1999 (3) TMI 43 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was right in law in cancelling the rectification order of the AO.
2. Whether the interest paid for the broken period on the purchase of securities is an allowable deduction.

Summary:

Issue 1: Tribunal's Cancellation of Rectification Order
The Tribunal found that the rectification order passed u/s 154 cannot be upheld, relying on various judicial decisions. The Tribunal held that the issue involved is a debatable point and not a mistake apparent from the record. The Tribunal also considered the CBDT Circular No. 599 dated 24th April 1991, which indicated that the interest paid or received for the broken period on purchase/sale of securities by a banking company would constitute revenue payments/receipts and should be taxed as business income. The Tribunal's view was that the net amount of interest paid and received for the broken periods constitutes 'business income' and any loss derived therefrom could be set off against income assessed as 'interest on securities'.

Issue 2: Allowability of Interest Paid for Broken Period
The AO and CIT(A) disallowed the interest paid for the broken period on the grounds that there was no provision for allowing such interest under ss. 18, 19, and 20 of the IT Act. The Tribunal, however, found that the Government securities are the current assets of a banking company and income from such securities would be income from business. The Tribunal concluded that the interest paid for the broken period constitutes an allowable outgo in the hands of the assessee. The Tribunal also considered the CBDT Circular No. 599, which clarified that securities held by banks must be regarded as stock-in-trade, and both interest payments and receipts must be regarded as revenue payments/receipts.

Separate Judgments:
Justice P. Shanmugam dissented, arguing that the interest on securities should be assessed under ss. 18, 19, and 20, and not under s. 37, and that the original assessment allowing interest for the broken period was a mistake apparent from the record. Justice G. Sivarajan, however, agreed with the majority view that the interest paid for the broken period is an allowable deduction and that the Tribunal was justified in cancelling the rectification order.

Conclusion:
The question of law referred to the Court was answered in the affirmative, in favor of the assessee and against the Revenue. The Tribunal was justified in cancelling the rectification order issued by the AO.