N.P.GUPTA,J. - (1.) THESE four appeals involve common questions of law, and are between the same parties, and are, therefore, being decided by common order. Though these are two sets of appeals, one being Appeal No. 12/2005, which has been filed against the order of the learned Tribunal dt. 15.7.2004, while the other three appeals are against the common judgment of the Tribunal dated 29.5.2003, but then the judgment dt. 15.7.2004 simply follows the judgment dated 29.5.2003. Thus these appeals involve common questions of law. Appeal No. 12 was admitted vide order dt. 24.3.2005, by framing the following substantial question of law: Whether in the facts and circumstances of the case, the difference in interest amount accounted for by the assessee on accrual basis in his books of accounts, and the amount actually offered for taxation in computation of income submitted by the assessee should be the subject matter of adjustment under Section 143(1)(a) for raising a demand of tax and additional tax on that basis.?
(2.) WHILE the other three appeals have been admitted vide order dt. 13.12.2005, by framing the following three substantial questions of law: (i) Whether since Sections 18 to 21 have been deleted from the Income Tax Act, 1961 the interest on securities, that becomes part of transaction price of sale a purchase of securities is taxable as income from profits and gains of business? (ii) Whether taxability of such interest on securities subject of transaction price on sale or security continues to be governed by ratio of Supreme Court decision in Vijay Bank Limited v. Commissioner of Income Tax : [1991]187ITR541(SC) for the periods subsequent to amendment in Income Tax Act? (iii) Whether the Tribunal was justified in holding that the Commissioner was in error in holding the assessment of such income made by Assessing Officer to be erroneous and prejudicial to the interest of the revenue while exercising power under Section 263 of the I.T. Act and in setting aside the order of commissioner passed under Section 263? Since the basic judgment of the Tribunal is dated 29.5.2003, we proceed to consider the facts from that judgment. That judgment decides the matter relating to assessment years 1990 -91, 1991 -92, and 1992 -93. The precise question involved in these matters before us is, only about taxability of the interest paid by the assessee, commonly known in the tax world as 'broken period interest'. To elucidate, the bank purchases government securities, which have the issue price, they bear interest, they have maturity period, and are purchased by the bank. In this background when the bank purchase those security after certain time, of the date of issue, then, by the time they are purchased by the bank certain amount of interest is already accrued on that security, payable by the Government to the purchaser bank, and therefore, the bank purchased that security by paying the composite sum, comprising of the issue price, and accrued interest up -till the date of purchase. It is this element of interest, which is paid by the bank, at the time of purchase, for the period between 4 the date of issue, and date of purchase, is known as 'broken period interest', and the question precisely involved is, as to whether the bank is entitled to have deduction of this element of interest from its income. The question as formulated in Appeals No. 117, 119 and 120 comprehends, the effect of deletion of Section 18 to 21, and significantly, the transaction price of such purchase of security, being taxable as income from profit and gains of business. The second question is about continuity of transaction being covered by the ratio of judgment of Hon'ble the Supreme Court in Vijaya Bank v. Commissioner of Income Tax reported in : [1991]187ITR541(SC) , for the period subsequent to the amendment in the Income Tax Act, and the third question comprehends the power of the realizing authority. Thus, in substance the question is, as to whether the amount of broken period interest paid by the Bank can be claimed as allowable deduction from the income of the bank.
(3.) IT is not in dispute, that for the relevant period, involved in these appeals, the provisions of Section 18 to 21 of the Income Tax Act as they stood, did stand deleted. However, since much of the controversy is raised on the aspect of effect of deletion of these sections, we think it appropriate to quote the provisions of Section 18 to 21, as they stood earlier, and they read as under: Section 18 Interest on securities (1) The following amounts due to an assessee in the previous year shall be chargeable to income -tax under the head interest on securities: (i) interest on any security of the Central or State Government. (ii) interest on debentures or other securities for money issued by or on behalf of a local authority or a company or a corporation established by a Central, State or Provincial Act. (2) Nothing contained in Sub -section (1) shall be construed as precluding an assessee from being charged to income -tax in respect of any interest on securities received by him in a previous year if such interest had not been charged to income -tax for any earlier previous year. Section 19. Deductions from Interest on securitiesSubject to the provisions of Section 21, the income chargeable under the head 'Interest on securities' shall be computed after making the following deduction - (i) any reasonable sum expended by the assessee for the purpose of realising such interest; (ii)any interest payable on moneys borrowed for the purpose of investment in the securities by the assessee. Section 20 Deductions from interest on securities in the case of a banking company -(1) In the case of a banking company - (i) the sum to be regarded as a sum reasonably expended for the purpose referred to in Clause (i) of Section 19 shall be an amount bearing to the aggregate of its expenses as are admissible under the provisions of Sections 30, 31, 36 and 37 (other than Clauses (iii), (vi), (vii) and (viia) of Sub -section (1) of Section 36) the same proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to income -tax 6 under Section 18 bear to the gross receipts of the company from all sources which are included in the profit and loss account of the company; (ii)the amount to be regarded as interest payable on moneys borrowed for the purpose referred to in Clause (ii) of Section 19 shall be an amount which bears to the amount of interest payable on all moneys borrowed by the company the same proportion as the gross receipts from interest on securities (inclusive of tax deducted at source) chargeable to income -tax under Section 18 bear to the gross receipts from all sources which are included in the profit and loss account of the company. (2) The expenses deducted under Clauses (i) and (ii) of Sub -section (1) shall not again form part of the deductions admissible under Sections 30 to 37 for the purposes of computing the income of the company under the head 'Profits and gains of business or profession'. Explanation - For the purposes of this section, 'moneys borrowed' includes moneyes received by way of deposits. Section 21. Amounts not deductible from interest on securities -Notwithstanding anything contained in Sections 19 and 20, any interest chargeable under this Act which is payable outside India (not being interest on a loan issued for public subscription before the 1st day of April, 1938) on which tax has not been paid or deducted under Chapter XVII -B, and in respect of which there is no person in India who may be treated as an agent under Section 163 shall not be deducted in computing the income chargeable under the head 'Interest on securities'. ;