Ita/27/2013 Of The Commissioner Of Income Tax v. State Bank Of India(Sbi)

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 8 DAY OF SEPTEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD ILT.A. NO.27 OF 2013 C/WLT.A. NQ.26 OF 2ZO1L ILT.A. NO.27 OF 2O13BE!TVW E 1.|THE COMMISSIONER OF INCOME-TAX LTU, JSS TOWERS BSK III STAGE, BANGALORE. 2 |THE COMMISSIONER OF INCOME-TAX (APPEALS) LTU, JSS TOWERS BSK III STAGE, BANGALORE.| ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,) AND: STATE BANK OF INDIA (SBI)HEAD OFFICE, P.B. NO.9727K.G. ROAD, BANGALORE. ... RESPONDENT (BY SRI. ANKUR PAI, ADV., A/WSRI. K.R. VASUDEVAN, ADV.,) THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,1961 ARISING OUT OF ORDER DATED 14.09.2017 PASSED IN [TA| NO.889/BANG/2011 FOR THE ASSESSMENT YEAR 2000-01,|PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO:(1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN.» (1) ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THEITAT, BANGALORE IN ITA NO.889/BANG/2011 DATED 14-09-2012|AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER|CONFIRMINGTHE|ORDER|PASSEDBY|THEASSISTANT—COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE, INTHE INTEREST OF JUSTICE AND EQUITY. LT.A.§ NO.26 OF 2013 BETWEEN: 1.|THE COMMISSIONER OF INCOME-TAX LTU, JSS TOWERS BSK III STAGE, BANGALORE. 2 |THE COMMISSIONER OF INCOME-TAX (APPEALS) LTU, JSS TOWERS, BSK III] STAGE, BANGALORE. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,) AND: STATE BANK OF INDIA (SBI)HEAD OFFICE, P.B. NO.9727|K,.G. ROAD, BANGALORE. ... RESPONDENT (BY SRI. ANKUR PAI, ADV., A/WSRI. K.R. VASUDEVAN, ADV.,) THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT,1961 ARISING OUT OF ORDER DATED 14.09.2017 PASSED IN [TA|NO.888/BANG/2011 FOR THE ASSESSMENT YEAR 1999-2000,|PRAYING THAT THIS HON'BLE COURT MAY BE PLEASED TO: (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED THEREIN. (1) ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THEITAT, BANGALORE IN ITA NO.888/BANG/2011 DATED 14-09-2012|AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER|CONFIRMINGTHE|ORDER|PASSEDBY|THEASSISTANT. COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE, INTHE INTEREST OF JUSTICE AND EQUITY. THESE ITAS COMING ON FOR’ HEARING, THIS’ DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: COMMON JUDGMENT These appeals under Section 260A of the Income)Tax Act, 1961 (hereinafter referred to as the Act forShort) has been preferred by the revenue. The subjectmatteroftheI.T.A.No.27/2013pertainsCO.theAssessment year 2000-01, whereas, the subject matterof I.T.A.No.26/2013 pertains to assessment year 1999-2000. Since, common substantial questions of law arisefor consideration in these appeals, they were heardanalogously and are being decided by this commonjudgment. — I.T.A.No.27/2013 was admitted by a bench of this)Court vide order dated 12.07.2013 on the followingsubstantial question of law: (I)Whether the Tribunal was correct [nholdingthat|thebrokenperiodinterest paid by the assessee should (iI) "777# not be added to the cost of the'securities purchased by including theinterest in the closing stock of thesecurities,when|theexpendituretowards interest was towards the'capital outlay? Whether the Tribunal was correct [nholding that the expenditure incurred|towards broken period interest in theearlier years is not to be treated aspart of closing stock in the currentyear as the same was not debited tothe P & L account without taking into considerationthat|thecorrectvaluation can be arrived at only after|taking into consideration the broken|period interest paid and recorded aperverse finding? Whether the Tribunal was correct [nnot declaring that adjustment on)value of securities after considering|thebrokenperiodinterestWasrequired for arriving at the correct|value and consequently recorded a) perverse finding? I.T.A.No.26/2013 was admitted by a bench of this. Whether the Tribunal was correct [nholding that the expenditure incurred|towards broken period interest in theearlier years is not to be treated aspart of closing stock in the currentyear as the same was not debited tothe P & L account without taking into considerationthat|thecorrectvaluation can be arrived at only after|taking into consideration the broken|period interest paid and recorded aperverse finding? Whether the Tribunal was correct [nnot declaring that adjustment on)value of securities after considering|thebrokenperiodinterestWasrequired for arriving at the correct|value and consequently recorded a) perverse finding? I.T.A.No.26/2013 was admitted by a bench of this. court vide order dated 03.06.2013 to consider thefollowing substantial questions of law:| (i) (iI) Whether the Tribunal was correct [nNholdingthat|thebrokenperiodinterest paid by the assessee shouldnot be added to the cost of the’securities purchased by including theinterest in the closing stock of thesecurities,when|theexpendituretowards interest was towards thecapital outlay? Whether the Tribunal was correct [nNholding that the expenditure incurredtowards broken period interest in theearlier years is not to be treated aspart of closing stock in the currentyear as the same was not debited tothe P & L account without taking intoconsiderationthat|theCOrrectvaluation can be arrived at only aftertaking into consideration the broken period interest paid and recorded aperverse finding? (iI)Whether the Tribunal was correct [nnot declaring that adjustment on)value of securities after considering|thebrokenperiodinterestWasreguired for arriving at the correctvalue and consequently recorded a)perverse finding? not declaring that adjustment on)value of securities after considering|thebrokenperiodinterestWasreguired for arriving at the correctvalue and consequently recorded a)perverse finding? 2. Facts leading to filing of these appeals Driefly| stated are that the assessee is a_ public sectorundertaking. The assessee filed its returns of income for the|assessmentYedalS1999-00and2000-01respectively. The assessments were initially completedunder Section 143(3) for both the assessment years on28.03.2002. The assessee apart from deriving incomefrom other sources also derived interest from sale ofsecurities. The Government securities were purchasedby the assessee either directly through public auction orin the open market. In the event of purchase of security from open or secondary market, the bank paid interestto the sellers of securities for the period upto date oftransaction or purchase of the last open date which isknown as broken period interest. 3.The Commissioner of Income Tax, Bangaloreby an order dated 29.03.2004 set aside the orders ofassessment for the assessment year 1999-00 and 2000-O1 on the ground that same were erroneous andprejudicial to the interest of the revenue in the light ofthe decision of the Supreme Court in ‘VIJAYA BANKLTD., VS. ADDITIONAL COMMISSIONER INCOMETAX’, 187 ITR 541 (SC),wherein it was held that pricepaid for securities including broken period interest was.in the nature of capital outlay and no part of it can beset off as expenditure against income accruing on the.securities. Thereupon the Assessing officer passed anorder under Section 143(3) of the Act on 31.03.2005 forassessment years 1999-00 and 2000-01 by which totalincome|WaSassessedat.Rs.64,86,46,345/-for. assessment year 1999-00 and Rs.61,48,51,585/- forassessment year 2000-01. The assessee thereupon filedan)appealbeforeCommissioner|ofIncome.Tax(Appeals). The Commissioner of Income Tax (Appeals)by an order dated 12.08.2011 directed the Assessingofficer to recast the profits in respect of sale of securitiesafter taking into account the enhancement in cost of.securities purchased in addition of Broken PeriodInterest. Accordingly, the appeals were partly allowed. _ assessment year 1999-00 and Rs.61,48,51,585/- forassessment year 2000-01. The assessee thereupon filedan)appealbeforeCommissioner|ofIncome.Tax(Appeals). The Commissioner of Income Tax (Appeals)by an order dated 12.08.2011 directed the Assessingofficer to recast the profits in respect of sale of securitiesafter taking into account the enhancement in cost of.securities purchased in addition of Broken PeriodInterest. Accordingly, the appeals were partly allowed. _ aThe assessee approached the Income TaxAppellate Tribunal (hereinafter referred to as theTribunal’ for short). The Tribunal by an order dated14.09.2012 relying on its previous order for theassessment year 1988-89, wherein it had treated theBroken Period Interest paid as an allowable businessexpenditure as well as decision of the Supreme Court in‘CIT VS. CITIBANK’~ held that assessee since, itsinception has been offering the broken period interest.earned from the sale of securities as business Income under Section 28 of the Act and not as interest incomeunder het head ‘income from other sources’. Therefore,the broken period interest paid to the _ sellers osecurities is an allowable deduction from the business|income under the Act. In the result, the appealspreferred by the assessee were allowed. In the aforesaidfactual background, the revenue has filed these appeals.5.|Learned counsel for the revenue submittedthat increase in the capital results in expansion of thecapital base of the company and incidentally that wouldhelp in the business of the company and also helps inprofit making and the expenses incurred in the aforesaidconnection retains the character of a capital expenditureas the expenditure is directly related to the expansion ofthe capital base of the company and therefore, theexpenditure incurred by the assessee was a Capitalexpenditure. It is also urged that if an assessee bankpurchases securities and certain amount of interestaccrued thereon payable by the government to the bank, the purchase price comprise of issue price till thedate of purchase, which is known as Broken PeriodInterest cannot be claimed as allowable deduction from|its income. In support of aforesaid submissions, reliancehas been placed on decisions of the Supreme Court in‘VIJAYABANKLTD,VS,ADDITIONALCOMMISSIONER OF INCOME TAX’, (1991) 187 ITR541(SC),“BROOKEBONDINDIALTD,YS, COMMISSTONER|OFINCOME-TAX’,(1997)OlTAXMAN 26 (SC)and‘COMMISSIONER OF INCOME-TAX VS. BANK OF RAJASTHAN LTD.,’, (2009) 178TAXMAN 304 (RAJASTHAN). 6.|On the other hand, learned counsel for theassessee while inviting the attention of this court toparagraph 9.3 of the order passed by the Tribunal,submitted that assessee has been offering the Broken.Period Interest income earned from the sale of securitiesas business income under Section 28 of the Act and|therefore, the same is an allowable deduction from its business income under the Act. It is further submittedthat the order passed by the Tribunal does not call forany interference and the substantial questions of lawdeserves to be answered in favour of the assessee. It js/also pointed out that the decision of the Supreme Courtin VIJAYA BANK supra was clarified by Supreme Court inCOMMISSIONER OF INCOME TAX VS. CITIBANK INCIVIL APPEAL NO.1549/2006 DECIDED ON 12.08.2008.Learned counsel for tne assessee has relied on tnedecision in the case of CITIBANK supra as well asdecision in.“AMERICAN EXPRESS INTERNATIONAL|BANKINGCORPN,VS, COMMISSIONER|OFINCOME-TAX,(2002)125|TAXMANA488(BOMBAY J |We have considered the submissions madeby learned counsel for the parties and have perused therecord. The bank purchases Government securities,which have the issue price, they bear interest, they havematurity period, and are purchased by the bank. In this background, when the bank purchases those securitiesafter certain time, of the date of issue, then, by the timethey are purchased by the bank, certain amount ofinterest is already accrued on that securities, payable bythe Government to the purchase bank, and therefore,the bank purchased that security by paying hecomposite sum, comprising of the issue price, andaccrued interest uptill the date of purchase. It is thiselement of interest, which is paid by the bank, at thetime of purchase, for the period between the date ofissue, and date of purchase, is Known as “Broken PeriodInterest’. The issue, which arises for our considerationin these appeals, is about taxability of interest paid bythe assessee commonly Known as_ Broken PeriodInterest. In VIJAYA BANK LTD. Supra, the SupremeCourt considered the issue whether in a case where the|assessee purchases securities at a price determined withreference to their actual value as well as interestaccrued thereon till the date of purchase, the entire price paid for them would be in the nature of capitaloutlay or whether the interest portion could be claimedas revenue expenditure. In the aforesaid context, theSupremeCourtheld that|whateverWaStheconsideration which prompted the assessee to purchasethe securities, the price paid for them was in the natureof capital outlay and no part of it could be set off asexpenditure against income accruing on those securities. —The Supreme Court was not directly concerned with theissue whether the securities form part of stock in tradeOr capital assets. After the decision of the SupremeCourt, in VIJAYA BANK supra, a clarification dated05.10.1993 was issued vide Circular No.65 with regardto treatment of securities as stock In trade orinvestment and it was decided that the Assessing officerShould determine on the facts and circumstances of eachcase as to whether particular security constitutes stockin. trade or investments, taking into account theguidelines issued by Reserve Bank of India in this regard from time to time. | 8.|Tne Supreme Court in CITIBANK supra,referred to decision in VIJAYA BANK LTD. supra and heldthat Vijaya Bank had offered the amounts as interest onsecurities under Section 18 and in the aforesaid factual|background it was held that outlay on purchase ofincome bearing asset was in the nature of capital outlay.and no part of capital outlay can set off as expenditureagainst income accruing from the asset in question. Itwas further held that in Citibank, the amount, which theassessee received, has been brought to tax under thehead of business under Section 28 of the Act.—Therefore, the decision in Vijaya Bank Ltd.’s case did not.apply to the facts of the case. Similar view was taken byHigh Court of Bombay in|American Express InternationalBanking Corporation supra 9 |In the light of the aforesaid well settled legalprinciples, the facts of the case in hand may be seen. In the instant case, the assessee bank ever since, itsinception has been offering the Broken Period Interestincome earned from the sale of securities as business.income under Section 28 of the Act and not as incomeunder the head ‘income from other sources’. Therefore,the Broken Period Interest paid to the sellers ofsecurities was claimed as allowable deduction from its/business income under the Act. The Tribunal whilerecording the finding in favour of the assessee Nas reliedupon the decision of the Supreme Court in CITIBANKSUPId. In view of preceding analysis, the substantial|questions of law framed by a bench of this court areanswered against the revenue and in favour of theaSSeSSAE., �2�6,-�4-+106!�6,-�.//-.0+�9.70�.23�.4-�,-4-<=� 37+:7++-3�� ����������������������++� �����������