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TMI Blog1995 (4) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... on was not covered by the above provisions. The Assessing Officer rejected the application. On appeal, the CIT(A) allowed the same holding that the taxability of interest on securities in question would be decided only in the regular assessment made under section 143(3) of the Act. In the assessment under section 143(3) of the Act, the Assessing Officer added back the said sum of Rs. 5,81,15,549. 3. Aggrieved by the said addition, the assessee took up the matter in appeal before the CIT(A) and contended that interest on securities cannot be held taxable before the due dates of the interest. The CIT(A), however, rejected the claim on the ground that under section 145(1) interest on securities is taxable based on the regular method of accounting employed by the assessee. This view was taken by the CIT(A) on the reasoning that the special provisions of sections 18 to 20 of the I.T. Act have since been deleted by the Finance Act, 1988, with effect from assessment year 1989-90. Since the assessee has been following mercantile system of accounting and showing the said interest income on securities on accrued basis, the claim of excluding the same from the taxable income of the year was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the general provisions of the Act as rightly held by the CIT(A). The present assessment is relevant for the assessment year 1989-90 and, therefore, the claim of the assessee is to be decided exclusive of the provisions of the sections 18 to 21 of the I.T. Act which have since been omitted. It is also submitted that the relevant decisions rendered by the various Courts on the basis of these specific provisions have to be ignored while considering the assessability of the income from interest on securities for the present and subsequent assessment years. 7. According to Shri Tilakchand, the learned Sr. Departmental Representative, the facts of the case and the actual nature of the market operations clearly establish that the interest on securities is totally distinct from the value of the securities and the cost thereof. According to him, the value of the securities fluctuates according to the market conditions. However, the interest on the securities is always separately calculated and the seller and the purchaser receive and make the payments respectively on the basis of the transactions. The interest is normally calculated up to the date of the transaction and the purchaser ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest debited to profit loss account pertaining to those securities which have been purchased but not sold in the same previous year. The assessee, however, did not provide these figures taking the stand that these figures were not readily available with it and that the additions made by the Assessing Officer in the past are also only on estimated basis. The Assessing Officer accordingly estimated such interest at Rs. 70,00,000 and added the same to the income of the assessee. 10. Aggrieved by the said addition, the assessee took up the matter in appeal before the CIT(A) who, however, deleted the addition in the light of the decision of the Tribunal. 11. The revenue is aggrieved and has come up in appeal before the Tribunal and contended that the decision of the Tribunal for the earlier assessment years will have no application to the facts of the case. Firstly, the decision was made by the Tribunal mainly on the reasoning that the withdrawal of the beneficial circular will have no effect to the right of the assessee. According to Shri Tilakchand, the learned Sr. Departmental Representative, the beneficial circular in this case cannot have any effect to the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Express International Banking Corpn. v. IAC [1983] 6 ITD 373 (Bom.). It is also submitted that similar view has been taken in the assessment years 1985-86 and 1986-87.On the other hand, Shri Tilakchand, the learned Sr. Departmental Representative, supported the orders of the learned CIT(A). According to him, the earlier decisions of the Tribunal have been rendered in the line of the specific provisions in the Incometax Act. With the omission of sections 18 to 21, the entire procedure has to be reviewed and, therefore, the question of allowing depreciation by treating the securities as stock in trade does not arise. Since the decision in the case of Vijaya Bank Ltd. fully covered the case, there is no question of allowing depreciation on the capital outlay. It is, therefore, submitted that no interference is called for in this regard. 15. We have carefully considered the rival submissions in the light of the material on record. On a careful reading of the orders of the revenue authorities in the light of the material on record, it is seen that both the revenue and the assessee are taking contrary stands by compartmentalising particular transactions which could have been consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. It is, therefore, necessary that the outgoing and the incoming income on account of interest had to be properly adjusted so as to arrive at the real and true profit of the assessee during the accounting period relevant to the assessment year. 16. Similarly, the assessee claimed depreciation on the securities on the reasoning that they are the stock in trade. If the securities are in the nature of stock in trade, then the cost including the interest paid for up to the date of purchase shall form part of the cost and the value of the securities including the interest accrued would form part of the closing stock so that the cost of the goods entered on the other side of the accounts at the time of the purchase will be cancelled out of the entries by the unsold stock. This would leave only the transactions on which there have been actual sales in the course of the year showing profit or loss actually realised on the year's trading. The Hon'ble Supreme Court have been seized of this problem from time to time. In the latest decision in the case of British Paints India Ltd. the principle of valuation of closing stock was restated. It was held that even though the assessee had ado ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest should enter the credit side of the profit loss account. Otherwise, it will not be possible to compute the correct income of the year. 18. Both the parties compartmentalised each transaction and therefore confused the whole issue. We, therefore, consider it necessary to set aside the order of the CIT(A) on these points and restore the matter to the file of the Assessing Officer with a direction that he will compute the income in accordance with law after giving full opportunity to the assessee to substantiate the claim. In doing so, the Assessing Officer will ascertain whether the dealing in the securities by the assessee is in the nature of stock in trade or in the nature of a capital outlay for the purpose of investment. Once the nature of trading is ascertained, then the allowability of the claims should find their respective places. If the purchases of the Government securities are in the nature of stock in trade, then the cost of the securities plus the interest paid would form part of the cost of the goods, ie., purchase price. Similarly, at the end of the year, the unsold securities along with the accrued interest will have to be entered in the credit side of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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