TMI Blog1999 (3) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... the same years the assessee purchased Government securities cum-interest and paid interest on the broken period, of Rs. 6,36,411 and Rs. 5,15,659 respectively. The assessee disclosed these amounts under the head 'interest on securities' and originally the assessments were completed for the years 1979-80 and 198081 under s. 143(3) of the Act allowing the interest paid for the broken period. Subsequently the AO initiated action under s. 154 of the Act and disallowed the interest paid for the broken period, namely, Rs. 6,36,411 for 1979-80 and Rs. 5,15,659 for 1980-81 on the ground that as the income had been computed under the head 'interest on securities' there was no provision for allowing such interest paid. The CIT(A) confirmed the disallowance against which further appeals were filed before the Tribunal. The Tribunal found that the rectification order passed under s. 154 cannot be upheld placing reliance on the following decisions : Malabar Co-operative Central Bank Ltd. vs. CIT (1975) 101 ITR 87 (Ker) : TC 26R.701, Karnataka Bank Ltd. vs. CIT (1978) 114 ITR 421 (Kar) : TC 13R. 1035, Brooke Bond Co. Ltd. vs. CIT (1986) 57 CTR (SC) 25: (1986) 162 ITR 373 (SC) : TC 45R.268 and T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r investment. Clarifications on the following issues have been sought by banks from the CBDT. (i) Whether the securities held by the banks constitute their stock-in-trade or investment, and consequently whether the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing their taxable profits ? (ii) Whether deduction claimed in respect of interest paid for broken period on the purchase of securities should be allowed as a deduction from the taxable profits ? 2. The matter has been considered by the Board and it has been decided that the securities must be regarded as stock-in-trade by the banks. Therefore, the claim of loss, if debited in the books of account, would be given the same treatment as is normally given to the stock-in-trade. As far as the second issue is concerned, both the interest payments and receipts must be regarded as revenue payments/receipts, and only the net interest on securities shall be brought to tax as business income. (Sd.) Nishi Nair Under Secretary Central Board of Direct Taxes" 5. As pointed out earlier, the impugned proceedings have been initiated under s. 154(1) of the Act on 7th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and the income derived therefrom would represent business income though taxable under head 'interest on securities'. Therefore, the interest paid for the broken period would constitute allowable outgo in the hands of the assessee. When we analyse in the above respective viewpoints of the officer and the assessee the only conclusion possible is that the question involved is a debatable point and not a mistake apparent from the record. 7. Notwithstanding the above conclusion we will examine the case of the Revenue that as the income had been computed on 'interest on securities' there was no provision for allowing interest paid for the broken period. A Division Bench of this Court in Malabar Co-operative Central Bank Ltd. vs. CIT was dealing with a case of co-operative society carrying on banking business. During the asst. yr. 1968-69 the assessee-bank earned Rs. 49,086 by way of interest on securities. The assessee claimed that this amount should be exempted under s. 80P(2)(a)(i) of the IT Act for the reason that the Banking Regulation Act, 1949, had been made applicable to the assessee and the provisions of the Regulation clearly indicated that the holding of securities, the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s proposition the Division Bench relied on the decision of the Supreme Court in Bihar State Co-operative Bank Ltd. vs. CIT (1960) 39 ITR 114 (SC) : TC 13R. 1010. 8. Chapter IV of the Act deals with computation of total income. Under s. 14 all income for the purpose of charge of income-tax and computation of total income has been classified under six heads of income. The second item "B. Interest on securities" was there in s. 14 during the assessment years in question and it was deleted by the Finance Act, 1988 w.e.f. 1st April, 1989. The salient principle is that the income-tax is only one tax levied on the sum total of the income classified and charged under different heads. Tax is not levied separately on each head of income. Beasley, C.J. said in CIT vs. T. Namberumal Chetty Sons (1933) 1 ITR 32 (Mad): TC 8R.286 that assessment to income-tax is one whole and not a group of assessments of different items of income. Rankin C.J. in In the matter of assessment of Behari Lal Mullick AIR 1927 Cal. 553 said, the income-tax is one tax and not aggregate of different taxes. The above principle derived from Attorney General, London County Council 4 Tax Cases 265 and Salisbury House ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. The statute operates on the principle that it is the net income under each head which should be considered as a component of the total income. The statute permits specified deductions from gross receipts in order to compute the net income. The net income under the different heads is then pooled together to constitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, the quantum of income which is assessed to tax. Ordinarily when income pertains to a certain head, the source of such income is peculiar to that head, but it is not unusual that commercial considerations may properly describe the source differently. For instance, a banking concern may hold securities in the course of its business. The securities constitute its trading assets and income from them would in the commercial sense, be regarded as business income. However, for the purposes of computation under the income-tax law, the income from such securities would be computed not under the head 'inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrent assets or stock-in-trade of the banking company. The income from such securities would be income from business, but the computation would be made under the head 'interest on securities'. The amount of interest paid and received for the broken period with reference to transactions in Government securities would obviously constitute 'business income' and if any loss is derived therefrom it could be legitimately be set off against income assessed as interest on securities. Once it is treated as business income the statute permits specified deductions from gross profits in order to compute the net income as observed in Brooke Bond Co.'s cases . 12. However, counsel for the Revenue also contended on the basis of the observation of the Supreme Court in Brooke Bond Co.'s case at p. 379, that the process of computation 'at this stage' only means the second stage and that stage has not reached. This submission does not appear to be correct inasmuch as the interest paid for broken period is admitted to be an allowable deduction from the 'business income' and so after such deduction the net income under 'interest on securities' is arrived at. In other words, when interest payments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the Board has the power to relax the rigour of the law or grant relief which is not to be found in the terms of the statute. Such circulars are intended for a just and fair administration of the law. [See K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) : TC 68R.306]. The Supreme Court also accepted the validity and binding nature of such beneficent circulars and recognized the taxpayer's right to enforce them in his favour even in the Court. [See Navnitlal Javeri vs. Sen (1965) 56 ITR 198 (SC) : TC 69R.265, Ellerman Lines Ltd. vs. CIT (1971) 82 ITR 913 (SC) : TC 69R.265, Varghese vs. ITO, CIT vs. Ramanaiah (1986) 157 ITR 300 (AP) : TC 69R.277 and CIT vs. Sriram (1986) 54 CTR (Pat) 367: (1987) 161 ITR 302 (Pat) : TC 69R.277]. While recognizing the right of the assessee to enforce in Court in benefits available under circulars issued by the Board, I cannot agree to the view that such circulars are binding on the Courts. However, in this case I have already expressed the view in favour of the assessee on true analysis of the relative provisions contained in the Act. 14. In view of what is discussed herein above, I hold that the Tribunal was justifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest on securities purchased from the various vendors, there is no provision of allowing interest paid either under ss. 18, 19 or 20 of the Act. He also submitted that if the interest is specifically assessed under interest on securities, expenditure cannot be allowed under s. 37 of the Act. Therefore, he concluded that the original assessment order allowing interest for the broken period on securities was a mistake of fact and law apparent from the records. 21. Learned counsel appearing on behalf of the respondent submitted that the securities which the bank was dealing which constituted its trading assets and income from them would, in the commercial sense, be regarded as "business income". Even though it was broken up under the head 'interest on securities', that is only for the purpose of computation of the total income and the income did not cease to be the income of the business. He further submitted that the CBDT in Circular No. 599, dt. 24th April, 1991 has clearly laid down that interest paid or received from the broken period on purchase/sale of securities by a banking company would constitute revenue payments/receipts and that only the net interest on securiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------------------------------------------------- The figures of Rs. 1,00,73,718 and Rs. 1,16,78,957 have been shown under the head 'interest on securities' for the asst. yrs. 1979-80 and 1980-81. Sec. 19 of the Act was the provision during the relevant period. There is no provision for deduction of amounts paid for purchase on securities in respect of the broken period. 24. Therefore, the main question is to consider whether this could be brought under the head of "business expenditure" allowable under s. 37 of the Act. The issue raised in my view is covered by the decision of the Supreme Court in United Commercial Bank Ltd. vs. CIT. In that decision also the assessee was a bank carrying on banking business and it was claimed that it was a part of the business of the bank to deal in securities and that no distinction should be made between the income from securities and income from business for the purpose of set off under s. 24. Two questions were raised in that case one of which was : whether interest on securities was part of bank's income from business carried on by it. The Tribunal stated the case and sought the opinion of the High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, no question of the applicability of the principle generalia specialibus non derogant arises. This finds support from the decided cases which have been discussed above. Thus both on precedent and on a proper construction, the source of income "interest on securities" would fall under s. 8 and not under s. 10 as it is specifically made chargeable under the distinct head "interest on securities" falling under s. 8 of the Act and cannot be brought under a different head even though the securities are held as a trading asset in the course of its business by a banker". In the light of the statutory form of return prescribed and the entries contained thereunder on the analysis of those provisions the Supreme Court had taken the view that the different and distinct head of income, profits and gains, salaries, interest on securities and property, business, etc. is indicative of the intention of the legislature making the various heads of income, profits and gains mutually exclusive. So every item of income whatever its source would fall under one particular head and for the purpose of computing the income for charging of income-tax the particular section dealing with that head will hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to set off the loss against the entire income including the interest on securities. In that context the Supreme Court held that the scheme of IT Act is that income-tax is one tax. Though taxable income under different heads for the purpose of computation of the net income of the assessee, it does not cease to be part of income from business if the securities are part of the trading assets. 26. The decision in T.S. Balaram, ITO vs. Volkart Brothers and T.S. Raja vs. CED (1968) 69 ITR 342 (SC) have no application to the facts of the case. In this case there is no difficulty or debatable issue whatsoever since admittedly and claim of the respondents is that the amount claimed is on interest on securities. Therefore, whether the provision that applies for computing the net income is ss. 18, 19 and 20 or s. 37 of the Act. 27. On the question of interpretation of law declared by the Supreme Court in Union of India vs. Dhanwanti Devi (1996) 6 SCC 44 the Supreme Court held that what is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in the judgment. It would, therefore, be not profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged under the specific head and computed in accordance with the provisions of this section, and not under s. 28 as business profits. (See under s. 14, "Income-tax is only one tax", under s. 22, "Property held as business asset", and under s. 28(i), "Dividend and interest"). Similarly, interest on tax-free securities which is exempt from charge under this section cannot be taxed as business profits under s. 28 even if the securities are held as trading assets. But for certain purposes of the Act, e.g. under ss. 72(1)(i) and 80P(2)(a)(i), where the separate head of charge under this section is not relevant, such interest on securities held as trading assets is treated as part of business profits. (See post under s. 72, "'Profits ........ of any business' may include income under other heads", and under s. 80P). 29. The judgment of the Supreme Court in Brooke Bond Co. Ltd. vs. CIT (1986) 57 CTR (SC) 25: (1986) 162 ITR 373 (SC) : TC 45R.268 was relied on by both the Revenue as well as the respondent. In my view the Supreme Court has not taken a different view than one in the United Commercial Bank Ltd. case . As a matter of fact it was held that the true nature and character of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing authority withdrawn the said deductions by resort to the provisions of s. 154 of the Act, evidenced by Annexures B1 and B2 orders and the same was confirmed in appeal by the CIT(A), Calicut, evidenced by Annexure C1 order. On further Tribunal cancelled the orders of the authorities below. The reason stated by the assessing authority and by the appellate authority for disallowing the claim for deduction of the interest paid for the broken period is that since the income by way of interest from purchase and sale of securities was computed under the head 'interest on securities' the provisions of ss. 18 to 20 do not permit any such deduction. It was also stated that the provisions of s. 37 of the Act cannot have any application in the matter of computation of income under the head "interest on securities". The Tribunal, relying on the decisions of this Court and the Supreme Court and also the circular of the CBDT, took the view that the Government securities are the current assets of a banking company and that the income from such securities would be income from business. It further took the view that the computation of such income must be made under the head "interest on securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income by way of interest on the purchase and sale of securities was computed under the head "interest on securities", the Government securities in the hands of the assessee had the character of stock-in-trade of the business and since the receipts by way of purchase and sale of such stock-in-trade are to be treated as revenue receipts, though for the purpose of the assessment it has to be assessed under the head "interest on securities", nonetheless it is income from business and therefore, the interest paid on the purchase of Government securities is an admissible deduction, at any rate under s. 37 of the Act. The counsel, in support of his submissions, relied on the decision of this Court in Malabar Co-operative Central Bank Ltd. vs. CIT (1975) 101 ITR 87 (Ker) : TC 26R.701 and the decisions of the Supreme Court in CIT vs. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC) : TC 45R.243 and in Brooke Bond Co. Ltd. vs. CIT. The counsel further relied on the circular issued by the CBDT already mentioned earlier which took the same view. Learned counsel further submitted that at any rate, the question at issue is a debatable one and in view of the decision of the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whatever source. 'Total income' is defined in s. 2(45) of the Act to mean the total amount of income referred to in s. 5 computed in the manner laid down in this Act. Sec. 14 of the Act, which deals with computation of total income, provides that save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income: A. Salaries, B. Interest on securities, C. Income from house property, D. Profits and gains of business or profession, E. Capital gains, and F. Income from other sources. 8. On a reading of the provisions of s. 2(45) r/w charging s. 4, s. 5 and s. 14, the scheme of the Act is clear. The total income of a person from various sources falling under the separate heads specified in s. 14 has to be computed in accordance with the provisions governing such heads specified in Chapter IV of the Act. In the instant case, the income of the assessee-bank, though arises from business, falls under two separate heads, viz., "Profits and gains of business or profession" and "Interest on securities". Secs. 28 to 43A deal with computation of income chargeabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities". They are (i) interest on any security of the Central or State Government, not being the interest payable under s. 280D in respect of an annuity deposit made under Chapter XXII-A and (ii) interest on debentures or other securities for money issued or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act. Sec. 19, which provides for deductions from interest on securities, states that income chargeable under the head "interest on securities" shall be computed after making the following deductions subject to the provisions of s. 21 :---They are (i) any reasonable sum expended by the assessee for the purpose of realising such interest and (ii) any interest payable on money borrowed for the purpose of investment in the securities by the assessee. Sec. 20 which is a special provision for deduction from interest on securities in the case of a banking company reads as follows : "20(1) In the case of a banking company--- (i) the sum to be regarded as a sum reasonably expended for the purpose referred to in cl. (i) of s. 19 shall be an amount bearing to the aggregate of its expenses as are admissible under the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the agent for recovery of the amount but could recover only a sum of Rs. 28,000 and wrote off the balance of Rs. 2,02,422 as irrecoverable. The question was whether this amount was an admissible deduction in computing the profits of the assessee from business for the purpose of income-tax. In that case, the Supreme Court held that the loss sustained by the appellant therein as a result of misappropriation by the agent was one which was incidental to the carrying on of the business and should, therefore, be deducted in computing the profits under s. 10(1) of the Act. Venkatarama Iyer, J. speaking for the Court observed thus : "The result is that when a claim is made for a deduction for which there is no specific provision in s. 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act. " The above principle was again applied by the Supreme Court in Nainital Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is entitled to deduction of the interest paid for the broken period on the purchase of Government securities in view of the specific provisions contained in sub-s. (2) of s. 20 of the Act. Sec. 20 of the Act, as already stated, is a special provision regarding deductions from interest on securities in the case of a banking company. So far as the computation of income by way of interest on securities is concerned the provisions that should be applied in the case of the assessee, being a banking company, is s. 19 r/w s. 20. Sub-s. (1) of s. 20 does not provide for deduction of the interest paid for the broken period on the purchase of Government securities. But sub-s. (2) only prohibits the deduction of the expenses deducted under cls. (i) and (ii) of sub-s. (1) of s. 20 again while considering the admissible deductions under ss. 30 to 37 for the purpose of computing the income of the company under the head "profits and gains of business or profession". From the provisions of sub-s. (2) of s. 20 it is clear that though the interest paid for the broken period on the purchase of Government securities is not an allowable deduction under sub-s. (1) of s. 20, there is no pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court. Before dealing with the decisions relied on by the learned counsel for the Revenue and found favour with by Shanmugam J. it is profitable to note certain salient aspects. The Supreme Court in United Commercial Bank Ltd. case concerned with the interpretation of the provisions viz., ss. 8, 10 and 24(2) of the Indian IT Act, 1922. The question that arose for consideration was as to whether the business loss of the earlier years carried forward could be set off against the income under head "Interest on securities". In Brooke Bond Co. Ltd. case, also the Supreme Court, inter alia, was concerned with carry forward and set off of loss of earlier year against income assessable under the head "Interest on securities". It is in those contexts the Supreme Court considered the question of computation of income under different heads and mutually exclusive nature of different heads of income. The observations of the Supreme Court in those cases has to be understood in the above background. In other words, the Supreme Court in those cases was not concerned with the question as to whether a deduction not provided for under a particular head of computation can be allowed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest : Provided further that no income-tax shall be payable on the interest receivable on any security of the Central Government issued or declared to be income-tax free: Provided further that the income-tax payable on the interest receivable on any security of a State Government issued income-tax free shall be payable by the State Government." I have already dealt with, the provisions of the IT Act, 1961 regarding computation of income under the head "Interest on securities" (ss. 18 to 21). The only point to be noted is that a provision similar to s. 20 was absent in s. 8 of the 1922 Act. This makes all the difference so far as the case on hand is concerned. 17. In the light of what is stated above, it is clear that the principles laid down by the Supreme Court in United Commercial Bank's case and in Brooke Bond Co. Ltd.'s case interpreting the provisions of ss. 8, 10 and 24 of the Indian IT Act, 1922, cannot have any application while considering the question raised in the case in the light of the provisions of ss. 18 to 21 and 28 to 37 of the IT Act, 1961. According to me, the principle laid down in the said decisions will not stand in the way of allowing the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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