Bombay High Court
Standard Chartered Bank vs Deputy Commissioner Of Income-Tax. on 3 April, 1995
Equivalent citations: [1995]54ITD570(MUM)
ORDER
Per Shri V. Dongzathang, Vice-President - These cross-appeals are directed against the orders of the CIT (Appeals) for the assessment years 1989-90 and 1990-91.
2. The assessee is an International Bank functioning in India through 24 branches located in different parts of the country. For the accounting period from 1-1-1988 to 31-3-1989, relevant to the assessment year 1989-90, the assessee filed a return showing an income of Rs. 20,63,98,977. The Assessing Officer made an assessment under section 143(1) (a) of the I.T. Act, wherein a sum of Rs. 5,81,15,549, being the interest accrued but not due on securities at the close of the year, was included in the assessable income and also levied an additional tax under section 143(1A) of the Act. The assessee sought for rectification of the said intimation sent under section 143(1) (a) on the reasoning that the addition was not covered by the above provisions. The Assessing Officer rejected the application. On appeal, the CIT (A) allowed the same holding that the taxability of interest on securities in question would be decided only in the regular assessment made under section 143(3) of the Act. In the assessment under section 143(3) of the Act, the Assessing Officer added back the said sum of Rs. 5,81,15,549.
3. Aggrieved by the said addition, the assessee took up the matter in appeal before the CIT (A) and contended that interest on securities cannot be held taxable before the due dates of the interest. The CIT (A), however, rejected the claim on the ground that under section 145(1) interest on securities is taxable based on the regular method of accounting employed by the assessee. This view was taken by the CIT (A) on the reasoning that the special provisions of sections 18 to 20 of the I.T. Act have since been deleted by the Finance Act, 1988, with effect from assessment year 1989-90. Since the assessee has been following mercantile system of accounting and showing the said interest income on securities on accrued basis, the claim of excluding the same from the taxable income of the year was not justified.
4. The assessee is still aggrieved and has come up in appeal before the Tribunal. Shri N. A. Dalvi, the learned counsel for the assessee, vehemently objected to the orders of the learned CIT (A). According to him, the learned CIT (A) grossly erred in rejecting the claim for exclusion of the interest on securities accrued but not due from the assessable income of the year. According to him, the assessee has been following this system of accounting consistently in the past and the same has been accepted by the revenue authorities. It has the sanction of the decision of the Honble Supreme Court and also various High Courts. The Honble Supreme Court has held that interest on securities does not accrue day to day but accrues only on the due dates. This view has been fully explained by the Honble Karnataka High Court in the case of CIT v. Canara Bank [1992] 195 ITR 66. The learned counsel also cited the following decisions in support of the above proposition :-
1. Wigmore (HM Inspector of Taxes) v. Thomas Summerson & Sons Ltd. 9 TC 577.
2. Rajniti Prasad Singh v. CIT 4 ITC 264 (Pat.).
3. Haveli Shah Sardari Lal v. CIT [1936] 4 ITR 297 (Lahore).
4. Dalmia Dadri Cement Ltd. v. CIT [1980] 126 ITR 851 (Delhi).
5. It is further submitted that the income which is assessable is to be decided on the basis of the method of accountancy and not on the basis of the actual entries made in the books. The method of maintaining the accounts was one thing and the actual entries in the accounts maintained was a different thing. Even if the said income from interest on securities is deemed to accrue from day to day, it can only be treated as assessable income when the same is due and not before. This view has been in line with the provisions of sections 18 to 21 of the I.T. Act and the same principle regularly followed by the assessee has to be accepted and the interest income on securities should be assessed only on due basis.
6. On the other hand, Shri K. L. Tilakchand, the learned Sr. Departmental Representative, vehemently supported the order of the learned CIT (A). According to him, the provisions of sections 18 to 21 are special provisions for assessment of interest on securities. These provisions have been omitted by the Finance Act, 1988 with effect from 1-4-1989. In such a case, the income from interest on securities has to be assessed in the light of the general provisions of the Act as rightly held by the CIT (A). The present assessment is relevant for the assessment year 1989-90 and, therefore, the claim of the assessee is to be decided exclusive of the provisions of the sections 18 to 21 of the I.T. Act which have since been omitted. It is also submitted that the relevant decisions rendered by the various Courts on the basis of these specific provisions have to be ignored while considering the assessability of the income from interest on securities for the present and subsequent assessment years.
7. According to Shri Tilakchand, the learned Sr. Departmental Representative, the facts of the case and the actual nature of the market operations clearly establish that the interest on securities is totally distinct from the value of the securities and the cost thereof. According to him, the value of the securities fluctuates according to the market conditions. However, the interest on the securities is always separately calculated and the seller and the purchaser receive and make the payments respectively on the basis of the transactions. The interest is normally calculated up to the date of the transaction and the purchaser has to pay the same separately as distinct from the cost of the securities which is quoted in the market from time to time. The assessee in this case has been calculating the interest on accrued basis and entering the same in the suspense account without passing through the profit & loss account. The assessee, however, claimed deduction of the interest in the profit & loss account for the broken period. Keeping in view of the system of accounting maintained by the assessee, it is submitted that the interest is rightly assessable on the basis of accrual as done by the Assessing Officer.
8. It is admitted that the system of accounting followed by the assessee has been accepted in the earlier assessment years. But, this acceptance is only due to the specific provisions of sections 18 to 21 of the Act which provide for assessment of interest on securities. In the absence of such specific provisions now in the statute, the assessment has to be made in the light of the commercial principles and on the basis of the system of accounting followed by the assessee. There is, therefore, no infirmity in the order of the learned CIT (A). The view taken by the Assessing Officer and the CIT (A) is fully fortified by the decision of the Supreme Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 and the recent decision in the case of CIT v. British Paints India Ltd. [1991] 188 ITR 44. Though the assessee may be following consistently its practice, even then the Assessing Officer is entitled to interfere with the said system if such method of accounting does not disclose the true picture of profits and gains of the year. It is, therefore, submitted that no interference is called for in this regard.
9. The assessee in this case also claimed deduction of interest paid for broken period at the time of purchase of securities. In doing so, the assessee treats the purchase of securities as stock-in-trade and claimed deduction for the period up to the date of purchase and debited the same to the profit & loss account. In the cases of securities sold during the year, such adjustment is found to be acceptable. However, if the securities are not sold during the same previous year, there is difference on the taxable income to the extent of such interest debited to the profit & loss account. The Assessing Officer, therefore, asked the assessee to furnish the quantum of interest debited to profit & loss account pertaining to those securities which have been purchased but not sold in the same previous year. The assessee, however, did not provide these figures taking the stand that these figures were not readily available with it and that the additions made by the Assessing Officer in the past are also only on estimated basis. The Assessing Officer accordingly estimated such Rs. 70,00,000 and added the same to the income of the assessee.
10. Aggrieved by the said addition, the assessee took up the matter in appeal before the CIT (A) who, however, deleted the addition in the light of the decision of the Tribunal.
11. The revenue is aggrieved and has come up in appeal before the Tribunal and contended that the decision of the Tribunal for the earlier assessment years will have no application to the facts of the case. Firstly, the decision was made by the Tribunal mainly on the reasoning that the withdrawal of the beneficial circular will have no effect to the right of the assessee. According to Shri Tilakchand, the learned Sr. Departmental Representative, the beneficial circular in this case cannot have any effect to the claim of the assessee for the assessment year under consideration, namely, 1989-90. The circular was issued on 24-4-1991 and withdrawn on 31-7-1991. In such a case, that circular has absolutely no application to the present assessment year. Therefore, the reliance of the Tribunal in the earlier years on the beneficial circular No. 599 of 24-4-1991 has no relevance to the facts of the present assessment. Even on accounting principles, it is submitted that the claim cannot be allowed particularly when the assessee did not show the interest income on accrued basis. Therefore, it is contradictory to treat this amount as interest in the nature of revenue expenditure allowable in the profit & loss account while not showing the interest income which accrued at the end of the accounting year. There is, therefore, no basis for allowing the said claim.
12. On the other hand, Shri N. A. Dalvi, the learned counsel for the assessee, submitted that this issue is squarely covered by the decision of the Tribunal for the assessment year 1988-89. For the reasons fully discussed by the Tribunal in the said order, it is submitted that no interference is called for in this regard.
13. The assessee also claimed depreciation on securities which was disallowed by the Assessing Officer. The assessee in this case credited the profit & loss account with an amount of Rs. 94,25,17,601 as income from interest and discount. While arriving at this amount, the assessee had, inter alia, claimed deduction of Rs. 1,73,22,536 on account of depreciation on Government and R.S. securities. The Assessing Officer did not allow the claim on the reasoning that these securities held by the assessee are treated as investment and not as stock in trade. Following the decision of the Supreme Court in the case of Vijaya Bank Ltd. v. Addl. CIT [1991] 187 ITR 541, it was held that the price paid for the purchase of securities was capital outlay. The learned CIT (A) upheld the disallowance.
14. The assessee is aggrieved and has come up in appeal before the Tribunal contending that the said claim is to be allowed as done by the Tribunal for the assessment year 1987-88 in the assessees own case. This issue came up before the Tribunal in the assessment year 1987-88. In that case, the Tribunal allowed the claim and upheld the order of the CIT (A) in view of the decision of the Spl. Bench of the Tribunal in the case of American Express International Banking Corpn. v. IAC [1983] 6 ITD 373 (Bom.). It is also submitted that similar view has been taken in the assessment years 1985-86 and 1986-87. On the other hand, Shri Tilakchand, the learned Sr. Departmental Representative, supported the orders of the learned CIT (A). According to him, the earlier decisions of the Tribunal have been rendered in the line of the specific provisions in the Income-tax Act. With the omission of sections 18 to 21, the entire procedure has to be reviewed and, therefore, the question of allowing depreciation by treating the securities as stock in trade does not arise. Since the decision in the case of Vijaya Bank Ltd. (supra) fully covered the case, there is no question of allowing depreciation on the capital outlay. It is, therefore, submitted that no interference is called for in this regard.
15. We have carefully considered the rival submissions in the light of the material on record. On a careful reading of the orders of the revenue authorities in the light of the material on record, it is seen that both the revenue and the assessee are taking contrary stands by compartmentalising particular transactions which could have been considered as a single transaction. The assessee in this case purchased various Government securities and other securities from time to time. These securities are quoted in the market from time to time. These securities normally bear interest at a particular percentage. When the assessee purchased the securities, the price is normally paid at the market price as against the face value of the securities. The assessee also has to pay interest that has accrued up to the date of purchase which is normally determined by the broker in the bill itself. As rightly pointed out by the Assessing Officer, if all these securities were sold within the same previous year, there would not have been any controversy in the accounting system for these securities and the income therefrom. However, this does not happen in all cases. The assessee, therefore, did not include the interest paid up to the date of purchase as forming part of the cost of the securities and claimed the same in the profit & loss account. Similarly, at the end of the year, the assessee calculated the accrued interest on these securities and transferred the same to the suspense account without passing it through the profit & loss account. The Assessing Officer, therefore, disallowed the claim of interest for the broken period paid up to the date of purchase holding that the entire purchase price, i.e., the cost of the shares plus the interest, formed the capital outlay. He, however, added the accrued interest as forming part of the income of the year. There is, therefore, contradiction in the view taken by him. If the interest which accrued at the end of the previous year is to be treated as a revenue receipt, then it follows that the interest paid up to the date of purchase has to be allowed as revenue expenditure. Otherwise, the income of the assessee for the year cannot be properly computed. Similarly, the assessee did not show the interest which accrued up to the end of the previous year as its income on the reasoning that the interest is not due for payment. Since the assessee has been following consistently the system of accounting showing income or due basis, it is claimed that this system should be accepted as done in the earlier years. The claim of the assessee also cannot be accepted in view of the fact that the assessee itself had been claiming the expenditure for the broken period as deduction during the year. It is, therefore, necessary that the outgoing and the incoming income on account of interest had to be properly adjusted so as to arrive at the real and true profit of the assessee during the accounting period relevant to the assessment year.
16. Similarly, the assessee claimed depreciation on the securities on the reasoning that they are the stock in trade. If the securities are in the nature of stock in trade, then the cost including the interest paid for up to the date of purchase shall form part of the cost and the value of the securities including the interest accrued would form part of the closing stock so that the cost of the goods entered on the other side of the accounts at the time of the purchase will be cancelled out of the entries by the unsold stock. This would leave only the transactions on which there have been actual sales in the course of the year showing profit or loss actually realised on the years trading. The Honble Supreme Court have been seized of this problem from time to time. In the latest decision in the case of British Paints India Ltd. (supra), the principle of valuation of closing stock was restated. It was held that even though that assessee had adopted a regular system of accounting, it was the duty of the Assessing Officer under section 145 of the I.T. Act, 1961, to consider whether the correct profits and gains could be deduced from the accounts so maintained. If he was of the opinion that the correct profits could not be deduced from the accounts, he was obliged to have recourse to the proviso to section 145 of the I.T. Act, 1961. Any system of accounting which excluded, for the valuation of stock in trade, all costs other than the cost of raw materials for the goods-in-process and finished products, was likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system might produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, such a system was apt to diminish the assessment of taxable profit of a year. The profit of one year was a likely to be shifted to another year which would be an incorrect method of computing profits. Each year being a self-contained unit, and the taxes of a particular years being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee was found to be such that income could not properly be deduced therefrom. It was, therefore, not only the right but the duty of the I.T.O. to act in exercise of his statutory power for determining what, in his opinion, would be the correct income. It was further stated that there is no estoppel/in these matters and the Officer is not bound by the method followed in the earlier years.
17. As per the system of the accounting maintained by the assessee and the claim made by it, it is apparent that it will not be able to reflect the correct profits of the year. The Government securities cannot be treated as capital outlay at the stage of the purchase and as stock-in-trade at the end of the year. If, in fact, it is the stock in trade of the assessee, then the value of the stock in trade at the beginning and at the end of the accounting year should be entered in the profit & loss account. Similarly, if the interest paid by the assessee is claimed under the head "revenue" and debited to the profit & loss account, then the corresponding entry of the price paid including the accrued interest should enter the credit side of the profit & loss account. Otherwise, it will not be possible to compute the correct income of the year.
18. Both the parties compartmentalised each transaction and therefore confused the whole issue. We, therefore, consider it necessary to set aside the order of the CIT (A) on these points and restore the matter to the file of the Assessing Officer with a direction that he will compute the income in accordance with law after giving full opportunity to the assessee to substantiate the claim. In doing so, the Assessing Officer will ascertain whether the dealing in the securities by the assessee is in the nature of stock in trade or in the nature of a capital outlay for the purpose of investment. Once the nature of trading is ascertained, then the allowability of the claims should find their respective places. If the purchases of the Government securities are in the nature of stock in trade, then the cost of the securities plus the interest paid would form part of the cost of the goods, i.e., purchase price. Similarly, at the end of the year, the unsold securities along with the accrued interest will have to be entered in the credit side of the profit and loss account so as to balance each other. There is no universal law that purchases of securities are in the nature of capital outlay or otherwise. What is a capital asset to one person can be a stock in trade for another person depending on the nature of business and the manner in which it is dealt with. The Assessing Officer will, therefore, ascertain the nature of the trading and then redecide the issues in accordance with law.
19. This disposes of ground Nos. 1 to 5 of the appeals of the assessee for assessment years 1989-90 and 1990-91 and ground No. 1 of the appeals of the revenue for the same assessment years.
20. to 25. [These paras are not reproduced here as they involved minor issues.]