Rs.22,95,11,354.Oo As Broken[Period ] Interest[On ][Purchase Of] Securities During The Previous[Year ][Relevant ][To ][The ][Assessment] Year 1998-99 v. > Tcj & Ntrj I.'i'.t.a.i\ O. 1 55 Of 2O06

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD WEDNESDAY, THE FOURTH DAY OF JANUARYTWO THOUSAND AND TWENry THREE PRESENT THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE HONOURABLE SRI JUSTICE N.TUKARAMJI INCOME TAX TRIBUNAL APPEAL NO: 155 0F 2006 Appeal Under Section 260-4 of the lncome Tax Act, 1961 against the orderdated 18-03-2005 passed by the lnccme Tax Appellate Tribunal, Hyderabad BenchHyderabad in lTA.No. B93lHl2O02 for the Assessment Year 1998-99 preferredagainst the order of the Commissioner of lncome Tax (Appeals)-lV, Hyderabad inAppeal No. 28lDC-3(1)lClT(A)-lV/2002-03 dated 19-08-2002 preferred against theorder of the Deputy Commissioner of lncome Tax Circle (3), Hyderabad in GIR No.31/2000-01 dated 1 9-03-2002. Between: The Commissioner of lncome Tax-lll, Hyderabad AND State Bank of lndia, Gunfoundry, Hyderabad ...APPELLANT (Cause title is amended as per court order dated 31.01.2018 in lA.No. 1/2018in ITTA. No. 155 of 2006). ...RESPONDENT Counsel for the Appellant(s): SRl. J V PRASAD (SC FOR INCOME TAX DEPT.)Counsel forthe Respondents: SRl. KARTHIK RAMANA PUTTAMREDDYThe Court delivered the following: JUDGMENTThe Court delivered the following: JUDGMENT THE HON[,BLE ]TH [BHIryAN] AND THE HON'BLE SRI [ N. ] l.T.T.A.No.155 of [2OO6] JUDGMENT:[(Per ][the ][Hon'bte ][the Chief ][Justice Ujjal Blrugan)] Heard Mr. J.V.Prasad, [learned ][Standing ][Counsel']Income Tax Department [for the ][appellant ][and ][Mr' ][Karthik]Ramana Puttam [Reddy, ][learned ][counsel ][for the respondent'] This is an appeal is an appeal an appeal appeal [[by ][the ][Revenue ][under ][Section]][[the ][Revenue ][under ][Section]][[Revenue ][under ][Section]][[under ][Section]][[Section]] 2This is an appeal is an appeal an appeal appeal [[by ][the ][Revenue ][under ][Section]][[the ][Revenue ][under ][Section]][[Revenue ][under ][Section]][[under ][Section]][[Section]]26OL of the Income [Tax ][Act, ][1961 ][(briefly ][referred ][to]hereinafter as the [Act') ][against ][the ][order dated ][18'O3'2005]Income [Tax ][Appellate ][Tribunal, ][Hyderabad]passed by the Bench B', Hyderabad [(briefly ][referred ][to ][hereinafter ][as]"lribunal') in [ITA No.893/Hyd ]l2OO2 [fot ][the ][assessment year]1998-99. 3. Though by order [dated ][O4'04'2006' ][the ][appeal]was admitted for hearing, [no ][substantial ][question of ][law ][was]framed. ) 4. Hov ever, we find from the appeal lnerrro thatappellant has 1 roposed the following questions as substantiaiquestions of la\ r': t.Whetrer on the facts and in the circumstancesof th : case, Tribunal was justified in hold:.ngthat nterest paid by the assessee on prlrqhilssof th : case, Tribunal was justified in hold:.ngthat nterest paid by the assessee on prlrqhilssof sr curities constituting stock_in_tra clr: butpaid for the broken period is allowab ie as; adedu:tion?paid for the broken period is allowab ie as; adedu:tion? 1lWhetrer on the facts.and irr the circum stancesof tt e case, assessee is entitled tc cle.imdedu :tion of interest paid on purcl rase ofsecut ities constituting stock for the brol:enof tt e case, assessee is entitled tc cle.imdedu :tion of interest paid on purcl rase ofsecut ities constituting stock for the brol:enperio I till the date of acquisition in t:rms olSection 37 of the Act?Section 37 of the Act? 5. 5. Restondent is an assessee under the ,Act havingthe status of a banking company. For the asse ssment year1998-99, it fiie i return of income declaring taxab r: income atRs. 183,25,58,560.00. In the course of the assessmentproceedings, a:isessee claimed that it had paid a:i amount of Rs.22,95,11,354.oo as broken [period ]interest [on ][purchase of]securities during the previous [year ][relevant ][to ][the ][assessment]year 1998-99. 5. 5. Restondent is an assessee under the ,Act havingthe status of a banking company. For the asse ssment year1998-99, it fiie i return of income declaring taxab r: income atRs. 183,25,58,560.00. In the course of the assessmentproceedings, a:isessee claimed that it had paid a:i amount of Rs.22,95,11,354.oo as broken [period ]interest [on ][purchase of]securities during the previous [year ][relevant ][to ][the ][assessment]year 1998-99. 6. After hearing the assessee and [considering ][its]objection, assessing officer [uide ][the ][assessment ][order ][dated]19.03.2002 passed under Section [143(3) ][of the Act held ][that]claim of the assessee was required [to ][be ][disallowed ][in ][the]light of the decision of the Supreme [Court ][in Vijaya ][Bank ][Ltd]v. Additional Commissioner [of ][Income ][Tax, ][Bangalorer]wherein it was held that such [an ][expenditure is required ][to ][be]and cannot be [allowed ][as a ][deduction']capitalized Explanation of the assessee that [the ][securities ][be ][treated ][as]stock-in-trade thereby treating [the ][broken period ][interest ][as]revenue expenditure was turned [down. ][Consequently' ][the]a-foresaid amount was added [back ][to ][the ][income ][of ][the]assessee and assessed [accordingly.] ' [(1991) ][187 rTR ][541 ][(SC)] L 7. The aforesaid order of the assessing officer wasassailed by tht assessee before the first appella.e aurthorit5ri.e., Commissioner of Income-Tax (Appeals) IV, Hy,lerabad (forshort, 'CIT(A)' rereinafter). By the order dated |9.OB.2OO2,CIT(A) upheld he order of the assessing officer by rel.Ting onthe decision of the Supreme Court in Vijaya Bank Ltd. (supral) holding thrrt expenditure claimed being broken periodinterest is not r [iowable as a revenue expenditure. 8. Agg rieved by the a-foresaid order..ASSESSECpreferred furth:r appeal before the friUunaf. 9Tril ,una_l framed the question for cons iderzrtion asunder:under: Whe }rer broken period interest p aidonpurchase of securities is revenue expendituresl ncethe securi :ies constitute stock-in-trade? 10. Aft,:r hearing rival submissions and cn perusal of the decision ol the Supreme Court in Vijaya Banlr Ltd. (supra 1),TribunalnotedthatthedecisionoftheSupremeCourtinVijaya Bank Ltd. [(supra ][1) was ][explained ][by ][the ][Central]BoardofDirectTaxes(forshort,'CBDT'hereinafter)'Onthesame lines, [Kerala ][High Court ][in ][Commissioner ][of ][Income]Taxv.NedungadiBankLtd.2distinguishedthedecisionofthe Supreme Court [in ][Vijaya ][Bank ][Ltd' ][(supra ][1)' ][which ][held]thatifthesecuritieswereheldbythebankingcompanyaSstock-in-trade of [the ][business, ][interest paid ][for the ][broken]would constitute [an ][allowable ][deduction ][in ][the ][hands]period .'''oftheassessee.Tribunalheldthatadmittedlyassesseehadpurchased the securities [to ][hold ][them ][as ][stock-in-trade']the [interest paid ][for ][the ][broken period ][is ][allowable]Therefore, as a deduction. 11. Mr. J.V.Prasad, [learned Standing ][Counsel' ][Income]Tax Department [for ][the ][appellant ][has ][placed ][before ][us ][the]two-Judge Bench [decision ][of ][the ][Supreme ][Court ][in ][Vijaya]Bank Ltd. [(supra ][1)' ][In ][that ][case, ][assessee ][had ][purchased] 2 (2003) 264 ITR 545 securities. It was contended that the theprice t,aid by securities was letermined with reference to their rctua-l valueas well as the interest which had accrued on t.rem till thedate of purchase. But Supreme court noted that whateverwas the cons ideration whichprompted the tssessee topurchase the r;ecurities, the price paid for them was in thenature of a callital outlay and no part of it can lle set off asexpenditure a;lainst income accruing on thosr sec:urities.Relying on the said decision, he further submits tlrat claim fordeduction can be sustained only when an asse isee is in _ai.position to shr,w that any reasonable expenditur.e had beenincurred for th,: purpose of realizing the interest or securities. 2 (2003) 264 ITR 545 securities. It was contended that the theprice t,aid by securities was letermined with reference to their rctua-l valueas well as the interest which had accrued on t.rem till thedate of purchase. But Supreme court noted that whateverwas the cons ideration whichprompted the tssessee topurchase the r;ecurities, the price paid for them was in thenature of a callital outlay and no part of it can lle set off asexpenditure a;lainst income accruing on thosr sec:urities.Relying on the said decision, he further submits tlrat claim fordeduction can be sustained only when an asse isee is in _ai.position to shr,w that any reasonable expenditur.e had beenincurred for th,: purpose of realizing the interest or securities. 12. Mr. [prasad ]has also placed reliartce ot a decisionof the Rajasth an High Court in Commissioner of lncomeTax v. Bank cf Rajasthan Limite{e wherein ltre questionbefore the C< ,urt was whether taxability of r nterest onsecurities sub. ect to transaction price on sale or securitv3 2009 (316) ITR i 91 continues to be governed by the ratio of the decision in VijayaBank Ltd. (supra 1). In that case, Ra,iasthan High CourtBank Ltd. (supra 1). In that case, Ra,iasthan High Courtapplied the decision of the Supreme Court and answered theabove question in favour of the Revenue. Mr. Prasad submitsthat ratio laid down by the Supreme Court in Vijaya BankLtd. (supra 1) still holds the field. Therefore, the questionsthat ratio laid down by the Supreme Court in Vijaya BankLtd. (supra 1) still holds the field. Therefore, the questionsframed may be answered in favour of the Revenue. 13. Per contra, Mr. Karthik Ramana Puttam Reddy,learned counsel for the respondent submits that decision ofthe Supreme Court in Vijaya Bank Ltd. (supra 1) isdistinguishable in the facts of the present case. He submitsthat Bombay High Court in American Express InternationalBaoking Corporation v. Commissioner of Income Tax+ hasdistinguished the judgment of the Supreme Court in VijayaBank Ltd. (supra 1) and held in the facts of that case that theIncome Tax Department ought to have allowed deduction forthe broken period interest paid. According to him, after the + 1zOO2l 2s8 ITR 601 (Bom) ) decision of the Rajasthan High Court, Supreme [(lourt ]hasdelivered a ju(gment in Civil Appeal No. 1549 r;f 2006,Commissioner of Income Tax v. Citibank N.A.s lrhere thequestion which iell lor consideration was whether t he interestpaid for broken period should not be considered as pa-rt of thepurchase price rut should be allowed as revenue r:xperrditurein the year of p rrchase of securities? He submits that in thesaid decision, S upreme Court accepted the distinc'ir:n pointedout by the E ombay High Court in American ExpressInternational Banking Corporatiorr (suprri 4) zrnd agreedwith the view ,rxpressed that judgment in Vijaya Barrk Ltd.(supra 1) woulC have no application. He theref :re s;ubmitsthat appeal h, the Revenue has no merit anc should bedismissed. 14. Sulrmissions made by learned courrsel for theparties have re ceived the due consideration ofthe Court. s 2008 (8) TMr T( 6 15. Issue before the Court is whether broken periodinterest paid on purchase ol securities is revenue expendituresince the securities constitute stock-in-trade? 16. To appreciate the above question, it would beappropriate to first examine the meaning of the expression'broken period interest". This has been explained by theBombay High Court in American Express InternationalBanking Corporation (supra 4) in the following manner: 14. Sulrmissions made by learned courrsel for theparties have re ceived the due consideration ofthe Court. s 2008 (8) TMr T( 6 15. Issue before the Court is whether broken periodinterest paid on purchase ol securities is revenue expendituresince the securities constitute stock-in-trade? 16. To appreciate the above question, it would beappropriate to first examine the meaning of the expression'broken period interest". This has been explained by theBombay High Court in American Express InternationalBanking Corporation (supra 4) in the following manner: ' "6.- Before coming to the facts of the case; a shortpreface needs to be mentioned. This preface explains theconcept of broken period interest. Every bank is requiredto maintain Statutory Liquidity Ratio (hereinafter referredto as "SLR"). For that purpose, every bank subscribes toGovernment securities. One such security is known asSGL (Subsidiary General Ledger). This ledger ismaintained in the Public Debt Office in the Reserve Bankof India. Every bank is required, as a part of bankingbusiness, to subscribe to this loan. This loan/SGL is alsotransferable like any other security. In this case, forexample, we are concerned with 4.75 per cent.Government of India Loan, 198O, f. v. Rs. 5 lakhs. On theSGL, the Reserve Bank of India pays half yearly interest.ln tlre case of the said 4.75 per cent. Government of India ) ) Loan. 198(, f. v. Rs. 5 lakhs, the Reserve Bank of Indiawas requir, :d to pay half yearly interest on May 12, 1976,and Noverr ber 12, 1976. The Reserve Bank of India paysinterest on due dates on such securities to the hold:rs ofthe securi ies, every six months. The Reserve Banl: ofIndia pays interest on the balaace to the banks, ,vtrosenarnes af pear as holders in the pDO ledgcr. Aftersubscribir g to the said loans, the banks r,r,ere f:r:r: tctransfer sr,ch loans for consideration to the other t :urksConsequer ttly, the Reserve Baltk of India pays inte, (:st tc,the holder on the balances in a security if, in its lr,r,rksthe said s:curit5z stood in the name of that holder ,)n thodue date for palment of interest. As stated abc r r:, tomaintain SLR levels, every bank subscribes to suchloans. Thi r is a part of banking.business. However, afte rso subscl ibing, the banks are free to deal with suchsecurities like any other trader. Therefore, there are twr)activities mvolved--one activity is that of subscril,ing t,tthe loan and the other is trading. Now. if a tran.<purchase, [ 4.75 per cent. GOI toan, 1980. f. v. Rs. ]iakhs on Augrst 11, 1976, then, on purchase, tl.r: saiCbank war required to lodge tie transfer form w tl: thePDO. On such lodgement, the name of the bar I< wasentered i r the PDO ledger. Therefore, on the n€xt duedate for J alrment of interest, namely, November lit.19T6,the l-.ank [.r,as ]endtleC to receive ha-lf 5rerly intere;t fi-ornthe Rese: ve Bank of India for the period May 12 197tt,up to No'ember 12, 1976, even though it had boueJrt thesaid secr rity on August 11, 1926. Therefore, it r er:eivr:s interest for the entire six months, though it bought [the]security on August ll, 1976.In the above example, [since]the security was sold/transferred on [August ][11, ][1976](i.e., after due date for payment of interest), interest hadaccrued to the transferor/ seller from [tlle ][last ][due ][date,]i.e., May 12, 1976 up to August ll,1976." interest for the entire six months, though it bought [the]security on August ll, 1976.In the above example, [since]the security was sold/transferred on [August ][11, ][1976](i.e., after due date for payment of interest), interest hadaccrued to the transferor/ seller from [tlle ][last ][due ][date,]i.e., May 12, 1976 up to August ll,1976." 17. As explained by the Bombay High Court' [every]bank is required to maintain a Statutory [Liquidity ][Ratio]{SLR). [For ][that ][purpose, ][every ][bank ][subscribes ][to]government securities. One such security is [known ][as]Subsidiary General Ledger [(SGL) ]which is [maintained ][in ][the]Public Debt Office in the Reserve Bank of [India. ][Every ][bank]is required as a part of its banking business to [subscribe ][to]this loan. Like any other security, such a [loan/SGL ][is ][also]transferable. Reserve Bank of India [pays ][interest ][on ][due]dates on such securities to the holders [of ][the ][securities ][every]six months. After subscribing to the said [loans, ][banks ][are]free to transler such loans lor consideration [to ][other ][banks.]Reserve Bank of India pays interest to [the ][holder ][on ][the]balances in a security if in its books the [said ][security ][stands] in the name of that holder on the due date for cayment ofinterest. The allove exercise, if we may say so, is a part. of thebanking business. However, after so subscribing the banksare free to dea I with such securities like any or her trader.Therefore, the -e are two activities involved _ one ofsubscribing to I he loal and the other is trading. 18. One of the questions before the Bcrnba.y HighCourt was whr :ther broken period interest payn rent by theassessee was € llo$'able as a revenue gxpendityre unrler thehead lncome fr om business or profession? Whil: ansrveringthis question, 3ombay High Court examine,l the clec.sion ofthe Supreme C rurt in Vijaya Bank Ltd. (supra 1). 19. In Vijaya Baak Ltd. (supra l), rluring theassessment y(:ar under consideration, Vij aya llank hadentered into ,rn agreement with Jayalakshmi Bank Ltd.whereby Vijayz Bank took over the liabitities of .Izrya.lakshmiBank. It aiso [ook over the assets belonging to .JayalakshmiBank. One cf the two items taken over by 'li.iaya Bank represented interest which accrued on securities taken overby Vrjaya Bank from Jayalakshmi Bank. Such amount wasbrought to tax by the assessing officer under Section 18 of ttreAct. However, assessee claimed that such amount wasdeductable under Sections 19 & 20 of the Act. It was in thebrought to tax by the assessing officer under Section 18 of ttreAct. However, assessee claimed that such amount wasdeductable under Sections 19 & 20 of the Act. It was in thelight of such facts that the decision in Vijaya Bank Ltd.(supra l) was rendered. 20. Therefore, Bombay High Court in AmericanExpress International Banking Corporation (supra 4), inthe facts of that case, held that having assessed the income ofthe assessee under Section 28 of the Act, Revenue ought tohave taxed the broken period interest received but at thesame time ought to have allowed deduction for the brokenperiod interest paid. 21. As already noticed above, this decision of theBombay High Court has found favour with the Supreme Courtin Citibank N.A. (supra 5) where Supreme Court agreed withthe views expressed by the Bombay High Court. Decision of ) the Supreme C rurl- in Citibank N.A. (supra 5 is dated12.O8.2OO8 whe-eas decision of the Rajastha:r HigrL Court inBank of Rajastl an Limited (supra 3) is dated 24.C:\.2O)8 20. Therefore, Bombay High Court in AmericanExpress International Banking Corporation (supra 4), inthe facts of that case, held that having assessed the income ofthe assessee under Section 28 of the Act, Revenue ought tohave taxed the broken period interest received but at thesame time ought to have allowed deduction for the brokenperiod interest paid. 21. As already noticed above, this decision of theBombay High Court has found favour with the Supreme Courtin Citibank N.A. (supra 5) where Supreme Court agreed withthe views expressed by the Bombay High Court. Decision of ) the Supreme C rurl- in Citibank N.A. (supra 5 is dated12.O8.2OO8 whe-eas decision of the Rajastha:r HigrL Court inBank of Rajastl an Limited (supra 3) is dated 24.C:\.2O)8 22. Befol e we advert to the facts of the pres:nt appeal,we may refer t r the decision of the Kerala Hig)r Court inNedungadi Bank Ltd. (supra 2). In that appeal, Iierala HighCourt also exarrined the effect of the decision of tlre SupremeCourt in Vijala Bank Ltd. (supra 1). Out of the foursubstantial qu(:stions of law which were considr:rr:d by theKerala High [( ])ourt, question No.1 pertained to whetherinvestments mitde by the assessee in the form of governmentsecurities acqr Lired for the purpose of compiyir rg with therequirements cf the provisions of the Banking Rezulat.ion Acti.e., to maintai r SLR, could be treated as trading rsse(/stock-in-trade ol thr business of the assessee? The 4th questionconsidered by the Kerala High Court was as to [.whether]interest paid for the broken period in the purchase ofsecurities is an allowable deduction? Refer ring to the Circular dated 24.04. [1991 issued ][by the ][CBDT, Kerala High]Court held that securities [held ][by ][banks constitute ][their]stock-in-trade or investment [and ][consequently ][loss ][claimed]by banks on the valuation [of ][their ][securities ][should ][be]allowed as a deduction [in ][computing ][the ][taxable ][prolits']Therefore, Kerala [High ][Court ][confirmed the ][view ][taken ][by ][the]Tribunal that securities [held ][by ][the ][assessee ][bank ][were]stock-in-trade of the [business ][of ][the ][assessee ][bank and ][that]the notional loss suffered [on ][account ][of ][revaluation ][of ][the]said securities at the [close ][of ][the ][year was ][a-n allowable]deduction in the computation [of ][profits ][of ][the ][assessee ][bank"]in Finally, respect [of ][the ][4th question ][as ][to ][whether ][the]Tribunal was [justified ][in ][allowing ][the ][claim for ][deduction ][of]interest paid for the broken [period ][for ][acquisition ][of ][the]securitiestillthedateofsuchsecurities,KeralaHighCourtheld that the said [question was squarely ][covered ][by ][its ][earlier]decision in Commissioner [of ][Income ][Tax ][v' ][South Indian]Bank Ltd.o wherein [it ][was held ][that ][interest ][paid ][for ][the]) broken period vould constitute allowable outgo irr the handsof the assess€ e and was an admissible deduction in thecomputation ol total income ol the assessee (banl:) under thehead 'profits ar d gains of business or profession,. 23. Adv:rting to the facts of the present cl.se, we findthat it is the ,)ontention of the respondent that respondenthad been holcing its securities all along as sttck_in_tradewhich is not i r dispute. For successive assessmenl. yea_rs,, [Revenue ]has rccepted the fact that responden t. had- beenholding the s:curities as stock_in_trade. Circrrlar No.66Sdated O5.10.1993 of the CBDT has clarified the dec:rsion of theSupreme Court in Vijaya Bank Ltd. (supra i). CBDT hasclarilied that rrr here the banks are holding securit es as stock-in-trade and n;t as investments, principles of lau. enunciatedin Vijaya Barrk Ltd. (supra 1) would not be applicable.Therefore, CBI)T has clarified that assessing olficer shoulddetermine on lhe facts and circumstances of each case as towhether any J articular securitJr constitute stocl:-in-trade or investment [taking ][into ][account ][the ][guidelines ][issued ][by]Reserve [Bank ][of ][India ][from time ][to ][time'] investment [taking ][into ][account ][the ][guidelines ][issued ][by]Reserve [Bank ][of ][India ][from time ][to ][time'] 24. It [is ][in ][the ][above ][back drop ][that ][Tribunal ][has held]that the [respondent had purchased securities ][to ][hold ][them ][as]stock_in-trade.Therefore,interestpaidonsuchsecuritieswould [be ][an ][allowable ][deduction'] 25. We [are ][in ][agreement ][with ][the finding ][returned ][by] the Tribunal. [That apart, ][this is ][a ][finding ][of ][fact ][rendered by]the Tribunal [and ][in ][ut' ][tppt"t ][under ][Sectiott ] [of ][thC ][Act']we are not [inclined to ][disturb ][such a trnding of ][fact' that ][too']when the [legal ][position ][is very ][clear'] 26. For [the ][aforesaid ][reason' ][we][ answer ][the ][above] in [favour ][of the ][respondent ][assessee ][and ][against]questions the apPellant [Revenue ]['] 27.App.al is [accordingly ][dismissed' ][However' ][there]shall be [no ][order ][as ][to costs'] H(U & NTRJI T-T.A No. 1:;S of 2aO6 28. As a sequel, miscellaneous applicatior s pending, ifany, in this Wr it Appeal, shall stand closed. Sd/- [g. ]1;. CHTRANJEEVIJOINT REGIS //TRUE COPY// To, SEt:TIoNFFICER ' il:":tt:tJ'n: Registrar, lncorne Tax Appeflate Triburrar, Hyderabad Bench2. ['i-he ]Cornrnisr ioner of lncome Tax (Appeals)-lV, Hyderarac, 3. The Deputy C cmnrissioner of lnconre Tax Circle (3), F{y,lerabad 4. One CC to S il. J V PRASAD (SC FOR TNCOME TAX) tOpUCJ tOpUCJ5. One CC to SF l. KARTHTK RAMANA PURAMREDDy, r\dvoiate 6. Two Spare Cr piesVI{\,-*\K HIGH COT'RTUBJ&NTRJDATED: O4/A tnAZZ(:._."I.{.+.,sJUDGMENTITTA.No.155 of 2006 Dismissing tt e ITTA,rvithout costGrX"7'