ITAT Allows Rs.1,094.14 Cr Loss To Standard Chartered Bank Arising From Securities Scam As Business Loss

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has allowed the loss of Rs. 1,094.14 crore to Standard Chartered Bank arising from a securities scam as a business loss.

The bench of Rahul Chaudhary (Judicial Member) and Prashant Maharishi (Accountant Member) has observed that the loss suffered by the assessee was a result of both the nature of the arrangements the assessee had with the brokers and the misconduct on the part of the employees or ex-employees of the assessee. The loss was suffered by the assessee during the normal course of business.

The assessee is a foreign corporate body, a bank incorporated by the Royal Charter under the laws of England and Wales and registered in India under the Companies Act, 1956. The assessee was engaged in the business of banking, financial services, and allied activities in India and filed a return of income for the assessment year 1993–94 on December 29, 1993, declaring a loss of INR 1,645.85 crore. An assessment order was passed under Section 143(3) at a net loss of INR 448.74 crore after making various additions and disallowances.

In the return of income, the assessee claimed a loss of Rs. 1,427.59 crore on account of a securities transaction scam. During the assessment proceedings, the assessee claimed that during the security scam, various payments were made by the assessee for the purchase of securities that were never delivered to the assessee. Similarly, the assessee had sold several securities but did not receive the sale consideration.

The amounts represented loss suffered by the assessee during the normal course of business, which was allowable as a deduction under Section 28. Alternatively, it was contended by the assessee that the assessee should be allowed a deduction for the amount under Section 36(1)(vii) for bad debts.

The assessee contended that the assessee bank was a victim of massive fraud perpetrated by a broker in collusion with the employees of the assessee, resulting in the embezzlement of funds. The loss thus suffered by the assessee was allowable as a deduction under Section 28.

The CIT (A) allowed a deduction for losses of Rs. 756.96 crores, which was reduced by recoveries of Rs. 110.53 crores and losses written off by the assessee of Rs. 867.50 crores. The balance claimed for deduction of losses amounting to Rs. 337.18 crore was not allowed by the CIT (A) on the ground that the same was either not written off during the relevant previous year or could not be considered as having become final.

The ITAT held that transactions were regular and undertaken during the ordinary course of business. The genuineness of the loss suffered by the assessee cannot be doubted in view of the independent assessment of gross exposure made by the RBI-appointed committee in the wake of the securities scam.

The ITAT upheld the CIT(A)’s approach of reducing the losses written off by recoveries made and not allowing deductions for losses that were not written off or did not become final.

Case Title: Deputy Director of Income Tax Versus Standard Chartered Bank

Case No.: ITA No. 884/MUM/2003

Date: 27.07.2023

Counsel For Appellant: Soumendu Kumar Dash

Counsel For Respondent: P. J. Pardiwala

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