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2008 (3) TMI 325 - HC - Income TaxDeduction of Interest Security transaction adjustment u/s 143(1) whether the difference in interest amount accounted for by the assessee on accrual basis in his books of account and the amount actually offered for taxation in computation of income submitted by the assessee should be the subject-matter of adjustment under section 143(1)(a) for raising a demand of tax and additional tax on that basis held that - in view of the ratio laid down in Vijaya Bank Ltd. s case 2008 -TMI - 5316 - SUPREME Court which very much applies to the circumstances and facts of the present case the judgment of the learned Tribunal cannot be sustained - the questions framed in all the four cases are answered as above in favour of the Revenue and against the assessee
Issues Involved:
1. Adjustment of interest amount under Section 143(1)(a). 2. Taxability of interest on securities as income from profits and gains of business post-deletion of Sections 18 to 21. 3. Applicability of the Supreme Court decision in Vijaya Bank Ltd. v. Addl. CIT post-amendment. 4. Justification of the Tribunal's decision regarding the Commissioner's error under Section 263. Issue-wise Detailed Analysis: 1. Adjustment of Interest Amount Under Section 143(1)(a): The primary question framed in Appeal No. 12 of 2005 was whether the difference in interest amount accounted for by the assessee on an accrual basis in the books of account and the amount actually offered for taxation should be adjusted under Section 143(1)(a) for raising a tax demand. The court did not provide a detailed discussion on this specific issue, focusing more on the broader implications of interest on securities and related deductions. 2. Taxability of Interest on Securities Post-Deletion of Sections 18 to 21: The court examined whether the interest on securities, which becomes part of the transaction price of sale and purchase of securities, is taxable as income from profits and gains of business after the deletion of Sections 18 to 21 of the Income-tax Act. The Tribunal had initially set aside the Commissioner's order under Section 263, holding that the Assessing Officer had thoroughly examined the bank's case and allowed the claim of the assessee. The Tribunal referenced the judgment in American Express International Banking Corporation v. CIT, which held that the Department should tax interest for the broken period received and allow deduction for the broken period interest paid. However, the High Court disagreed, emphasizing that the ratio in Vijaya Bank Ltd. v. Addl. CIT still holds good despite the deletion of Sections 18 and 19. 3. Applicability of Vijaya Bank Ltd. v. Addl. CIT Post-Amendment: The court considered whether the taxability of interest on securities continues to be governed by the Supreme Court's decision in Vijaya Bank Ltd. v. Addl. CIT for periods after the amendment. The Tribunal had found that the Vijaya Bank judgment was not applicable since it was based on the now-deleted Sections 18 to 21. However, the High Court held that the principle established in Vijaya Bank Ltd.'s case still applies, stating that the purchase price of securities, including the interest component, is a capital outlay and not deductible as business expenditure. The court did not agree with the Bombay High Court's reasoning in American Express International Banking Corporation's case, which allowed such deductions. 4. Justification of the Tribunal's Decision on the Commissioner's Error Under Section 263: The Tribunal had quashed the Commissioner's revision order under Section 263, stating that the Assessing Officer had duly examined and allowed the assessee's claim. The Tribunal relied on the American Express case to justify the deduction of broken period interest. The High Court, however, restored the Commissioner's order, holding that the Tribunal's reliance on American Express was misplaced and that the established principle from Vijaya Bank Ltd.'s case should prevail. The High Court emphasized that the method of accounting adopted by the bank does not justify the deduction of interest paid on securities as business expenditure. Conclusion: The High Court answered all questions in favor of the Revenue and against the assessee, allowing the appeals and setting aside the Tribunal's order. The court restored the Commissioner's order, emphasizing adherence to the Supreme Court's decision in Vijaya Bank Ltd. v. Addl. CIT and rejecting the Tribunal's reliance on the American Express case.
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