TMI Blog1983 (10) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... uch securities chargeable in the year of account. (ii) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in directing that the amount of Rs. 7,83,288 credited in the accounts of the relevant previous year should be deducted from the profits chargeable in the assessment year 1977-78. (iii) Without prejudice to the above question that on the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in directing that Rs. 7,83,288 (Gross) or Rs. 4,07,283 (Net) should not be considered as part of the chargeable income for the year of account, without considering that such amounts represent part of the profits on sale of securities in the normal course of the business of the assessee in the year of account." In the assessee's appeal, the following ground has been taken : " The Commissioner (Appeals) erred in not directing the IAC to exclude the profit on revaluation of investments amounting to Rs. 7,83,288 in arriving at your appellant's total income. Your appellant submit that this amount represents notional book adjustment in respect of the securities held by your appellant and pray that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee at the time of the purchase of the securities as a revenue expense. At the same time, the department taxed the interest for the broken period, received by the assessee at the time of the sale of the securities shown by it, as a revenue receipt. In addition, a new complication was introduced this year by the assessing authority. Another practice regularly followed by the assessee was to value the securities held by it at the end of each year and offer for taxation the appreciation in their value (by way of interest earned due to the efflux of time) for taxation year after year. During the year under consideration, the assessee claimed that if the department insisted on following its own method of not allowing the interest for the broken period paid by the assessee at the time of the purchase as a revenue deduction, then the department (i) should not tax the interest for the broken period received by the assessee at the time of the sale of the securities which has been shown by the assessee as a revenue receipt ; and (ii) should not tax the notional profit on the revaluation of the securities held by the assessee at the end of the year as has been done by the assessee, bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, had to be made ; (iii) that such adjustments would mean making hundreds of entries in the books of account maintained by the assessee for several years which would involve enormous expense of time and money ; (iv) that there is no difference between the method formerly adopted by the assessee and accepted by the department and the new method adopted by the department from the assessment year 1974-75 (after appropriate adjustments), so far as the amount of income to be assessed over a period of years is concerned ; (v) that, therefore, it is best to accept the method followed by the assessee up to and including the assessment year 1973-74 ; and (vi) that if that earlier method is accepted, no further dispute would survive. He passed his order, accordingly. It is to be noted that his order was different from the orders passed by his predecessor-in-office for the earlier three years, and in the first two of those three years, the orders have been confirmed by the Tribunal. 7. Both the assessee as well as the department has come up in appeal against the aforesaid order of the Commissioner (Appeals). The Bench of the Tribunal which heard these appeals felt that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the interest for the broken period at the time of purchase or sale of the securities, the assessee had been following another practice consistently which was also accepted by the department for several years up to and including the assessment year 1973-74. This second practice was that the assessee was treating the securities as its stock-in-trade and valuing the same as closing stock at the end of each year. This valuation was done after taking into account the interest that accrued on the securities in the course of the year, i.e., since they were last valued on the closing day of the earlier previous year. The result was that the interest notionally earned every year was being offered for taxation year after year so that, on maturity or on sale of the security, only the balance of interest which has not already suffered tax was offered for taxation. Shri F.N. Kaka stated before us that the aforesaid method followed regularly by the assessee was in keeping with the general practice followed in the banking world and that method also reflected the true profits of the business carried on by the assessee. He stated that there was no need at all to change either of the aforesaid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method adopted by the department is consistently followed by taking the same to its logical conclusion, Shri F.N. Kaka filed before us the following illustration : " Face value of security Rs. 100 to mature in five years purchased by the bank for Rs. 92 (Rs. 90 representing the cost of security and Rs. 2 representing broken period interest). Investment Account Rs. Rs. 1st year to cash 90 by balance c/d 92 To profit on revaluation 2 ------- 92 ------- 2nd year to balance b/d 92 by balance c/d 94 To profit on revaluation 2 ------- 94 ------- 3rd year security is sold for Rs. 95---(Rs. 93 representing cost of security and Rs. 2 representing broken period interest). Rs. Rs. To balance b/d 94 By cash 93 By loss on sale 1 -------- -------- 94 94 -------- -------- According to the department profit on sale of security would be Rs. 3 taxable in the third year. According to the assessee's method of accounting, the following position will emerge : 1st year --- Profit on revaluation Rs. 2 will be offered for tax and the assessee will claim deduction for broken period interest of Rs. 2. 2nd year --- Profit on revaluation, Rs. 2 will be ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 4,07,283. If the sum paid by the assessee is to be taken as a part of the capital cost, then the sum received by the assessee will also have to be treated as a capital receipt. If the method adopted by the department is to be followed, then the books of the assessee have to be rewritten. The number of transactions in securities run into hundreds every year and rewriting the accounts in the way the department wants would involve enormous expense of time and money which is clearly avoidable because the method followed by the assessee also reflects the true profits of the business over a period of years. He relied on the decision in the case of K. Sankarapandia Asari Sons in this connection. In this case, it has been held that section 145 of the Income-tax Act, 1961 (' the Act ') enables the ITO to make adjustments in the method of accounting followed by the assessee only if the said method does not reveal the true profits of the business. If the system followed by the assessee reveals the true profits, then the ITO has no power to make any adjustments. Apart from the above, the ITO has no power under the Act to impose his own method of accounting on the assessee. As both the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowing passage appearing in Samath Iyengar's Law of Income-tax, Volume 1, Seventh edition : " No splitting of ' interest ' as between seller and purchaser : When an interest-bearing security is sold during the currency of an interest period, the question arises as to how far the purchaser is liable in respect of interest accrued due before the date of his purchase. It frequently happens that the purchaser pays to the seller the value for interest accrued till the date of the sale, and that the seller receives the equivalent of the interest up to the date of the sale from the purchaser. Nevertheless, for purposes of revenue law, the only person liable to pay tax is the person who is the owner of the securities at the date when the interest falls to be paid. Such owner is the person liable in respect of the entire amount of interest-Shree Jagdish Mills Ltd. v. CIT [1959] 36 ITR 279 (Bom.). Though as between the transferor and the transferee, interest may be computed de die in diem, it does not really accrue from day to day, as it cannot be received until the due date. This section makes it clear that the assessment is upon the person entitled to receive, viz., the holder of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d followed by the assessee might be correct over a period of years, but the method adopted by the department could not be said to be erroneous. He urged that the entire profit or loss on the sale or maturity of a security would arise on such sale or maturity and is liable to be taxed in that year. Of course, be stated that if a portion of the said profit had already been taxed, the same has to be deducted in the final year, or, the assessments of the earlier years have to be revised, leaving out the notional income already taxed, so that the full amount could be taxed in the year of sale or maturity. He stated that from a purely technical and legalistic point of view, the stand ,adopted by the assessing officer cannot be said to be erroneous. 15. Shri S.E. Dastur, intervening on behalf of City Bank N.A. as well as Mercantile Bank Ltd., supported the contentions urged by Shri F.N. Kaka. He pointed out that the two banks were consistently following the practice of treating the interest for the broken period on the revenue account for several years past, and the same was accepted by the department. In some years, interest on such broken periods paid by the assessee exceeded similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which really does not enure for the benefit of either the company or the department. Under these circumstances, we are of the opinion that no change should be made and the assessee's claim for deduction of the sum paid by way of interest should be allowed ". 16. Then Shri S.E. Dastur referred to a letter from the Chief Manager of the Central Bank of India, wherein it is stated that interest paid for the broken period was being treated as on revenue account by them. He also referred to certain extracts from Handbook of Modern Accounting by Davidson Weil (1977 edition) and The Modern Accountants' Handbook by Edwards Black (1976 edition). Both these authorities on accounting principles state that the buyer of the security acquires two different assets on buying a security between two due dates for paying interest. 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. Similar was the opinion expressed in the other standard books on accountancy, namely Accountants' Handbook by Wixon, Kell Vedfird (197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings in securities and every method, if followed fully, would reflect the true profits of the business. In the case before us, we are concerned with the question as to whether there is any difference between the method followed by the assessee in the past and the method adopted by the department subsequently, and if so, which method is the correct one. We may state that the methods followed by the assessee and that followed by the department differ on two different planes. In other words, a choice has to be made twice relating to the two different sets of alternatives. Firstly, either the interest paid at the time of purchase for the broken period may be treated as a revenue deduction in which case, a lower figure will represent the cost of the security for the purpose of determining the profits on its sale. Or, the interest paid for the broken period at the time of purchase may be treated as a part of the purchase price and be capitalised, in which case, the cost of purchase will be a higher amount for the purpose of determining the profit at the time of sale. One can choose either of these two methods. Either of the methods will lead to the correct result only if another importan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. If the assessee follows this procedure, then out of the total profit earned in the year of sale the profits already taxed in the earlier years as notional income must evidently be deducted and only the balance can be taxed in the year of sale. Otherwise, it would lead to double taxation ; a part of the profit having been taxed on notional basis in the earlier year and the same part of the profit again being taxed on actual accrual basis in the year of sale. Thus, the choice is between refraining from valuing the closing stock year after year (as has been done by City Bank N.A. and Mercantile Bank), or valuing the closing stock year after year and offering the incremental value as notional income as has been done by the assessee before us. In our considered opinion, either of these two methods, if followed consistently, and fully, will not make any difference on the total amount or the nature of the income over a period of years. The assessee before us has adopted the latter method. We do not see anything improper or irregular in it because this method also reflects the true profits of the business carried on by it over a period of years, as is clear from the example given by Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided to the employees. The case of the assessee before the IAC was that some portions of the residential premises given by the assessee to its employees were used for the purpose of the business of the assessee, and so that portion should be left out while computing the perquisite value of the accommodation. The IAC rejected this claim of the assessee on the ground that there was absolutely no proof in support of the claim that any portion of residential houses of the employees was used for the purpose of the business of the company. Again, the assessee claimed that the value of the perquisites relating to the accommodation should be worked out as per rule 3 of the Income-tax Rules, 1962. The IAC did not agree. He valued the perquisite of accommodation on the basis of actual rent paid as in the earlier years. Thus, he calculated the amount to be disallowed on account of accommodation perquisite under section 40A(5) at a figure which was more than the figure worked out by the assessee by Rs. 2,37,931. Regarding the car perquisite, the assessee claimed that the value thereof should be determined in accordance with rule 3. The IAC did not agree on the ground that full particulars ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in the case of Britannia Industries Co. Ltd. is not applicable. 22. We have considered the contentions of both the parties as well as the facts on record. We find force in the contentions raised for the department that where rent of the accommodation is known, rule 3 has no application. This is the decision of the Bombay High Court in the case of Bombay Burmah Trading Corpn. Ltd. Respectfully following the aforesaid decision, we uphold the order of the Commissioner (Appeals) on this point. Similarly, we also uphold the valuation of the car perquisite done by the department with reference to the actual expenses instead of resorting to rule 3 as claimed by the assessee. However, we find force in the assessee's alternative contention. The expenses relating to the non-business use of the cars has been estimated at Rs. 42,000 by the assessee, which, in our opinion, is quite fair. We, therefore, reduce the estimate of Rs. 60,000 made by the IAC to Rs. 42,000. Thus, the assessee gets a relief of Rs. 18,000 on this score. 23. We now take up the remaining grounds in the departmental appeal. One such ground relates to head office expenses. It says that the Commissioner (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions of section 44C should be applied only to the expenses incurred after 1-6-1976. In other words, the Commissioner (Appeals) held that the provisions of section 44C introduced with effect from 1-6-1976 did not have retrospective operation as there is nothing in the Act to lead to that conclusion. There was another claim made by the assessee before the Commissioner (Appeals), namely, the sum of Rs. 14,79,085 which was directly attributable to the Indian business should be allowed in full instead of subjecting the same to the formula laid down in section 44C. On this issue, the Commissioner (Appeals) found that the IAC had not examined the merits of the assessee's claim. He felt that the character of the expenditure of Rs. 14,89,085 had to be examined in order to see whether it comes under the expenses envisaged under section 44C or not. Further, it was to be seen as to whether in any of the earlier years, expenses of the type included in Rs. 14,89,085 were allowed to the assessee. Besides, the expenses incurred in the first two months of the previous year has to be separately ascertained. The Commissioner (Appeals) observed that in determining whether a particular item comes unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in force throughout the previous year has curtailed his rights. On the other hand, we find that the decision in the case of Best Co. (P.) Ltd. relied on by the assessee does help its case. In that case, it has been laid down : " The well settled proposition that the law as on the 1st day of April of any assessment year should govern the assessment for that year is not absolute but is subject to qualification by any express provision or necessary implication. A provision may be retrospectively brought into the statute book even subsequent to 1st April so as to affect any assessment year. Where any provision expressly states the date from which it is to be effective, it must be given effect to accordingly." We find that the above case is the only direct authority on the issue before us. We also find that section 44C has been brought into operation from 1-4-1976 without any retrospective operation. Hence, respectfully following the aforesaid decision, we uphold the order of the Commissioner (Appeals) on this aspect of the issue. Regarding the nature of the sum of Rs. 14,89,085, we agree with the direction of the Commissioner (Appeals) to the IAC to find out its true nature an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als).. In paragraph 30 of his order, the Commissioner (Appeals) has stated that he would give the same direction as given in his predecessor's order. At the end of his order, he has not stated anything more against the ground relating to the valuation of the car perquisites. However, in order to remove all doubts, we hereby hold, on the authority of the decision in the case of Bombay Burmah Trading Corpn. Ltd., that, because the expenses attributable to the non-business use of the cars has been ascertained, there is no need to take recourse to rule 3. Either the Commissioner (Appeals) has not given any direction to apply rule 3 (as understood by the assessee), in which case, the ground becomes infractuous. If he has actually given a direction that rule 3 is not applicable, we agree with the same for the reasons stated above. In either case, this ground has to be rejected and we do so. 29. The next ground states that the Commissioner (Appeals) erred in directing the exclusion of the club membership subscription fees paid in respect of the employees from the computation of disallowance under section 40A(5). The assessee claimed that the aforesaid expenses should not be considered f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decisions of the Punjab and Haryana High Court in CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619 and the Madras High Court in CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572. Hence, we uphold the order of the Commissioner (Appeals) on this point and reject this ground. 31. The last ground in this appeal states that the Commissioner (Appeals) erred in holding that the alleged loss of currency notes valued at Rs. 89,206 was an allowable expense. The assessee's Calcutta branch sent currency notes worth 10,000 US dollars by registered post parcel. The parcel was lost in transit. The assessee claimed the sum of Rs. 89,206 representing the aforesaid loss as a deduction while computing its business income. The IAC rejected the claim of the assessee on the ground that it was not known whether the aforesaid parcel was insured for loss during transit and that no evidence was produced to prove conclusively that the assessee actually lost the amount. 32. The assessee appealed to the Commissioner (Appeals) and contended that its claim should have been allowed. It was explained that the currency notes were sent by registered post through Calcutta GPO to Frankfurt, West German ..... X X X X Extracts X X X X X X X X Extracts X X X X
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