Counsel Forthe Appellant: Srl. J v. Prasad [(Sc ]For Income Tax

HIGH COURT FOR THE STATE OF TELANGANA WEDNESDAY,THE SEVENTH DAY OF JUNETWO THOUSAND AND TWENTY THREE PRESENT THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUYANANT)THE HONOURABLE SRI JUSTICE N.TUKARAMJI INCOME TAX TRIBUNAL APPEAL NO: 378 OF 2006 (lncome Tax Tribunal Appeal Under Section 260-4 of the lncome Tax Act, againstthe order of the lncome Tax Appellate Tribunal, Hyderabad Bench 'A', Hyderabad inITA No.663Hyd 12003, for assessment Year 1998-1999 dated 28-10-2005 preferredthe order of the lncome Tax Appellate Tribunal, Hyderabad Bench 'A', Hyderabad inITA No.663Hyd 12003, for assessment Year 1998-1999 dated 28-10-2005 preferredagainst the Order of the Commissioner of lncome Tax (Appeals) lV, Hyderabad,Appeal No.25lDC-3(1yClT(A)-1V12002-03 dated 19-08-2002, preferred against theAppeal No.25lDC-3(1yClT(A)-1V12002-03 dated 19-08-2002, preferred against theOrder of the Joint Commissioner of lncome Tax(Assts.) Special. Range-4,Hyderabad, PAN/GIR No.S-31 , dated 29-03-2001.)Hyderabad, PAN/GIR No.S-31 , dated 29-03-2001.) Between: The Commissioner of lncome Tax-lll, Hyderabad ...APPELLANT AND State Bank of Hyderabad, Finance and Accounts Department, Head Office, Gunfoundry,Hyderabad. ...RESPONDENT lA NO: 1 OF 2018 Petition under Section 151 CPC praying that in the circumstances stated in theaffidavit filed in support of the petition, the High Court may be pleased Permit theaffidavit filed in support of the petition, the High Court may be pleased Permit thepetitioner to substitute its name as respondent in the appeal as "State Bank of lndia,Gunfoundry, Hyderabad" by amending the caused title accordingly in the interest ofjusticeGunfoundry, Hyderabad" by amending the caused title accordingly in the interest ofjustice Counsel forthe Appellant: SRl. J. V. PRASAD [(SC ]FOR INCOME TAX) Counsel for the Respondent: Mr. K.P.AMARNATH REDDY The Court made the following: T}Ip-rpNll_rlp !IlE- JUSTICE UJJAL BHIIYANAND THE HON 'BLE SRI JUSTICE N. TUKARAMJI I.T.T.A.No.37a of 2o06 JUDGMENTt1'e. tlk rl,,!,I)k il!, | )nt! J\lstic.e Uial Bhuyan) Hearcl Xilr. ,i.V.Prasad, learned Standing Counsel.Income ['l;rx ]Dcpartmer)t, for the appellant andN,lr. K.P.Arnarnatlr Reddr, learned counsel for theresponden t 2. This anpeal has beerr preferred by the revenue as theappeliant Lrnder Scction 260A of the Income Tax Act, 1961(briefly, 'thr Act' herc-initfter) against the order dated28.10.2005 passecl br. rhc Income Tax Appellate Tribunal,Hyderabad Bench 'A', Hyderabad (Tribunal) inI.T.A.No.663,tHydl2OO3 for the assessment year 1998-t999. 3. Learnerl counsel for the parties are in agreement thatissue raised in this altpcarl1S squarely covered by the It1decision of this [court ][dated ][04 ][-Ol ][-2023 ][passed]LT.T.A.No.32a [of ]2006 [(Commissioner ][of ][Income ][Tax-III ][v']State Bank of Hyderabad) [wherein ][parties ][r'vere ][the ][same'] 4. In fact, I.T.T.A.No.328 of [2006 ][arose ][out ][of the ][same]order of the Tribunat [dated ][28.10'2005 passed ][in]I.T.A.No.661/Hydl2OO3 [for the ][assessment ][year ][7996']t997. 5. Relevant portion of the [judgment ][and ][order ][dated]O4.O1.2023 passed in I.T.T.A.No'328 [of ][2OO6 ][reads ][as]follows: 15. Issue before the Court [is ][whether broken ][period]interest paid on [purchase ]of [securities ][is ][revenue]expenditure since tJle [securities ][constitute ][stock-in-]trade? 16- To appreciate [the ][above ][question. ][it ][would ][be]to first examine [the ][meaning ][of ][the]appropriate exprcssion "broken [period ][interest". ][This ][has ][been]explarned by the [Bombay ][High Court ][in ][American]Express Lrteraational [Balking ][CorPoration ][v.]Commissioner of [Income ][Tax ][((2OO2) ][258 ] [601](Bom)) in the following manner: 5. Relevant portion of the [judgment ][and ][order ][dated]O4.O1.2023 passed in I.T.T.A.No'328 [of ][2OO6 ][reads ][as]follows: 15. Issue before the Court [is ][whether broken ][period]interest paid on [purchase ]of [securities ][is ][revenue]expenditure since tJle [securities ][constitute ][stock-in-]trade? 16- To appreciate [the ][above ][question. ][it ][would ][be]to first examine [the ][meaning ][of ][the]appropriate exprcssion "broken [period ][interest". ][This ][has ][been]explarned by the [Bombay ][High Court ][in ][American]Express Lrteraational [Balking ][CorPoration ][v.]Commissioner of [Income ][Tax ][((2OO2) ][258 ] [601](Bom)) in the following manner: ''6. iJr'lirrc .orlrir!t to the facts of the r:ase, asfrort l)!raact' ')(.ds to be mentioned Thisprefac<: r'xplai rs tire aoncept o[ broken periodLnterc:j1 t \ [( ]r'. IIrnK rs required to maintainStatul,,rr [-r(l( ,ll\ Ratio (hereinafter rc[crredlo i1s 'Sl-R ) l( I rhat purposc, every l;anksLtbscr rlres to [( ],,,\ ( rnntent securities. Onc suchsccuritr rs knorrrr as SGL (Subsidiary GencralI-cdger) i his llrlqt r is maintained in the PubticDebt Oflr< e rir 1 lr( Reser ve Bank of [ndia. Every5ank is reclLrrrrrl, as a part of bankinglusincss, to sLrlrscribe to this loan. Thisloan/S(ll, is irl:j() transferable like any othersccurit\'. In tlrisi case, for example, rve areronccrrcd $ltll 1.75 per cent. Government of'r.rclia [Lrirn. ][i9l]o, ][l. ][v. Rs. ][5 lakhs. On ]the SGL,he llt'stric Il:rnii ol Indra pays half vearlyntcrest In llrc , irs( ol the said 4.75 per cent.';overnrre!rr ol [lnrlia ]Loan, 1980, f. v. Rs. 5lakhs, tlrc Resr,,-r't, Bank of India was requiredro pa\' [r.ill' re:i.lv interest on May 12, 1976,irnd NovernbL'r- 12. i976. The Reserve Bank oflrdia pavs inl(.('sr on due dates on suchsecurrtres to t[r(. llolders of the securities, everyslr months. TIrc Rescrve Bank of India paysintercst on thc baiance to the banks, whosenames appear as holders in the PDO ledger./\fter subs(:ribin!., lo rhe said loans, the banks\ cre l|ec to transfcr such loans forcoDsi(lc-rirlro|t Lo the other banks.(onseqtrt,nth, llr(. Reserve Bank of India paysinterest to thr: lrolder on the balances in as,rcurity i[, rn it:i l)ooks, the said security stoodirr the rrarnr: o[ r lrr t holder on the due date for pajment of interest. As stated above, tomaintain SLR levels, every bank subscribes tosuch loans. This is a part of banking business.llorr,ever, after so subscribing, the banks arefrec to deal wrth such securities like any othertradcr. Therefore, there are two activitiesinvolved--one activity is that of subscribrng tothe loan and the other is trading. Now, if abank purchased 4.ZS per cent_ GOI Loan,1980, f. v. Rs. 5 lakhs on August 11, 19|6.then, on purchase, the said bank was requiredto lodgc the transfer form with the pDO. Onsuch lodgement, the name of the bank wasentered in the pDO ledger. Therefore, on thenext due date for payment of interest, namely,November 12,1976, the bank was entided toreceive half yearlv interest from the ReserveBank of [ndia for the period May 12, 1926, upto November 12, 1976, even though it hadbought the sard security on August 11, 1976.Therefore, it receives interest for the entire sixmonths, though it bought the security onAugust l l, 1976. In the above example, sincethe security was sold/ transferred on Augustll, 1976 (i.e., after due date for payment ofinterest), interest had accrued to thetransferor/ seller from the last due date, i.e,,May 12, t976 up to August tl, 1976." 17. As exptajned by the Bombay High Court, everybank is required to maintain a Statutory Liquidity Ratio(SLR). For that purpose, every barrk subscribes togovernment securities. One such security is known as - 17. As exptajned by the Bombay High Court, everybank is required to maintain a Statutory Liquidity Ratio(SLR). For that purpose, every barrk subscribes togovernment securities. One such security is known as - Subsitliary Gcrrcral I_r'riricr (SGL) r,,,hich is matntaincd tnthe h.i)lic Dcl:lr Otfir.r rn rhe Rcsen.e Bank of India.Every irank is rcclrrr:'cri ir:i ii part of its bankrng businessto subscribe tc ihrs irt;rn Like an-v- other security, sucha loan,'SGL is rrlso -ransfr'rablc Reserve Bank of Indiapays intcrest on due (lirtes on such securities to theholders of the se<:'rritics every six months. Aftersubscribing to the sald ioans, banks are free to transfersuch l,)ajts for consrclcrrrtron to other banks. ReseryeBank of India p:r_r's rnier-est to the holder on thebalanc,rs in a sccurirv il in its books the sard securitystands in the nanre oi tlrirL holder on the due date forpayment of intcrcst. ['l-hc ]above exercise, if we may sayso, is a part o[ thc banl<ins business. However, after sosubscrrl:ing, thc barl<s are free to deal wrth suchsecurlties like airv otn.! tr;lder. 'l'herefore, there are twoactiwities tnvoh,cd ,;nc of subscribrng to the loal ardthe othcr is trading, 18. One of tl)c questrons before the Bombay HighCourt u.as whether l;roken period interest payment bythe assc:ssee was allou,irble as a revenue expenditureunder the head 'incom<' from business or profession?While answering rhrs rltrcstion, Bombay High Courtexamined the decision ()l the Supreme Court in ViJayaBank Ltd, v. Additional Commissioner of IncomeTax, Bangalore ((199 1) iflT lTR 54 I (SC)). 19. [n ViJaya Bank Ltd. v. AdditlonalCommissioner of Income Tax, Bangalore ((1991) 1g7ITR 54 I (SC)), dr-rrin q rhe assessment year under Additlonal consideratlon. Vrla-va tsank [had ][entered ][into al]agrcemenL with Jayalakshmi [Bank Ltd. ][whereby Vijaya]Balrk took over the [liabilities ][of Jayalakshmi ][Bank. ][It]also took over the assets [belonging ][to ][Jayalakshmi]Bank. One of the two [items taken ][over by ][Vijaya Bank]represented interest which accrued on securities [taken]over by Vij aya Bank from Jayalakshmi [Bank. ][Such]arnount was brought to tax by the [assessing ][ofhcer]under Section l8 of the Act. However, [assessee ][claimed]that such amount was deductable under Sections [19 ]&2O of thc Act. It $,as in thc light of such facts that thedccision rn Vijaya Bank Ltd. v. AdditionalCommissioner of Iacome Tax, Baugalore ((19911 [187]ITR 54 I (SC)) uas rendercd. 20. Therefore, Bombay High Court rn Americanv.E:(press Internatlonal Banking Corporation Commissioner of Income Tax (.l2OO2l 258 ITR 601(Bom)), in the facts of that case, held that havingassessed thc income of the assessee under Section 28 ofthe Act, Revenue ought to have taxed-the broken periodinterest received but at the same time ought to haveallowed deduction for the broken period interest paid. 21. As already noticed above, this decision of theBombay High Court has found favour with the SupremeCourt in Commissioner of Income Tax v. CitibankN.A. (2008 (8) TMI 766) where Supreme Court agreedwith the views expressed by the Bombay High Court.Decision of the Supreme Court in Commissioner ofIncome Tax v. Citibank N.A. (2008 (8) TMI 766) is - dat-ed i2.08.2008 [q4r('r.-'as ]deciston o[ the RalasthanI{igh Court in Commissioner of Income Ta:i v. Bankof Rajasthan Limited ((2009) 316 iTR 291) is dated24.O3.2AOA. 21. As already noticed above, this decision of theBombay High Court has found favour with the SupremeCourt in Commissioner of Income Tax v. CitibankN.A. (2008 (8) TMI 766) where Supreme Court agreedwith the views expressed by the Bombay High Court.Decision of the Supreme Court in Commissioner ofIncome Tax v. Citibank N.A. (2008 (8) TMI 766) is - dat-ed i2.08.2008 [q4r('r.-'as ]deciston o[ the RalasthanI{igh Court in Commissioner of Income Ta:i v. Bankof Rajasthan Limited ((2009) 316 iTR 291) is dated24.O3.2AOA. 22. Before we advert to ihe facts of the presentappeal, rve may refer io the decision of the Kerala HighCourt in Commissioner of Income Tax v. NedungadiBank Ltd. ((2003) 2b4 I1'R 545). ln that appeal, KcralaHigh Corrrt also examrncd the effect of the dccision ofthe Suprr:me Court in Vijaya Bank Ltd, v. AdditionalCommissioner of Income Tax, Bangalore (( 199 I ) 187ITR 541 iSC)). Out of the four substantial questions oflaw which were considcred by the Kcrala High Court,question No.I pertained to rvhether investments madeby tJle assessee in the lorm of government securitiesacquired for the purpose of complying with therequiremcnts of the pror isions of the BankingRegulation Act i.e., to mirintain SLR, could be treated astrading rLsset/stock-in tradc of thc business of theassessee? The 4,h questron considercd by the KeralaHigh Cou rt was as to rvhcther interest paid for thebroken pcriod in the purchase of securities is anallowable deduction? Referring to the Circular dated24.04.1991issued by thc CBDT, Kerala High Court heldthat securities held by banks constitute their stock-in-trade or investment and consequently loss claimed [by]bar-rks on the valuation of their securities [should ][be]atlowed as a deductlon rrr conrputing the taxablc [profits.]Therefore, Kerala High Clorrrt confirmed the vrew takenby the Tribune that sc.t:uriLies held by the assessee balk were stock-trl-trade [tlf ][tt.tc ][business ][o[ ][thc ][asscssce]bank and that [the ][nottonltl loss suflered on account of]reva-luation of the [said sccuri'.ies at ][the ][close ][of ][the ][year]was an eJlowablc dcduction [in ][the ][computation ][of ][profits]of the assessec bzrnk. [Finally, ][in ][respect ][of ][tl're ][4th]question as to whether the [Tribunal ][was ][justified ][in]allowing the claim [for ][dcduct.ion ][of ][interest ][paid ][for ][the]broken period for acquisition [of the ][securities ][till ][the]date of such securities, [Kerala High ][Court ][held ][that ][the]said question was [squarely ][covered ][by its ][earlier]decision in Cornmissioner of [Income ][Tax ][v. ][South]Indian Bank Ltd. [((2000) ][241 ] [374 ]lKetll [wherein ][it]was held that interest [paid ]for the broken [period would]constitute allowable outgo in [the ][hands ][of ][the ][assessee]and was an admissible deduction [in the ][computation of]total incorne of the assessee [(bank) ]under the [head]'profits and gains of business or profession'. 23. Adverting to the facts of the [present ]case, [we ]findthat it is the contention of the respondent thatrespondent had been holding its securities all along [as]stock-in-tradc which is not in dispute. [For ]successiveassessment years, Revenue has accepted [the ][fact ][that]respondent had been holding the securities as stock-in-trade. Circula-r No.665 dated 05.10. 1993 of the CBDThas clarified thc decision of the Supreme Court inVijaya Bank Ltd. v. Additional Commissioner ofrncone Tax, Bangalore ((1991) 187 ITR 541 [(SC)).]CBDT has clarified that [where ]the banks [are ][holding]securities as stock-in-trade [and ]not as [investments,]principles of law enunciated in Vijaya Bank Ltd. [v.] Additional Commissioner of Income Tax, Bangaiore((1991) 187 ITR 5+ I (SC)) [-wouid ]not be airplicable.Thercfrrre, CBDT has clarified that assessrng cfficersl.rould determine on the facts and circurnstances [of]each rase as to \\'hcther any [particular ]securityconstitute stock-in-trircle or investment [taklng ][into]accoun t the guidelines isstrcd by Rcserve [Btrnk ][of ][IndLa]from time to time. Additional Commissioner of Income Tax, Bangaiore((1991) 187 ITR 5+ I (SC)) [-wouid ]not be airplicable.Thercfrrre, CBDT has clarified that assessrng cfficersl.rould determine on the facts and circurnstances [of]each rase as to \\'hcther any [particular ]securityconstitute stock-in-trircle or investment [taklng ][into]accoun t the guidelines isstrcd by Rcserve [Btrnk ][of ][IndLa]from time to time. 24. I t rs in the abrtt'e back drop that [Tribu ][nai ][has]held that the responrlcnt had [purchased securitles ][to]hold them as stock-in tradc. [Therefore, ][interest paid ][on]such securities would be [an ][allowable deduction.] 25. We are in agreement with the [ltnding ][returned ][by]the Tribunal. Thar :1part, this [is a ][finding ][of ][fact]renclered by the Tribunal and in an [appcal ][under]Section 260A of the Act. [\ve ]are [not ][inclined to disturb]such a hnding of fact. [that ][too, ][when ][the ][legal ][position]is very clear. 26. For the aforesaid [reason, ][we ][answer ][the ][above]questions in favour of the respondent [assessce ][and]against the appellant [Revenue.] 27. Appeat is accordingly dismissed. Howevcr, [there]shall be no order as to [.-osls.] II v, HIGH COURT DATED:07 tO6t2023 JUDGMENTlTTA.No.378 of 2006 OISMISSING THE APPEAL -iliE srArt1-c.+',ic\i\.Irlflr8IitlJt