1995 (4) TMI 81 - AT - Income Tax

Additions To Income, Assessing Officer, Deduction Of Interest, Previous Year, Purchase Price, Revenue Receipt

Summary

Issues Involved:
1. Taxability of interest on securities accrued but not due.
2. Deduction of interest paid for the broken period at the time of purchase of securities.
3. Depreciation on securities treated as stock-in-trade.

Detailed Analysis:

1. Taxability of Interest on Securities Accrued but Not Due:
The primary issue was whether the interest on securities, which had accrued but was not yet due, should be included in the assessable income for the year. The assessee, an international bank, argued that interest on securities should only be taxable when due, citing consistent past practice and judicial precedents, including a Supreme Court decision and various High Court rulings. The CIT(A) rejected this claim, stating that with the deletion of sections 18 to 20 of the I.T. Act by the Finance Act, 1988, the interest should be taxable based on the regular method of accounting employed by the assessee, which was the mercantile system. The Tribunal upheld the CIT(A)'s decision, emphasizing that the interest on securities must be assessed on an accrual basis, given the current legal framework and accounting principles.

2. Deduction of Interest Paid for the Broken Period at the Time of Purchase of Securities:
The assessee sought to deduct the interest paid for the broken period when purchasing securities, treating these securities as stock-in-trade. The Assessing Officer added an estimated Rs. 70,00,000 to the income of the assessee due to the lack of specific figures provided by the assessee. The CIT(A) deleted this addition, relying on a previous Tribunal decision. However, the revenue contended that the Tribunal's earlier decision was not applicable, as the beneficial circular relied upon was issued and withdrawn in 1991, and thus irrelevant for the assessment year 1989-90. The Tribunal found that the assessee's method of accounting did not reflect the true profits and gains of the year, leading to the decision to set aside the CIT(A)'s order and direct the Assessing Officer to re-examine the nature of the securities and compute the income accordingly.

3. Depreciation on Securities Treated as Stock-in-Trade:
The assessee claimed depreciation on securities, arguing they were stock-in-trade. The Assessing Officer disallowed this, treating the securities as investments, a decision upheld by the CIT(A). The Tribunal noted that if the securities were indeed stock-in-trade, the cost, including interest paid up to the date of purchase, should be part of the purchase price, and the value of unsold securities, including accrued interest, should be reflected in the closing stock. The Tribunal cited the Supreme Court's decision in British Paints India Ltd., which emphasized the necessity of accurately reflecting the true state of business for computing taxable income. Therefore, the Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to ascertain the nature of the securities and re-evaluate the claims accordingly.

Conclusion:
The Tribunal concluded that the income from interest on securities should be assessed on an accrual basis, given the deletion of specific provisions and the mercantile system of accounting followed by the assessee. The Tribunal also directed the Assessing Officer to re-examine the nature of the securities-whether they were stock-in-trade or investments-and compute the income and allowable deductions accordingly, ensuring the correct reflection of the assessee's true profits and gains for the year.