1986 (3) TMI 109 - AT - Income Tax

Summary

Issues:
1. Whether interest paid on purchase of securities is eligible for deduction under the IT Act.
2. Whether the original order allowing deduction suffered from a mistake apparent from the record warranting rectification under section 154 of the IT Act.

Analysis:
1. The appeal involved a dispute regarding the eligibility of interest paid on the purchase of securities for deduction under the IT Act. The IAC of IT disallowed the deduction, stating that the net interest paid on the purchase of securities would form part of the purchase price and thus not be eligible for deduction. The CIT (A) upheld the order but directed a correct computation of the disallowable interest. The assessee, a bank, argued that the interest paid on securities was a deductible item under the head 'income from business' and had been consistently treated as such in the past. The departmental representative contended that interest paid on securities was part of the cost of purchase and not deductible. The Tribunal found merit in the assessee's objection, emphasizing that in the case of a bank, where securities are stock-in-trade, interest paid on purchase forms part of the cost and is deductible in computing profits from the sale of securities.

2. The second issue revolved around whether the original order allowing the deduction of interest suffered from a mistake apparent from the record warranting rectification under section 154 of the IT Act. The assessee argued that the original order did not contain any such mistake as the treatment of interest paid on securities as a deductible item was debatable and had been consistently followed. The Tribunal agreed with the assessee, citing various accounting principles and authorities to support the view that interest paid on purchase of securities could be treated as a deductible item based on the method of accounting followed by the assessee. The Tribunal concluded that there was no mistake apparent from the record capable of rectification under section 154 of the IT Act, setting aside the orders of the departmental authorities and allowing the appeal of the assessee.