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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: SOUTH INDIAN BANK LTD.
Court Name: Kerala High Court Judge(s): G. Sivarajan, P. Shanmugam, P. A. Mohammad Title: COMMISSIONER OF INCOME-TAX vs SOUTH INDIAN BANK LTD. Case No.: Income-tax References Nos.52 and 53 of 1995 Date of Judgment:1999-03-01 Reported As: 2002 PTD 848 Result: Reference answered
JUDGMENT
JUDGMENT P.A. MOHAMMED, J.---These income-tax reference cases are coming up before this Court at the instance of the Revenue under section 256(2) of the Income Tax Act, 1961 (for short "the Act"). The question referred for decision is as follows: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in cancelling the rectification order of the Assessing Officer?" The assessee is the. South Indian Bank Limited, Trichur, which is a "scheduled bank" and .The assessm ent years in question are 1979-80 and 1980-81. In view of provisions contained in the Banking Regulation Act, 1949, the assessee is required to buy and sell. Securities to maintain' the requisite ratio. During the above assessment years, the assessee sold Government securities ex- interest and received a sum of Rs.5,70,740 and Rs.4,75,294 respectively, with respect to the, broken period interest up the date of sale. During the same years, the assessee purchased Government securities-cum-interest and paid interest on the broken period of Rs.6,36,411 and Rs.5,15,659, respectively. The assessee disclosed these amounts under the head "Interest on securities" and originally the assessm ents were completed for the years 1979-80 and 1980-81 under section 143(3) of the Act allowing the interest paid for the broken period. Subsequently, the Assessing Officer initiated action under section 154 of the Act and disallowed the interest paid for the broken period, namely, Rs.6,36,411 for 1979-80 and Rs.5,15,659 for 1980-81 on the ground that as the income had been computed under the head "Interest on securities" there was no provision for allowing such interest paid. The Commissioner of Income-tax (Appeals) confirmed the disallowance against which further appeals were filed before the Tribunal. The Tribunal found that the rectification order passed under section 154 cannot be upheld placing reliance on the following decisions Malabar
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Cooperative Central Bank Ltd. v. CIT (1975) 101 ITR 87 (Ker.); Karnataka Bank Ltd. v. CIT (1978) 114 ITR 421 (Kar.); Brooke Bond & Co. Ltd. v. CIT (1986) 162 ITR 373 (SC) and Balaram (T.S), ITO v. Volkart Brothers (1971) 82 ITR 50 (SC).. The Assessing Officer took the view that income has been computed under the head of income "Interest on securities" and therefore, any deduction while computing the interest on securities is to fall within the scope of sections 18, 19 and 20. Since there is no provision for deduction of amounts paid for purchase of securities in respect of the broken period, the said allowance of the amount in respect of both the years is a mistake apparent from the record. The Assessing Officer for taking the decision placed reliance on the decisions in T. Manickavasagam Chettiar v. CIT (1983f'143 ITR 269 (Mad.); CIT v. R.M. & Company (1984) 148 ITR 353 (AP) and CIT v. Sundaram Textiles Ltd. (1984) 149 ITR 525 (Mad.). The Commissioner (Appeals) confirmed the above view taken by the Assessing Officer. The Commissioner further observed that the issue involved in the appeal was not a debatable question of law and, therefore, the contention of the assessee based on the decision in T.S. Balaram, ITO v. Volkart Brothers (1971) 82 ITR 50 (SC), was negatived. However, the Appellate Tribunal found that the Government securities are the current assets of the banking company and that income from such securities would be income from business. However, the computation would be made under the head "interest on securities". The Tribunal further found that the net amount of interest paid and received for the broken periods with reference to transactions in Government securities would obviously constitute "business income" and if any loss is derived therefrom, it could legitimately be set off against income assessed as "interest on securities". The Tribunal also found that the Central Court of Direct Taxes Circular No.599 (see (1991) 189 ITR (St.) 126 ), dated April 24, 1991, has clearly indicated that the interest paid or received for the broken period on purchase/sale of securities by a banking company would constitute revenue payments/receipts and that only the net interest on securities shall be brought to tax as business income. If the above circular is made applicable it cannot be said the view taken by the Tribunal is unjust or improper in the circumstances of this case. The circular issued by the Central Board of Direct Taxes referred to above is reproduced hereunder (see (1991) 169 ITR (St.) 126): "Circular No.599, dated 24th April, 1991 Subject: Treatment of securities---Stock-in-trade or investment. Clarifications on the following issues have been sought by banks from the Central Board of Direct Taxes: (i) Whether the securities held by the banks constitute their stock-intrade or investment, and consequently whether the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing their taxable profits? (ii) Whether deduction claimed in respect of interest paid for broken period on the purchase of securities should be allowed as a deduction from the taxable profits? 2. The matter has been considered by the Board and it has been decided that the securities must be regarded s stock-in-trade by the banks. Therefore, the claim of loss if debited in the books of account, would be given the same reatment as is normally given to the stockin-trade. As far as the second issue is concerned, both the interest payments and receipts must be regarded as revenue payments/receipts, and only the net interest on securities shall be brought to tax as business income. (Sd.) Nishi Nair, Under Secretary, Central Board of Direct Taxes." (Emphasis supplied). As pointed out earlier, the impugned proceedings have been initiated under, section 154(1) of the Act on March 7, 1985. The said provision as'it stood at the relevant time, is as follows:
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"With a view to rectifying any mistake apparent from the record, an income-tax authority referred to in section 116 may amend any order passed by it under the provisions of this Act." In order to attract the above provisions, two essential requisites shall be complied with. Firstly, it must be a case of a mistake and, secondly, the mistake must be apparent from the record. No doubt a clerical or arithmetical mistake amounts to mistake apparent from the record. But a mistake found out by a long drawn process of reasoning cannot be said to be a mistake apparent from record. Webster defines the word "apparent" as clear, or manifest to the understanding, plain, evident, obvious, appearing to the eye or mind. The Supreme Court in T.S. Balaram, ITO v. Volkart Brothers (1971) 82 ITR 50 held (page 53): "From what has been said above, it is clear that the question whether section 17(1) of the Indian Income-tax Act, 1922, was applicable:to the case of the first respondent is not free from doubt. Therefore, the Income-tax Officer was not justified in thinking that on that question there can be no two opinions. It was not open to the Income-tax Officer to go into the true scope of the relevant provisions of the Act in a proceeding under section 154 of the Income Tax Act, 1961. A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. As seen earlier, the High Court of Bombay opined that the original assessments were in accordance with law though in our opinion the High Court was not justified in going into that question."(Emphasis supplied) What emerges from the above decision is that in a case where there are likely to be two opinions on a fact, it may be a debatable point. That means a debate, discussion or inquiry may be necessary to find out the correctness of the point. In such circumstances, it cannot be said to be a mistake apparent from the record. In the present case, according to the officer there is no provision for deduction of amounts paid for purchase of securities in respect of the broken period because any deduction while computing the interest on securities is to fall within the scope of sections 18, 19 and 20. On the other hand, the case of the assessee is that the securities constituted the "stock-in- trade" of the assessee and the income derived therefrom would represent business income though taxable under the head "Interest on securities". Therefore, the interest paid for the broken period would constitute allowable outgo in the hands of the assessee. When we analyse the above respective view points of the officer and the assessee, the only conclusion possible is that the question involved is a debatable point and not a mistake apparent from the record. - Notwithstanding the above conclusion we will examine the case of the Revenue that as the income had been computed on "interest on securities" there was no provision for allowing interest paid for the broken period, A Division Bench of this Court in Malabar Cooperative Central Bank Ltd. v. CIT (1975) 101 ITR 87, was dealing with a case of a cooperative society carrying on banking business. During the assessm ent year 1968-69, the assessee-bank earned Rs.49,086 by way of interest on securities. The assessee claimed that this amount should be exempted under section 80P(2)(a)(i) of the Income-tax Act for the reason that the Banking Regulation Act. 1949, had been made applicable to the assessee and the provisions of the regulation clearly indicated that the holding of securities, the realisation of those securities and the earning of interest from those securities all spelt out carrying on of the business of banking and, therefore, the interest that accrued on the securities should be treated as business income. However, the Appellate Tribunal held that the assessee had not discharged the burden of showing that the securities represented stock-intrade and, therefore, the rejection of the assessee's claim for exemption was justified. This Court while not approving the approach of the Tribunal that the burden of proving that the securities were held. As stock-in-trade would be discharged by the assessee, observed (page 90): "A banking institution, as we understand it, as a part of its business activity will have to have ready resources to meet its liabilities the extent of which can never be foreseen. It must, therefore have
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liquid resources which of course will normally be cash, and secondly, easily realisable securities. This is in the interest o, the banking institution and it is in the interest of the public di t deal with the bank. Taking the latter aspect into considerat,on the Legislature has stepped in and has made it obligatory that the banking institutions must maintain a certain percentage, one fifth of its assets, in the form of securities at any given day. This is one of the legislative restrictions, on the otherwise unlimited freedom of a banking institution to conduct its business in any manner it liked. Any prudent banking institution will so invest in securities even without legislative compulsion. If it did, holding of securities cannot be resumed to be not a art of its business' nor can it be said that the securities held are not part of its stock-in-trade. The fact that law now insists that the business must be run in a prudent manner by holding a specified part of its readily realisable reasources in securities does not detract from the provision that in so holding securities the bank is carrying on its business and securities so held are stock-in-trade. Further, we do not think that the securities so held by a bankings institution must be dealt with daily or often in order that those securities might become stock-intrade. "(emphasis supplied) Therefore, this Court said that there was no hesitation in holding that the income earned by the assessee from the securities held by it in the form of interest is also income from the business of the assessee bank. For this proposition the Division Bench relied on the decision of the Supreme Court in Bihar State Cooperative Bank Ltd. v. CIT (1960) 39 ITR 114. Chapter IV of the Act deals with computation of total income. Under section 14 all income for the purpose of charge of income-tax and computation of total income has been classified under six heads of income. The second item B. Interest on securities was there in section 14 during the assessm ent years in question and it was deleted by the Finance Act, 1988 with effect from April 1, 1989. The salient principle is that the income-tax is only one tax levied on the sum total of the income- classified and charged under different heads. Tax is not levied separately on each head of income. Beasley. C.J. Said in CIT v. T. Namberumal Chetty & Sons (1933) 1 ITR 32 (Mad.), that assessm ent to income-tax is one whole and not a group of assessments of different items of income. Rankin, C.J. In the matter of assessment of Behari Lal Mullick's case, AIR 1927 Cal 553, said the income-tax is one tax and not an aggregate of different taxes. The above principle derived from Attorney General v. London County Council (1900) 4 TC 265 (HL) and Salisbury House Estate Ltd. v, Fry (H.M. Inspector of Taxes) (1930) 15 TC 266 (HL), is more clearly applicable to Indian than to English Courts. One of the important consequences of the rule deducted above is that a logs sustained in any year under one head should be set off against the income under another head in that year in order to arrive at the true total income of the assessee (see CIT v. Seshasayee Paper & Boards Ltd. (1985) 156 ITR 542 (Mad.). In this context it is apt to recall the provisions contained in sections 70 and 71, which are reproduced hereunder: "70. Set off of loss from one source against income from another source under the same head of income---Save as otherwise provided in this Act, where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head. 71. Set off of loss from one head against income from another.---Where in respect of any assessm ent year, the net result of the computation under any head of income is a loss, the assessee shall, subject to the provisions of this Chapter, be entitled to have the amount of such loss set off against his income, if any, assessable for that assessment year under any other head." By virtue of the provision contained in section 71, if after setting off of losses against income under the same head, the net result is still a loss, such loss may be set off against income of the same
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year under any other head (see Ambika Silk Mills Co: Ltd. v. CIT (1952) 22 ITR 58 (Bom.) and CIT v. Trilikchand Kalyanmal (1960) 39 ITR 131 (MP)). The Supreme Court in Brooke Bond & Co. Ltd. v. CIT (1986) 162 ITR 373, has clearly summarised the principles of law on the subject as below (page 379): "It is a cardinal principle of the law relating to income-tax that income-tax is a single charge on the total income of an assessee. For the purpose of computation, the statute recognises different classes of income which it classifies under different heads of income. For each head of income, the statute has provided the mode of computing the quantum of such income. The mode of computation varies with the nature of the class of such income, for the deductions permissible under the law in computing the income under each head bear a particular relevant to the nature of the income. The statute operates on the principle that it is the net income under each head which should be considered as a component of the total income. The statute permits specified deductions from gross receipts in order to compute the net income. The net income under the different heads is then pooled together to constitute the total income. The process of computation at this stage takes in the provisions relating to the carry forward and setting off of losses and of unabsorbed depreciation. On the conclusion of the entire process of assessment, what emerges is the figure of taxable income, the quantum of income which is assessed to tax. Ordinarily, when income pertains to a certain head, the source of such income is peculiar to that head, but it is not unusual that commercial considerations may properly describe the source differently. For instance, a banking concern may hold securities in the course of its business. The securities constitute its trading assets and income from them would, in the commercial sense, be regarded as business income. However, for the purposes of computation under the income-tax law, the income from such securities would be computed not under the head "Income from business' but under the head 'Interest on securities'."' (Emphasis supplied) The Supreme Court in CIT v. Chugandas & Co. (1965) 55 ITR 17 held that business income was broken up under different heads under the Income-tax Act only for the purpose of computation of the total income and by that break up the income did not cease to be the income of the business. Therefore, the Court observed (page 24): "The heads described in section 6 and further elaborated for the purpose of computation of income in sections 7 to 10 and 12, 12A, I2AA and 12B are intended merely to indicate the classes of income: the heads do not exhaustively delimit sources from which income arises." In United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688, the apex Court held that a finding on whether the purchase and sale of securities was as much the assessee's business as receiving deposits from clients and withdrawals by them and the securities were held by the assessee as part of its trading assets in the course of its banking business, had to be arrived at in order to determine whether the holding by the assessee of the securities formed part of the "same business" under section 24(2) and consequently the assessee would be entitled to a set-off thereunder. Again in CIT v. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306, the Supreme Court said (page 310): "Though for the purpose of computation of the income, interest on securities is separately classified, income by way of interest from securities does not cease to be part of the income from business if the securities are part of the trading assets. Whether a particular income is part of income from a business falls to be decided not on the basis of the provisions of section 6 but on commercial principles. To put it in other words, did the securities in the present case which yielded the income form part of the trading assets of the assessee? The Tribunal and the High Court found that they were the assessee's trading assets and the income therefrom was, therefore, the income of the business. If it was the income of the business, section 24(2) of the Act was
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immediately attracted. If the income from the securities was the income from its business, the loss could in terms of that section, be set off against that income." (Emphasis supplied) Therefore, the principle that emerges from the above decisions is that the Government securities are the current assets or stock-in-trade of the banking company. The income from such securities would be income from business, but the computation would be made under the head "interest on securities". The amount of interest paid and received for the broken period with reference to transactions in Government securities would obviously constitute "business income" and if any loss is derived therefrom it could be legitimately set off against income assessed as interest on securities. Once it is treated as business income the statute permits specified deductions from gross profits in order to compute the net income as observed in Brooke Bond & Co.'s case (1986) 162 ITR 373 (SC). However, counsel for the Revenue also contended on the basis of the observation of the Supreme Court in Brooke Bond & Co.'s Case (1986) 162 ITR 373 at page 379, that the process of computation at this stage" only means the second stage and that stage has not reached. This submission does not appear to be correct inasmuch as the interest paid for the broken period is admitted to be an allowable deduction from the "business income" and so atter such deduction the net income under "interest on securities" is arrived at, In other words, when interest payments and receipts are regarded a enue payments/receipts only the net interest on securities shall be available for taxation as business income. That is the first stage and the second gage reaches when after such calculation if there is a loss such loss may be set off against the income of the -same year under any other head. These are stages leading to the ultimate result in the process of computation. This is sufficiently, evident from the observation of the Supreme Court in the above decision itself. Now we will come to the circular issued by the Central Board of Direct Taxes on April 24, 1991. What is revealed from the above circular is that the Central Board of Direct Taxes has decided that the securities held by the banks must be regarded as stock-in-trade of the banks. Therefore, the claim of loss if debited in the books of account would be given the same treatment as is normally given to stock-in-trade. It is further seen that both interest payments and receipts shall be regarded as revenue payments/receipts and only the interest on securities shall be brought to tax as business income. This is based purely on true, commercial sense. This Court need not base its conclusion on the said circular and it cannot also do so. However, a careful analysis of the relevant provisions in the background of sound commercial principles will drive this Court to the same conclusion. The claim of the assessee has to be admitted if the relative provisions are interpreted in view of the clarifications contained in the circular referred to above. In this en ) context it is necessary to examine the binding nature of the circulars issued by the Central Board of Direct Taxes. The Central Board of Direct Taxes, was introduced as per section 3 of the Central Board of Revenue Act, 1963. It is the highest executive authority under the Act. The Board has powers of administration, supervision and control over the whole Department and it has also power to make rules, to issue order, instructions and directions to all officers and persons employed in the execution of the Act. The circulars or general instructions issued by the Board would be binding under section 119 of the Act on all officers of the Department. In the exercise of the power to issue general circulars, the Board cannot impose a burden Oa the taxpayer or otherwise put him in a worse position than he is under the statute. (see Gestetner Duplicators (P.) Ltd. v. CIT (1979) 117 ITR 1 (SC)). However, the Board has the power to relax the rigour of the law or grant relief which is not to be found in the terms of the statute. Such circulars are intended for a just and lair administration of law. (see K/O. Varghese v. ITO (1981) 131 ITR 597 (SC)). The Supreme Court also accepted the validity and binding nature of such beneficent circulars and recognized the taxpayer's right to enforce them in his favour even in the Court. (see Novnitlal C. Javeri v. K. K. Sen, AAC of I.T. (1965) 56 ITR 198 (SC); Ellerman Lines Ltd. v. CIT (1971) 82 ITR 913 (SC); K.P. Varghese v. ITO
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(1981) 131 ITR 597 (SC); CIT v. T.V. Ramanaiah and Sons (1986) 157 ITR 300 (AP) and CIT v. Sriram Agrawal (1986) 161 ITR 302 (Patna)). While recognizing the right of the assessee to enforce in Court the benefits available under circulars issued by the Board, I cannot agree to the view that such circulars are binding on the Courts. However, in this case, I have already expressed the view in favour of the assessee on a true analysis of the relative provisions contained in the Act. In view of what is discussed hereinabove, I hold that the Tribunal was justified in cancelling the rectification order issued by the Assessing Officer. In the result, the question of law referred to this Court is answered in the affirmative, that is to say, in favour of the assessee and against the Revenue. P. SHANMUGAM, J.---I have gone through the judgment of my learned brother. With respect I am unable to agree with it. The question of law referred by the Tribunal is as follows: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in cancelling the rectification order of…
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