2014 (1) TMI 849 - AT - Income Tax

Power of Revision u/s 263 of the Act - Allowability of broken period interest Held that - Although the disallowance on account of broken period interest relating to securities bought in the year under consideration but held in the stock as on 31-3-2008 was required to be disallowed, the interest accrued but not due having been added to the income of the assessee - the disallowance on account of broken period interest was not required to be made Relying upon American Express International Banking Corporation Versus Commissioner Of Income-Tax. 2002 (9) TMI 96 - BOMBAY High Court - when the broken period interest received is taxed in the hands of the assessee, the interest for broken period paid by the assessee cannot be disallowed. A sound and convincing basis thus was given by the A.O. to justify the addition made on account of disallowance of broken period interest on protective basis - There was no error in the orders of the A.O. passed u/s 143(3) of the Act for both the years under consideration on this issue as alleged by the ld. CIT calling for any revision u/s 263 of the Act - orders of the CIT passed u/s 263 of the Act for assessment years 2008-09 and 2009-10 set aside and the matter restored to the AO passed u/s 143(3) of the Act Decided in favour of Assessee.

Summary

Issues:
Appeals against orders passed by CIT - 2, Mumbai u/s 263 of the Income Tax Act, 1961 regarding disallowance of broken period interest.

Analysis:
The appeals involved a common issue of disallowance of broken period interest by the Assessing Officer (A.O.) on a protective basis. The CIT found the A.O.'s order erroneous and prejudicial to the Revenue's interest, directing the A.O. to treat the protective addition as substantive. The A.O. justified the protective addition based on the relationship between broken period interest and accrued interest already added to the income. The A.O. reasoned that if interest income is taxed on a due basis, broken period interest should also be disallowed. The A.O.'s rationale was supported by legal precedents, including a decision by the Bombay High Court. The CIT disagreed, emphasizing that protective assessments should not create alternative assessments within one. The Tribunal noted that the A.O.'s reasoning was logical and valid, concluding that there was no error in the A.O.'s orders. Consequently, the Tribunal set aside the CIT's orders and restored those of the A.O.

The A.O.'s decision to disallow broken period interest on a protective basis was based on the relationship between accrued interest and broken period interest. The A.O. considered the impact of taxing interest income on a due basis and the contested addition of accrued interest. The A.O. referred to legal precedents to support the protective addition, highlighting the interplay between different types of interest income. Despite the CIT's view of the protective assessment, the Tribunal found the A.O.'s reasoning sound and coherent, leading to the restoration of the A.O.'s original orders.

The Tribunal's analysis focused on the A.O.'s justification for disallowing broken period interest on a protective basis. The A.O. had clearly explained the rationale behind the protective addition, linking it to the taxation of accrued interest and the legal principles established by the Bombay High Court. The Tribunal concurred with the A.O.'s reasoning, emphasizing the logical basis for the protective measure. By setting aside the CIT's orders, the Tribunal affirmed the validity of the A.O.'s approach and upheld the original assessments for the relevant years.