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American Express International Vs. Inspecting Assistant - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1983)6ITD373(Mum.)
AppellantAmerican Express International
Respondentinspecting Assistant
Excerpt:
1. these two appeals, one filed by the assessee and the other filed by the department, are heard together and disposed of by this common order for the sake of convenience.2. the assessee is non-resident banking company, deriving income from banking business. the assessment year involved in these appeals is 1977-78. the relevant previous year was the year ended 31-12-1976.3. in the departmental appeal, the following three grounds have been taken : (i) on the facts and in the circumstances of the case and in law, the learned commissioner (appeals) erred in holding that the amount of rs. 3,06,399 (sic) part of the purchase price of securities, being the estimate of the interest alleged to have accrued up to the date of purchase, should be allowed as deduction from the income from such.....
Judgment:
1. These two appeals, one filed by the assessee and the other filed by the department, are heard together and disposed of by this common order for the sake of convenience.

2. The assessee is non-resident Banking Company, deriving income from banking business. The assessment year involved in these appeals is 1977-78. The relevant previous year was the year ended 31-12-1976.

3. In the departmental appeal, the following three grounds have been taken : (i) On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the amount of Rs. 3,06,399 (sic) part of the purchase price of securities, being the estimate of the interest alleged to have accrued up to the date of purchase, should be allowed as deduction from the income from such 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.

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 the IAC be directed to exclude such amount in arriving at your appellant's total income.

4. The above grounds taken in the department's and the assessee's appeals are interlinked. The assessee was following a certain practice regarding the method in which it treated the value of the securities bought and sold by it, and the interest for the broken period paid at the time of buying the securities and received at the time of selling the securities. This method had been accepted by the department year after year, up to and including the assessment year 1973-74. In the assessment year 1974-75, the department did not accept the regular practice followed by the assessee. Instead, it held that the interest for the broken period paid by the assessee at the time of purchasing a security should not be allowed as a revenue expense as was being done in the past, but it should be disallowed as capital expense on the ground that it represented a part of the cost price of the security.

The assessee appealed to the AAC and then to the Tribunal, but did not succeed. In that year, the attention of the Tribunal was not drawn to the fact that the assessee was following a particular practice since several years and that fact was not present in the case of Addl. CIT v.Vijaya Bank Ltd. 1976 Tax LR 524 (Kar.). Hence, the Tribunal, relying on Vijaya Bank Ltd.' s case (supra) allowed the case of the department.

The matter has been taken by the assessee on a reference to the High Court and the same is pending there. In the subsequent two assessment years, namely, 1975-76 and 1976-77, the department followed the procedure adopted in the assessment year 1974-75, departing from the earlier practice a doped by the assessee. On appeal, the first appellate authority dismissed the appeal of the assessee relying on the order for the assessment year 1974-75. For the assessment year 1975-76, the matter was taken to the Tribunal. In this year, the nature of the regular practice followed by the assessee was pointed out to the Tribunal; but, the Tribunal, following their earlier decision, upheld the order of the first appellate authority.

5. In the assessment year 1977-78, which is now under consideration, the department again declined to follow the procedure regularly followed by the assessee in the past, and disallowed the assessee's claim to deduct the interest for the broken period paid by the 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, because the profit or loss on the sale of the securities would be determined by the difference of the sale proceeds and the cost of the security as determined by the department without any reference to the notional appreciation in the value of the security as recorded by the assessee in the intervening years. The assessing authority rejected both the contentions of the assessee.

6. The assessee appealed to the Commissioner (Appeals) and contended that the action of the department was contradictory and could not be sustained. It was explained that in the earlier years, his predecessor-in-office decided the issue in favour of the revenue because of the decision of Vijaya Bank Ltd.'s case (supra). However, that decision was rendered in a different context, and with reference to facts which are distinguishable. There was no reference therein to the regular method of accounting followed by the assessee. In any case, the consistent accounting practice followed by this assessee and the arguments based thereon were not canvassed before their Lordships of the Karnataka High Court in the case of Vijaya Bank Ltd. (supra).

Further, another decision of the Madras High Court had come up since then, namely, CIT v. K. Sankarapandia Asari & Sons [1981] 130 ITR 541.

In that Madras High Court decision, it has been held that the ITO may reject the method followed by the assessee only if that method did not reflect the true profits of the assessee's business. If it did reflect the true profits, then the ITO cannot reject the method regularly employed by the assessee. If it did not, he can make such adjustments to the incorrect method followed by the assessee as are called for to ascertain the true profits. But, there is no power with the ITO to impose his own method on the assessee. The Commissioner (Appeals), therefore, reconsidered the whole issue in detail in the light of the case law as well as in the light of the practice followed by the assessee regarding the various entries made in its books of account relating to the purchase and sale of the securities. He arrived at the conclusion that (i) the method formerly followed by the assessee up to and including the assessment year 1973-74 was not erroneous and was reflecting the true profits of the business carried on by it ; (ii) that if the method followed by the department was to be adopted, then certain inevitable adjustments, as pointed out 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 order of the Commissioner (Appeals) was not unreasonable and so the orders of the Tribunal for the assessment years 1974-75 and 1975-76 required reconsideration. Hence, they referred the matter to the President for being referred to a larger Bench and that is how this matter has come up before us.

8. Shri F.N. Kaka, the learned representative for the assessee, urged before us that the department was not justified in not accepting the regular method of accounting consistently followed by the assessee and accepted by the department for several years up to and including the assessment year 1973-74. He stated that the assessee was doing banking business in which it had to buy and sell securities. Some of the incomes arising out of these securities were assessable under the head 'Income from securities'. At the same time, the bank was also a dealer in securities so that certain income arising out of transactions in securities was assessable under the head 'Profits and gains of business or profession'. He explained that the assessee is to buy and sell securities in the course of its ordinary business, as a banker dealing in securities. On the date of purchase of the security, interest from the last date on which the interest was payable (according to the terms of the issue of the securities) till the date of purchase had already accrued and the assessee had to pay the interest for that broken period along with the cost of the security. The practice of the assessee was to keep the cost of the security and the interest for the broken period in two separate accounts and, to claim the latter as a revenue deduction. Similarly, when the assessee sold a security, it realised the interest for the broken period along with the price of the security. Consistent with the practice it followed while purchasing the securities, the assessee took the price of the securities to the 'security account', and determined the profit or loss therefrom with reference to the book value of the security ; and treated the interest for the broken period received by it as a revenue receipt and offered the same for taxation, just as it claimed the interest for the broken period paid by it as a revenue deduction. Shri F.N Kaka explained that the above practice was in keeping with the general practice followed by all bankers.

9. In addition to the above practice relating to the treatment 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 two practices as has been done by the department. His point was that the method followed by the assessee was quite allright in the sense that it was reflecting the true profits.

The method followed by the department would also reflect the true profits if, and only if (i) the interest for the broken period paid by the assessee at the time of the purchase was not allowed as a deduction ; (ii) the. interest for the broken period received by the assessee at the time of sale is also not assessed as income separately ; and (Hi) the income on the valuation of the closing stock of securities on the basis of the interest deemed to have been earned from year to year is not taxed as income. In that case, the entire amount paid by the assessee would become cost and the entire amount received by the assessee would become the sale proceeds and the difference between the two would represent the profit or loss ; and, there was no need to spread over that profit (or loss) over a period of years by way of valuing the closing stock year after year. Shri F.N. Kaka pointed out that the department has not allowed the deduction claimed by the assessee on the one hand and at the same time, has taxed the income shown by it which actually resulted in an anomalous position. Further, the incremental value of the securities on valuation from year to year which represented only the notional income in the books of the assessee were also taxed, which, in fact, amounted to taxing the same amount twice. He stated that the learned Commissioner (Appeals) had corrected the first anomaly by his decision to the effect that the interest for the broken period paid or received by the assessee should be treated as revenue expense or revenue receipt. The Commissioner (Appeals) has directed to accept the second practice of the assessee also so that the ground of the assessee claiming to exclude the incremental value of Rs. 7,83,288 no longer survived. If the direction of the Commissioner (Appeals) is reversed by allowing the ground in the departmental appeal, then Shri F.N. Kaka stated that this ground of the assessee will become alive and will require consideration and adjudication.

Otherwise, a further anomalous situation will be perpetrated.

10. In order to explain the method followed by the assessee, and the fact that there would be no difference in the quantum or nature of the income even if the 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). 1st year to cash 90 by balance c/d 92 To profit on revaluation 2 2nd year to balance b/d 92 by balance c/d 94 To profit on revaluation 2 3rd year security is sold for Rs. 95(Rs. 93 representing cost of security and Rs. 2 representing broken period interest).To balance b/d 94 By cash 93 By loss on sale 1__ 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. 3rd year - Broken period interest, Rs. 2 will be taxed and loss of Re. 1 on sale of security will be claimed as a deduction.

Therefore, as per the assessee's method of accounting also Rs. 3 will be brought to tax. Rs. 2 in the 2nd year and Re. 1 in the 3rd year.

Shri F.N. Kaka explained that both according to the assessee as well as the department, the taxable profit works out to Rs. 3 only. However, there is a difference in the year of taxation which will not make any difference over a number of years, specially in the case of a company.

However, what the department has done is that it has not followed even its own method consistently. While it has disturbed one side of the equation to its advantage, it has not made compensatory adjustments on the other side of the equation so that the position has become anomalous and detrimental to the assessee. In the above illustration, the department has disallowed the sum of Rs. 2 paid by the assessee in the year of purchase, but it has not treated the interest for the broken period received by the assessee in the year of sale, as capital receipt and so free from tax. Similarly, the department has taxed year after year the incremental value shown by the assessee of the stock of the securities while, at the same time, it is taxing the whole profit arising over a period of years on maturity or sale ignoring the profit already taxed on the incremental basis, as shown by the assessee year after year. He stated that the Commissioner (Appeals) had correctly directed to accept both the practices followed by the assessee, so that neither party could have any further grievance as they had none in all the past years up to and including the assessment year 1973-74.

11. Shri F.N. Kaka then took us through the actual figure for this year. The assessee had paid Rs. 7,13,682 as interest for the broken period on the purchase of securities. Similarly, the assessee had received a sum of Rs. 4,07,283 as interest for the broken period on the securities sold by it. After adjustment of those two figures, the assessee claimed a net sum of Rs. 3,06,399 as deduction. If the sum of Rs. 7,13,682 paid by the assessee is not to be allowed, then, on the same reasoning, the sum of Rs. 4,07,283 received by it should not be taken as income. However, the department has disallowed Rs. 7,13,682 and at the same time has taxed the sum of 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 (supra) 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 practices followed by the assessee were such that they also reflect the true profits of the business and as any change even to another equally correct method would involve rewriting of the books for a number of past years involving enormous amounts of avoidable expense and trouble, Shri F.N. Kaka urged that the impugned order of the Commissioner (Appeals) deserved to be upheld.12. Shri F.N. Kaka then urged before us that the facts of the case in Vijaya Bank Ltd. (supra)' were distinguishable. In that case, it was not shown that the assessee was following a certain practice consistently for a number of years and that the said practice had already been accepted by the department. Again, that was a case primarily concerned with the determination of income under Section 20 of the Act dealing with the head of income 'Interest on securities'.

Further, the decision in that case rested, to a large extent, on the English decisions in the case of Wigmore (Inspector of Taxes) v. Thomas Summer Son & Sons Ltd. [1926] 9 TC 577 and the case of CIR v. Pilcher's [1949] 31 TC 314. Shri F.N. Kaka explained that in Wigmore's case (supra), Justice Rowlatt was not considering any established practice in the banking world. He was concerned with the meaning of the peculiar language of the English Statute. In Pitcher's case {supra), the question was as to whether the price of a farm sold with some standing fruits could be bifurcated into (i) a revenue receipt comprising the price of the fruits ; and (ii) a capital receipt comprising the balance of the sale proceeds. Shri F.N. Kaka urged before us that the issue in the instant case is entirely different. The practice followed by the assessee is in keeping with the practice firmly established in the banking world in India. Hence, the ratio of the decision in the case of Vijaya Bank Ltd. {supra) could not be applied to the facts of this case. He pointed out that in the assessment year 1974-75, these distinguishing features were not brought to the notice of the Tribunal and that was why the Tribunal had no other alternative but to follow the case of Vijaya Bank Ltd. {supra).

13. Shri R.J. Joshi, the learned standing counsel for the department, on the other hand, urged that the Commissioner (Appeals) erred in his decision, when he said that the earlier practice of the assessee followed up to and including the assessment year 1973-74, should be followed. He referred to the following 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 interestShree 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 security on the date of maturity of interest. Further, the machinery sections of the Act do not provide for taking separately the vendor and the purchaser or to keep track of interest adjustments between transferors and transferees. Tax is exigible when the income is due to or is received and is on the person who receives. Haveli Shah Sardari Lal v. CIT [1936] 4 ITR 297 (Lahore). The principle is that the seller does not receive 'interest' ; he receives the price of the expectancy of interest, and expectancy of interest is not a subject-matter of taxation. The only person who receives interest is the purchaser. Wigmore v. Thomas Summer son & Sons Ltd. [1926] 9 TC 577. Where an interest bearing security is sold and part of the sale price represents accrued but hitherto unpaid interest, that accrued interest is not chargeable to tax, unless it can be treated as accruing from day to day.

He emphasised the point that whatever is paid by the buyer for acquiring an asset at the time of purchase was paid on the capital account. He also relied on the decision in the case of Vijaya Bank Ltd. (supra). In particular, he drew our attention to paragraphs 20 and 21 of the said judgment, wherein it has been held that the interest for the broken period had not accrued or crystallised into a debt and, thus, it had not become due and payable, and so it could not be characterised as income chargeable to tax in the hands of the transferor, or as expenditure deductible in the hands of the transferee. He pointed out that the decision in the case of Vijaya Bank Ltd. (supra) was rendered after considering the English cases, namely, that of Wigmore's case (supra), which was referred to by the Supreme Court in the case of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27.

However, he stated that there may not be any difference in the quantum of the income or the nature of income over a period of years as arrived at by the method adopted by the assessee and that arrived at by the method adopted by the department. Still, he urged that from a correct legalistic point of view, the method adopted by the assessing officer deserved to be upheld.14. Shri R. J. Joshi, however, stated that he did not wish to press ground No. 2 in the departmental appeal. Regarding the profit shown by the assessee, year after year, by revaluing the closing stock of the securities held by it, Shri R. J. Joshi stated that the method 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, he 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 interest paid by the assessee ; and in other years, the latter exceeded the former. However, in one particular year, the department differed from its own practice of accepting the method regularly followed by the assessee and treated the aforesaid interests as revenue payments. It so happened that in that year the payments exceeded the receipts and so there was a claim for deducting a net amount which was disallowed ignoring the past accepted practice. The assessee appealed and the matter was considered by the Tribunal in their order dated 10-2-1981 in IT Appeal No. 1361 (Bom.) of 1979 for the assessment year 1974-75. After considering the whole matter, the Tribunal held that the interest paid by the assessee could not be allowed under the head 'Interest on securities' but they are allowable as revenue expenditure under the head 'Business', if the assessee was following the same practice regularly over a period of years, and if that practice was usually followed in the banking world. For that purpose, the Tribunal remanded the matter to the IAC with a direction to ascertain as to what is the practice followed by the banks. Shri S.E. Dastur pointed out that the IAC made an enquiry as directed by the Tribunal and has now found as a fact that the practice followed by the assessee was indeed the general practice followed by all the banks in the banking world. In this connection, he pointed to the order dated 19-3-1981 of the Commissioner (Appeals) in the case of City Bank N.A.for the assessment year 1977-78, wherein the Commissioner (Appeals) has found that it is an accepted banking practice to treat the interest for the broken periods both while purchasing as well as while selling on revenue account. He also referred to the order dated 18-2-1982 in IT Appeal No. 1894 (Bom.) of 1981 in the case of IAC V. Mercantile Bank Ltd., where the Tribunal has found "that the banking companies have been following this method uniformly over the years and there is no loss of revenue over the period. Technically, the department would be right in considering such interest payment as part of the purchase consideration. It is also supported by the decision of the Karnataka High Court in the case of Vijaya Bank Ltd. {supra). But, if at this stage a change is to be introduced in the method of accounting for interest on such securities, it will create considerable confusion and chaos 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 (1970 edition), Advanced Accounts by Shukla & Grewal (1982 edition), Advanced Accountancy by Hrishikesh Chakraborty (1981 edition), Book-Keeping and Accounts by Spicer & Pegler (1972 edition), Carter's Advanced Accounts by Douglas Garbutt (1982 edition), and Munro's Book-Keeping and Accountancy by Alfred Palmer (1969 edition).

All these extracts referred to by Shri S.E. Dastur are found at pages 56 to 62 of the compilation relating to the Mercantile Bank Ltd.'s case (supra) filed before us. Shri S.E. Dastur emphasised the fact that the two banks represented by him were following regularly a certain practice which reflected the true profits of the business over a period of years and so, the said method did not require any disturbance because that will lead to general chaos and confusion relating to the account books of several years resulting in unnecessary waste of time and money. In this connection, Shri S.E. Dastur referred to the decision in the case of Miss Dhun Dadabhoy Kapadia v. CIT [1967] 63 1TR 651 (SC), wherein, it has been held that in working out capital gain or loss, the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purposes. He also referred to the decision of the Supreme Court in the case of Challaplli Sugars Ltd. v. CIT [1975] 98 ITR 167, wherein it has been held that the meaning of the expressions appearing in the Act should be construed in the sense which no commercial man would misunderstand. For this purpose, it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. Shri S.E. Dastur urged that the acceptable principles followed in the commercial world cannot be ignored without any compelling reason as has been held in these cases ; and that there was no reasonfar less, any compelling and accepted reason in the case before us to depart from the regular practice.

17. We have carefully considered the contentions of the different parties before us as well as the facts on record. In these appeals, we are concerned with the question as to how the profits arising from the business of dealing in securities have to be computed. Evidently, there is more than one method of recording the transactions relating to these dealings 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 important condition is followed. That condition is that the choice made with reference to the interest paid at the time of purchase should also be applied to the interest received by the assessee at the time of sale. In other words, there should be a consistent method of treatment for both purchase and sale. If this consistency is not maintained, the true profits will not be reflected.

The assessee, in this case, has chosen the first method. It has followed that method both for purchases as well as sales. Hence, there is no inconsistency. It has been following this method regularly over a number of years. That practice has also been accepted by the department for several years, namely, up to and including the assessment year 1973-74. As the method followed ' by the assessee is in keeping with the general commercial practice followed in the banking world, no exception can be taken to that method. Thus, we do not find any reason whatsoever to disturb that method regularly followed by the assessee and accepted by the department for so many years, especially when the said method reflects the true profits of the business carried on by it.

We, therefore, uphold the decision of the Commissioner (Appeals) on this point, namely, that the earlier practice of the assessee accepted up to and including the assessment year 1973-74 should be followed during the year under consideration. We are supported in this conclusion of ours by the various authorities on law and accountancy cited by the learned counsels for the assessee and the interveners.

18. We now come to the second choice. Either a person can keep the original cost of the security at the initial figure and refrain from revaluing it year after year, in which case, there will be a higher profit in the year of sale because a lower amount will be deducted from the sale proceeds in the year of sale. Alternatively, the initial cost may be increased year after year by the amount of interest accrued during the year and the additional interest may be offered to tax as deemed income. It is to be noted that no income actually accrues by mere revaluation. Hence, it is only a notional income. But, it is open to a businessman to value his closing stock year after year and offer the accretion to its value as income of that year. This method is recognised by the Supreme Court in the decision of Chainrup Sampatram v. CIT [1953] 24 ITR 481. 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 Shri F.N. Kaka and quoted earlier in this order. We, therefore, agree with the Commissioner (Appeals) that the method followed by the assessee of offering the incremental interest to tax as notional income year after year should be accepted. In fact, the department has accepted this method not only up to and including the assessment year 1973-74, but in the two subsequent assessment years also. It is only in the assessment year 1977-78, which is now before us, that this additional complication was introduced by the assessing authority. We do not find any justification for the same. If the method followed by the assessee is accepted on this issue also, then as rightly observed by the Commissioner (Appeals), no further issue would survive for consideration. We are convinced that there is no need at all to depart from the method of revaluing the stock as adopted by the assessee and accepted by the department for several years and that it should be followed as in the past. This will also result in the reflection of the true profits of the business carried on by the assessee. We find support for this conclusion of ours in the case of K. Sankarapandia Asari & Sons (supra). Hence, the ground taken in the assessee's appeal relating to the deletion of the notional profits shown by it on valuation of the closing stock has to be rejected as it no longer survives for consideration. We have considered the decision in the case of Vijaya Bank Ltd. (supra), but, we agree with the learned counsels for the assessee and the interveners that the facts therein were quite different. In that case, no argument based upon the regular practice followed by the assessee was canvassed before their Lordships of the Karnataka High Court. Further, in the instant case, we are concerned with the assessment of interest under the head 'Profits and gains of business or profession' and not under the head 'Interest on securities'. For the above reasons, we reject the grounds numbered 1 and 3 of the departmental appeal, as well as ground No. 2 in the assessee's appeal. As stated earlier, the department did not press ground No. 2 taken in its appeal.

19. We now take up the only other ground in the assessee's appeal. This has two parts. Both the parts relate to the valuation of the perquisites under Section 40A(5) of the Act. The first part relates to the accommodation while the second part relates to the cars provided to the employees. The case of tne 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 relating to the actual use of the three cars owned by the assessee during the year under consideration were not available.

Instead, the IAC estimated the disallowable expenses in respect of the car perquisites under Section 40A(5) at Rs. 60,000. Deducting the sum of Rs. 27,800 calculated by the assessee as disallowable under Rule 3, the IAC disallowed a further sum of Rs. 32,200. It may be stated that in the earlier assessment year also, the assessee's claim to apply Rule 3 in this behalf was not accepted by the department.

20. The assessee appealed to the Commissioner (Appeals), and contended that the value according to Rule 3 should have been adopted both in respect of the accommodation perquisite and the car perquisite for the purpose of determining the amount to be disallowed under Section 40A(5). The Commissioner (Appeals) did not agree on the ground that the Tribunal in their order dated 5-3-1979 in IT Appeal No. 153 (Bom.) of 1978-79 for the assessment year 1972-73 have rejected the contention of the assessee.

21. Shri F.N. Kaka urged before us that the assessee's claim to value the aforesaid perquisites relating to the accommodation and the car should have been valued as per Rule 3. He relied on the decision in the case of CIT v. Britannia Industries Co. Ltd. [1982] 135 ITR 35 (Cal.) in support of his contention. As an alternative argument regarding the valuation of the car perquisite, he pointed out that the expenses attributable to the use of the cars by the employees for non-business purposes was shown by the assessee at Rs. 42,000 as against Rs. 35,000 shown and accepted last year. Hence, he contended that the estimate of Rs. 60,000 made in this regard by the IAC was on the high side. Shri Prasant Ray, the learned representative for the department, on the other hand, supported the order of the Commissioner (Appeals). He stated that this very point has been decided in favour of the department by the Tribunal in the earlier year. He referred to . the decision in the case of Bombay Burmah Trading Corpn. Ltd. v. CIT [1983] 12 Taxman 178 (Bom.) wherein the decision of the Calcutta High Court in the case of Britannia Industries Co. Ltd. {supra), has been distinguished. Shri P. Ray urged before us that the facts of the case before us come within the purview of the aforesaid Bombay High Court decision in the case of Bombay Burmah Trading Corpn. Ltd. (supra), and so, the decision in the case of Britannia Industries Co. Ltd. (supra) 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. (supra). 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 (Appeals) erred in holding that the provisions of Section 44C of the Act do not apply to the assessment for the assessment year 1978-79, except in regard to the expenditure incurred after 1-6-1976 and in deleting the disallowance of Rs. 14,89,085 on that ground. In this connection, it may be pointed out that Section 44C was introduced in the Act with effect from 1-6-1976. The assessee's previous year was the period from 1-4-1976 to 31-3-1977, relevant for the assessment year 1977-78 which is now under consideration. The case of the assessee was that up to 31-5-1976, the head office expenses should be allocated pro rata as in the past and the formula laid down in Section 44C should be applied only to the expenses incurred after 1-6-1976 which is the date with effect from which Section 44C was brought into force. The IAC did not agree with the above contention. He held that the provisions of Section 44C were applicable to the assessment year 1977-78 and since the previous year relevant to the assessment year 1977-78 began from 1-4-1976, the formula laid down in Section 44C should be applied to the expenses incurred in the entire previous year including the period prior to 1-6-1976.

The claim of the assessee was for Rs. 57,56,956 on account of expenses allocable to the Indian business and Rs. 14,89,085 as expenses directly incurred by the head office relating to India, totalling Rs. 72,56,041.

The IAC allowed only the sum permissible under Section 44C namely, five per cent of the total income computed at Rs. 5,28,10,702, which came to Rs. 26,40,535. Thus, the claim of the assessee to the extent of Rs. 46,15,506 (Rs. 72,56,041 minus Rs. 26,40,535) was disallowed by him.

24. The assessee appealed to the Commissioner (Appeals) and contended that its claim should have been allowed. It was contended that the restrictive provisions of Section 44C could be applied only to the expenses incurred after 1-6-1976 with the result that for the expenses incurred in the first two months of the previous year, the old formula should be applied, namely, expenses directly related to the Indian business should be fully allowed and a portion of the composite expenses incurred for all the countries should also be allocated to the Indian business in proportion of the ratio of the Indian business to the world business. The Commissioner (Appeals) agreed with the assessee that the provisions 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 under the head office expenditure envisaged under Section 44C, regard had to be paid to the definition of 'head office expenditure' as found in Section 44C and no importance is to be given as to how the assessee has classified the expenses. Another aspect of the issue considered and decided by the Commissioner (Appeals) was that 5 per cent of the head office expenditure relating to Rs. 55,122 being profit on revaluation of foreign currency should be allowed. In view of the above findings of the Commissioner (Appeals), he restored the matter to the file of the IAC with a direction that Section 44C should be applied only to the expenses incurred after 1-6-1976, that the character of the expenditure of Rs. 14,89,085 should be determined and the law applied, accordingly, and 5 per cent of Rs. 55,122 should be allowed under Section 44C.25. Shri P. Ray urged before us that the Commissioner (Appeals) erred in his decision. He relied on the decision in the case of Maneklal Vallabhdas Parikh & Sons v. CIT [1969] 72 ITR 637 (Guj.) for the proposition that section 44C introduced with effect from 1-6-1976 applied to the whole of the previous year relevant to the assessment year 1977-78. He also placed reliance on the decision in the case of Reliance Jute & Industries Ltd. v. CIT [1919} 120 ITR 921 (SC) in this connection. Shri F.N. Kaka, on the other hand, supported the order of the Commissioner (Appeals). He placed reliance on the decision in the case of CIT v. Best & Co. (P.) Ltd. [1979] 119 ITR 830 (Mad.).

26. We have considered the contentions of both the parties as well as the facts on record. We find that the decision in the case of Maneklal Vallabhdas Parikh & Sons (supra) is of no help to the department. In that case, the Taxation Laws (Amendment) Act, 1960 had retrospective effect from 1-4-1960 and so, the Court held that the provisions thereof applied from 1-4-1960. Section 44C has no such retrospective operation.

Similarly, the case of Reliance Jute & Industries Ltd. (supra) is also distinguishable on facts. In that case, the question was whetherSsection 24(2) of the Act which was in force in the previous year should not be applied merely because according to the law as it existed prior to the previous year, a different state of affairs prevailed. The Court held that the assessee was not entitled to claim any vested rights on the ground that the amended law which was 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. (supra) 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 and decide the matter in accordance with the law. We also uphold the decision of the Commissioner (Appeals) that the sum of Rs. 55,122 qualifies for being considered under the formula laid down in Section 44C, because a similar point has been decided in favour of the assessee by the Tribunal in their order dated 12-9-1979 in IT Appeal No. 785 (Bom.) of 1978-79 for the assessment year 1973-74 in the case of this very assessee, with which we fully agree. We, therefore, reject this ground.

27. The next ground in this appeal states that the Commissioner (Appeals) erred in holding that the proportionate expenses deductible underSsection 20 for computing the income chargeable to tax under the head 'Interest on securities' should not be considered for restriction under the provisions of Section 40A(5), even though such interest on securities and on treasury bills was part of business profits. The assessee's case was that interest on securities and treasury bills were assessable under the head 'Interest on securities', and so, the proportionate expenses relatable thereto should be outside the purview of Section 40A(5). The IAC did not agree. On appeal, the Commissioner (Appeals) agreed with the contention of the assessee. Shri P. Ray urged before us that the Commissioner (Appeals) erred in his decision, while Shri F.N. Kaka supported the order of the Commissioner (Appeals). We have considered the contentions of both the parties as well as the facts on record. We find that this very issue has been decided in favour of the assessee by the Tribunal in their order dated 27-9-1974 in IT Appeal Nos. 2756 and 2757 (Bom.) of 1973-74 relating to the assessment years 1969-70 and 1970-71 in the case of this very assessee.

We have gone through the aforesaid order and we are in agreement with the conclusion arrived at therein. Hence, we uphold the order of the Commissioner (Appeals) on this point and reject this ground.

28. The next ground states that the Commissioner (Appeals) erred in holding that the valuation of perquisites relating to the user of the cars by the employees of the assessee should be done under Rule 3. We find that we have already considered this ground in the assessee's appeal in paragraph 22 of this order. We do not find any categorical direction of the type alleged in the ground taken in the departmental appeal in the order of the Commissioner (Appeals). 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. (supra), 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 infructuous. 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 for disallowance under Section 40A(5). The IAC did not agree. On appeal, the Commissioner (Appeals), in paragraph 31 of his order, gave the same direction as his predecessor-in-office gave in his appellate order for the earlier year. Shri P. Ray urged before us that the Commissioner (Appeals) erred in his decision. On the other hand, Shri F.N. Kaka supported the order of the Commissioner (Appeals).

We have considered the contentions of both the parties as well as the facts on record. We find that an exactly similar issue has been decided by the Tribunal in favour of the assessee in their order dated 3-3-1982 in IT Appeal No. 1178 (Bom.) of 1980 for the assessment year 1975-76 in the case of this very assessee. We have gone through the aforesaid order and we agree with the conclusion arrived at therein. We, therefore, uphold the decision of the Commissioner (Appeals) on this issue, and reject this ground.

30 The next ground states that the Commissioner (Appeals) erred in holding that interest on loan accrued and credited to the suspense account is not chargeable in the year of account. The assessee considered that a sum of Rs. 1,08,132, being interest on certain advances, was of doubtful recovery because the principal amounts themselves were in danger of becoming irrecoverable. The assessee claimed that the aforesaid sum of Rs. 1,08,132 credited in the suspense account should not be taken as the income of the assessee. The IAC did not agree and brought the amount to tax. On appeal, the Commissioner (Appeals) allowed the claim of the assessee. Shri P. Ray urged before us that the Commissioner (Appeals) erred in his decision. He relied on the decision in the case of State Bank of Travancore v. CIT [1977] 110 ITR 336 (Ker.). In this case, it has been held that interests accrued on advances, though not realised, were liable to income-tax. Shri F.N.Kaka, on the other hand, supported the order of the Commissioner (Appeals). He relied on the decision of the Tribunal in their order, dated 13-2-1981 in IT Appeal Nos. 867 and 868 (Bom.) of 1980 for the assessment years 1973-74 and 1974-75 in the case of this very assessee, wherein this matter has been decided in favour of the assessee. We have gone through the aforesaid order of the Tribunal and we fully agree with the arguments given and the conclusion arrived at therein. This view of the Tribunal is supported by 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 Germany. The Frankfurt office intimated the assessee that the parcel never reached them. It was later learnt that the parcel reached Frankfurt airport on 24-4-1976 but disappeared thereafter. A complaint was lodged with the criminal section of the Frankfurt postal authorities but nothing tangible came out of it. It was urged that the currency was a part of the stock-in-trade of the assessee and so, its loss was admissible as a revenue loss. The Commissioner (Appeals) agreed with the contention of the assessee and allowed the claim of the assessee.

33. Shri P. Ray urged before us that the Commissioner (Appeals) erred in his decision, while Shri F.N. Kaka supported the order of the Commissioner (Appeals). We have considered the contentions of both the parties as well as the facts on record. We find from the note at page 51 of the compilation filed before us that the assessee did send the parcel containing the currency to Frankfurt, that the parcel reached Frankfurt airport and became untraceable thereafter. It is apparent that the currency notes were part of the stock-in-trade of the assessee which was doing banking business and that the loss arose in the ordinary course of carrying on of its business. Under the circumstances, we agree with the finding of the Commissioner (Appeals) on this point and so, we uphold the same.

34. In the result, the assessee's appeal is partly allowed, while the departmental appeal is dismissed,


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