Broken period interest on securities purchase is income, not deductible expenditure, despite separate accounting treatment.

Interest attributable to the broken period on purchase of securities by a bank was held not to be deductible as expenditure. The Court treated the accounting bifurcation of the purchase price into security cost and accrued interest as a mere book entry that did not alter the true tax character of the amount. The interest element remained income in the hands of the assessee and could not be converted into an outgoing simply because it was separately recorded. The Tribunal was therefore wrong in directing deduction of the broken period interest in computing income from securities.

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Issues: Whether the interest relatable to the broken period on purchase of securities by the assessee-bank was deductible as expenditure, and whether the Tribunal was justified in directing its deduction in computing income from securities.

Analysis: The securities were purchased by the bank in the course of maintaining statutory liquidity requirements, and the accounting practice relied upon by the assessee treated the purchase price as split between the cost of the security and the portion attributable to accrued interest for the unexpired period. The Court held that such arithmetical bifurcation for accounting purposes did not alter the true character of the amount received. The sum represented interest income received by the assessee and could not be converted into expenditure merely because it was shown separately in the books. The Court rejected the Tribunal's view that the broken period interest was an outgoing or deductible business expense.

Conclusion: The broken period interest was not deductible as expenditure and was assessable as income; the Tribunal's decision was incorrect.

Final Conclusion: The reference was answered against the assessee and in favour of the Revenue on both questions, with the disputed amount held not to be allowable as a deduction.

Ratio Decidendi: The accounting allocation of a purchase price into cost and accrued interest does not change the tax character of the interest element, which remains income and is not deductible as expenditure merely because it is separately recorded in the books.

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