CENTRAL BANK OF INDIA v. INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -1986-LL-0327]

Citation 1986-LL-0327
Appellant Name CENTRAL BANK OF INDIA
Respondent Name INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 27/03/1986
Assessment Year 1976-77
Judgment View Judgment
Keyword Tags mistake apparent from record • interest on securities • income from business • method of accounting • allowable deduction • sale of securities • specific provision • business activity • accrued interest • cost of purchase • revenue account • banking company • capital account • specified date • stock-in-trade • purchase price • accrual basis • special bench • interest paid • market price • actual cost • sale price
Bot Summary: Since, according to t h e IAC, the net interest was paid on purchase of securities-cum-interest, it would form part of the purchase price of securities and therefore will not be eligible for deduction and deduction has been wrongly allowed. Interest on such securities become payable on specified dates and if any purchase is made before such interest becomes due before the specified date the assessee has to pay in addition to the purchase price of the securities accrued interest till the date of purchase according to market price in respect of dealing such securities. In the same manner when securities are sold by the assessee, it would be entitled to receive accrued interest on such securities till the date of sale though interest thereon become payable on a later date. The assessee in this case had separately debited to an account accrued interest paid and similarly accrued interest received at the time of the sale and has claimed the difference as a deduction as the interest paid is more than the interest received. Departmental representative submitted that it is a clear proposition of law that interest paid on purchase of securities according to the market practice is part and parcel of the cost of purchase and is not a deductible item. Normally, as stated by the departmental representative the interest that is paid on the purchase of securities upto the date of such purchase on accrual basis would form part of the cost of the purchase but in a case of bank where the securities are stock-in trade, it is bound to be allowed as part of the cost on the securities being sold against the profit. One asset is obviously the security itself, which is on the capital account, while the other one being the interest since the last date of payment to the date of purchase is another asset which could be treated as on revenue account.


This appeal is by Central Bank of India, Bombay. It arises out of order passed by IAC of IT under s. 154 of IT Act, 1961. It appears that in original assessment made, assessee was allowed deduction of interest paid on purchase/sale of securities amounting to Rs. 65,74,005. Since, according to t h e IAC, net interest was paid on purchase of securities-cum-interest, it would form part of purchase price of securities and therefore will not be eligible for deduction and deduction has been wrongly allowed. IAC therefore, after issuing notice under s. 1154 of IT Act in this connection revised total income by including interest paid on purchase of securities as stated above. He also included in order amount of Rs. 20,00,000 as interest received on sale of securities on estimate subject to rectification in absence of details furnished by assessee in this connection. When matter was taken in appeal by assessee, CIT (A) has upheld order subject to direction that interest disallowable has not been correctly computed for want of necessary details and should be correctly ascertained and disallowed. He has pointed out that assessee being bank has to purchase and sell securities in course of its business. Interest on such securities become payable on specified dates and if any purchase is made before such interest becomes due before specified date assessee has to pay in addition to purchase price of securities accrued interest till date of purchase according to market price in respect of dealing such securities. In same manner when securities are sold by assessee, it would be entitled to receive accrued interest on such securities till date of sale though interest thereon become payable on later date. Therefore, it is pointed out by CIT (A) that accrued interest paid when assessee purchases any such securities will form part of purchase consideration or cost of purchase, and it would be taken into account for working out profit on any subsequent sale of these securities. assessee in this case, however, had separately debited to account accrued interest paid and similarly accrued interest received at time of sale and has claimed difference as deduction as interest paid is more than interest received. According to Commissioner (A) therefore, deduction has been wrongly allowed. Aggrieved by this order, assessee is in appeal. submission of ld. representative for assessee before us was that original order allowing deduction cannot be said to suffer from any mistake apparent from record so as to warrant rectification under s. 154 of IT Act as dispute involved is highly debatable one or there can reasonably be more than one view. In this connection, he drew our attention to decision of Special Bench of Tribunal in case of American Express International Banking Corpn. vs. IAC (1984) 18 TTJ (Bom) 218 (SB): (1983) 6 ITD 374 (Bom) (SB) and in particular to paragraphs 8, 11 and 16 of that order. It is submitted that in case of assessee who is bank it holds securities as its stock-in- trade, that in accounts interest paid on purchase of securities is debited to profit and loss account and in particular to paragraphs 8, 11 and 16 of that order. It is submitted that in case of assessee who is bank it holds securities as its stock-in-trade, that in accounts interest paid on purchase of securities is debited to profit and loss account and similarly interest received is credited and such interest is deductible item and has been allowed as deduction all along, in past that deduction is allowed in computing income under head 'income from business that this method of accounting adopted by assessee has been consistently followed all along, purchase and sale of securities being activity in with assessee s carrying on business and interest paid is allowable deduction in computing such income. ld. departmental representative submitted that it is clear proposition of law that interest paid on purchase of securities according to market practice is part and parcel of cost of purchase and is not deductible item. He has, kly relying on paragraph 2 of CIT (A) s order, submitted that interest on securities is not taxed as income from business but under head 'interest on securities . Therefore, there is no question of allowing interest paid in respect of purchase of such securities, which forms part of cost. He also submitted that decision of Special Bench of Tribunal in case of American Express International Banking Corpn. (supra) cited by assessee is not applicable to facts in this case and further that past treatment is no ground for perpetuating mistake committed. We have carefully considered facts and submissions of parties and We have carefully considered facts and submissions of parties and find substantial merit in assessee s objection. It is undisputed that assessee being banking company, purchase or sale of securities forms part of its regular business activity and any profit or loss which may arise on such transaction would be chargeable to tax as income from business. It is true that interest that is received by it on securities held on due dates will be chargeable under head interest on securities but that is on account of specific provision of statute namely IT Act directing charge under particular head. For that reason it does not cease to be income from business. Normally, as stated by departmental representative interest that is paid on purchase of securities upto date of such purchase on accrual basis would form part of cost of purchase but in case of bank where securities are stock-in trade, it is bound to be allowed as part of cost on securities being sold against profit. Where method of accounting followed is such, that interest is treated as part of cost and profit is ascertained against sale price of securities, interest which form part of cost would also necessarily be deduction in computing profit in year of sale but where as in case of assessee as bank, accounting system followed is that interest paid on purchase and interest received on sale are taken to separate account and profit or loss as case may be is taken into Profit & Loss account and what is taken as cost of securities is actual cost or face or par value excluding interest paid or received then regard must be had to system and method of accounting followed by assessee regularly and Profit & Loss determined on that basis. decision of Tribunal in (1983) 6 ITD 374 (supra) has dealt elaborately with various methods of accounting in this connection and paragraph 16 of that order clearly refers to fact that in case of very assessee, Central Bank of India interest paid for broken period was treated as on revenue account by them. Reference was also made to extracts from two books, one Handbook of Modern Accounting by Davidson & Weil (1977 edition) and other Modern Accountant s Handbook by Biwards & Block (1976 edition) and both these authorities on accounting principles state that buyer of security acquires two different assets on buying security between two due dates for paying interest. One asset is obviously security itself, which is on capital account, while other one being interest since last date of payment to date of purchase is another asset which could be treated as on revenue account. It is further noticed that similar was opinion expressed in other standard books on accountancy, namely Accountant s Handbook by Wixon, Koll & Vedfird (1970 edition), Advanced Accounts by Shukla & Grewal (1982 edition) Advanced Accountancy by Hrishikesh Chakraborty (1981 edition), Book Keeping and Accounts by Spicer & Pegler (1972 edition), Carter s Advanced Accounts by Douglas Garbutt (1982 edition) and Munro s Book Keeping and Accountancy by Alfred Palmer (1969 edition). and Munro s Book Keeping and Accountancy by Alfred Palmer (1969 edition). From above it is clear to use that it cannot be said that interest paid on purchase of securities between two due dates must always be treated as part of cost of asset purchased and at any rate, there is more than one view possible on this aspect according to accountancy commercial principles which must prima facie govern determination of income from business. We are therefore satisfied that there is no mistake apparent from record capable of rectification under s. 154 of IT Act. departmental authorities were wrong in holding so. orders of departmental authorities accordingly is set aside. appeal of assessee is allowed. *** CENTRAL BANK OF INDIA v. INSPECTING ASSISTANT COMMISSIONER OF INCOME TAX
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