Tax treatment of bank income and expenses turns on accrual, revenue character, and trading securities valuation principles.

Interest on securities was held taxable in the year it became legally due, even if earlier excluded from income, because due income cannot be omitted from computation. Foreign exchange gain on return of funds remitted to overseas branches was treated as revenue receipt, as the funds were on circulating capital and not capital account. Depreciation on building and entertainment expenses were disallowed in line with prior treatment and statutory restriction. By contrast, loss on revaluation of bank trading securities and Wills World Cup expenditure were allowed as revenue items. Translation difference, wage arrears, and rebated interest were remanded for fresh examination or a speaking order.

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Issues: (i) whether interest on securities, which became legally due in the relevant previous year but had earlier been excluded from taxable income, was liable to tax; (ii) whether foreign exchange gain arising on receipt back of funds remitted to overseas branches was taxable as revenue receipt; (iii) whether depreciation on building and entertainment expenses were allowable; (iv) whether loss on revaluation of securities held by the bank was deductible and whether expenditure on Wills World Cup was allowable; (v) whether the claims relating to translation difference and wage arrears required fresh examination and whether the issue of rebated interest was to be restored for adjudication.

Issue (i): Whether interest on securities, which became legally due in the relevant previous year but had earlier been excluded from taxable income, was liable to tax.

Analysis: The assessee had followed a consistent approach of excluding interest that had not legally become due. The dispute was not about taxing interest before it became due, but about taxing the same interest when it subsequently became due and was not included in the return for that year. The settled principle applied was that income is assessable in the year in which it becomes legally due, and the assessee had no explanation for omitting such due interest from computation.

Conclusion: The addition was upheld and the issue was decided against the assessee.

Issue (ii): Whether foreign exchange gain arising on receipt back of funds remitted to overseas branches was taxable as revenue receipt.

Analysis: The funds were transferred by the head office to overseas branches for business purposes and later received back with exchange gain. The controlling test was whether the foreign currency was held on revenue account as trading asset or circulating capital, or as capital asset or fixed capital. No material showed that the funds were held as capital asset. The transaction resulted in real exchange gain on circulating capital and therefore bore the character of revenue receipt.

Conclusion: The addition was sustained and the issue was decided against the assessee.

Issue (iii): Whether depreciation on building and entertainment expenses were allowable.

Analysis: The issue of depreciation had already been decided against the assessee in earlier proceedings on the same line of reasoning, and the assessee conceded the position. For entertainment expenses, the expenditure was treated as falling within the statutory restriction under the governing provision and the earlier view against the assessee was followed.

Conclusion: Both disallowances were upheld and the issue was decided against the assessee.

Issue (iv): Whether loss on revaluation of securities held by the bank was deductible and whether expenditure on Wills World Cup was allowable.

Analysis: Securities held by a bank as trading assets are to be valued consistently in accordance with accepted accounting principles, and diminution in their value is allowable when the securities form part of trading assets. The Wills World Cup expenditure was revenue in nature, incurred for business purposes, and no capital asset or enduring advantage was shown. The fact that part of the expense was deferred in the books did not control tax allowability when the expenditure had truly been incurred on revenue account.

Conclusion: The loss on revaluation of securities and the Wills World Cup expenditure were allowed in favour of the assessee.

Issue (v): Whether the claims relating to translation difference and wage arrears required fresh examination and whether the issue of rebated interest was to be restored for adjudication.

Analysis: The translation difference issue involved factual controversy and was restored for fresh adjudication after verification. The wage arrears claim was also remanded because the accrual year required examination in light of the settlement and the possibility of double deduction had to be checked. The rebated interest claim had not been adjudicated in the assessment order and was likewise sent back for a speaking order.

Conclusion: These issues were remanded to the Assessing Officer and were allowed for statistical purposes.

Final Conclusion: The assessment years under appeal did not result in a uniform outcome: the first appeal was dismissed, while the other appeals were partly allowed, with some claims accepted on merits and others remanded for fresh consideration.

Ratio Decidendi: Income is taxable when it becomes legally due; exchange gain on circulating capital is revenue in nature; revenue expenditure is allowable in the year of incurrence unless a specific basis exists for deferral; and diminution in value of trading securities held by a bank is deductible.

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