JUDGMENT V. V. Kamat, J. 1. In this reference in answer to the questions we will have to determine whether the amount of Rs. 1,25,858 which is representing the amount of interest relating to the broken period in the context of securities purchased by the assessee bank, would be income or not. The assessee Catholic Syrian Bank Ltd. with its head office at Trichur is concerned with the assessment for 1982-83. Undisputedly for the purposes of this proceeding it is a banking company governed by the provisions of Banking Companies Regulation Act and as such we are concerned with the situation f elating to the purchase of securities for the limited extent of maintaining the required cash vis-a-vis security ratio. The problem is with regard to the interest relating to the broken period as to whether it will present the character of being income or whether it would represent the character of being expenditure as has been shown by the assessee bank in the relevant accounts. The two questions are in the following manner: "1. Whether, on the facts and in the circumstances of the case, (i) the assessee is entitled to deduct interest representing the broken period? (ii) The tribunal is right in law and fact in upholding the claim of the assessee and in directing the assessing officer to deduct the sum of Rs. 1,25,858 in computing the income on securities? 2. Whether, on the facts and in the circumstances of the case and also for the reasons given by the CIT (Appeals) in Para.4 of his order, the Tribunal is justified in law in interfering with the order of the Commissioner of Income Tax (Appeals) on the issue? 2. The assessing officer added back this sum of Rs. 1,25,858 representing the interest receivable for the concerned broken period relating to the purchase of securities. In this connection the contention of the assessee that this amount representing the interest for the broken periods has to be understood as a deduct able expenditure under S.18 of the Income Tax Act, 1961 was rejected. 1,25,858 representing the interest receivable for the concerned broken period relating to the purchase of securities. In this connection the contention of the assessee that this amount representing the interest for the broken periods has to be understood as a deduct able expenditure under S.18 of the Income Tax Act, 1961 was rejected. In the assessment order it is observed, relying on the decision referred to therein that if an assessee purchases securities of the description mentioned in S.18 from a vendor at any time before the interest on security has fallen due and the vendee pays not only the price fixed for the securities but also an amount representing the interest between the last date of accrual of interest and the date of sale of securities the vendee shall not be entitled to claim deduction of the amount paid over and above the price fixed for the said securities on the ground that his real income from interest on securities was not the amount fallen due but a sum as reduced by the amount representing the interest between the last date of accrual of interest and the date of sale/ purchase of the securities. In such cases the estimated accrued interest paid by the vendee would form part and parcel of the consideration. 3. It was submitted before the assessing officer that the concerned securities form stock in trade of the assessee bank, resorting to provisions of S.37 of the Act and it was submitted that it should be understood as a business expenditure. The officer referred to the decision of the apex court (1) rejecting the concerned submission has observed that every item of income, whatever its source, would fall under particular head and for the purpose of computing the income for charging income tax the particular section dealing with that head will have to be looked into. It is further observed that the various sources of income, profits and gains have been so classified that the item falling under those heads become chargeable under S.7 to 12 of the Act according as they are income of which the source is salaries, interest on securities and property, business, profession of vocation and other sources or capital gains. It is further observed that the various sources of income, profits and gains have been so classified that the item falling under those heads become chargeable under S.7 to 12 of the Act according as they are income of which the source is salaries, interest on securities and property, business, profession of vocation and other sources or capital gains. It is further observed that under the scheme of the Act and on a true construction of these relevant provisions 'interest on securities' by whomsoever and whatever purpose held has to be taxed under S.8 and under no other sections is also well founded and sustainable. 4. In the context of the situation under consideration the Income Tax officer continued to draw upon the above decision of the apex court to observe that the words to be found in S.6, 8 and 1.0 of the Act have to be read so as to give effect to find out the relationship between income, profits and gains chargeable under the head 'interest on securities' and 'income' 'profits and gains' chargeable under the head 'business'. The discussion has (1) 32 ITR 668 (SC) United Commercial Bank Ltd. v. CIT further followed that in each situation the head should be understood as being specific to cover the issue arising from the particular source. The Income Tax Officer negatived the contention that the amount relating to the interest with reference to the broken periods could be understood as a deductible expenditure under S.18 of the Act and consequently disallowed the claim in regard thereto. 5. Perusal of the assessment order shows inclusion of this amount of Rs. 1,25,868 in computation of the income under the head 'interest on securities' relating to the broken period in Para.6 of the order. 6. The first appellate authority-Commissioner of Income Tax (Appeals) Calicut has also considered this question as to whether this amount of Rs. 1,25,868 relating to the broken period could be understood as business expenditure. As was done by the Income Tax Officer the first appellate authority has also discussed the background, to follow that securities go to form investment made by the bank out of its income and also out of this surplus funds in order to earn interest. Liquid cash alone is the stock in trade of a bank. Interest income on securities get computed in accordance with the provisions of S.1,8,1.9 and 20. Liquid cash alone is the stock in trade of a bank. Interest income on securities get computed in accordance with the provisions of S.1,8,1.9 and 20. The first appellate authority fund no provision for allowing interest for the broken period i.e i.e. up to the date of purchase or sale of securities as a deduction under the head of income, interest on securities. In this process the contention was rejected. 7. The Income Tax Appellate Tribunal, Cochin bench has approached the problem by offering an illustration and in regard thereto it would be more than appropriate to reproduce the said portion of the judgment of the Tribunal relating to the illustration supplied and it is as follows: "Suppose 10 per cent interest is payable on a security of Rs. 100 on 31st March and 30th September of each year. A person purchases a security cum interest on 31st May at Rs. 11 cum interest. In this transaction, the agreed price of Rs. 110 includes the payment for interest at 10 per cent for expired period of two months. Such interest is calculated as follows: 10 per cent of Rs. 100 X 2/12 = 1.67 The price quoted is Rs. 110 which include interest for the expired period. Therefore, the real cost of purchase is 110-1.67 namely Rs. 108.33. It is recognised accounting practice to take the cost of investment at Rs. 108.33 and charge interest account in a sum of Rs. 1.67. On 30th September, interest is receivable by the purchaser, who is the holder of the security and interest will be paid for the entire period of six months reckoned from the last date on which previous interest was payable. In this example, the holder of the bond will be receiving interest for six months from 1st April to 30th September at 10 per cent which will work out to Rs. 5. Interest receivable by the holder of the bond is Rs.5 but to earn this interest he had already sacrificed or foregone the interest of Rs. 1.67. When he purchased the bond. So the real interest earned by the person is only Rs. 3.33. We have given the above illustration only to point out that in accounting practice when a transaction is cum interest it is never added to the cost of the purchase. 1.67. When he purchased the bond. So the real interest earned by the person is only Rs. 3.33. We have given the above illustration only to point out that in accounting practice when a transaction is cum interest it is never added to the cost of the purchase. Legally also it cannot be considered as cost of purchase because while purchasing the security the understanding is that the price included a portion of the interest for the expired period. So such portion has to be segregated from the price paid to the seller of the security. This is what has been happened in the case of the bank." Ia other words the Tribunal takes up a contemplated situation of a purchase of illustrative securities in the month of May at Rs. 110. What is determined is the real cost of purchase price determined at Rs. 108.33. In the process of understanding the Tribunal has given recognition to accounting practice to take the cost of investment at Rs. 108.33 and showed separately the interest earned for the broken period amounting to Rs. 1.67. This was in view of the purchase of the security in question on May 31 of the year in question. This is because, according to the Tribunal that the interest for April and May becomes receivable by the purchaser as the holder of the security by reason of the determined dates of payment of interest. The Tribunal then reasons out that in fact interest for April and May amounting to Rs.167 is really receivable by the holder of the security during that period which is foregone and which must be taken into consideration in determination of the price of the security which is purchased on May 31. In the process of reasoning the Tribunal has found that the real interest earned by the person purchasing the security on May 31 would have to be understood only at Rs. 3.33. It is observed that in the accounting practice when this transaction is understood as cum interest transaction and this cum interest amount of Rs.1.67 is never understood for addition to the cost of purchase because while purchasing the security. The understanding is that the price included a portion of the interest for the expired period and such portion has to be segregated from the price paid to the seller of the security. The understanding is that the price included a portion of the interest for the expired period and such portion has to be segregated from the price paid to the seller of the security. The Tribunal felt that this is what has taken place with regard to the problem under consideration leading to the conclusion relating to the determination of the actual cost of the security. 8. The Tribunal, little earlier, has emphasized the aspect that the assessee is a banking company governed by the provisions of banking companies regulation and dealing in purchase and sale of Government securities to maintain its statutory reserves. The Tribunal has also appreciated that a specific head of income if it is shown in regard thereto cannot be understood to rob it to the true nature of income. The Tribunal has also followed to see the nexus between the business of the assessee and its investment in Government securities of deposits in compliance with the requirements of the Banking Companies Regulation Act to record that interest on securities earned by the assessee is very much part of its income may be assessable under a different and distinct heads. It must be stated that the analysis adopted by the Tribunal with the help of recognised accounting practice will go arithmetically to determine the cost price of the purchase of the security in the midst of the term with reference to the modes of payment of interest in regard thereto. The Tribunal can also be understood and appreciated that the bank purchasing securities in the midst of the period purchase it at cum interest position and has understood in the process of accounting the bifurcation in the nature of reimbursement to the seller in respect of the interest for the unexpired portion. In the process, the resultant bifurcation showing Rs. 108.33 as the cost price of the security and Rs. 1.67 towards reimbursement to the seller in respect of the interest for the unexpired portion can also be appreciated. 9. However the Tribunal has proceeded further and has observed that in ex interest transactions the understanding is that the interest for the expired portion is paid in addition to the purchase price. In the above example if the purchase is ex interest at Rs. 110 the purchaser will have to pay Rs.110+Rs. 1.67 as interest towards the unexpired portion on the security held by the seller. In the above example if the purchase is ex interest at Rs. 110 the purchaser will have to pay Rs.110+Rs. 1.67 as interest towards the unexpired portion on the security held by the seller. The Tribunal has observed that in this situation the purchase price has to be considered as an outgoing in the hands of the person and when he receives interest of Rs. 5 on 30th September, the appointed day for payment of interest, the net income from the securities would only be Rs. 3.33 and not Rs. 5. The Tribunal has carried the discussion thereafter to observe that the purchase cost will be lesser than the quoted figure by the amount of interest transaction to the purchase cost will be at the quoted figure and interest for the unexpired period additionally paid. It is thereafter that the Tribunal has taken a somersault in the process of logical thinking, abruptly to observe "therefore, there is no difference so far as taking such interest as an expenditure in the hands of the assessee". The Tribunal has thereafter in the same way hastened with the conclusion upholding the claim of the assessee that the amount should be understood as expenditure in the hands of the assessee, allowing the Second Appeal. 9(A) We have heard the learned senior standing counsel for taxes as well as learned counsel for the assessee in extenso, in regard to the aspect as to whether the amount of interest relating to the broken period specified in the above situation, which has been treated by the assessee as expenditure could really be understood in the way in which it is sought to be pleaded. 10. The assessee bank is required to invest in securities or keep cash or gold as per the stated ratio with reference to the time and demand of liabilities and to meet the situation the banking institutions are also understood to ensure the maintenance of the ratio in the form of cash or gold or approved securities. This system is practically understood as a part of banking operations and are understood as the stock in trade in the context. This would not really be a matter of concern with reference to the problem that is at hand before us. This system is practically understood as a part of banking operations and are understood as the stock in trade in the context. This would not really be a matter of concern with reference to the problem that is at hand before us. It may be that a banking institution as a part of its business activity must have ready resources to meet its liabilities to the extent of which the situation may be required or even may be foreseen. Any prudent banking institution will so invest in securities even prior to the legislative compulsions in regard thereto. This is because of the need that the business of the bank must run in a prudent manner by holding a specified part of its readily realisable resources in securities as a sound security of measure. In the process it is also understood in the context of the concept of liquidity in regard thereto that many times even cash is kept by a bank in another banking institutions as a part of its business. In this process the bank accrues and receives interest even with reference to such arrangement. It is in a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business and receiving deposits or lending moneys or discounting hundies of issuing demand drafts. The entire process is to see the motion of the circulating capital which is the normal course of business of a bank. 11. In this context there is no dispute and it is well established and acknowledged by the courts in connection and it is also seen in regard thereto that even the Tribunal has respected the recognised accounting practice in regard thereto, to the effect that the cost of investment or the price of the security concerned would be Rs. 108.33 and interest of Rs. 1.67 would have to be understood separately, in terms of the recognised accounting practice and its canons. The Institute of Chartered Accountants of India have published a Compendium of Statements and Standard Accounting, including International Accounting Standards. In Chap.14 thereof relating to the Standards as on 31st March 1,995 we find accounting standards for investments. 12. 1.67 would have to be understood separately, in terms of the recognised accounting practice and its canons. The Institute of Chartered Accountants of India have published a Compendium of Statements and Standard Accounting, including International Accounting Standards. In Chap.14 thereof relating to the Standards as on 31st March 1,995 we find accounting standards for investments. 12. Learned counsel for the assessee has not only placed before us the entire compendium but has also placed on record a xerox copy of page 76 relating to maintenance of investment accounts. He has also placed for our consideration Accounting Standard 13 relating to accounting for investments. We find there from, certain situations understood mainly with reference to maintenance of the accounts, with reference to the established accounting practice. At the outset clause No. 12 of the Accounting Standard 13 relating to accounting for investment could definitely guide us in the context of the '. problem at hand. We get to know that interest in connection with an investment is generally regarded as income, being the return on investment. In the same circumstances such inflows represent a recovery of past and may not form part of the income. It is stated in regard thereto by way of an example that when unpaid interest has accrued before the acquisition of an interest-bearing investment and is therefore included in the price paid for the investment, the subsequent receipt of interest is allocated between pre-acquisition portion is deducted from the cost. When dividends on equity are declared from pre-acquisition profits, a similar treatment may apply. At the same time it is observed in the context that it isdifficult to make such an allocation except on an arbitrary basis, the cost of investment is normally reduced by dividends receivable only if they clearly represent a recovery of a part of the cost. 13. Additionally we also find from the study material of the Institute of Chartered Accountants of India (page 76 paras 6 onwards), the following paragraph:- "In case the transaction is on cum-interest basis, a part of purchase price is related to the interest accrued from the date of the last interest paid to the date of transaction. 13. Additionally we also find from the study material of the Institute of Chartered Accountants of India (page 76 paras 6 onwards), the following paragraph:- "In case the transaction is on cum-interest basis, a part of purchase price is related to the interest accrued from the date of the last interest paid to the date of transaction. And hence in his case the cost of investment has to be calculated by subtracting the amount of accrued interest from the purchase price." At Para.6.1 , thereafter deals with the question of valuation of the securities and it is observed that where investment are in the nature of fixed assets, not held for purposes dealing in investment, the investment on hand should be carried forward at cost. If part of investments are sold the balance in the capital column will represent profit or loss on sale and should be transferred to the Profit and Loss Account or Capital Reserve in case the investments are held as fixed assets. We are concerned with the problem of purchase of securities. The process of keeping account gets further explained with reference to the adjustment relating to brokerage, stamps, transfer fee, etc. to be calculated with reference to nominal value and they are added to acquisition cost, in the process of arriving at the net sale figure. It is in this context it is seen from note (b) in regard thereto that interest amount is always calculated with respect to nominal value. 14. Thus it would be seen that with reference to the question of calculation of the cost of an investment normally it includes brokerage, fees, duties etc. In the process of accounting and keeping the accounts under proper heads the principal with interest, dividends, rentals etc. are generally regarded as income. The procedure prescribes modes of determination of the value of the investment in regard to which the amount of interest in regard to the broken period could be understood to go in the process of determination of the actual cost. It is not necessary, but the established accounting practice explains the arithmetical dissection for the purpose of accounting, leaving the question as to whether the amount of interest relating to broken period although shown separately whether could acquire the character of expenditure in the process. The entire scheme shows that the amount is received. It is not necessary, but the established accounting practice explains the arithmetical dissection for the purpose of accounting, leaving the question as to whether the amount of interest relating to broken period although shown separately whether could acquire the character of expenditure in the process. The entire scheme shows that the amount is received. There is no question of payment of the amount at any time to the seller of the security in question. The situation also will have to be understood and appreciated in the context of the share prices in the markets depending on various factors showing fluctuations in regard thereto. In the process of purchase of securities it will also have to be understood that the price offered for sale which is more or less determined in the share market in the context of the security in consideration and in regard thereto the aspect of the portion of interest for the expired period may contribute one of the factors. The situation has also to be appreciated in the context of the approach in common parlance. The shares are sold and purchased not solely depending on this unexpired period in consideration but as a result of many other aspects. For the purpose of the present proceedings there is no dispute that this sum of Rs. 1,25,858 is received by the assessee bank. It is income which has been shown for the purpose of accounting in regard thereto, may be as an expenditure but as stated at the outset the nomenclature offered by the accounting process cannot change its character for the purpose of levy of income tax in regard thereto, merely because it is shown as expenditure and debited as such accordingly. In our judgment what is purchased for the purpose of maintaining the required ratio at the prevailing market price cannot be understood even with regard to a part thereof, interest for the unexpired period illustratively in the present proceedings, otherwise than the income of the assessee bank. It is not possible to accept the reasoning of the Tribunal and the same could not be treated as an expenditure in the hands of the assessee. For all the above reasons we answer both the parts of question No. 1 in the negative-in favour of the revenue and against the assessee. We also answer question No. 2 in the negative-in favour of the revenue and against the assessee. For all the above reasons we answer both the parts of question No. 1 in the negative-in favour of the revenue and against the assessee. We also answer question No. 2 in the negative-in favour of the revenue and against the assessee. A copy of the judgment under the seal of this Court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench, as required by law.