1996 (10) TMI 39 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee is entitled to deduct interest representing the broken period.
2. Whether the Tribunal is right in law and fact in upholding the claim of the assessee and in directing the Assessing Officer to deduct the sum of Rs. 1,25,858 in computing the income on securities.
3. Whether the Tribunal is justified in law in interfering with the order of the Commissioner of Income-tax (Appeals) on the issue.

Issue-Wise Detailed Analysis:

1. Entitlement to Deduct Interest Representing the Broken Period:
The primary issue revolves around whether the amount of Rs. 1,25,858, representing interest for the broken period on securities purchased by the assessee-bank, should be considered as income or deductible expenditure. The assessee-bank contended that this amount should be deductible under section 18 of the Income-tax Act, 1961. The Income-tax Officer, relying on the decision in United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC), rejected this contention, stating that the interest accrued between the last date of interest and the date of sale forms part of the consideration for the securities and cannot be deducted as expenditure.

2. Tribunal's Decision on Deducting the Sum of Rs. 1,25,858:
The Tribunal upheld the assessee's claim, illustrating that in a cum-interest transaction, the purchase price includes interest for the expired period, which should be segregated from the cost of the security. The Tribunal reasoned that the real cost of the security should be reduced by the interest for the broken period, thus treating it as a deductible expenditure. This was based on the recognition of accounting practices that segregate the interest component from the purchase price of the security.

3. Justification of Tribunal's Interference with the Commissioner of Income-tax (Appeals) Order:
The Commissioner of Income-tax (Appeals) had upheld the Income-tax Officer's decision, stating that there is no provision for allowing interest for the broken period as a deduction under the head "Interest on securities." The Tribunal, however, found that the interest for the broken period should be treated as a business expenditure due to the nature of the banking business and the need to maintain statutory reserves. The Tribunal emphasized the nexus between the business of the assessee and its investment in Government securities, asserting that the interest earned is part of the bank's income.

Conclusion:
The High Court, after extensive deliberation, rejected the Tribunal's reasoning. It stated that the amount of Rs. 1,25,858 received by the assessee-bank is income, and the nomenclature offered by the accounting process cannot change its character for the purpose of income-tax. The High Court concluded that the interest for the broken period cannot be treated as an expenditure in the hands of the assessee and upheld the decisions of the Income-tax Officer and the Commissioner of Income-tax (Appeals).

Final Judgment:
Both parts of question No. 1 and question No. 2 were answered in the negative, in favor of the Revenue and against the assessee. The High Court directed that a copy of the judgment be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.