Bank Of Rajasthan Ltd v. Commissioner Of Income Tax

Section: ISSUES Bank of Rajasthan Ltd. v. Commissioner of Income Tax (Civil Appeal Nos. 3291-3294 of 2009) 16 October 2024 [Abhay S. Oka* and Pankaj Mithal, JJ.] Issue for Consideration Issue arose as regards the treatment to be given to broken period interest, whether a deduction of the broken period interest can be claimed by the Bank, purchaser of the government Securities. Headnotes[†] Income Tax Act, 1961 – s.28 – Interest on securities – Interest on Held to Maturity (HTM) government securities – Interest for the broken period, if allowed as a deduction: Held: As the securities were treated as stock-in-trade, the interest on the broken period cannot be considered as capital expenditure and will have to be treated as revenue expenditure, which can be allowed as a deduction – Whether the Bank holds the HTM security as investment or stock-in-trade will depend on the facts of each case – If it is found that HTM Security is held as an investment, the benefit of broken period interest will not be available and if it is held as a trading asset, deduction for broken period interest can be claimed – If deduction on account of broken period interest is not allowed, the broken period interest as capital expense will have to be added to the acquisition cost of the securities, which will then be deducted from the sale proceeds when such securities are sold in the subsequent years – Profit earned from the sale would be reduced by the amount of broken period interest. [Paras 20, 21, 24-30] Case Law Cited Vijaya Bank Ltd. v. Additional Commissioner of IncomeTax, Bangalore (1991) Supp 2 SCC 147; American Express International Banking Corporation v. Commissioner of Income Tax & Anr (2002) 258 ITR 601 (Bombay) : 2002 SCC OnLine Bom 944; Commissioner of Income Tax, Bombay v. Citi Bank NA Civil Appeal Bank of Rajasthan Ltd. v. Commissioner of Income Tax No. 1549 of 2006; Commissioner of Income Tax, Andhra Pradesh, Hyderabad v. The Cocanada Radhaswami Bank Ltd., Kakinada (1965) 57 ITR 306 : 1965 SCC OnLine SC 186; United Commercial Bank Ltd., Calcutta v. Commissioner of Income Tax, West Bengal (1957) 32 ITR 688 : 1957 SCC OnLine SC 74; Commissioner of Income Tax, Jalandhar v. Nawanshahar Central Cooperative Bank Ltd (2007) 289 ITR 6 : (2007) 15 SCC 611; Bihar State Cooperative Bank Ltd. v. Commissioner of Income Tax (1960) 39 ITR 114 : 1960 SCC OnLine SC 193; M/s. Radhasoami Satsang, Saomi Bagh, Agra v. Commissioner of Income Tax [1991] Supp. 2 SCR 312: (1992) 193 ITR 321: (1992) 1 SCC 659; Commissioner of Income Tax (Central), Calcutta v. Associated Industrial Development Company (P) Ltd., Calcutta (1972) 4 SCC 447; HDFC Bank Ltd. v. CIT (2014) 366 ITR 505 – referred to. List of Acts Banking Regulation Act, 1949; Income Tax Act, 1961; Finance Act, 1988. List of Keywords Broken period interest; Deduction of broken period interest; Purchaser of the government securities; Interest on securities; Interest on Held to Maturity (HTM) government securities; Stock-in-trade; Capital expenditure; Revenue expenditure; HTM Security; Investment. Case Arising From CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 3291-3294 of 2009 From the Judgment and Order dated 24.03.2008 of the High Court of Rajasthan at Jodhpur in ITA Nos. 12, 117, 119 and 120 of 2005 With Civil Appeal Nos. 11200-11201, 11202, 11203, 11204, 11205, 11196, 11197, 11198 and 11199 of 2024 And Civil Appeal No. 4755 of 2023 Appearances for Parties Balbir Singh, A.S.G., Sanjay Jhanwar, Jehangir Mistri, Sr. Advs., Ms. Kavita Jha, Anant Mann, Aditya Rathore, Naman Tandon, Samarvir Singh, Shyam Gopal, Raj Bahadur Yadav, H R Rao, Digital Supreme Court Reports With Prahlad Singh, Manoj Mishra, Ms. Kritgya Kait, Rupesh Kumar, Zoheb Hussain, Satya Prakash Gautam, Sridhar Potaraju, Aayush, Rajat Srivastava, Ms. Zeba Zoariah, Sanjay Kapur, Surya Prakash, Ms. Divya Singh Pundir, Tarun Gupta, Rajat Sharma, Aryan Singh Chaudhary, Gaurav Asati, Sanjiv M. Shah, Pranab Kumar Mullick, Mrs. Soma Mullick, Ms. Banani Sikdar, Sebat Kumar Deuria, Anil Rana, Advs. for the appearing parties. Judgment / Order of the Supreme Court Judgment Abhay S. Oka, J. 1. Leave granted in the Special Leave Petitions.FACTUAL ASPECTS 2. The main issue in this group of appeals is about the treatment to be given to broken period interest. The question is whether a deduction of the broken period interest can be claimed. We must provide a brief background of how the issue arises. 3. A Scheduled Bank is governed by the provisions of the Banking Regulation Act, 1949 (for short, “the 1949 Act”). The 1949 Act, read with the guidelines of the Reserve Bank of India (for short, ‘RBI’), requires Banks to purchase government securities to maintain the Statutory Liquidity Ratio (for short, ‘SLR’). The guidelines dated 16[th]October 2000 issued by the RBI categorise the government securities into the following three categories: (a) Held to Maturity (HTM); (b) Available for Sale (AFS); and (c) Held for Trading (HFT). 4. The interest on the securities is paid by the Government or the authorities issuing securities on specific fixed dates called coupon dates, say after an interval of six months. When a Bank purchases a security on a date which falls between the dates on which the interest is payable on the security, the purchaser Bank, in addition to the price of the security, has to pay an amount equivalent to the interest accrued for the period from the last interest payment till the date of purchase. This interest is termed as the interest for the broken period. When the interest becomes due after the purchase of the security by the Bank, interest for the entire period is paid to the purchaser Bank, including the broken period interest. Therefore, in effect, the purchaser of securities gets interest from a date anterior to the date of acquisition till the date on which interest is first due after the date of purchase. 5. Under the Income Tax Act, 1961 (for short, ‘the IT Act’), Section 18, which was repealed by the Finance Act, 1988, dealt with tax leviable on the interest on securities. Section 19 provided for the deduction of (i) expenses in realising the interest and (ii) the interest payable on the money borrowed for investment. Section 20 dealt with the deduction of (i) expenses in realising the interest and (ii) the interest payable on money borrowed for investment in the case of a Banking company. Section 21 provided that the interest payable outside India was not admissible for deduction. Sections 18 to 21 were repealed by the Finance Act, 1988, effective from 1[st] April 1989. We are dealing with cases involving the period post the deletion of the four Sections. 6. In Civil Appeal Nos.3291-3294 of 2009, which is the lead case, the appellant-assessee is a Scheduled Bank. The appellant was engaged in the purchase and sale of government securities. The securities were treated as stock-in-trade in the hands of the appellant. The amount received by the appellant on the sale of the securities was considered for computing its business income. The appellant consistently followed the method of setting off and netting the amount of interest paid by it on the purchase of securities (i.e., interest for the broken period) against the interest recovered by it on the sale of securities and offering the net interest income to tax. The result is that if the entire purchase price of the security, including the interest for the broken period is allowed as a deduction, then the entire sale price of the security is taken into consideration for computing the appellant’s income. According to the appellant’s case, the assessing officer allowed this settled practice while passing regular assessment orders for the assessment years 1990-91 to 1992-93. However, the Commissioner of Income Tax (for short, ‘CIT’) exercised jurisdiction under Section 263 of the IT Act and interfered with the assessment orders. The CIT held that the appellant was not entitled to the deduction of the interest paid by it for the broken period. The Commissioner relied upon a decision of this Court in the case of Vijaya Bank Ltd. v. Additional Commissioner of Income Tax, Bangalore.[1] This Court held that under the head “interest on securities”, the interest for a broken period was not an allowable deduction. Being aggrieved by the orders of the CIT, the appellant preferred an appeal before the Income Tax Appellate Tribunal (for short, ‘Appellate Tribunal’). The Tribunal allowed the appeal by holding that the decision of this Court in the case of Vijaya Bank Ltd.[1] was rendered after considering Sections 18 to 21 of the IT Act, which have been repealed. Therefore, the Tribunal held that as the appellant was holding the securities as stock-in-trade, the entire amount paid by the appellant for the purchase of such securities, which included interest for the broken period, was deductible. The respondent Department preferred an appeal before the High Court against the decision of the Appellate Tribunal. By the impugned judgment, the High Court interfered and, relying upon the decision of this Court in the case of Vijaya Bank Ltd.,[1] allowed the appeal. This order was impugned in Civil Appeal Nos. 3291-3294 of 2009. 7. All other appeals that are the subject matter of this group are preferred by the Revenue. These are the cases where the deduction of interest for the broken period was allowed. 8. The learned counsel appearing for the appellant in Civil Appeal Nos. 3291-3294 of 2009 and learned counsel representing the respondents/Banks in other appeals have made extensive submissions. The submissions made by the learned counsel appearing for the assessees can be summarised as follows: a. Reliance was placed on a decision of the Bombay High Court in the case of American Express International Banking Corporation v. Commissioner of Income Tax & Anr.[2] Learned counsel pointed out that in the said decision, the Bombay High Court distinguished the decision in the case of Vijaya Bank Ltd.[1] by holding that in the case of Vijaya Bank Ltd.,[1] the claim for deduction of interest on broken period was made under Sections 19 and 20 of the IT Act. This was done on the footing that the Department had brought to tax the interest accrued on the securities up to the date of purchase as “interest on securities” under Section 18. It was held that the decision in the case of Vijaya Bank Ltd.[1] will not apply to the cases post-repeal of Sections 18 to 21 of the IT Act. In the said case, the amount of interest was brought into tax under Section 28. b. The learned counsel appearing for the assessees pointed out that the view taken by the Bombay High Court in the case of American Express International Banking Corporation[2] has been approved by the order dated 12[th] August 2008 of this Court in the case of Commissioner of Income Tax, Bombay v. Citi Bank NA.[3] The learned counsel pointed out that this Court affirmed the decision of the Bombay High Court in the case of Citi Bank NA,[3]which in turn relied upon its earlier decision in the case of American Express International Banking Corporation.[2] c. Our attention was also invited to a decision by this Court in the case of Commissioner of Income Tax, Andhra Pradesh, Hyderabad v. The Cocanada Radhaswami Bank Ltd., Kakinada.[4] Inviting our attention to the said decision, it is pointed out that this Court accepted that the securities held by Banking companies are held as stock-in-trade. He pointed out that this Court, in the case of United Commercial Bank Ltd.; Calcutta v. Commissioner of Income Tax, West Bengal,[5] held that government securities are held as stock-in-trade by Banking companies. He submitted that the assessee pays interest for the broken period to which he is not entitled as after the purchase, when the interest becomes due, the assessee gets income for the entire period even covering the interest payable before the date on which the assessee makes the acquisition. It is submitted that there cannot be any dispute that such securities held by Banking companies constitute stock-in-trade. He submitted that in the case of Commissioner of Income Tax, Jalandhar v. Nawanshahar Central Cooperative Bank Ltd.,[6] it was held that investments are a part of the Banking business, particularly when statutorily mandated. It was submitted that Banking companies buy government securities to comply with SLR requirements. d. It is well-settled that in the Banking business, securities purchased by Banks, per se, constitute stock-in-trade of the Bank 3 Civil Appeal No. 1549 of 2006 4 (1965) 57 ITR 306 : 1965 SCC OnLine SC 186 5 (1957) 32 ITR 688 : 1957 SCC OnLine SC 74 6 (2007) 289 ITR 6 : (2007) 15 SCC 611 as normal and ordinary Banking business is to deal in money credit. The money is parked in readily marketable securities so that it is available to meet the demand of depositors. This argument is supported by a decision of this Court in the case of Bihar State Co-operative Bank Ltd. v. Commissioner of Income Tax.[7] e. It was contended that when the interest income of securities is uniformly assessed under the head “profits and gains from business or profession”, the decision of this Court in the case of Citi Bank NA[3] will squarely apply. It was submitted that in the case of many Banks, for several assessment years, the assessment officer allowed the deduction of interest for the broken period. Reliance was placed on a decision of this Court in the case ofM/s. Radhasoami Satsang, Saomi Bagh, Agra v. Commissioner of Income Tax.[8] f. It was submitted that IndusInd Bank Ltd. is following a practice that interest accrued on a security but not due on the date of purchase of security is debited to the profit and loss account as expenditure and is claimed as such in return of income. The balance amount remaining after reducing the broken period interest is capitalised to the balance sheet covering the acquisition cost of such securities. It is submitted that the department has accepted the said methodology for several years. It was submitted that the exercise undertaken by Revenue in disallowing broken period interest on the footing that it is a capital expenditure is revenue neutral. It was pointed out that if the deduction of broken period interest as a capital expense is disallowed, it will have to be added to the acquisition cost of the securities, which will then be deducted from the sale proceeds when such securities are sold in the subsequent years. It was submitted that, consequently, the related interest received would have to be excluded from the income and truncated from the purchase cost, or alternatively, both the broken interest period and interest received thereof will be netted and added/subtracted from the cost of acquisition. Therefore, the exercise done by 7 (1960) 39 ITR 114 : 1960 SCC OnLine SC 1938 [1991] Supp. 2 SCR 312: (1992) 193 ITR 321 : (1992) 1 SCC 659 the Department is academic. It was submitted that the decision of this Court in the case of Vijaya Bank Ltd.[1] is per incuriamas it was rendered in ignorance of the decisions of this Court in the case of Cocanada Radhaswami Bank Ltd.[4] Reliance was also placed on the Central Board of Direct Taxes (for short, “the CBDT”) Circular No. 665 of 1993. g. It was also pointed out that though Banks are required to maintain SLR by investing amounts in specified securities, as long as Banks maintain a specified percentage of reserve, they are permitted to buy and sell such securities, irrespective of their categorisation. There is no embargo on the Bank to hold security in SLR up to the maturity date of the security. It was submitted that Banks always treat interest income from all securities as profit or loss, irrespective of the categorisation of investments. The interest on securities held by Banks is always taxed under the head “income from business or profession”. This contention is raised by HDFC Bank. It was submitted that in accordance with the well-settled and accepted method of accounting, the amount of broken period of interest which is debited in the profit and loss account of the Bank is claimed as a deduction while computing the income from business under the head “income from business and profession” as the entire interest income is offered to tax under the said head. h. Reliance was placed on the RBI Circular dated 1[st] July 2009, which permits the debit of broken period interest to the profit and loss account. Reliance was also placed on a Circular dated 2[nd] November 2015 issued by the CBDT. The Circular provides that the investments made by a Banking company are a part of the business of the Bank. Therefore, income from such investments is attributable to the business of Banking falling under the head “profit and gain of business and profession”. i. It was submitted that assuming that as per the mandate of the 1949 Act, the securities are treated as investments in the books of accounts, it cannot be held that even for the purposes of the IT Act, securities would continue to be investments and not stock-in-trade. It was submitted that this Court has repeatedly held that the entries in the books of accounts are not relevant for determining the taxability under the provisions of the IT Act. Reliance is placed on the RBI Circular dated 1st July 2009, which provides that broken period interest is not to be capitalised as part of the cost and is required to be debited to the profit and loss account. j. It is submitted that as required by the Banking Regulation Act, all three categories of securities are treated in the same manner, and there is no distinction between the securities which are HTM and the other two categories of securities. It was submitted that Banks can always shift the securities falling in the category of HTM to the other two categories. k. It was further urged on behalf of the assessee that the plea based on distinguishing the nature of the treatment of SLR securities viz-a-viz non-SLR securities has been raised for the first time by the Revenue before this Court. l. Considering the fact that securities are held as stock-in-trade, interest paid on them constitutes an expense which is liable to be claimed as a deduction. 9. The submission of learned ASG is that the broken period interest on security held to maturity constitutes an investment and, therefore, should be treated as capital expenditure. It was submitted that since HTM securities are held up to maturity for maintaining the SLR ratio and as the same are treated as investment in the books of accounts of Banks, the same should be treated as investment and not stock-in-trade. Another submission of ASG is that Circular No. 18 of 2015 applies only to non-SLR securities. Another submission of learned ASG is that the decision of Vijaya Bank Ltd.[1] would squarely apply as while omitting Sections 18 to 21, corresponding amendments have been made in Sections 28, 56(2)(d) and 57(3) of the IT Act, and the securities are now taxable under the head of “Income from other Sources”. Therefore, the principles laid down in the case of Vijaya Bank Ltd.[1 ]will squarely apply. He argued that the increase in capital by the acquisition of securities results in the expansion of the Bank’s capital base, which helps in profit making. Therefore, the expenditure in the nature of broken period interest was capital expenditure. Learned ASG, thus, submitted that the assessees in these cases will not be entitled to a deduction of broken period interest. CONSIDERATION OF LEGAL POSITION 10. We deal with the legal position at the outset. As noted, Sections 18 to 21 were deleted from 1[st] April 1989. In this group of appeals, we are not concerned with cases before the financial year 1988-89. Section 14 of the IT Act reads thus: “14. Heads of income.— 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. C. —Income from house property. D. —Profits and gains of business or profession. E. —Capital gains. F. —Income from other sources.”