attracted. claim of assessee was directed to be considered accordingly. 1 2 . objection of Revenue about assessee having failed to establish as to whether services have been rendered by expatriate employees in regard to PE of assessee in India was found untenable with observation that if employees have not rendered services in India for which remuneration had been received abroad, then how was it that assessee was under obligation to deduct tax from their remuneration and that very fact that assessee has accepted its obligation to deduct taxes from salary paid to expatriate employees was sufficient to infer that services had been rendered in India. Similarly, objection of Revenue that taxes have been paid on behalf of expatriate employees and not as tax deducted at source was also found untenable in view of provisions of s. 199 providing that any deduction made in accordance with provisions of s. 192 and paid to Central Government is to be treated as payment of tax on behalf of person from whose income deduction is made under s. 205 of IT Act. There is bar for Revenue to demand tax from assessee to extent amount has been deducted from income. It was, therefore, observed that tax deducted at source by assessee and paid to Government is to be treated as fine paid on behalf of expatriate employees. 13. As regards tax deducted at source in respect of remuneration paid outside India to expatriate employees, Tribunal held that in principle, assessee would be entitled to deduction in respect of tax component of salary also if salary is found to be deductible as per directions of Tribunal for asst. yr. 1996-97 and, accordingly, no deduction would be permissible in asst. yrs. 1992-93 to 199 4 -95 by operation of s. 4 (a)(i) of IT Act and claim for said assessment year shall have to be disallowed for reason of non-deduction of tax but allowed same in asst. yr. 1995-96. Both Members, therefore, held that subject to verification, claim of remuneration and tax deducted has not been taken into account under s. 44 C in regard to expatriate employees, deduction relating to asst. yrs. 1992-93 to 199 4 -95 would be permissible in asst. yr. 1995-96 as per proviso to s. 4 (a)(i) of Act. 1 4 . In Asst. yr. 1995-96, assessee had also claimed deduction for remuneration and tax paid for asst. yrs. 1990-91 and 1991-92. Vice President (JM) held that no evidence has been placed on record to establish that assessee at any stage made claim for deduction in said assessment year and in principle, claim of assessee has got to be considered in assessment year to which claim pertains. It is also observed that it is only when claim is considered and found allowable but for provisions of s. 4 (a) that same cannot be allowed in year of payment and since claim for asst. yrs. 1990-91 and 1991-92 is not established to have been made or considered in earlier year, benefit according to him, is not permissible in asst. yr. 1995-96 merely because tax has been paid in year under appeal. According to him, benefit of proviso to s. 4 (a)(i) is not available in absence of claim made in respective assessment years. He, accordingly, upheld disallowance pertaining to asst. yrs. 1990-91 and 1991-92 in regard to remuneration and tax component in asst. yr. 1995-96. AM, on other hand, held that assessee would be entitled to deduction in respect of tax component and salary for asst. yrs. 1990-91 and 1991-92 in asst. yr. 1995-96 notwithstanding fact that no claim was ever made in asst. yrs. 1990- 91 or 1991-92 by assessee before AO. According to him, s. 4 (a)(i) permits deduction in year of payment and, therefore, omission to claim in relevant year is of no consequence. This is first point of difference between two Members. 15. learned counsel of assessee submitted that there is no warrant in imposing restriction for allowability of remuneration and tax deducted at source on ground that it was not claimed in respective assessment years as deduction. He referred to proviso to s. 4 (a)(i) and submitted that, where tax has been deducted or paid in subsequent year, then such sum shall be allowed as deduction in computing income of previous year, such tax has been paid and since tax has been paid in year under consideration, deduction is to be allowed and it is so held by both JM and AM insofar as claim for asst. yrs. 1992-93 to 199 4 -95 is concerned. learned Departmental Representative, however, supported orders of Departmental Authorities and view taken by JM. 16. I have heard parties and considered their rival submissions. There is no dispute as to allowability of remuneration and tax deducted/deductible at source as revenue expenditure. Both 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 199 4 -95. sum chargeable under this Act (remuneration in this case) which is payable either outside India or in India to non-resident, is not allowable as deduction because of provisions of s. 4 (a)(i) if tax has not been deducted or after deduction has not been paid before expiry of time prescribed under sub- s. (1) of s. 200 and in accordance with other provisions of Chapter XVII-B of Act. When deduction is not allowable because of statutory provisions, it would make no difference whether same was claimed or not by assessee. Because of proviso to s. 4 (a)(i) such sum has to be allowed as deduction in computing income of previous year in which such tax deducted at source has been paid in subsequent year. 17. Sec. 4 (a)(i) reads as under : " 4 . Notwithstanding anything to contrary in ss. 30 to 38, following amounts shall not be deducted in computing income chargeable under head "Profits and gains of business or profession", (a) in case of any assessee : (i) any interest (not being interest onaloan issued for public subscription before 1st day of April, 1938), royalty, fees for technical services or other sum chargeable under this Act, which is payable, (A) outside India; or (B) in India to non-resident, not being company or to 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 previous year, or in subsequent year before expiry of time prescribed under sub-s. (1) of s. 200 : Provided that where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in previous year but paid in any subsequent year after expiry of time prescribed under sub-s. (1) of s. 200 such sum shall be allowed as deduction in computing income of previous year in which such tax has been paid." 18. On bare reading of aforesaid provision, it is evident such sum shall be allowed as deduction in computing income of previous year in which such tax has been paid if tax has been deducted in any subsequent year or, has been deducted in previous year but paid in any subsequent year after expiry of time prescribed under sub-s. (1) of s. 200. No restriction is placed for allowability of deduction of remuneration paid in subsequent year that it should have been claimed in earlier year. As aforesaid, it will also not stand to logic that when deduction is not allowable under particular provision of Act, in this case s. 4of Act, that assessee should make claim and that should be rejected at first instance in relevant year. proviso does not contemplate any such restriction. On contrary it would be futile rather exposing assessee to penal consequences if he made wrong claim which is not allowable due to specific prohibition. Such restriction, therefore, cannot be read in language of s. 4 (a)(i) of Act nor could it be inferred so. deduction for asst. yrs. 1990-91 and 1991-92 has also to be allowed similarly as admissible deduction with similar direction as were given for allowing claim for asst. yrs. 1992-93 to 199 4 -95. 19. Second difference is with regard to allowability of interest paid under s. 201(1A). As aforesaid, assessee had also claimed interest paid by assessee as defaulter of non-payment of tax deductible at source. Here, Vice President (JM) held that assessee had committed default in discharge of its obligation of deduction of tax and payment to Government in respect of salary paid to expatriate employees as result of which it had to pay interest under s. 201(1A) of Act. No deduction according to him, would be permissible to assessee in respect of interest payable as assessee-in- default for its failure to discharge its statutory obligation of non-deduction of tax and non-payment thereof to Government in contrast to obligation of assessee as employer. AM, on other hand, expressed opinion that interest charged under s. 201(1A) is part of cost of employment to assessee and, accordingly, on same parity of reasoning of allowability of remuneration and taxes, interest, would also be permissible deduction. 20. As regards this claim, assessee s contention is that interest for late payment of TDS imposed under s. 201(1A) relating to deduction for all asst. yrs. 1990-91 to 199 4 -95, is part of remuneration, that it is therefore, additional cost and would be allowable on same reasoning as salary payment is allowable. learned counsel of assessee also submitted that it is compensatory in nature and should be allowed as deduction. Interest, according to him, would partake character of original sum which is paid late and when tax deducted at source itself is allowable deduction, interest cannot be disallowed. liability for interest has arisen in asst. yr. 1995-96 and, therefore, it should be allowed as deduction. He also referred to decision of Tribunal in case ofITO vs. 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. decision of Supreme Court in case ofHarshad Shantilal Mehta vs. Custodian & Ors. (1998) 231 ITR 871 (SC)is also relied upon. learned Departmental Representative, on other hand, supported orders of Revenue authorities and submitted that interest is for delay in discharging statutory obligation of assessee for payment of tax and, therefore, would not be allowable deduction. 21. parties were heard and their arguments were considered. term tax has been defined in DTA vide art. 3(d) of DTA to mean Indian tax or Netherlands tax as context requires, but does not include any amount which is payable in respect of any default or omission in relation to taxes to which this convention applies or which represents penalty imposed relating to this tax. By this definition, interest paid cannot be treated or equated to tax payment. Tax deducted at source is liability of assessee under s. 192/195 of Act. It was to be deducted by it at time of payment of salary to expatriate employees. assessee committed default and omission in relation to tax by not deducting same within prescribed time under IT Act. interest was thus payable for that default or omission in relation to tax deducted at source. Therefore, on combined reading of definition of tax in art. 3(d) of DTA in conjunction with provisions of ss. 192 and 195 of Act, interest, in my opinion, would not be allowable deduction. It has nothing to do with carrying on business of assessee. It may be that tax was deducted for and on behalf of employees but it was obligation of assessee itself under IT Act, 1961, to deduct tax within prescribed time and, therefore, it was personal liability of assessee-bank. In decision ofJubilee Investments & Industries Ltd. vs. Asstt. CIT & Ors. (1999) 155 CTR (Cal) 397 : (1999) 238 ITR 6 4 8 (Cal), Calcutta High Court dealt with scope of levy of penalty under s. 221 of Act for failure to deposit tax deducted at source in time and in that connection, Calcutta High Court observed that when assessee is found to be in default in depositing amount of TDS within time prescribed, he is liable to pay interest as well as he is liable to pay penalty and fact that he has suffered loss or financial stringency and, therefore, could not deposit amount in time has nothing to do with liability to deposit TDS. 22. Besides statutory obligation to deduct tax from remuneration and pay to Government, assessee in present case has undertaken to pay tax on behalf of employees and having not paid it failed to discharge obligation it had which but for such agreement of employment expatriate employees had to discharge. assessee has not discharged its obligation on behalf of expatriate employees insofar as taxes have not been paid as it had neither filed return nor was there any assessment made. interest liability in any case is not upon employees. It was on assessee itself for not complying with statutory obligation to deduct tax which was its own liability under Act because of provisions of ss. 192 and 195. This obligation is independent of obligation of assessee as agent of expatriate employees. Therefore, in my opinion, payment of interest does not partake character of remuneration package in respect of expatriate employees. decisions referred to in case ofMahalaxmi Sugar Mills Co. Ltd. vs. CIT (1980) 16 CTR (SC) 198 : (1980) 123 ITR 4 29 (SC)and in case ofPrakash Cotton Mills (P) Ltd. vs. CIT (1993) 111 CTR (SC) 389 : (1993) 201 ITR 68 4 (SC), in case ofCIT vs. Ahmedabad Cotton Mfg. Co. Ltd. & Ors. (1993) 115 CTR (SC) 4 1 : (199 4 ) 205 ITR 163 (SC)would have no application as these cases were under 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 income-tax and non-allowability of interest as deduction gets support from two decisions of Supreme Court in case ofSmt. Padmavati Jaikrishna vs. Addl. CIT (1987) 62 CTR (SC) 1 4 : (1987) 166 ITR 176 (SC). In case ofPadmavati Jaykrishna(supra), payment of interest was to Department on late payment of tax and annuity deposit and in that context Supreme Court held that in case where interest was paid on amount borrowed to pay taxes and annuity deposit assessee was meeting liability for income-tax and annuity deposit, it was personal one and dominant purpose for paying annuity deposit was not to earn income but to meet statutory liability for making deposit. expenditure was not, therefore, wholly and exclusively for purpose of earning income. Similarly, in this case, liability to deduct tax and pay same to Government was personal one imposed under IT Act on payer of salary and, therefore, interest paid by assessee for delayed payment thereof would also be personal liability of assessee-bank and failure to discharge that liability in time would not entitle assessee to claim deduction for such interest payment. 23. In case ofEast India Pharmaceuticals Ltd. vs. CIT (1998) 139 CTR (SC) 372 : (1997) 22 4 ITR 627 (SC), interest was paid on overdraft which was utilized for payment of income-tax and it was held to be not allowable as expenditure wholly and exclusively laid out for purpose of business. Again in case ofBharat Commerce & Industries Ltd. vs. CIT (1998) 1 4 5 CTR (SC) 3 4: (1998) 230 ITR 733 (SC), Supreme Court held that when interest is paid for committing default in respect of statutory liability to pay advance tax, amount paid and expenditure incurred in that connection is in no way connected with preserving or promoting business of assessee. Their Lordships held that interest levied on assessee under s. 139 of IT Act, 1961, for delay in filing return and under s. 215 for failure to pay advance tax upto statutory percentage are not allowable deduction as business expenditure under s. 37 of Act. 2 4 . It might be true that payment of salary and liability for payment of tax thereon are part of pay package or employment cost of assessee and that they are in nature of expenses wholly and exclusively for purpose of business of assessee but part of that liability has partaken character of statutory liability. That part is, that as employer assessee was under obligation under ss. 192 and 195 of Act to deduct tax and deposit same with Government of India. This statutory liability was personal liability of assessee and on failure to deduct that tax, assessee becomes assessee-in-default. Interest is paid for failure of discharging that liability under Act. interest, therefore, was levied upon assessee for failure in discharging personal liability and, therefore, cannot be allowed as deduction. fact that such tax deducted at source would ultimately be adjusted against liability of payee in computing its income-tax liabilities does not, in my opinion, convert liability of assessee and consequently, in my opinion, payment of interest under s. 201(1A) cannot be allowed as deduction. 25. third difference is regarding allowability of amount of Rs. 9,57,58,90 4 being operational loss claimed to have arisen on account of transaction in securities and is arising in appeal for asst. yr. 199 4 -95. assessee had claimed deduction of Rs. 9,57,58,90 4 being amount refunded to Punjab Housing Board (PHB) on account of investment made by them. payment of interest at rate of 17 per cent was also claimed separately. AO allowed both deductions but CIT(A) enhanced income of assessee by disallowing deduction for refund of Rs. 9,57,58,90 4 . facts of case are that assessee received sum of Rs. 10 crores from PHB, for investment by assessee, for period of 180 days subject to condition that money was to be invested in any Government securities, UTI o r tax-free bonds which can give with 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 money in specific securities. It was in course of investment of this money received, assessee issued cheque of Rs. 9,75,58,90 4 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 payment advice and cheque, to broker Shri N.K. Agarwal. As Shri. N.K. Agarwal failed to deliver said 17 per cent NPC Bonds, assessee sought information from Andhra Bank who vide their letter dt. 2nd June, 1992 informed that amount received was credited in account of Shri Hiten Dalal, as per instructions of Shri. N.K. Agarwal. 26. With advent of payment advice-cum-cheque in Indian banking, it is no longer cheque book which is used by large corporate account- holders. These cheque books are now replaced by packets of perforated computer friendly forms, used as continuous computer stationery. These are numbered advices. These are in two parts and can be separated by tearing off at perforated points top portion containing details of person issuing cheques like letterhead, with columns for name and address of person to whom cheque is issued, details of payment, and details of purposes for which it is issued; bottom portion being form for cheque itself. These forms are computer friendly and, while processing payment, details of payment are printed on top portion, and details necessary for cheque are printed on bottom portion. top portion is used as payment advice, while bottom portion, on being removed from aforesaid advice, works as cheque itself. This was system for transaction with Andhra Bank. cheque portion appeared to be in favour of Andhra Bank but top portion was used, as part of normally acceptable practice, to credit accounts of Hiten Dalal, one of central characters in several cases of security scams in this country. 27. Thereafter it seems that alternative security in 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 said Shri N.K. Agarwal. assessee accepted delivery though on understanding that same would be held as security pending delivery of originally contemplated purchase of 17 per cent NPC Bonds. When sent for registration of these 1 lakh IRFC Bonds in favour of assessee it was, however, refused on ground that said bonds have already been registered in name of Standard Chartered Bank. assessee made appeal against refusal but same was dismissed by Company Law Board vide order dt. 25th Aug., 199 4 . assessee thereafter filed appeal to Delhi High Court and that was transferred to Special Court and there also it was dismissed on 31st March, 1998. In meantime, assessee, it seems, settled claim of PHB by returning balance principal of Rs. 9,57,58,90 4 on 7th July, 1993 along with 17 per cent interest in year under consideration, i.e., after adjusting sum of Rs. 2 4 , 4 1,096 returned at time when it issued cheque in favour of Andhra Bank for purchase of NPC Bonds for Rs. 9,57,58,90 4 in March, 1992, and sum of Rs. 18 lakhs received from Shri N.K. Agrawal refunded to PHB thereafter. This payment of Rs. 9,57,58,90 4 and 17 per cent interest payment was claimed as loss. 2 8 . Vice President (JM) held that assessee had made investment in course of its business with Andhra Bank through broker Shri N.K. Agarwal. Andhra Bank credited amount received through Shri N.K. Agarwal in account of Shri Hiten Dalal as per instructions of Shri N.K. Agarwal. claim of assessee, on other hand, is that no such instructions were issued by assessee and cheques paid in name of Andhra Bank were issued for purchase of NPC Bonds on behalf of PHB. This fact is disputed by Andhra Bank. According to him, if at all assessee can b e said to have lost investment made through Shri N.K. Agarwal, its discovery was on receiving information from IRFC in June, 1992, informing that IRFC Bonds have already been transferred in name of Standard Chartered Bank. said date, according to him, fell in asst. yr. 1993-9 4 . Vice President (JM) held that refund to PHB was of their investment with assessee and payment of interest on such investment was rightly allowed as expenditure incurred for purpose of business. It is, according to him, like purchases being made from and goods having been sold to B and if B does not pay price of goods, it may amount to loss suffered by assessee but payment to for goods supplied will not amount to loss to assessee though loss to assessee on account of B s refusal to pay relates to goods supplied by A. According to him, in view of disputed facts, it cannot be said that assessee had suffered loss. He further observed that refund of principal and interest to investor, PHB, in any case is not event of loss. He, therefore, held that loss does not pertain to year under appeal. He, however, made it clear that this decision is without prejudice to right of assessee to claim loss, if any, (in year) in which it can be said to have been incurred. 29. AM, however, held that assessee is entitled to deduction and, according to him, decision of Supreme Court in case ofCIT vs. Nainital Bank (1966) 62 ITR 638 (SC)under which assessee had two options (i) to enforce its right strictly in accordance with law and thereby to lose goodwill it had built up among constituents, and (ii) to compensate constituent for loss suffered in securities scam, and maintain its business connections and goodwill. In choosing second alternative, as held by Supreme Court, assessee-bank, according to AM, laid out expenditure for purpose of its business and consequently, it would be abona fidebusiness expenditure eligible for deduction under s. 37(1) of Act. As regards finality of dispute pending with Andhra Bank, N.K. Agarwal and Hiten Dalal, he observed that firstly there is fallacy that it was loss incurred on behalf of PHB which is being claimed as deduction. According to him it was payment to PHB, which was warranted on account of commercial expediency rather than contractual obligations, which is being claimed as deduction. Secondly, on assuming that such possibility may have any relevance in this matter, he observed that even possibility of recovery has to be reasonable possibility, i.e., what reasonable person would expect in given circumstances. material on record, in his understanding, indicates that assessee-bank has been taken for ride by unscrupulous operators, misusing loopholes in system, and exploiting fact that transactions involving such huge amounts were entered into, perhaps as normal course in banking industry, without taking highest degree of safety measures and incorporating checks and balances as such, and but for this laxity inherent in normal banking practices, scams of kind which have become somewhat common in recent past could not have taken place. fact that matter is still pending before Special Courts set up for dealing with security scam cases, by itself, cannot imply that there are reasonable prospects of recouping loss, because, it is also well-known fact, perhaps as equally well-known as fact about existence of these Special Courts itself, that claims on these scamsters are several times 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 licence to assessee-bank for opening branch in Madras had again been decided to be kept in abeyance till such time as dispute on securities transactions between assessee-bank and Andhra Bank is resolved", assessee-bank has clearly given more importance to licence for Chennai branch rather than claim, whatever were its merits, on Andhra Bank. 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 money so refunded to PHB, according to him, constitutes loss, and is, accordingly, booked as expenditure, that same is beyond reasonable hope of recovery, and that chances of recouping loss are too remote to affect accounting treatment of loss. 30. assessee s contention is that it was business loss. It approached RBI in April, 1993, but they refused to interfere in matter. assessee was also refused permission vide RBI letter dt. 16th June, 1993, to open branch until dispute with Andhra Bank was settled. assessee s main claim is that matter was settled with PHB on 7th July, 1993 and that date falls within previous year relevant to asst. yr. 199 4 -95 and, therefore, it is allowable as deduction. It was also submitted that in order to avoid adverse publicity, assessee in business interests considered it prudent to settle claim and, therefore, in view of decision of Supreme Court in case ofNainital Bank(supra), it is allowable business loss. Reference was also made to CBDT Circular No. 35D wherein loss incidental to business is advised to be allowed in year in which it was discovered. Reference was also invited to decision of Gujarat High Court in case ofDinesh Mills Ltd. vs. CIT (2002) 173 CTR (Guj) 4 78 : (2002) 25 4 ITR 673 (Guj). He also referred to decision of Tribunal in case ofCama Motors (P) Ltd. vs. IAC (1987) 29 TTJ (Ahd) 4 52 : (1987) 21 ITD 6 4(Ahd)allowing claim of assessee after taking into consideration decision of Punjab and Haryana High Court in case ofLaxmi Ginning & Oil Mills vs. CIT (1971) 82 ITR 958 (P&H). In this case, it is held that claim should be allowed in year of theft and if any amount is recovered therefrom, it would be offered to tax. Revenue s case is that claim of assessee wassub judiceand it was not allowable on mere possibility of its non-recovery. According to Revenue, assessee has not suffered any loss in year under appeal and, therefore, deduction was not permissible. 31. assessee is in business of arranging investment for its clients. It is true that assessee was making investment specifically on behalf of PHB and it was bound to conduct business of customer as per directions given by him, or, in absence of such instructions, according to normal usage. assessee received sum of Rs. 10 crores from PHB, for investment by assessee, for period of 180 days not necessarily and specifically in investment of these 17 per cent NPC Bonds but with understanding and subject to condition that money was to be invested in any Government securities, UTI or tax-free bonds with minimum guaranteed return of 17 per cent. It was also with 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 investment of this money received that assessee issued cheque of Rs. 9,75,58,90 4 on 9th March, 1992, to Andhra Bank. It was for purchase of 17 per cent NPC Bonds @ Rs. 97 per bond plus accrued interest. assessee arranged investment. It however, fell down. assessee made another deal though stated to be as security for 1st deal in substitute in form of IRFC Bonds valued at Rs. 9,57,58,90 4 and also received sum of Rs. 18 lakhs representing difference in value of NPC Bonds and IRFC Bonds, on 18th March, 1992, but even these IRFC Bonds could also not be transferred to assessee-bank as same were already sold to Standard Chattered Bank. assessee pursued both matters further. 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 matter of N. K. Agarwal (is) stated to be still pending. By end of previous year relevant to asst. yr. 199 4 -95 both matters (were) pending adjudication. 32. 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 deal. These receipt of money and investment in bonds are two independent different transactions. other facts, i.e., refund of unused amount of Rs. 2 4 , 4 1,096 to PHB, receipt of Rs. 18 lakhs from N.K. Agarwal being difference between market value of IRFC Bonds and alternate investment in IRFC Bonds, though indicate common thread, i.e., business of assessee and its client PHB but all transactions are independent, one after other but not as integral part of same transaction. While making purchase of 17 per cent NPC Bonds, assessee was making investment as businessman though for and on behalf of customer, i.e., PHB. In my opinion, therefore, loss was incurred by assessee as such on its own account, and not on account of its client PHB, on whose behalf and specifically in whose name, assessee was trying to acquire securities. 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 RBI declined to issue licence for opening new branch office at Chennai by its letter dt. 16th June, 1993. It might be fact that within three weeks of this communication, assessee- bank entered into settlement with PHB but that does not have any bearing or influencing factor for settling issue with PHB. RBI s refusal or suspension of decision to issue licence was for 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 scase, therefore, is of no help to assessee, I, therefore, hold that refund of money to PHB was not loss to assessee. Loss, if any, which could be said to have been suffered by assessee was on account of decision to invest in NPC Bonds through Shri N.K. Agarwal. Here, broker Shri N.K. Agarwal had played mischief and consequently taken that upon himself by offering another security in IRFC Bonds. Andhra Bank has transferred money on instructions of Shri N.K. Agarwal, stated to be on behalf of assessee. That fact is disputed by assessee. assessee had not pursued matter vis-a-vis Andhra Bank. It had carried matter further accepting alternative security in form of IRFC Bonds, registration for which was refused on ground that they have already been registered in name of another bank. matter of registration of alternative security ended in 1998 whereas 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 assessee in year under consideration. 3 3 . In case ofDinesh Mills Ltd.(supra), assessee carried on business in textiles. It maintained mercantile system of accounting. It had incurred loss of Rs. 13, 4 ,000 on account of embezzlement by its employee between 29th Jan., 197 4 , and 26th April, 1976. assessee discovered loss during asst. yr. 1977-78 and claimed entire loss as deduction in that year. AO disallowed claim on ground that extent of loss remained indeterminate or unknown during assessment year in question and amount of actual loss could be known only when assessee entered into compromise decree with defaulter-employee in calendar year 1980. CIT(A) considered embezzlement in two parts-one which could reasonably b e estimated to be recoverable and other which could not be reasonably expected to be recoverable and ascertained position at end of previous year, i.e., 31st Dec., 1976. He held that assessee had reasonable hope of recovery for Rs. 7,20,000 while balance Rs. 6,20,000 was lost by assessee for all time to come and granted deduction thereof. Tribunal accepted that loss was incidental to business and upheld order of CIT(A). On reference, High Court held that in view of statement made on behalf of assessee to effect that no deduction had been allowed in any subsequent year, assessee would be entitled to deduction of loss during assessment year in question as this was year in which loss on account of embezzlement was, in fact, discovered. It set aside matter to Tribunal to ascertain allowability or otherwise of embezzlement loss in light of statement made on behalf of assessee. 3 4 . In case ofCama Motors (P) Ltd.(supra), Ahmedabad Bench of Tribunal was dealing with case of expenditure of Rs. 2,87,516 on purchase of four jeeps, which had been handed over to it on basis of order placed by executive engineer directly with supplier. assessee claimed that on or about 1st May, 1981, these jeeps were stolen and that it suspected that its sales manager was involved in theft. On police investigation, suspect was arrested and jeeps were recovered from him. Magistrate, however, found that jeeps were registered in names of outsiders, and hence ordered that they might be restored to registered owners. On appeal by assessee, High Court stayed Magistrate s order and directed that jeeps be placed in custody of assessee for safe keeping till final decision by Court. High Court also ordered that vehicles must be kept unused and that Magistrate should dispose of case before 31st Dec., 1982. dispute about ownership remained unsolved even till September, 1986. For asst. yr. 1982-83, assessee claimed amount of Rs. 2,87,516 as business loss, but claim was rejected by I C and CIT(A). High Court held that four jeeps lying with company under orders of Court were not property of company. They were not reflected in closing stock of company and were undergoing continuous deterioration being subjected to elements day in and day out. As against this, sum of Rs. 2,78,516 had gone out of coffers of company f o r purchase of four jeeps which had been handed over to executive engineer. It was not known as of today what company would recover as result of conclusion of legal proceedings and when. alleged accused was absconding. record did not state anything as to whether any money was recovered from him when his arrest was effected. In case company recovered anything by sale of four jeeps, amount might not be much because of considerable erosion in their value after lapse of time. In these circumstances, Tribunal held that claim merited allowance not only on basis of system of accounting being followed by it, but also on facts surrounding claim. 3 5 . In case ofLaxmi Ginning & Oil Mills(supra), case before Punjab and Haryana High Court, assessee sold certain quantity of oil to company for total value of Rs. 26,6 4 2. purchaser-company did not take delivery. assessee then sold that quantity of oil in open market at risk of purchaser and realized only sum of Rs. 20,572 incurring loss of Rs. 9,160 which was debited by him to "groundnut account" and credited for "claim in dispute account". assessee thereafter filed suit against company for recovery of said loss and ultimately obtained decree in 1962. In meantime, assessee claimed above loss in its return for asst. yr. 1953-5 4 . AO disallowed loss on ground that loss debited to trading account had not been finally settled, debit created in groundnut account cannot be allowed and added back same. CIT(A) and Tribunal upheld contention of AO. On reference, High Court held that loss was suffered by assessee in accounting year relevant to asst. yr. 1953-5 4 and if, as result of litigation, it was found entitled to less amount than amount claimed, difference could be included in assessable income of assessee for year during which final decision of litigation was made. Similarly, if assessee had been successful in obtaining entire amount of loss from company, amount could be included in income of assessee for year during which amount was actually recovered. pendency of litigation about loss suffered cannot militate against fact that loss was suffered by assessee during accounting year relevant to asst. yr. 1953-5 4 when company did not take delivery and assessee had sold goods in open market for lesser amount. All these cases could have helped assessee in present case if claim was made in appeal for asst. yr. 1993-9 4 when assessee got information that cheques issued for investment in NPC Bonds were diverted to account of Shri Hiten Dalal or when alternative security in IRFC Bonds was found to be registered in some other bank s name. Both these dates were falling in asst. yr. 1993-9 4 and consequently, assessee cannot claim loss in year under consideration even on basis of three decisions referred to above. In view of above, in my opinion, CIT(A) was right in disallowing claim of assessee. 36. matter will now go to Division Bench which heard appeals for passing majority order. *** ABN AMRO BANK N.V. v. JOINT COMMISSIONER OF INCOME TAX