THE ACIT (I.T) 1(2), V. M/S. THE DEVELOPMENT BANK OF SINGAPUR LTD.,

ITA 1787/MUM/2004

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48532 (ITAT-MUMBAI)
• Duration Of Justice: 7 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-04-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 29-12-2010
• Assessment Year: 1999-2000
• Appeal Filed On: 18-03-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARSI PRASAD
• Keywords: Earning of tax free income
• Section: 14A; 37

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL L BENCH, MUMBAI BEFORE SHRI D. MANMOHAN (VP) AND SHRI RAJENDRA SIN GH(AM) ITA NO.1787/M/2004 ASSESSMENT YEAR 1999-2000 ITA NO.6514/M/2004 ASSESSMENT YEAR 2000-01 ITA NO.2269/M/2005 ASSESSMENT YEAR 2001-02 THE ADIT(IT) 1(2), ROOM NO.113, M/S.THE DEVELOPMEN T BANK OF SINGAPORE SCINDIA HOUSE, BALLARD ESTATE 122, MAKER CHAMBER IV, NARIMAN POINT MUMBAI 400 001. MUMBAI 400 021. PAN : AAACT 4652 J APPELLANT RESPONDENT REVENUE BY : SHRI ARSI PRASAD ASSESSEE BY : SHRI P.J.PARDIWALLA SHRI NISHANT THAKKAR ORDER PER RAJENDRA SINGH THESE APPEALS BY THE REVENUE ARE DIRECTED AGAINST DIFFERENT ORDERS DATED 25.11.2003, 25.6.2004 AND 25.12.2004 OF CIT(A) FOR ASSESSMENT YEARS 1999- 2000, 2000-01 AND 2001-02 RESPECTIVELY. AS DISPUTES RAISED IN THESE APPEALS ARE MOSTLY COMMON, THESE ARE BEING DISPOSED OFF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE FIRST DISPUTE WHICH IS COMMON IN ALL THE APP EALS IS REGARDING DISALLOWANCE OF HEAD OFFICE EXPENSES. THE ASSESSEE HAD CLAIMED EXPENDITURE OF RS.91,37,305/-, RS. 1,03,54,000/- AND RS. 71,08,008 /-INCURRED BY THE HEAD OFFICE OF THE BANK WHILE COMPUTING TOTAL INCOME. TH E EXPENDITURE MAINLY 2 CONSISTED OF SALARIES TO EXPATRIATE EMPLOYEES WORKI NG IN INDIA. THE EXPENDITURE ALSO INCLUDED EXPENSES ON POSTS, TELEPHONE, TELEX, COURIER, INTERNAL AUDIT, INFORMATION TECHNOLOGY, COMPUTER MAINTENANCE ETC. T HE ASSESSEE SUBMITTED BEFORE AO THAT THESE EXPENSES HAD BEEN INCURRED BY THE HEAD OFFICE SPECIFICALLY FOR THE OPERATIONS OF THE INDIAN BRANCHES AND WERE SUPPORTED BY THE STATUTORY AUDIT REPORT. THE ASSESSEE ALSO SUBMITTED THAT BILL S AND VOUCHERS WERE AVAILABLE WHICH WOULD BE PRODUCED AS AND WHEN REQUI RED. THE AO HOWEVER OBSERVED THAT THESE EXPENSES HAD NOT BEEN DEBITED T O THE PROFIT AND LOSS ACCOUNT BUT WERE CLAIMED AS INCURRED SPECIFICALLY F OR THE INDIAN OPERATIONS CORRECTNESS OF WHICH COULD NOT BE VERIFIED. AO ALSO REFERRED TO THE DECISION OF THE TRIBUNAL IN CASE OF AMERICAN EXPRESS BANK LTD. VS DECIT IN ITA NO.7072/M/1990 IN WHICH IT WAS HELD THAT SUCH EXPEN SES HAVE TO BE COVERED UNDER SECTION 44C. AO THEREFORE DISALLOWED THE EXPE NSES AND OBSERVED THAT THE NECESSARY DEDUCTION COULD BE CLAIMED UNDER SECTION 44C. 2.1 THE ASSESSEE DISPUTED THE DECISION OF THE AO A ND SUBMITTED BEFORE CIT(A) THAT THE EXPENDITURE HAD BEEN INCURRED EXCLU SIVELY FOR RUNNING THE INDIAN BRANCHES. IT WAS POINTED OUT THAT EXPATRIATE OFFICERS WERE RENDERING SERVICES IN INDIAN BRANCHES AND EXPENSES WERE DIREC TLY RELATABLE TO THE INDIAN OPERATIONS. THE ASSESSEE REFERRED TO THE JUDGMENT O F HONBLE HIGH COURT OF MUMBAI IN CASE OF EMIRATES COMMERCIAL BANK (262 ITR 55) IN WHICH IT WAS HELD THAT ONLY COMMON EXPENSES COULD BE CONSIDERED FOR L IMITATION UNDER SECTION 44C AND EXPENDITURE EXCLUSIVELY INCURRED FOR THE IN DIAN BRANCHES BY THE HEAD OFFICE HAS TO BE ALLOWED UNDER SECTION 37 OF THE IN COME-TAX ACT. CIT(A) WAS SATISFIED BY THE ARGUMENTS ADVANCED AND FOLLOWING T HE JUDGMENT OF HONBLE HIGH COURT OF MUMBAI IN CASE OF EMIRATES COMMERCIAL BANK (SUPRA) ALLOWED THE 3 CLAIM OF THE ASSESSEE AGGRIEVED BY WHICH THE REVENU E IS IN APPEAL BEFORE THE TRIBUNAL. 2.2 BEFORE US THE LEARNED AR FOR THE ASSESSEE AT TH E OUTSET POINTED OUT THAT THE SAME ISSUE HAD BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y.1997-98 IN ITA NO.122/M/2001 AND THE CLAIM OF T HE ASSESSEE HAD BEEN ALLOWED BY THE TRIBUNAL. THE TRIBUNAL ALSO ALLOWED THE SIMILAR CLAIM IN ASSESSEES OWN CASE IN A.YRS.1995-96, 1996-97 AND 1998-99 IN I TA NOS.5272 TO 5274 FOLLOWING THE EARLIER DECISION IN A.Y.1997-98. THE LEARNED AR ALSO POINTED OUT THAT THE DECISION OF THE TRIBUNAL IN A.Y.1996-97 HA D BEEN CONSIDERED BY THE HONBLE HIGH COURT OF MUMBAI WHO ALLOWED THE EXPENS ES ON ACCOUNT OF STAFF COST AND ALLOWABILITY OF OTHER EXPENDITURE WAS REST ORED TO THE AO FOR FRESH CONSIDERATION. THE LEARNED DR PLACED RELIANCE ON TH E ORDER OF AO. 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF EXPENDITURE IN CURRED BY THE HEAD OFFICE IN RELATION TO THE INDIAN BRANCHES. THE EXPENDITURE CO NSISTED OF MAINLY OF SALARY TO EXPATRIATE EMPLOYEES WORKING IN INDIA BUT ALSO I NCLUDED EXPENSES SUCH AS POSTAGE, TELEPHONE, TELEGRAM, INTERNAL AUDIT, COURI ER AND COMPUTER ETC. WE FIND THAT THE SAME ISSUE HAD BEEN CONSIDERED BY THE TRIB UNAL IN ASSESSEES OWN CASE IN A.Y.1997-98 (SUPRA) IN WHICH THE TRIBUNAL OBSERV ED THAT AO HAD DISALLOWED THE CLAIM FOLLOWING THE DECISION OF THE TRIBUNAL IN CASE OF AMERICAN EXPRESS BANK WHICH WAS SUBSEQUENTLY REVERSED BY THE HONBLE HIGH COURT OF MUMBAI IN CASE OF EMIRATES COMMERCIAL BANK (SUPRA). THE TRIBU NAL THEREFORE ALLOWED THE CLAIM UNDER SECTION 37 OF THE INCOME-TAX ACT. FOLLO WING THE SAID DECISION THE CLAIM WAS ALSO ALLOWED BY THE TRIBUNAL IN A.YRS.199 5-96, 1996-97 AND 1998-99 (SUPRA). THE DECISION OF THE TRIBUNAL IN A.Y. 1996- 97 HAD COME FOR 4 CONSIDERATION BEFORE THE HONBLE HIGH COURT OF MUMB AI IN INCOME-TAX APPEAL NO.2386/2008 IN WHICH THE HIGH COURT ALLOWED THE CL AIM RELATING TO SALARY TO EXPATRIATE EMPLOYEES AND OTHER EXPENSES WERE REFERR ED BACK TO THE AO FOR FRESH CONSIDERATION. THE FACTS IN THE PRESENT APPEA LS ARE IDENTICAL. THOUGH THE DETAILS OF OTHER EXPENSES HAD BEEN FILED BEFORE AO THE SAME HAD NOT BEEN EXAMINED. THEREFORE IN OUR VIEW FOLLOWING THE JUDGM ENT OF HONBLE HIGH COURT IN A.Y.1996-97 (SUPRA) THE EXPENSES RELATING TO STA FF COST ARE ALLOWED AND OTHER EXPENSES ARE RESTORED TO THE AO FOR FRESH ORD ER AFTER NECESSARY EXAMINATION AS TO WHETHER THE SAME WERE INCURRED EX CLUSIVELY FOR THE INDIAN BRANCHES. 3. THE SECOND DISPUTE IS REGARDING ADDITIONS ON ACC OUNT OF REVALUATION OF OUTSTANDING FOREIGN EXCHANGE CONTRACTS. THE ASSESSE E DURING THE COURSE OF BUSINESS HAD ENTERED INTO CERTAIN FORWARD FOREIGN E XCHANGE CONTRACTS. AS PER THE METHOD OF ACCOUNTING BEING FOLLOWED BY THE ASSE SSEE, THESE CONTRACTS WHICH HAD NOT EXPIRED DURING THE YEAR HAD BEEN REVA LUED AT THE END OF THE ACCOUNTING PERIOD RESULTING INTO NOTIONAL PROFIT TO THE TUNE OF RS.1,36,25,321/-, RS.56,99,519/- AND RS.16,33,348/- RESPECTIVELY FOR THE ASSESSMENT YEARS 1999-2000 TO 2001-02. THESE NOTIONAL PROFITS WERE A DDED BY THE AO TO THE TOTAL INCOME. IN APPEAL CIT(A) REFERRED TO THE JUDG MENT OF HONBLE HIGH COURT OF MADRAS IN CASE OF INDIAN OVERSEAS BANK (154 ITR 446) IN WHICH IT WAS HELD THAT NOTIONAL LOSS ARISING ON ACCOUNT OF IMMATURE F ORWARD FOREIGN EXCHANGE CONTRACT WAS NOT ALLOWABLE AS DEDUCTION. FOLLOWING THE SAID JUDGMENT CIT(A) HELD THAT NOTIONAL PROFIT WAS NOT REQUIRED TO BE AS SESSED. AGGRIEVED BY THE SAID DECISION THE REVENUE IS IN APPEAL BEFORE THE TRIBUN AL. 5 3.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORDS AND CONSIDERED THE MATTER CAREFULLY. WE FIND THAT THE ISSUE RAISED IN THIS GROUND IS SETTLED BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN CA SE OF DCIT VS BANK OF BAHRAIN AND KUWAIT. IN THE SAID CASE THE SPECIAL BENCH HELD THAT WHERE FORWARD CONTRACT IS ENTERED INTO TO SELL FOREIGN CURRENCY AT AN AGRE ED PRICE ON A FUTURE DATE FALLING BEYOND THE LAST DAY OF ACCOUNTING PERIOD, T HE LOSSES INCURRED ON ACCOUNT OF REVALUATION OF CONTRACT ON THE LAST DAY OF ACCOU NTING PERIOD I.E. BEFORE THE DATE OF MATURITY OF THE CONTRACT HAS TO BE ALLOWED AS DEDUCTION. THEREFORE FOLLOWING THE SAID DECISION OF THE SPECIAL BENCH, A NY PROFIT ARISING ON ACCOUNT OF REVALUATION ON THE LAST DAY OF ACCOUNTING PERIOD HA S TO BE TREATED AS INCOME OF THE ASSESSEE. WE THEREFORE SET ASIDE THE ORDER OF C IT(A) AND CONFIRM THE ADDITION MADE BY THE AO. 4. THE THIRD DISPUTE WHICH ALSO COMMON IN ALL THE A PPEALS IS REGARDING ALLOWABILITY OF EXEMPTION OF THE INTEREST INCOME FR OM TAX FREE BONDS UNDER SECTION 10(15)(IV) OF THE INCOME-TAX ACT. THE FACTS IN BRIEF ARE THAT THE ASSESSEE HAD INVESTED A SUM OF RS.7 CRORES IN THE T AX FREE BONDS OF NATIONAL HOUSING BANK ON 6.3.1998. THE ASSESSEE HAD THUS EAR NED THE TAX FREE INTEREST INCOME OF RS.66,50,004/- IN EACH OF THE YEARS UNDER CONSIDERATION. THE AO IN THE ASSESSMENT ORDER OBSERVED THAT IT WAS THE NET I NTEREST INCOME AND NOT THE GROSS INTEREST INCOME WHICH COULD BE EXEMPTED UNDER SECTION 10(15)(IV). HE REFERRED TO THE PROVISIONS OF SECTION 10(33) WHICH PROVIDED FOR EXEMPTION OF INCOME BY WAY OF DIVIDEND. IT WAS OBSERVED BY HIM T HAT ONLY THE INCOME FROM DIVIDEND WAS EXEMPT WHICH WOULD MEAN THAT ONLY THE NET DIVIDEND INCOME AFTER EXCLUDING THE EXPENSES. THE AO NOTED THAT THE ASSESSEE HAD BOTH BORROWED AND OWN FUNDS WHICH WERE MIXED UP. THE ASS ESSEE COULD NOT PROVE THAT OWN FUNDS WERE USED IN MAKING THE INVESTMENT. THE AO THEREFORE 6 ATTRIBUTED THE INTEREST EXPENSE TO THE TAX FREE INT EREST INCOME ON THE AVERAGE RATE. IT WAS OBSERVED BY HIM THE AVERAGE RATE OF IN TEREST ON BORROWINGS BY THE ASSESSEE WAS AT 8.45% AND THEREFORE AT THAT RATE HE ALLOCATED THE INTEREST TO THE INVESTMENT AT RS.59,15,000/- IN AUGUST 2000 AND GRANTED EXEMPTION ONLY IN RESPECT OF BALANCE INTEREST INCOME OF RS.7,35,00 4 (6650004 5915000) SIMILAR DISALLOWANCES WERE ALSO MADE WHICH WERE RS. 18,34,000 IN A.Y.2000-01 AND RS.12,44,662/- IN A.Y.2001-02. THE ASSESSEE DIS PUTED THE DECISION OF THE AO AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE HA D INVESTED RS.7 CRORES IN TAX FREE BONDS ON 6.3.98. IT WAS POINTED OUT THAT A S ON 31.3.98 THE ASSESSEE HAD OWN CAPITAL OF RS.49.53 CRORES AND RESERVE OF R S.6.49 CRORES AND THEREFORE NO BORROWED FUNDS WERE UTILIZED. IT WAS ALSO POINTE D OUT THAT CIT(A) IN ASSESSMENT YEAR 1998-99 HAD CONSIDERED THE SAME ISS UE AND HELD THAT THERE WAS NO NEXUS ESTABLISHED BETWEEN BORROWINGS AND INV ESTMENTS AND THEREFORE THE PROVISIONS OF SECTION 14A WERE OF NO HELP TO TH E REVENUE. THE DEDUCTION WAS THEREFORE ALLOWED AS CLAIMED BY THE ASSESSEE. C IT(A) WAS SATISFIED BY THE SUBMISSIONS MADE AND ALLOWED THE CLAIM OF THE ASSES SEE AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 4.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUBMI TTED THAT UNDER THE PROVISIONS OF SECTION 10(15)(IV) THE INTEREST PAYAB LE WAS EXEMPT AND NOT THE INCOME FROM INTEREST AND THEREFORE THE AO WAS NOT C ORRECT IN EXEMPTING ONLY THE NET EXEMPT INCOME. RELIANCE WAS PLACED ON THE D ECISION OF THE TRIBUNAL IN CASE OF JCIT VS BRITISH BANK OF MIDDLE EAST IN ITA NO.4908/M/2000. AS REGARDS THE APPLICABILITY OF THE PROVISIONS OF THE SECTION 14A IT WAS SUBMITTED THAT THE INVESTMENT HAD BEEN MADE ON 26.3.1998 AND CIT(A) IN A.Y.1998-99 HAD GIVEN A CLEAR FINDING THAT THERE WAS NO NEXUS BETWEEN THE BORROWINGS AND THE INVESTMENT AND THE CLAIM OF THE ASSESSEE WAS ALLOWE D IN FULL. DEPARTMENT HAD 7 NOT BEEN FILED ANY APPEAL AGAINST THE ORDER OF CIT( A). THEREFORE ONCE THE SAME INVESTMENT WAS EXPLAINED OUT OF OWN FUND IN A.Y.199 8-99, NO INTEREST EXPENSES COULD BE ATTRIBUTED TO THE INVESTMENTS IN THE SUBSEQUENT YEARS. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN CASE OF SRIDEV ENTERPRISES (192 ITR 165). IT WAS AC CORDINGLY URGED THAT THE ORDER OF CIT(A) SHOULD BE UPHELD. THE LEARNED DR ON THE OTHER HAND PLACED RELIANCE ON THE ORDER OF AO. 4.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS WHETHER THE ENTIRE INTERE ST FROM TAX FREE BONDS SHOULD BE EXEMPTED UNDER SECTION 10(15)(IV) OR ONLY THE NE T INTEREST INCOME AFTER EXCLUDING THE EXPENSES ATTRIBUTABLE TO THE EARNING OF INTEREST INCOME. THIS ISSUE HAS CLEARLY BEEN CONSIDERED BY THE TRIBUNAL I N CASE OF JCIT VS BRITISH BANK OF MIDDLE EAST IN ITA NO.4908/M/2000 IN WHICH THE T RIBUNAL NOTED THAT WHAT WAS EXEMPT UNDER SECTION 10(15)(IV) WAS THE INTERES T PAYABLE AND NOT INCOME BY WAY OF INTEREST AND THEREFORE THE GROSS INTEREST HAD TO BE EXEMPTED. RESPECTFULLY FOLLOWING THE SAID DECISION WE HAVE TO HOLD THAT GROSS INTEREST WILL BE ELIGIBLE FOR DEDUCTION UNDER SECTION 10(15)(IV). AS REGARDS THE APPLICABILITY OF SECTION 14A TO WHICH OBLIQUE REFERENCES HAVE BEE N MADE BY THE AO IN SOME OF THE YEARS, WE FIND THAT THIS ASPECT HAD BEEN CON SIDERED BY THE CIT(A) IN A.Y.1998-99 WHO GAVE A CLEAR FINDING THAT THERE WER E NO NEXUS BETWEEN BORROWED FUNDS AND THE INVESTMENT. HE THEREFORE ALL OWED THE CLAIM FULLY IN A.Y.1998-99 AND THE SAID DECISION OF THE CIT(A) WAS ACCEPTED BY THE REVENUE. THE INTEREST INCOME UNDER CONSIDERATION IN THESE YE ARS IS IN RESPECT OF THE SAME INVESTMENT MADE IN A.Y.1998-99 AND THEREFORE T HERE BEING A FINDING THAT THE INVESTMENT IN A.Y.1998-99 WAS OUT OF OWN FUND N O INTEREST EXPENDITURE CAN BE ATTRIBUTED TO THE EARNING OF INCOME FROM THE SAM E INVESTMENT IN THESE 8 YEARS. THIS VIEW GETS SUPPORT FROM THE JUDGMENT OF HONBLE HIGH COURT OF KARNATAKA IN CASE OF SRIDEV ENTERPRISES (SUPRA) IN WHICH THE HONBLE HIGH COURT HELD THAT NATURE AND STATUS OF THE INVESTMENT ON TH E FIRST DAY OF THE ACCOUNTING YEAR WAS THE SAME AS ON THE LAST DAY OF PREVIOUS YE AR AND IF IN THE PREVIOUS YEAR, THE SAME WAS EXPLAINED OUT OF OWN FUND, THE R EVENUE COULD NOT BE PERMITTED TO TAKE A DIFFERENT STAND IN THE SUBSEQUE NT YEARS. THEREFORE EVEN IF THE PROVISIONS OF SECTION 14A APPLIED, NO DISALLOWA NCE COULD BE MADE. WE ACCORDINGLY SEE NO INFIRMITY IN THE ORDER OF CIT(A) ALLOWING THE CLAIM OF THE ASSESSEE AND THE SAME IS THEREFORE UPHELD. 5. THE FOURTH DISPUTE WHICH IS RELEVANT ONLY FOR A. Y.1999-2000 IS REGARDING DISALLOWANCE OF RS.26,25,000/- BEING THE DIMINUTION IN THE VALUE OF INVESTMENT. AO NOTED THAT THE ASSESSEE HAD MADE PROVISIONS OF R S.26,25,000/- ON ACCOUNT OF DIMINUTION IN THE IN THE VALUE OF INVESTMENTS. T HE AO DISALLOWED THE SAME WITHOUT GIVING ANY REASON. IN APPEAL THE ASSESSEE S UBMITTED THAT THE PROVISIONS HAD BEEN MADE IN COMPLIANCE WITH RBI GUI DELINES WITH RESPECT PRIORITY SECTOR BONDS. THE CLAIM WAS THEREFORE ALLO WABLE. THE ASSESSEE PLACED RELIANCE ON THE JUDGMENT OF HONBLE HIGH COURT OF M UMBAI IN CASE OF CIT VS BANK OF BARODA (262 ITR 334) AND SOME OTHER JUDGMEN TS. CIT(A) WAS SATISFIED BY THE EXPLANATION GIVE AND ALLOWED THE CLAIM OF TH E ASSESSEE AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 5.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE SUBMI TTED THAT THE ISSUE WAS COVERED BY THE JUDGMENT OF HONBLE HIGH COURT OF MU MBAI IN CASE OF CIT VS BANK OF BARODA (SUPRA) WHICH HAD BEEN FOLLOWED BY C IT(A) AND THEREFORE ORDER OF CIT(A) SHOULD BE CONFIRMED. THE LEARNED DR ON TH E OTHER HAND SUBMITTED 9 THAT THE CIT(A) HAD TREATED THE INVESTMENT AS STOCK IN TRADE WHICH WAS NOT CORRECT. HE PLACED RELIANCE ON THE ORDER OF AO. 5.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF LOSS ARISING ON ACCOUNT OF DIMINUTION IN THE VALUE OF INVESTMENT. WE FIND THAT THE SAME ISSUE HAD BEEN CONSIDERED BY THE HONBLE HIGH COURT OF MUMBAI IN C ASE OF CIT VS BANK OF BARODA (SUPRA) IN WHICH THE ASSESSEE HAD BEEN VALUI NG THE INVESTMENT AT COST OR MARKET WHICHEVER IS LOWER AND IN THAT PARTICULAR YEAR THE ASSESSEE HAD INCURRED LOSS WHICH WAS CLAIMED AS DEDUCTION. THE H IGH COURT ALLOWED THE CLAIM. THE FACTS IN THE CASE OF THE ASSESSEE ARE ID ENTICAL. THEREFORE RESPECTFULLY FOLLOWING THE SAID JUDGMENT WE SEE NO INFIRMITY IN THE ORDER OF CIT(A) AND CONFIRMED THE SAME. 6. THE FIFTH DISPUTE WHICH IS ALSO RELEVANT ONLY FO R A.Y.1999-2000 IS REGARDING ALLOWABILITY OF COMPENSATORY INTEREST OF RS.24,007/- PAID BY THE ASSESSEE TO RBI FOR NOT MAINTAINING THE PROPER BALA NCES. THE AO DISALLOWED THE SAME AS BEING PENAL IN NATURE. IN APPEAL THE ASSESS EE SUBMITTED THAT THE INTEREST HAD BEEN CHARGED FOR SHORTFALL IN CRR MAIN TAINED BY THE BANK IN AUGUST/ SEPTEMBER 1995. THE ASSESSEE HAD THEREFORE TO PAY INTEREST WHICH WAS COMPENSATORY IN NATURE AND HAS TO BE ALLOWED. I T WAS POINTED OUT THAT UNDER THE PROVISIONS OF SECTION 43(3) OF THE RBI AC T, PENAL INTEREST OF 3% ABOVE THE BANK RATE WAS PAYABLE ON THE AMOUNT BY WH ICH SUCH BALANCE WITH THE BANKS FELL SHORT OF THE PRESCRIBED MINIMUM BALA NCE AND IF THE SHORTFALL CONTINUED IN THE NEXT FORTNIGHT, THE PENAL INTEREST INCREASED TO 5%. THE LEARNED AR SUBMITTED THOUGH THE WORD USED WAS PENA L THE NATURE WAS ACTUALLY COMPENSATORY. CIT(A) REFERRED TO THE JUDGM ENT OF HONBLE SUPREME 10 COURT IN CASE OF PRAKASH COTTON MILLS VS CIT (201 I TR 64) IN WHICH IT WAS HELD THAT IN ORDER TO UNDERSTAND THE TRUE NATURE OF PAYM ENT BY WAY OF DAMAGES/ PENALTY, PROVISIONS OF THE STATUTE HAVE TO BE EXAMI NED TO FIND OUT WHETHER THE PAYMENT IS COMPENSATORY OR PENAL. HE ALSO REFERRED TO THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF MAHALAKSHMI SUGAR MILLS CO . VS CIT (122 ITR 429) IN WHICH IT WAS HELD THAT INTEREST PAID UNDER A STATUT E COULD NOT BE DESCRIBED AS PENALTY FOR INFRINGEMENT OF LAW. CIT(A) ACCORDINGLY DELETED THE ADDITION AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL. 6.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABI LITY OF INTEREST PAID BY THE ASSESSEE TO RBI FOR NOT MAINTAINING THE DAILY AVERA GE BALANCE. WE FIND THAT PROVISIONS OF SECTION 43(3) OF RBI ACT ITSELF PROVI DE FOR PAYMENT OF INTEREST IN CASE OF SHORTFALL FOR NOT MAINTAINING THE MINIMUM B ALANCES BY NOT MAINTAINING THE CRR THE ASSESSEE HAD DERIVED SOME ADVANTAGE FOR WHICH IT HAD TO PAY COMPENSATORY INTEREST. THEREFORE IN OUR VIEW NATURE OF INTEREST EVEN IF IT HAD BEEN REFERRED TO AS PENAL HAS TO BE CONSIDERED AS C OMPENSATORY IN NATURE. JUDGMENT OF HONBLE SUPREME COURT IN CASE OF MAHALA KSHMI SUGAR MILLS CO. VS CIT (SUPRA) ALSO SUPPORTS THE CASE OF THE ASSESSEE. WE THEREFORE SEE NO INFIRMITY IN THE ORDER OF CIT(A) AND THE SAME IS AC CORDINGLY UPHELD. 7. IN THE RESULT ALL THE APPEALS OF THE REVENUE ARE PARTLY ALLOWED. 8. THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 20.04.2011. SD/- SD/- ( D.MANMOHAN) ( RAJENDRA SINGH ) VICE PRESIDENT ACCOUNTANT MEMBER DATE : 20.04.2011 AT :MUMBAI 11 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), MUMBAI CONCERNED 4. THE CIT, MUMBAI CITY CONCERNED 5. THE DR L BENCH, ITAT, MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ALK