2003 (3) TMI 68 - HC - Income Tax

Held that Tribunal erred in holding that the interest received by the bank on the sale of Government securities held by it is assessable to tax as income from business and not as interest on securities - Held that Tribunal erred in holding that the discount on treasury bills is assessable as income from business and not as interest on securities ? - Tribunal was not right in law in holding that the expenditure incurred on repairs and maintenance of flats owned by the assessee and used for the residence of employees is not perquisite within the meaning of section 40A(5) of the Income-tax Act - Tribunal was not right in law in holding that the expenditure incurred by way of payment of ground rent, rates and taxes and society s charges in respect of the premises owned by the assessee and used for the purpose of residence of employees is not to be taken into account for the purpose of disallowance under section 40A(5)

Issues Involved:
1. Taxability of interest received by the bank on the sale of Government securities.
2. Taxability of discount on treasury bills.
3. Expenditure on repairs and maintenance of flats used for employees' residence as perquisite.
4. Expenditure on ground rent, rates, taxes, and society charges for employees' residence as perquisite.
5. Application of section 40A(5) to expenditure apportioned under different heads.
6. Apportionment of expenses deductible from 'interest on securities' under section 20(1)(i).

Issue-wise Detailed Analysis:

1. Taxability of Interest on Sale of Government Securities:
The Tribunal held that the interest received by the bank on the sale of Government securities is assessable as 'income from business' and not as 'interest on securities'. The court noted that there was no evidence regarding the nature of the Government securities involved. Consequently, the court could not apply the ratio of the judgment in American Express International Banking Corporation v. CIT. The court found no reason to distinguish this case from Citibank v. CIT and answered the question in favor of the assessee, affirming that the interest is assessable as 'income from business'.

2. Taxability of Discount on Treasury Bills:
Similarly, the Tribunal held that the discount on treasury bills is assessable as 'income from business' and not as 'interest on securities'. The court again relied on the absence of specific evidence about the nature of the securities and followed the precedent set in Citibank v. CIT. The question was answered in favor of the assessee.

3. Expenditure on Repairs and Maintenance of Flats as Perquisite:
The Department argued that expenditure on repairs and maintenance of flats owned by the assessee and used for employees' residence constitutes a perquisite under section 40A(5). The court examined section 40A(5)(a)(ii), which deals with expenditure resulting in perquisites or in respect of assets used by employees. The court found that the total expenditure, including repairs and maintenance, should be considered for disallowance under section 40A(5). The court relied on the precedent set in Lubrizol India Ltd. v. CIT and answered the question in favor of the Department.

4. Expenditure on Ground Rent, Rates, Taxes, and Society Charges as Perquisite:
The Department contended that such expenditures should be considered under section 40A(5). The court held that these expenses, including ground rent, municipal taxes, and society charges, must be taken into account for disallowance under section 40A(5). The court reiterated the rationale from Lubrizol India Ltd. v. CIT and answered the question in favor of the Department.

5. Application of Section 40A(5) to Expenditure Apportioned Under Different Heads:
The Department argued that section 40A(5) should apply to the total expenditure incurred by the banking company, including expenses apportioned under different heads. The court found that section 40A(5) imposes a limit on deductible expenses but should not be applied to the total expenditure indiscriminately. The court answered the question in favor of the assessee, stating that section 40A(5) should apply only to expenses apportioned under the head 'Profits and gains of business or profession'.

6. Apportionment of Expenses Deductible from 'Interest on Securities' Under Section 20(1)(i):
The court examined section 20(1)(i), which provides a formula to apportion common expenses between 'interest on securities' and other business income. The Department argued that section 40A(5) should apply to this apportionment. The court disagreed, stating that section 40A has an overriding effect and operates as a complete code, thus it cannot be read into section 20(1)(i). The court answered the question in favor of the assessee, affirming that section 40A(5) does not apply to the apportionment under section 20(1)(i).

Conclusion:
The court answered the questions regarding the taxability of interest and discount in favor of the assessee. However, it ruled in favor of the Department concerning the treatment of certain expenditures as perquisites under section 40A(5). The court also clarified the application of section 40A(5) and its non-applicability to the apportionment of expenses under section 20(1)(i), ruling in favor of the assessee. The reference was disposed of without any order as to costs.

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