2002 P T D 848

[241 I T R 374]

[Kerala High Court (India)]

Before P. A. Mohammed, P. Shanmugam and G. Sivarajan, JJ

COMMISSIONER OF INCOME-TAX

versus

SOUTH INDIAN BANK LTD.

Income-tax References Nos.52 and 53 of 1995, decided on 01/03/1999.

Income-tax---

----Business expenditure---Banking company---Interest on securities-- Rectification of mistake---Purchase and sale of securities in course of business of banking---Securities held as stock-in-trade---Interest paid for broken period on purchase of securities---Deductible as business expenditure---Rectification to disallow deduction---Not justified---Indian Income Tax Act, 1961, Ss. 19, 20, X1(1) & 154--- CBDT Circular No.599, dated 24-4-1991.

Per G. Sivarjan and P.A. Mohammed JJ (P. Shanmugam, J. dissenting): Section 20(1) of the Income Tax Act, 1961 (before omission with effect from April 1, 1988), dealt with quantum of the deductions provided under the head "Interest on securities" in the case of a banking' company. Subsection(2) of section 20 provides that the expenses deducted under clauses (i) and (ii) of subsection (1) shall not again form part of the deductions admissible under sections 30 to 37 for the purpose of computing the income of the company under the head "Profits and gains of business or profession". This provision; is a Positive indication in a negative form that the expenses/loss incurred for the purposes and incidental to the business though not specifically provided for, are a permissible deduction in the computation of total income from, business of a banking company. Sub section (2) makes it clear that the deductions from interest on securities in the case of a banking company provided under subsection (1) of section 20 are not exhaustive and if the claim for deduction of the interest paid on securities is allowable under the provisions of sections 30 to 37, the same can be allowed as a deduction under those sections.

The assessee was a banking company and a scheduled bank Under the provisions of the Banking Regulation Act, 1949, the-bank was required to invest a portion of its funds in Government securities. The bank was thus required to buy and sell Government securities to maintain certain ratios. During the assessment years 1979-80 and 1980-81, the assessee sold Government securities ex-interest and received sums of Rs.5,70,740 and Rs.4,75,294, respectively, for the two years concerned with respect to the broken period up to the date of sale.. Similarly, during the said periods, the assessee purchased Government securities-cum-interest and paid interest for the broken period, of Rs.6,36,411 and 5,15,659, respectively. In the computation of the total income for the years in question, the assessee deducted the interest paid for the broken period and this was originally allowed by the assessing authority in the assessments. Later, the assessing authority withdrew the said deductions by resort to the provisions 'of section 154 of the Act, which was upheld by the Commissioner of Income tax (Appeals). The -Tribunal cancelled the orders of authorities below. On a reference:

Held, per G. Sivarjan and P.A. Mohammed JJ. (P. Shanmugam, J. dissenting): (i) that the Government securities held by the assessee' bank were part of its trading assets. The purchase and sale of Government securities was incidental to the carrying on of the business of the assessee. Even assuming that the different heads of income specified in section 14 of the Act are mutually exclusive and the income under the different heads has to be computed in accordance with the provisions governing the said heads, the assessee was entitled to deduction of the interest paid for broken period on the purchase of Government securities in view of the specific provisions contained in subsection (2) of section 20 of the Act. Section 20 of the Act is a special provision regarding deductions from interest on securities in the case of a banking company. From the provisions of subsection (2) of section 20 it is clear that though the interest paid for the broken period on the purchase of Government securities is not an allowable deduction under subsection (1) of section 20, there is' no prohibition for the said claim forming part of the deductions admissible under, sections 30 to 37 for the purpose of computing the income of the company under the head "Profits and gains of business or profession". Moreover by Circular No.599, dated April 24, 1991, the CBDT has correctly understood the legal position that securities held by the banks constitute their stock-in-trade and that the claim for deduction of interest paid for the broken period on the purchase of securities should be allowed. The clarification is consistent with the special provision regarding banking companies in section 20. The interest paid for the broken period on the purchase of securities for the two years in question is an admissible deduction in the computation of the total income of the bank under the head "profits and gains of business or profession", though the interest income is to be computed under the head "Interest on securities", and the same was rightly allowed as a deduction in the original assessments for the years 1979-80 and 1980-81. There was no mistake apparent from the record in the original assessment orders for 1979-80 and 1980-81 in allowing deduction of the interest paid fox the broken period on the purchase of Government securities by the assessee-bank in the computation of its total income from business. The Tribunal was right in cancelling the rectification orders.

United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688 (SC) and Brooke Bond & Co. Ltd. v. CIT (1986) 162 ITR 373 (SC) explained and distinguished.

Badridas Daga v. CIT (1958) 34 ITR 10 (SC) and CIT v. National Bank Ltd. (1965) 55 ITR 707 (SC) applied.

Per P.A. Shanmugam, J. (dissenting): The assessee wanted to treat interest paid or not received for the broken periods in reference to the securities to constitute business income and if any loss is derived, it wanted to set it off against income assessed as interest on securities. It is not permissible since income is being assessed under the head "interest on securities": On a distinct and separate head, allowable deductions under sections 18, 19 and 20 alone are possible. The interest paid on purchase of securities from the previous due date till the date of purchase cannot be treated as business expenditure under section 37 of the Act. Once it is found that there is no provision for allowing the interest under sections 18, 19 or 20 of the Income-tax Act for the broken period, then it would be a mistake apparent on the record.

Ambika Silk Mills Co. Ltd. v: CIT (1952) 22 ITR 58 (Born.); Attorney-General v. London County Council (1900) 4 TC 265 (HL); Balaram (T.S.) ITO v. Volkart Brothers (1971) 82 ITR 50 (SC); Behari Lai Mullick: In re: AIR 1927 Cal. 553; Bihar State Cooperative Bank' Ltd. v. CIT (1960) 39 ITR 114 (SC): CIT v. Chugandas & Co. (1965) 55 ITR 17 (SC); CIT v. Cocanda Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC); CIT v. Namberumal Chetty (T.) & Sons (1933) 1 ITR 32 (Mad.); CIT v. R.M. & Company (1984) 148 ITR 353 (AP); CIT v. Ramanaiah (T.V.) & Sons (1986) 157 ITR 300 (AP); CIT v. Seshasayee Paper and Boards Ltd. (1985) 156 ITR 542 (Mad.); CIT v. Sriram Agrawal (1986) 161 ITk.302 (Pat.); CIT v. Sundaram Textiles Ltd. (1984) 149 ITR 525 (Mad.); CIT v. Trilokchand 'Kalyanmal (1960) 39 ITR 131 (MP); Eilerman Lines Ltd. v. CIT (1971) 82 ITR 913 (SC); Gestetner Duplicators (P.) Ltd. v. CIT (1979) 117 ITR l (SC); Karnataka Bank Ltd. v. CIT (1978) 114 ITR 421 (Kar.); Malabar Cooperative Central Bank Ltd. v. CIT (1975) 101 ITR 87 (Ker.); Manickavasagam Chettiar (T.) v. CIT (1965) 143 ITR 269 (Mad.); Navit Lal C. Javeri v. K.K. Sen, AAC of I.T. (1965)56 ITR 198 (SC); Rajam (T.S.) v. CED (1968) 69 ITR 342 (Mad.); Salisbury House Estate Ltd. v. Fry (H.M. Inspector of Taxes) (1930) 15 TC 266 (HL); Union of India v. . Dhanwanti Devi (1996) 6 SCC 44 and Varghese (K.P.) v. ITO (1981.) 131 ITR 597 (SC) ref.

P.K.R. Menon, Senior Advocate and N.R.K. Nair for the Commissioner.

P.G.K. Wariyar for the Assessee.

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 assessment 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 assessments 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 tire rectification order passed under section 154 cannot be upheld placing reliance on the following decisions Malabar 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 (1983) 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 Nth 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-in- trade 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 bf loss if debited in the books of account, would be given the same treatment as is normally given to the stock- in-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:

"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 assessment 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, he 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-in -trade 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 liquid resources which of course will normally be cash ante secondly easily realisable securities. This is in the interest of the banking institution and it is in the interest of the public that deal with the bank. Taking the latter aspect into consideration 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 presumed to be not a part 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 realizable resources 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-in trade. "(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 assessment years in question and it was deleted by the Finance Act, 1988 with effect from April I, 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 assessment 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 Lai 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 loss 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 assessment 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 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, 12AA 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 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 ester such deduction the net income under "interest on securities" is arrived at. In other words, when interest payments and receipts are regarded a revenue payments/receipts only the net interest on securities shall be available for taxation as business income. That is the first stage and the second stage 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 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 115 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 on 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 fair 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 (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 the Assessing Officer?"

The facts of the case are this: The assessee is a scheduled bank which used to buy and sell securities in the course of their business. During the assessment years 1.979-80 and 1980-81, the assessee sold and purchased Government securities 'the bank used to pay interest to the vendors for the period from the previous due dates, that is on which date the interest was due till the date of purchase. Similarly, when the banks sold the securities, it used to receive the interest from the previous due dates till the date of disposal. These payments and receipts were shown as broken period interest paid or received These amounts were deducted or added as the case may be to the interest on securities and claimed as expenditure allowable under section 19 of the Income-tax Act. Originally, the assessments were completed allowing the interest paid. Later, the Assessing Officer disallowed the interest paid by an order under section 154 of the Act holding that the income had been computed under "interest on securities" and that there was no provision for allowing such interest paid. The order was confirmed by the Commissioner of Income-tax (Appeals). On further appeal by the assessee, the Tribunal held that the rectification passed under section 154 cannot be upheld. The matter was referred for our opinion at the instance of the Revenue.

Learned senior counsel appearing on behalf of the Revenue submitted that the provision of law which is incapable of application to the facts of the particular case has been applied. It amounts to a mistake apparent from the record and rectification is permissible. He submitted that since the income is being assessed under the head "Interest on securities" the allowable deductions are only those which are given in sections 18, 19 and 20 of the Act: Since under these sections there is no provision for allowing the interest. paid for the broken period in respect of interest on securities purchased from the various vendors, there is no provision for allowing interest paid either under section 18, 19 or 20 of the Act. He also submitted that if the interest is specifically assessed under interest on securities, expenditure cannot be allowed under section 376 of the Act. Therefore, the concluded that the original assessment order allowing interest for the broken period on securities was a mistake of fact and law apparent from the records.

Learned counsel appearing no behalf of the respondent submitted that the securities in which the bank was dealing which constituted its trading assets and income from them would, in the commercial sense, be regarded as "business, income". Even though it was broken up under the head "Interest on securities", that is only for the purpose of computation of the total income and the income did not cease to be the income of the business. He further submitted that the Central Board of Direct Taxes in Circular No-599 (see (1997) 189 ITR (St.) 126), dated April 24, 1991, has clearly laid down that 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. It is his contention that while passing an order of rectification the Assessing Officer was traversing debatable areas and, therefore, section 154 would not apply with reference to debatable issues.

We have heard counsel at length. In my view, the basic question whether income from interest on securities falls under sections 18, 19 end 20 of the Act and not under section 37, namely, profits and gains of business, has already been concluded by the Supreme Court in' United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688. Once it is found that there is no provision for allowing the interest under section 18, 19 or 20 of the Income-tax Act for the broken period, then it would be a mistake apparent on the records. There would not be any decision required, since it is no longer a debatable point of law. It is not, disputed that the amount disallowed is interest on securities. As a matter of fact initially it was claimed that the broken period interest, that is interest paid by the bank to the bendor for the period from the previous due date to the date of purchase is actually an expenditure incurred by the bank to collect interest leviable under section 19 of the Act. It is now contended that the purchase and sale of securities is a part of the business of the bank and the securities are the stock-in-trade of the bank.

According to the assessee, it is business expenditure which would be allowed-under section 37 of the Income-tax Act. The following statements is the statement in reference to computation of interest on securities relating to the periods 1979-80 and 1980-81.

Particulars Figures 1979-80 1980-81 Rs.Rs. Interest due as per statement1,01,39,3891,17,19,322 Add; Broken period interest on sale of securities received5 70 7404 75 294 Total 1,07,10,129 1,21,94,616 Less: Broken Period interest paid on securities Chased6,36,4115,15,639 1,00,73,7181,16,78,957

The figures of Rs.1,00,73,718 and Rs.1,16,78,957 have been shown under the head "Interest on securities" for the assessment years 1979-80 and 1980-81. Section 19 of the Act was the provision during the relevant period. There is no provision for deduction of amounts paid for purchase of securities in respect of the broken period.

Therefore, the main question is to consider whether this could be brought under the head of "Business expenditure" allowable under section 37 of the Act. The issue raised in my view is covered by the decision of the Supreme Court in United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688.

In that decision also the assessee was a bank carrying on banking business and it was claimed that it was a part of the business of the bank to deal in securities and that no distinction should be made between the income from securities and income from business for the purpose of set off under section 24. Two questions -were raised in that case one of which was: whether interest on securities was part of the bank's income from business carried on by it. The Tribunal stated the case and sought the opinion of the Hi&, Court on three questions and opt of which was whether the assessee was entitled under section 8 to deduct any, part of the administrative expenses out of the income from interest on securities? The High Court answered all the questions in the negative and the relevant portion extracted in the Supreme Court judgment is as follows (page 691):

"...the interest on securities in the hands of a banker cannot be treated as business income. "

Before the Supreme Court the appellant therein raised the very same question, viz., whether sections 8 and 10 of the Act should be so read that "interest on securities" in cases where the true nature and character of the securities in the hands of an assessee is one of trading assets would be excluded from the scope of section. 8 and would fall under the head "Business" within section 10 of the Act. The Supreme Court after elaborate consideration of the scope of the provisions of the Income-tax Act has laid down the law as follows (pages 697 and 792):

"Decided cases all support the contention for counsel for the Revenue that the various heads of income enumerated in section 6 of the Act and more particularly dealt-with in sections 7 to 12 are exclusive heads and if an item of income falls under one of these heads then it has to be treated -for the purpose of income-tax under that head and no other...

Thus, on a true construction of the various sections of the Act the income of an assessee is one and the various sections 7 to 12 are modes in which the statute directs that income-tax is to be levied arid these sections are mutually exclusive. The head of income for which the source is 'interest on securities' has its characteristics for income-tax purposes and falls under the specific head covered by section 8 of the Act, and where an item falls specifically under one head it has to be charged under that head end no other This interpretation follows from the words used in sections 6, 8 and 10 which must be read so as to give effect to the contrast between 'income profits and gains' chargeable under the head 'interest on securities' and 'income, profits and gains' chargeable under the head 'Business'. Thus on this construction the various heads of 'income, profits and gains' must lie held to be mutually exclusive, each head being specific to cover the item arising from a particular source. It cannot, therefore, be said that quo the assessee in the present case and for the purpose of securities held by it, section 8 is more specific and section 10 general or vice versa, and therefore, no question of the applicability of the principle generalia specialibus non derogant arises. This finds support from the decided cases which have been discussed above. Thus both on precedent arid on a proper construction, the source of income 'Interest on securities' would fall under section 8 and not under section 10 as it is specifically made chargeable under the distinct head 'Interest on securities' falling under section 8 of the Act and cannot be brought under a different head even though the securities are held as a trading asset in the course of its business by a banker. " (Emphasis added) .

In the light of the statutory form of return prescribed and the entries contained thereunder on the analysis of those provisions the Supreme Court had taken he view that the different and distinct heads of income, profits and gains, salaries, interest on securities and property, business, etc., are indicative of the intention of the Legislature making the various heads of income, profits and gains mutually exclusive. So, every item of income whatever its source would fall under one particular head and for the purpose of computing the income for charging of income-tax the particular section dealing with that head will have to be looked at. Looked at thus the Supreme Court upheld the contention of the Revenue that under the scheme of the Act and on a true construction of these. relevant sections "interest on securities" by whomsoever and for whatever purpose held has to be taxed under section 8 and under no other section. It being a specific head of chargeability of tax, income from "interest on securities" whether held as a trading asset or capital asset would have to be taxed under section 8 and not under section 10 of the Act.

The Supreme Court in Brooke Bond & Co. Ltd.'s case (1986) 162 ITR 373, approved -the decision in United Commercial Bank Ltd.'s case (1957) 32 ITR 688 (SC), holding that 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 net income under the different heads is then pooled together to constitute a total income. The opinion attributed to the decision in United Commercial Bank Ltd.'s case (1957) 32.ITR 688 (SC), that by breaking up, the income did not cease to be the income of the business is not found in the judgment. Those were the words expressed by the Supreme Court in CIT v. Chugandas & Co. (1965) 55 ITR 17. In that decision the Supreme Court was dealing with the question whether a dealer in securities discontinuing business was exempted from payment of tax in respect of interest on securities and the question whether the interest on securities formed part of the assessee's business income for the purpose of the exemption from tax. The Supreme Court held that the assessee was entitled to exemption under section 25(3) in respect of interest on securities as well. In that context the Supreme Court was dealing with the definition of business income and held that the heads do not exhaustively delimit sources from which income arises. Business income is broken up under different heads only for the purpose of computation of that total income. By that breaking up the income does not cease to be the income of the business, the different heads of income being only the classification prescribed by the Income-tax Act for computation. The question as posed in this case did not arise for consideration in that case. In CIT v. Cocandana Rahaswami Bank Ltd. (1965) 57 ITR 306, the Supreme Court was dealing with the case of a claim of set off. The assessee incurred a loss under the head "Business" and earned interest on securities. The Supreme Court permitted the assessee to set off the loss against the entire income including the interest on securities. In that context the Supreme Court held that the scheme of the Income-tax Act is that income-tax is one tax. Though taxable income under different heads for the purpose of computation of the net income of the assessee, it does not cease to be part of income from business if the securities are part of the trading assets.

The decisions in T.S. Balaram, ITO v. Volkart Brothers (1971) 82 ITR 50 (SC) and T.S. Rajam v. CED (1968) 69 ITR 342 (Mad.), have no application to the facts of the case. In this case there is no difficulty or debatable issue whatsoever since admittedly the claim of the respondents is that the amount claimed is interest on securities. Therefore, whether the provision that applies for computing the net income is sections 18, 19 and 20 or section 37 of the Act.

On the question of interpretation of law declared by the Supreme Court in Union of India v. Dhanwanti Devi (1996) 6 SCC 44, the Supreme Court held that what is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made in the judgment. It would, therefore, be not profitable to extract a sentence here and there from the judgment and to build upon it because the essence of the decision is its ratio and not every observations found therein. The concrete decision alone is binding between the parties to it, but it is the abstract ratio decidendi, ascertained on a consideration of the judgment in relation to the subject-matter of the decision, which alone has the force of law and which, when it is clear what it was, is binding. Applying this principle of interpretation it is the judgment of the Supreme Court in United Commercial Bank Ltd.'s case (1957) 32 ITR 688, which raised the identical question and laid down the principles to be followed. From the facts of the case it could be seen that the assessee wanted to treat interest paid or not received for the broken periods in reference to the securities to constitute as business income and if any loss is derived wanted to set off against income assessed as interest on securities. In the light of the provisions of the Income-tax Act and clearly laid down principle of United Commercial Bank Ltd.'s case (1957) 32 ITR 688 (SC), it is not permissible since income is being assessed under the head "Interest on securities". On a distinct and separate head allowable deductions under sections 18, 19 and 20 alone are possible. The interest paid on purchase of securities from the previous due date till the date of purchase cannot be treated as business expenditure under section 37 of the Act. The contention that the purchase and sale of securities, are part of the business activities of the bank and, therefore, the interest paid by the bank for the broken period is allowable as business expenditure cannot be sustained since there is no provision under the Act for allowing those deductions.

The Central Board of Direct Taxes circular must be read in the light of the Supreme Court decision in United Commercial Bank Ltd. v. CIT (1957) 32 .ITR 688. In this context it is useful to refer to a passage in Kanaga and Palkhivala's "The Law and Practice of Income Tax", eighth edition, on sections 18 and 21 at page 422, which is as follows;

"Securities held as trading assets. ---Interest on securities is a separate head of charge, dealt with by this section. Therefore, 'as the Supreme Court held in United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688, even if the securities are held as trading assets or dealt with in the course of business, e.g., by a banker or a dealer in securities, the interest must be charged under the specific head and computed in accordance with the provisions of this section, and not under section 28 as business profits, (see under section 14, 'income-tax is only one tax', under section 22, 'property held as. business assets', and under section 28(i), 'dividend and interest'). Similarly, interest on' tax-free, securities which is exempt from charge under this section cannot be taxed as business profits under section 28 even if the securities are held. as trading assets. But for certain purposes of the Act, e.g. , under sections 72(1)(1) and 80P(2)(a)(i), where the separate head of charge under this section is not relevant, such interest on securities held as trading assets is treated as part of business profits (see post under section 72, 'profits ....of any business may include income; under other heads', and under section 80P)."

The judgment of the Supreme Court in Brooke Bond & to. Ltd.. v. CIT (1986) 162 ITR 373, was relied on by both the Revenue as well as the respondent. In my view, the Supreme Court has not taken a different view than one in the United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688. As a matter of fact it was held that the true nature and character of income must be determined from the evidence and not from the description as income from business, even though it is liable to, fall for computation under another head.

For all these reasons the rectification order of the Assessing Officer is upheld and the Tribunal was not right in interfering with that order. The question is answered in favour of the Revenue and against the assessee.

In view of the difference of opinion between us, these cases will have to be dealt with under section 259(2) of the Income-tax Act. Place the papers before the Honourable the Chief Justice for orders.

G. SIVARAJAN, J.---This matter comes up before me by virtue of the provisions of subsection (2) of section 259 of the Income Tax Act, 1961, since the two learned Judges, P.A. Mohammed, J. and P. Shanmugam, J., who heard these references differed in their opinion on the question referred for-decision of this Court, I had the advantage of reading both the judgments.

The question referred by the Tribunal for opinion of this Court reads 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 matter arises under the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The assessment years concerned are 1979-80 and 1980-81, the relevant accounting periods ended December 31, 1978, and December 31, 1979, respectively.

The question arises this way. The assessee is a scheduled bank. It is a banking company. Under the provisions of the Banking Regulation Act, the bank is required to invest a portion of its funds in Government securities. The bank is thus, required to buy and sell Government securities to maintain certain ratio's. During the assessment years in question the assessee sold Government securities ex-interest and received sums of Rs.5,70,740 and Rs.4,75,294, respectively for the two years concerned with respect to the broken period interest up to the date of sale. Similarly, during the said periods, the assessee purchased Government securities-cum-interest and paid interest for the broken period, of Rs.6,36,411 and Rs.5,15,659, respectively. In the computation of the total income for the years in question, the assessee deducted the interest paid for the broken period and this was originally allowed by the assessing authority in the assessments, evidenced by Annexures A-1 and A-2. Later, the assessing authority withdrew the said deductions by resort to the provisions of section 154 of the Act, evidenced by` Annexures B-1 and B-2 orders and the same was confirmed in appeal by the Commissioner of Income-tax (Appeals, Calicut, evidenced by Annexure C-1 order. On further appeal, the Tribunal cancelled the orders of the authorities below. The reason stated by the assessing authority and by the appellate authority for disallowing the claim for deduction of the interest paid for the broken period is that since the income by way of interest from purchase and sale of securities was computed under the head "Interest on securities" the provisions of sections 18 to 20 do not permit any such deduction. It was also stated that the provisions of section 37 of the Act cannot have any application in the matter of computation of income under the head "Interest on securities". The Tribunal, relying on the decisions of this Court and the Supreme Court and also the circular of the Central Board of Direct Taxes, took the view that the Government securities are the current assets of a banking company and that the income from such securities would be income from business. It further took the view that the computation of such income must be made under the head "interest on securities", but 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 the income assessed as "interest on securities". The Tribunal took the: stand that the Central Board of Direct Taxes in Circular No. 599 (see (1991) 189 ITR (St.) 126), dated April 24, 1991, has clearly laid down that 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 which is in line with the judicial pronouncements. The Tribunal further held that, at any rate, this is a debatable issue and therefore, the assessing authority was not justified in invoking the provisions of section 154 of the Act in the instant case.

The main contention taken by Sri P.K.R. Menon learned senior Central Government standing counsel appearing for the Revenue, is that the income by way of interest received by the assessee from the purchase and sale of securities has to be assessed under the head "Interest on securities" and the deductions which are permissible under the head are only those provided under sections 19 and 20 of the Act. Counsel submitted that there is no scope for application of the provisions of section 37 of the Act at all in such a case. In support of the said contentions, learned counsel relied on the decisions of the Supreme Court in United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688 and in Brooke Bond & Co. Ltd. v. CIT (1986) 162 ITR 373. Learned counsel submitted that if the ratios of the said two decisions are properly understood, then it would be clear that deduction of the interest paid for the broken period was inadmissible and that the deductions granted in the original assessments are the result of a mistake apparent on the face of the record. Counsel accordingly submitted that the assessing authority and the Commissioner of Income-tax (Appeals) were perfectly justified in invoking the provisions of section 154 of the Act for disallowing the said deductions granted in the original assessment orders for the two years in question.

Sri P.G.K.. Wariyar, learned counsel appearing for the assessee, on the other hand, submitted that though it is true that the income by way of interest on the purchase and sale of securities was computed under the head "Interest on securities", the Government securities in the hands of the assessee had the character of stock-in-trade of the business and since the receipts by way of purchase and sale of such stock-in-trade are to be treated as revenue receipts, though for the purpose of the assessment it has to be 'assessed under the head "Interest on securities", nonetheless it is income from business and, therefore, the interest paid on the purchase of Government securities is an admissible deduction at any rate under section 37 of the Act. Counsel, in support of his submissions, relied on the decision of this Court in Malabar Cooperative Central Bank Ltd. v. CIT (1975) 101 ITR 87 and the decisions of the Supreme Court in CIT v. Cocandada Radhaswami Bank Ltd. (1965) 57 ITR 306 and in Brooke Bond and Co. Ltd. v. CIT (1986) 162 ITR 373. Counsel further relied on the circular issued by the Central Board of Direct Taxes already mentioned earlier which took the same view. Learned counsel further submitted that at any rate, the question at issue is a debatable one and in view of the decision of the Supreme Court in T.S. Balaram, I.T.O. v. Volkart Brothers (1971) 82 ITR 50, the assessing authority has no jurisdiction to invoke the provisions of section 154 of the Act.

In order to appreciate the rival .contentions of the parties, it is necessary to refer to the relevant provisions of Act. The material portion of the provisions of section 154 which deals with rectification as it stood at the relevant time reads as follows:

"(1) With a view to rectifying any mistake apparent from the record---

(a) the Income-tax Officer may amend any order of assessment or of refund or any other order passed by him."

Under this section, the assessing authority can rectify an assessment order only if there is a mistake apparent from the record. The decision of the Supreme Court in Volkart Brothers (1971) 8t ITR 50 clearly lays down the position that it is not open to the assessing authority to go into the true scope of the relevant provisions of the Act in proceedings under section 154 and that a mistake apparent from the record must be an obvious and patent mistake and not something which can be established by along drawn process of reasoning on points on which there may conceivably be two opinions. In other words, a mistake apparent from the record means "an obvious and patent mistake". So, the question for consideration in this case is as to whether the deduction of the interest paid for the broken period for the purchase of Government securities allowed in the original assessment for the two years is due to an obvious or patent mistake. The relevant facts have already been stated. They are; the assessee-bank was obliged under the provisions of the Banking Regulation Act to maintain a certain percentage of its funds in the form of Government securities; the assessee for the said purposes was periodically effecting the purchase and sale of Government securities; for the purpose of the said securities the assessee was paying interest for the broken periods; and for the sale of Government securities the assessee was getting interest for the broken period.

Section 4 of the Act which is the charging section, provides that income-tax shall be charged at the rate or rates fixed for that year in accordance with and subject to the provisions of the Act in respect of the total income of the previous year of every person. Under section 5, the total income of a person, who is a resident, includes all income from whatever' source. Total income" is defined in section 2(45) of the Act to mean the total amount of income referred to in section 5 computed in the manner laid down in this Act. Section 14 of the Act, which deals with computation of total income, provides that save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:

(A) Salaries,

(B) Interest on securities,

(C) Income from house property,

(D) Profits and gains of business or profession,

(E) Capital gains, and

(F) Income form other sources.

On a reading of the provisions of section 2(45) read with charging section 4, section 5 and section 14, the scheme of the Act is clear. The total income of a person from various sources falling under the separate heads specified in section 14 has to be computed in accordance with the provisions governing such heads specified in Chapter IV of the Act. In the instant case, the income of the assessee-bank, though arises from business, falls under two separate heads, viz., "profits and gains of business or profession" and "interest on securities". Sections 28 to 43A deal with computation of income chargeable to tax under' the head "profits and gains of business or profession" of which sections 30/to 37. deal with specific deductions and the interest income from purchase and sale of Government securities has to be computed in accordance with the provisions of sections 18 to 21. As already stated, the only question arising for consideration in this case is as to whether the interest paid by the assessee-bank for the broken period on the purchase of Government securities can be allowed as a deduction either in the computation of income chargeable to tax under the provisions of sections 28 to 37 relating to the head "Profits and gains of business or profession" or under the provisions of sections 18 to 21 relating to the head "Interest on securities".

Now, I shall deal with the relevant provisions of the Act in regard to the computation of total income under the above two heads. Section 28 of the Act specifically provides the categories of income chargeable to tax under the head "Profits and gains of business or profession" and section 29 provides that the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Sections 30 to 36 deal with specific deductions. Section 37 deals with deduction of expenditure, not specifically falling under any of the sections mentioned above and not being in. the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession. The relevant portions of sections 28 and 37 are extracted hereinbelow:

"28. The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession:---

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year."

"37 (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'."

Sections 18 to 21 deal with computation of income under the head "Interest on securities". Section 18 provides the categories of income chargeable tax under the head "Interest on securities". They are (i) interest on any security of the Central or State Government, not being interest payable under section 280D in respect of an annuity deposit made under Chapter XXI-A, and (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. Section 19, which provides for deductions from interest on securities, states that income chargeable under the head "Interest on securities" shall be computed after making the following deductions subject to the provisions of section 21. They are (i) any reasonable sum expended by the assessee for the purpose of realising such interest; and (ii) any interest payable on money borrowed for the purpose of investment in the securities by the assessee. Section 20 which is a special provision for deduction from interest on securities in the case of a banking company reads as follows:

"20 (1) In the case of a banking company--

(i) the sum to be regarded as a sum reasonably expended or 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) and (vii) of subsection (1) of section 36) the same proportion as the gross receipts from interest no securities (inclusive of tax deducted at source) chargeable to income-tax 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 all 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 subsection (1) shall not again from part of the deduction 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'. "

The trading loss of a business is deductible in computing the profit earned by the business though it has not been specifically provided for under the provisions governing the computation of chargeable income, if the loss is incurred in carrying out the operations of the business and is incidental to the operation. This is settled by the decisions of the Supreme Court in Bardridas Daga v. CIT (1958) 34 ITR 10 and in CIT v. Nainital Bank Ltd. (1965) 55 ITR 707. In Badridas Daga's case (1958) 34 ITR 10 (SC), the question arose as to whether a claim for deduction for which there is no specific provision under section 10(2) of the Indian Income-tax Act, 1922, is admissible under section 10 of the Act. In that case, the appellant, viz., Badridas Dega carried on business as money lender, dealer in shares and bullion and commission agent, through an agent who held a power of attorney which conferred on him large powers of management including authority to operate on bank accounts. The agent withdrew from the bank account sums aggregating to Rs.2;30,636 and applied them in satisfaction of his personal debts incurred in speculative transactions. On being informed of the true state of affairs, the appellant cancelled the power of attorney and called upon the agent to pay the amounts withdrawn by him. The appellant later filed a suit against the agent for recovery of the amount but could recover only a sum of Rs.28,000 and wrote off the balance of Rs.2,02,442 as irrecoverable. The question was whether this amount was an admissible deduction in computing the profits of the assessee from business for the purpose of income-tax. In that case, the Supreme Court held that the loss sustained by the appellant therein as a result of misappropriation by the agent was one which was incidental to the carrying on of the business and should, therefore, be deducted in computing the profits under section 10(1) of the Act. Venkaratarama Aiyar, J., speaking for the Court observed thus (page 15):

"The result is that when a claim is made for a deduction for which there is no specific provision in section 10(2), whether it is admissible or not will 1 depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in Act."

The above principle was again applied by the Supreme Court in Nainital Bank Ltd.'s case (1965) 55 ITR 707 mentioned supra. That was also a case of a battling company which incurred loss of cash by dacoity. The provisions of section 10(2) of the 1922 Act did not provide for the loss thus incurred. The Supreme Court applying the principles stated in Badridas Daga's case (1958) 34 1TR 10, held that the loss incurred by dacoity is deductible. The principle stated in the aforesaid decisions are squarely applicable to a case of similar nature while considering the claim for deduction under the provisions of sections 28 to 43A of the Act. As pointed our in Badridas Daga's case (1958) 34 ITR 10 (SC), the only thing to be looked into is as to whether there is any prohibition against such deduction either express or implied in the Act.

It can be seen that section 20(1) of the Act extracted earlier deals with the quantum of the deductions provided under the head "Interest on securities" in the case of a banking company. Subsection (2) of section 20 is the most important provision so far as this case is concerned. It provides that the express deducted under clauses (i) and (ii) of subsection (1) shall not again from 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" (underlining mine). This provision, according to me, is a positive indication in a negative form that the expenses/loss incurred for the purposes and incidental to the business though not specifically provided for, is a permissible deduction in the computation of total income from business.

We have to consider the question regarding the deducibility of the interest paid by the assessee-bank for the broken period on the purchase of Government securities in the light of the principles laid down in the aforesaid two decisions mentioned above. The Government securities held by the assessee-bank are part of its trading assets as held by this Court in Malabar Cooperative Central Bank Ltd. v. CIT (1975) 101 ITR 87 and by the E

Supreme Court in CIT v. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 and Brooke Bond & Co. Ltd. v. CIT (1986) 162 ITR 373 (SC). The purchase and sale of Government securities is incidental to the carrying on of the business of the assessee. Even assuming that the different heads of income specified in section 14 of the Act are mutually exclusive and the income under the different heads has to be computed in accordance with the provisions governing the said heads, the assessee is entitled to deduction of the interest paid for the broken period on the purchase of Government securities in view of the specific provisions contained in subsection (2) of section 20 of the Act. Section 20 of the Act, as already stated, is a special provision regarding, deductions from interest on securities in the cash of a banking company. So far as the computation of income by way of interest on securities is concerned, the provision that should be applied in the case of the assessee being a banking company, is section 19 read with section 20. Subsection (1) of section 20 does not provide for deduction of the interest paid for the broken period on the purchase of Government securities. Butk subsection (2) only prohibits the deduction of the expenses deducted under clauses (i) and '(ii) of subsection (1) of section 20 again, while considering the admissible deductions under sections 30 to 37 for' the purpose of computing the income of the company under the head "Profits and gains of business or profession". From the provisions of subsection (2) of section 20 it is clear that though the interest paid for the broken period on the purchase of Government securities is not an allowable deduction under subsection (1) of section 20, there is no prohibition for the said claim forming part of the deductions admissible under sections 30 to 37 for the purpose of computing the income of the company under the head "Profits and gains of business or profession"". In other words, subsection (2) makes it clear that the deductions from interest on securities in the case of a banking company provided under subsection (1) of section 20 are not exhaustive and if the claim for deduction of the interest paid on securities is allowable under the provisions of sections 30 to 37, the same can be allowed as a deduction under those sections.

In this context it must be noted that Circular No.599 (see (1991) 189 ITR (St.) 126), dated April 24, 1991, issued by the Central Board of Direct Taxes, New Delhi, which is the highest authority under the Act empowered with the power to issue orders, instructions and directions to other income-tax authorities under section 119 of the Act, has correctly understood the legal position that securities held by the banks constitution their stock in trade and that the claim for deduction of interest paid for the broken period on the purchase of securities should be allowed. It must be noted that this clarification is issued on a query raised by the banks. It must be noted further that the said clarification applies only, to banking companies and not to other assessees, who .are engaged in dealing in securities in whose case it has to be established separately that the securities are held by them as part of the stock-in-trade of their business. So far as banking companies are concerned, the Legislature recognises that the holding of securities by the banking companies is part of the stock-in-trade of their business based on the legal position laid down by the Supreme Court as evident from the special provision regarding banking companies made in section 20 of the Act. The clarification is consistent with the above provision.

Thus, I am of the definite opinion that the interest paid for the broken period on the purchase of securities for the two years in question is an admissible deduction in the computation of the total income of the bank under the head "Profits and gains of business or profession", though the interest income is to be computed under the head "Interest on securities" and the same was rightly allowed as a deduction in the original assessments for the years 1979-80 and 1980-81.

However, I will now consider the contention of the Revenue based on the two decisions of the Supreme Court. Before dealing with the decisions relied on by learned counsel for the Revenue and found favour with by Shanmugam, J., it is profitable to note certain salient aspects. The Supreme Court in United Commercial Bank Ltd.'s case (1957) 32 ITR 688, was concerned with the interpretation of the provisions viz., sections 8, 10 and 24(2) of the Indian Income-tax Act; 1922. The question that arose for consideration. was as to whether the business loss of the earlier years carried forward could be set off against the income under head "Interest on securities". In Brooke Bond and Co. Ltd.'s case (1986) 162 ITR 373, also the Supreme Court, inter alia, was concerned with carry forward and set oft' of loss of earlier years against income assessable tinder the head "Interest on securities". It is in those contexts the Supreme Court considered the question of computation of income under different heads and mutually exclusive nature of different heads of income. The observations of the Supreme Court in those cases have to be understood in the above background. In other words, the Supreme Court in those cases was not concerned with the question as to whether a deduction not provided for under a particular head of computation can be allowed under another head, as in the instant case, deduction of interest paid on the purchase of Government securities not being a deduction specifically provided under sections 19 and 20 if can be allowed as a deduction under section 28 or 37. Hence, the observations in United Commercial Bank's case (1957) 32 ITR 688 (SC), that the different heads are mutually exclusive and where an item of income falls specifically under one head it has to be charged under that head and no other, has to be confined to the facts of that case. That apart, as already stated, the Supreme Court was considering the provisions of sections 8, 10 and 24(2) of the Indian Income tax Act, 1922, in United Commercial Bank's case (1957) 32 ITR 688. In the case on hand we are concerned with the provisions of sections 18 to 21 and sections 28 to 37 of the Income Tax Act, 1961. Under the Indian Income-tax Act, 1922, section 8 dealt with computation of income chargeable to tax under the head "Interest on securities" where as under the Income Tax Act, 1961, sections 18 to 21 deal with the same. Likewise, while section 10 of 1922 Act dealt with "business", sections 28 to 37 deal with the same. By the time the 1961 Act was enacted the decisions of the Supreme Court in United Commercial Bank's case (1957) 32 ITR 688 and also in Badridas Daga v. CIT (1958) 34 1TR 10, were already there. Now, I will refer to the provisions of section 8 of the Indian Income-tax Act, 1922, which reads as follows:

"8. Interest on securities. ---The tax shall be payable by an assessee under the head 'Interest on securities' in respect of the interest receivable by him on any security of the Central Government or of a Government, or on debentures or other securities for money issued by or on behalf of a local authority or a company:

Provided that no income-tax shall be payable under this section by the assessee in respect of any reasonable sum deducted by a banker from such interest by way of commission or paid to any other person by way of remuneration for realising such interest on behalf of the assessee or in respect of any interest payable on money borrowed for the purpose of investment in the securities by the assessee except interest chargeable under this Act which is payable without the taxable territories not being interest on a loan issued for public subscription before the 1st day of April, 1938, unless in respect of interest which is so chargeable tax has been paid or deducted under section 18, or unless there is a person in the taxable territories who may be appointed an agent under section 43 in respect of such interest:

Provided further that no income-tax. shall be payable on the interest received on any security of the Central Government issued of declared to be income-tax fee:

Provided further that the income-tax payable on the interest receivable on any security of a State Government issued income-tax free shall be payable by the State Government.".

I have already dealt with the provisions of the Income Tax Act, 1961, regarding computation of income under the head "Interest or; securities" (sections 18 to 21). The only point to be noted is that a provision similar to section 20 was absent in section 8 to the 1922 Act. This makes al' the difference so far as the case on hand is concerned.

In the light of what is stated above, it is clear that the principles laid down by the Supreme Court in United Commercial Bank Ltd.'s case (1957) 32 ITR 688 and in Brooke Bond & Co. Ltd.'s case (1986) 162 ITR-373, interpreting the provisions of sections 8, 10 and 24 of the Indian Income-tax Act, 1922, cannot, have any application while considering the question raised in the case in the light of the provisions of sections 18 to 21 and 28 to 37 of the Income Tax Act, 1961. According to me, the principle laid down in the said decision will not stand in the way of allowing the claim for deduction of the interest paid for the broken period on the purchase of securities in view of the provisions of section 20(2) of the Income Tax Act; 1961. Even otherwise it is a debatable issue as to whether, in the light of the decisions of the Supreme Court in Badridas Daga's case (1958) 34 ITR 10 and Nainital Bank's-case (1965) 55 ITR 707 and in view of the fact that the question raised in these cases was not directly in issue in the decisions of the Supreme Court in United Commercial Bank Ltd.'s case (1957) 32 ITR 688 and Brooke Bond & Co. Ltd.'s-case (1986) 162 ITR 373, the claim for deduction of the interest paid for the broken period on the purchase of securities by the assessee-bank is a permissible deduction in the computation of its total income under the head "Profits and gains of business or profession".

For the reasons stated in the preceding paragraphs I am unable to agree with the view taken by my learned brother, Shamugam, J., that the interest paid for the broken period on the purchase of securities by the assessee-bank is not a permissible deduction in the computation of its total income in view of the decision of the Supreme Court in United Commercial Bank Ltd.'s case (1957) 32 ITR 688 mentioned above.

I am of the view that there is no mistake, much less any mistake apparent from the record in the original assessments orders for 1979-80 and 1980-81 in allowing deduction of the interest paid for the broken period on the purchase of Government securities by the assessee-bank in the computation of its total income from business. I agree with my learned brother, Mohammad. J., that the Income-tax Appellate Tribunal was justified in cancelling the rectification orders issued by the assessing authority and the question of law referred to this Court has to be answered in favour of the assessee and against the Revenue. I answer accordingly.

The question referred to this Court is answered in the affirmative, that is to say, in favour of the assessee and against the Revenue.

A copy of this judgment with signature of the Registrar and the seal of this Court shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

M.B.A./596/FCReference answered