TMI Blog1996 (10) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... character of being expenditure as has been shown by the assessee-bank in the relevant accounts. The two questions are in the following manner : " 1. Whether, on the facts and in the circumstances of the case, (i) the assessee is entitled to deduct interest representing the broken period? (ii) the Tribunal is right in law and fact in upholding the claim of the assessee and in directing the Assessing Officer to deduct the sum of Rs. 1,25,858 in computing the income on securities? 2. Whether, on the facts and in the circumstances of the case and also for the reasons given by the Commissioner of Income-tax (Appeals) in paragraph 4 of his order, the Tribunal is justified in law in interfering with the order of the Commissioner of Income-tax (Appeals) on the issue The Assessing Officer added back this sum of Rs. 1,25,858 representing the interest receivable for the concerned broken period relating to the purchase of securities. In this connection, the contention of the assessee that this amount representing the interest for the broken periods has to be understood as a deductible expenditure under section 18 of the Income-tax Act, 1961, was rejected. In the assessment order, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be read so as to give effect to find out the relationship between income, profits and gains chargeable under the head " Interest on securities " and " Income ", " Profits and gains " chargeable under the head " Business ". The discussion has further followed that in each situation the head should be understood as being specific to cover the issue arising from the particular source. The Income-tax Officer negatived the contention that the amount relating to the interest with reference to the broken periods could be understood as a deductible expenditure under section 18 of the Act and consequently disallowed the claim in regard thereto. Perusal of the assessment order shows inclusion of this amount of Rs. 1,25,868 in the computation of the income under the head " Interest on securities " relating to the broken period in paragraph 6 of the order. The first appellate authority-Commissioner of Income-tax (Appeals), Calicut, has also considered this question as to whether this amount of Rs. 1,25,868 relating to the broken period could be understood as business expenditure. As was done by the Income-tax Officer, the first appellate authority has also discussed the background, to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he security the understanding is that the price included a portion of the interest for the expired period. So such portion has to be segregated from the price paid to the seller of the security. This is what has happened in the case of the bank. " In other words, the Tribunal takes up a contemplated situation of a purchase of illustrative securities in the month of May at Rs. 110. What is determined is the real cost of purchase price determined at Rs. 108.33. In the process of understanding, the Tribunal has given recognition to accounting practice to take the cost of investment at Rs. 108.33 and showed separately the interest earned for the broken period amounting to Rs. 1.67. This was in view of the purchase of the security in question on May 31 of the year in question. This is because, according to the Tribunal, the interest for April and May becomes receivable by the purchaser as the holder of the security by reason of the determined dates of payment of interest. The Tribunal then reasons out that in fact interest for April and May amounting to Rs. 1.67 is really receivable by the holder of the security during that period which is forgone and which must be taken into consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of the interest for the unexpired portion can also be appreciated. However, the Tribunal has proceeded further and has observed that in ex-interest transactions, the understanding is that the interest for the expired portion is paid in addition to the purchase price. In the above example if the purchase is ex-interest at Rs. 110 the purchaser will have to pay Rs. 110 + Rs. 1.67 as interest towards the unexpired portion on the security held by the seller. The Tribunal has observed that in this situation the purchase price has to be considered as an outgoing in the hands of the person and when he receives interest of Rs. 5 on 30th September, the appointed day for payment of interest, the net income from the securities would only be Rs. 3.33 and not Rs. 5. The Tribunal has carried the discussion thereafter to observe that the purchase cost will be lesser than the quoted figure by the amount of interest transaction to the purchase cost will be at the quoted figure and interest for the unexpired period additionally paid. It is thereafter that the Tribunal has taken a somersault in the process of logical thinking, abruptly to observed " therefore, there is no difference so far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a bank. In this context there is no dispute and it is well established and acknowledged by the courts in this connection and it is also seen in regard thereto that even the Tribunal has respected the recognised accounting practice in regard thereto, to the effect that the cost of investment or the price of the security concerned would be Rs. 108.33 and interest of Rs. 1.67 would have to be understood separately, in terms of the recognised accounting practice and its canons. The Institute of Chartered Accountants of India have published a Compendium of Statements and Standard Accounting, including International Accounting Standards. In Chapter 14 thereof relating to the standards as on March 31, 1995, we find accounting standards for investments. Learned counsel for the assessee has not only placed before us the entire compendium but has also placed on record a xerox copy of page 76 relating to maintenance of investment accounts. He has also placed for our consideration Accounting Standard 13 relating to accounting for investments. We find therefrom, certain situations understood mainly with reference to maintenance of the accounts, with reference to the established accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e process of arriving at the net sale figure. It is in this context it is seen from note (b) in regard thereto that interest amount is always calculated with respect to nominal value. Thus, it would be seen that with reference to the question of calculation of the cost of an investment normally it includes brokerage, fees, duties, etc. In the process of accounting and keeping the accounts under proper heads the principal with interest, dividends, rentals, etc., are generally regarded as income. The procedure prescribes the modes of determination of the value of the investment in regard to which the amount of interest in regard to the broken period could be understood to go in the process of determination of the actual cost. It is not necessary, but the established accounting practice explains the arithmetical dissection for the purpose of accounting, leaving the question as to whether the amount of interest relating to the broken period although shown separately could acquire the character of expenditure in the process. The entire scheme shows that the amount is received. There is no question of payment of the amount at any time to the seller of the security in question. The situ ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
