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TMI Blog2012 (12) TMI 418X X X X Extracts X X X X X X X X Extracts X X X X ..... r for the self same exercise. Valuation of investments and stock-in-trade - held that:- securities held as stock-in-trade and investment being stock in trade are to be treated on par and to be valued either at the cost or market price, whichever is lower. In the circumstances, keeping in the background the decision in the case of UCO Bank Vs. CIT [1999 (9) TMI 4 - SUPREME COURT], we direct the Assessing Officer to redo the valuation in respect of stock-in-trade at cost or market value, whichever is lower. Disallowance on the payment of additional interest on deposits made by Public Sector Undertakings - held that:- the assessee is entitled to succeed on its claim for deduction under Section 37 of the Act and the view of the Income Tax Appellate Tribunal that payment of additional interest on Fixed Deposits by PSUs as contrary to public policy cannot be sustained. - T.C.(A). No.455 of 2008 and M.P.No.1 of 2012 - - - Dated:- 30-10-2012 - MRS. CHITRA VENKATARAMAN AND MR. K. RAVICHANDRABAABU JJ. For Appellant: Dr. Anita Sumanth For Respondent: Mr. T.Ravikumar Standing Counsel for I.T.Dept JUDGMENT (JUDGMENT OF THE COURT WAS MADE BY CHITRA VENKATARAMAN , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be entitled to receive the interest. Thus, whenever the assessee purchased any security before the due dates for payment of interest, the assessee/purchaser pays the interest accrued from last due date till date of purchase to the seller and then gets himself reimbursed as and when interest become due and paid. In cases, where the assessee is a seller, it received broken period interest as against similar interest paid by Bank in respect of sale of the securities i.e., the assessee received broken period interest of Rs. 45,81,84,242/- as against similar interest paid by the bank to the purchasers to the tune of Rs.39,73,67,506/-. The assessee claimed the loss on the difference of this interest received and paid on the ground that the securities in which the assessee was investing constituted part of its stock-in-trade in the banking business. The Assessing Officer, however, rejected the contention of the assessee by following the decision in the case of Vijaya Bank Vs. CIT reported in 187 ITR 541. 3. Apart from this issue, there was yet another issue before the Assessing Officer in respect of payment of additional interest to the tune Rs.14,73,91,000/- on the deposits received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and that entry was debited to Suspense Account. According to the assesseee, the drafts taken were infact accounted for under the account entries of the PSUs only. Since the payment of interest is regulated by RBI, the Assessing Officer rejected the case of the assessee that the account of Rs.14,73,91,000/- paid as an additional interest was infraction of law and hence, not admissible as expenditure under Section 37 of the Income Tax Act, 1961. Apart from this issue, the Assessing Officer also disallowed certain expenditure incurred by the assessee. Aggrieved by the order of assessment, the assessee went on appeal before the Commissioner of Income Tax (Appeals). 4. As regards the claim for broken period interest, the assessee distinguished its case from Vijaya Bank case reported in 187 ITR 541. The assessee contended that it had consistently taken the stand that the securities, in which the assessee was investing constituted part of its stock-in-trade in the banking business; these securities were purchased and sold by the assessee in the course of business of banking and not as investments ; consequently, the assessee was claiming loss on investment in securities based on val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chandrakala and Co. In the circumstances, the question of adding the said amount as the income from undisclosed sources did not arise. The assessee pointed out that the rejection of the claim for deduction on the amount of additional interest paid, was without any basis. 6. As regards the expenditure incurred by the assessee, relating to the expenditure on securities, on bonus payment of interest, artificial inflation in the cost of securities and subsequent revaluation of securities at market value, the assessee challenged these issues before the Commissioner of Income Tax (Appeals). 7. On consideration of issues regarding the broken period interest relief as well as on the valuation of stock of securities, the CIT (Appeals) called for a report from the Income Tax Officer. It is seen from the order of the Commissioner of Income Tax (Appeals) that since there were divergent views held by the Commissioner of Income Tax (Appeals) with regard to ITA.No.71/2000-01 for the assessment year 1993-94 as investments and for ITA.No.375/2001-02 for the assessment year 1990-91 as investments in securities constituting current securities and stock in trade, the CIT (Appeals) thought it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stock-in-trade has to be allowed as the revenue expenditure based on the Bombay High Court decision in the case of American Express Bank Vs. Commissioner of Income Tax reported in 177 CTR 442(Bom). Thus, the Assessing Officer was directed to disallow the broken period interest in respect of the permanent securities held as the investment and allow the interest for a broken period in respect of current securities held as a stock-in-trade. The assessee's appeal was thus partly allowed. 9. However, on the aspect of valuation, the Commissioner of Income Tax (Appeals) pointed out that the assessee itself had booked the appreciation in the value of securities as the profit in the accounts. Pointing out to the likely-hood of distortion of profits of the securities held as stock-in-trade, if the depreciation was allowed and the appreciation was not taxed as income, the Commissioner of Income Tax (Appeals) pointed out that while the assessee had not offered the appreciation to tax, depreciation alone was claimed as an expenditure. Thus, there being no matching principle applied, the Commissioner of Income Tax (Appeals) felt it necessary to direct the Assessing Officer to add the appreci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l. 14. As far as the first issue relating to broken period of interest is concerned, after referring to the decision in Vijaya Bank reported 187 ITR 541 and the case in American Express Bank Vs. Commissioner of Income Tax reported in 177 CTR 442(Bom), the Income Tax Appellate Tribunal pointed out that the investment by the Bank is normally bifurcated into current and permanent investments ; as per the RBI directions, banks should not keep more than 70% of their investments in the permanent category from the accounting year 1992-93 ; since a perusal of the order of the Assessing Officer showed that no such enquiry made and that however, as the Bank bifurcated the permanent and current investments, the nature of income could be determined only by the classification made. Thus, the Tribunal set aside the order of the Commissioner of Income Tax (Appeals) and restored the matter to the files of the Assessing Officer for fresh consideration. 15. As regards the valuation of the securities is concerned, the Income Tax Appellate Tribunal confirmed the order of the CIT (Appeals). 16. As regards the claim for expenditure on payment of additional interest and commission, here too, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head permanent securities and current securities and on an analysis of the facts, applying the decision of the Vijaya Bank reported in 187 ITR 541, the CIT (Appeals) pointed out that the interest payment for the broken period in respect of permanent securities has to be taken as capital outlay. However, payment of interest on securities, which are held in stock-in-trade, has to be allowed as the revenue expenditure based on the decision of Bombay High Court in the case of Americal Express Bank Vs. Commissioner of Income Tax reported in 177 CTR 442(Bom). 21. A reading of the decision of the Bombay High Court reported in 177 CTR 442 (Bom) (Americal Express Bank Vs. Commissioner of Income Tax) show the extensive consideration on the said issue. The Bombay High Court pointed out that in respect of securities held as stock-in-trade, income being assessable under Section 28 of the Act, the assessee was entitled to deduction for the broken period. After citing the decision in Vijaya Bank Ltd's case reported (1991) 187 ITR 541 (SC), distinguishing the case of the assessee on the securities held as stock-in-trade, the Bombay High Court pointed out that the decision in Vijaya Bank r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of permanent securities and not current securities held as stock-in-trade, which are to be valued on cost or market value, whichever is lower. In the decision in the case of UCO Bank Vs. CIT reported in 240 ITR 355, the Apex Court pointed out that the assessee was valuing stock-in-trade at cost for the purpose of statutory balance sheet as required under the RBI guidelines and for Income Tax return, valuation was at cost or market value, whichever was lower. The Apex Court pointed out as under:- Preparation of the balance sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. Fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ceiling on interest payable in current account / saving bank account and discretion is available on interest to be paid on term deposits. The circular reads as under:- "5. Interest rates on term deposits 1. Banks are free to fix interest rates on term deposits. 2. The banks are required to offer uniform rates on deposits for the same maturity upto Rs.15 lakh. 3. In case of deposits of over Rs.15 lakh, banks may discriminate in the matter of rate of interest between one deposit and another, accepted on the same date and for the same maturity, on the basis of the size of deposit. 4. Banks are required to disclose in advance the schedule of interet rates payable on deposits including deposits on which differential rate of interest will be paid by the banks. Interest rates paid by a bank shall be as per the schedule and the same shall not be subject to negotiation between the bank and the depositor. 5. Banks are required to review their interest rate structure on term deposits of different maturities and take appropriate action to make them comparable with the rates offered by the commercial banks." Applying the said circular to the facts of the case herein, we hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove facts, we have no hesitation in setting aside the order of the Tribunal and accept the assessee's case for deduction that the payment of the additional interest was as per RBI Circular and that it was not against public policy. 27. As far as the question regarding- a) Estimated expenditure relating to securities; b) Disallowance of estimated expenditure relating to securities in computing the income under Section 115J of the Act; c) Disallowance of bonus and d) Deletion of additional tax, which are the issues raised in Ground No.3, a perusal of the order of the Income Tax Appellate Tribunal shows that although the question was raised before the Tribunal, there was no consideration by the Tribunal under the said issues. In the circumstances, we have no hesitation in accepting the assessee's contention that the Tribunal be directed to consider these issues and pass orders on merits. 28. In the circumstances, the assessee's Tax Case on the question of granting deduction on the expenditure made by way of additional interest made to the PSUs and the commission paid to the broker viz., M/s. Chandrakala Co., as falling under Section 37 of the Act, is allowed and we a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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