> Rs.38,59 ,!3,447.O0 As Broken[Period ][Interest ][On ][Purchase ][Of] Securities During The[Previous ][Year ][Relevant ][To ][The ][Assessment] Year L996-97 v. Hcj & A/Trj I.t.t.a

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD WEDNESDAY ,THE FOURTH DAY OF JANUARYTWO THOUSAND AND TWENTY THREE PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYANANDTHE HON'BLE SRI JUSTICE N.TUKARAMJI Income Tax Tribunal Appeal Under Section 260 A of lncome Tax Act,1961 aggrieved by the order dated 28-10-2005 in ITA No. 661 / Hyd / 2003 onthe file of the lncome Tax Appellate Tribunal, Hyderabad Bench A,Hyderabgd preferred against the order dated 26-02-1999 of the Commissionerof lncome Tax ( Appeals ) lV, Hyderabad preferred againit the order of theJoint Commissioner of lncome tax , (ASSTS) Special Range- 4, Hyderabaddated 26-02-1999 in PAN / GIR No. S-31. Between: The Commissioner of lncome Tax- lll, Hyderabad. ...APPELLANT AND State Bank Of lndia , Gunfoundry, Hyderabad . ( Amended as per C.O. dated 5-3-2018 in l.A. No. 1 of 2018 ) ..RESPONDENT Counsel for the Appellant: SRl. J.V. PRASAD Counsel for the Responden* SRI KARTHIK RAMANA PUTTAM REDDY The Court delivered the following: Judgment U AND N I.T.To.328 of 2o,0,6 JUDGMENTz [(Perthe Hon'ble the ][Clief ][Justice Uijal ][Blugan)] 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'] 2. This is an [appeal ][by the ][Revenue ][under ][section]260A of the lncome [Tax ][Act, ][1961 (briefly ][referred ][to]hereinafter as 'the [ActJ against ][the ][order dated 28'10'2005]Income [Tax ][Appellate ][Tribunal, ][Hyderabad]passed by the Bench A" Hyderabad [(briefly ][referred ][to ][hereinafter ][as the]Tribuna{ in ITA No.66llHydl2003 [for ][the ][assessment year]1996-97. 3.Thoughbyorderdated09'08'2006,theappealwas ad.mitted for hearing, no substantial [question of law ][was]framed.I d - However, we find from the appeal memo find from the appeal memo from the appeal memo the appeal memo appeal memo that 4. However, we find from the appeal memo find from the appeal memo from the appeal memo the appeal memo appeal memo thatappellant has proposed the [following ][questions as substantial]questions of law: l.Whether on the facts and in the [circumstances]of the case, Tribunal was [justified ]in [holding]that interest paid by the assessee on [purchase]of securities constituting stock-in-trade [but]paid for the broken period is allowable as adeduction?of the case, Tribunal was [justified ]in [holding]that interest paid by the assessee on [purchase]of securities constituting stock-in-trade [but]paid for the broken period is allowable as adeduction? iiWhether on the facts and in the circumstancesof the case, assessee is entitled to [claim]deduction of interest paid on [purchase ][of]securities constituting stock for the [broken]period till the date of acquisition in terms ofSection 37 of the Act?of the case, assessee is entitled to [claim]deduction of interest paid on [purchase ][of]securities constituting stock for the [broken]period till the date of acquisition in terms ofSection 37 of the Act? 5. is an assessee under the Act [having]Respondent the status of a banking company. For [the ][assessment year]1996-97, it filed return of income [declaring ][taxable ][income at]/ Rs.61,69,60,370.00. In the course of the assessmentproceedings, assessee claimed that it had [paid ][an ][amount ][of] Rs.38,59 ,!3,447.O0 as broken [period ][interest ][on ][purchase ][of]securities during the [previous ][year ][relevant ][to ][the ][assessment]year L996-97.securities during the [previous ][year ][relevant ][to ][the ][assessment]year L996-97. 5. is an assessee under the Act [having]Respondent the status of a banking company. For [the ][assessment year]1996-97, it filed return of income [declaring ][taxable ][income at]/ Rs.61,69,60,370.00. In the course of the assessmentproceedings, assessee claimed that it had [paid ][an ][amount ][of] Rs.38,59 ,!3,447.O0 as broken [period ][interest ][on ][purchase ][of]securities during the [previous ][year ][relevant ][to ][the ][assessment]year L996-97.securities during the [previous ][year ][relevant ][to ][the ][assessment]year L996-97. 6. After hearing the assessee and [considering ][its]objection, assessing officer [uide ][the ][assessment ][order ][dated]26.02.1999 [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, ][Bangaloret]wherein it was held that such an [expenditure ][is ][required to ][be]and cannot be allowed [as a ][deduction.]capitalized Explanation of t-he assessee that the [securities be ][treated ][as]stock-in-trade thereby treating [tJle ][broken ][period ][interest ][as]revenue expend.iture was turned dowri. [Consequenfly, ][the]aforesaid amount was added back to [the ][income ][of ][the]assessee and assessed accordingly. r 11991) 187 rTR 541 (SC) 4HCJ & A/TRJI.T.T.A.No.328 of [2006] 7. The aforesaid order [of ][the ][assessing ][officer ][was]assailed by the [assessee ][before ][the ][first ][appellate authority']i.e., commissioner [of Income-Tax ][(Appeats) ][IV, ][Hyderabad ][(for]short, [,cIT(A)', ]hereinafter). [By ][the ][order ][dated ][tr9.03.2003,]CIT(A) upheld the [order ][of ][the ][assessing ][officer ][by reiying ][on]the clecision of the [Supreme ][court ][in ][vijaya ][Bank ][Ltd. ][(supra]that [expenditure ][claimed ][being broken ][period]1) holding interest is not [allowable ][as ][a ][revenue expenditure.] 8. Aggrieved by the [aforesaid ][order, ][aSSeSSee]preferred further appeal [before ][tJ:e ][Tribunal'] g. Tribunal framed [the ][question ][for ][consideration ][as]under: Whether broken [period interest ][paid]onpurchase of securities [is ][revenue expenditure ][since]the securities [constitute stock-in-trade?] 10. After hearing [rival ][submissions ][and ][on perusal ][of] the decision of [the supreme ][court in ][vijaya ][Bank ][Ltd. ][(supra] :i .!-,I 1), Tribunal noted that the decision of the Supreme Court inVijaya Bank Ltd. (supra 1) was explained by the CentralBoard of Direct Taxes (for short, 'CBDT'hereinafter). On thes€une lines, Kerala High Court in Commissioner of IncomeTax v" Nedungadi Bank Ltd,.2 distinguished the decision ofthe Supreme Court in Vijaya Bank Ltd. (supra 1), which heldthat if the securities were held by the banking company asstock-in-trade of the business, interest paid for the brokenperiod would constitute an allowable deduction in the handsof the assessee. Tribunal held that admittedly assessee hadpurchased the securities to hold them as stock-in-tradeTherefore, the interest paid for the broken period is allowableas a deduction. 11. Mr. J.V.Prasad, learned Standing Counsel, IncomeTax Department for the appellant has placed before us thetwo-Judge Bench decision of the Supreme Court in ViJayaBank Ltd. (supra 1). In that case, assessee had [purchased] 2 (2OO3l264 rTR 545 t - 11. Mr. J.V.Prasad, learned Standing Counsel, IncomeTax Department for the appellant has placed before us thetwo-Judge Bench decision of the Supreme Court in ViJayaBank Ltd. (supra 1). In that case, assessee had [purchased] 2 (2OO3l264 rTR 545 t - securities. It was contended [that ][the ][price paid ][by ][the]securities was determined [with ][reference ][to ][their ][actual ][value]as well as the interest [which had ][accrued ][on ][them ][till ][the]date of purchase. But [Supreme ][Court ][noted ][that ][whatever]was the consideration which [prompted ][the ][assessee ][to]purchase the securities, the [price ][paid ][for ][them ][was ][in ][the]nature of a capital outlay and [no ][part ][of ][it ][can ][be ][set ][off ][as]expend.iturc against income [accruing ][on ][those ][securities.]Retying on the said [decision, he ][further ][submits ][that ][claim for]deduction can be sustained [only when ][an ][assessee ][is ][in ][a]position to show that any reasonable [expenditure ][had ][been]incurred for the [purpose ][of ][tealizrng ][the interest ][on securities.] 12. Mr. Prasad has [also ][placed ][reliance ][on a ][decision]of the Rajasthan High [Court ][in ][Commissioner ][of ][Income]Tax v. Bank of RaJasthan [Limitedg ][wherein ][the ][question]before the Court was [whether ][ta<ability ][of ][interest ][on]securities subject to transaction [price ][on ][sale ][or ][security] 3 2009 (316) ITR 291 continues to be governed by the ratio of the decision in ViiayaBank Ltd. (supra 1). In that case, Rajasthan 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 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 InternationalBanking 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 Ta< Department ought to have allowed deduction forthe broken period interest paid. According to him, after the 4 l2OO2l258 ITR 6Ct1 (Bom) decision of the [Rajasthan ][High ][court, ][supreme ][court ][has]delivered a [judgment ][in ][civil ][Appeal ][No.1549 ][of ][2006,]Commissioner [of ][Income Tax ][v. ][Citibank ][N.A.s where ][the]which fell [for consideration ][was ][whether the interest]question paid for broken [period should ][not ][be ][considered ][as ][part ][of ][the]but [should ][be allowed as rbvenue expenditure]purchase price in the year of [purchase of ][securities? ][He ][submits ][that ][in ][the]said decision, [Supreme ][Court ][accepted ][the ][distinction ][pointed]outbytheBombayHighCourtinAmericanExpressInternational [Banking ][corporation ][(supra ][4) ][and ][agreed]with the view [expressed ][that ][judgment ][in vijaya ][Bank ][Ltd.](supra 1) would [have ][no application. ][He ][therefore submits]that appeal by [the ][Revenue ][has ][no ][merit ][and ][should ][be]dismissed. 14. Submissions [made ][by ][learned ][corrnsel ][for ][the]parties have received [the ][due ][consideration ][of ][the ][Court.] s 2008 (8) TMI766 15. Issue before the court is whether broken periodinterest paid on purchase of securities is revenue expendituresince the securities constitute stock_in_trade? 16. To appreciate the above question, it wourd beappropriate to first examine the meaning of the expression"broken period interest". This has been explained by theBombay High Court in American Express rnternationalBanking corporation (supra 4) in the foilowing manner: 14. Submissions [made ][by ][learned ][corrnsel ][for ][the]parties have received [the ][due ][consideration ][of ][the ][Court.] s 2008 (8) TMI766 15. Issue before the court is whether broken periodinterest paid on purchase of securities is revenue expendituresince the securities constitute stock_in_trade? 16. To appreciate the above question, it wourd beappropriate to first examine the meaning of the expression"broken period interest". This has been explained by theBombay High Court in American Express rnternationalBanking corporation (supra 4) in the foilowing 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 toconcept 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 rsrown asSGL (Subsidiary General Ledger). This ledger isSGL (Subsidiary General Ledger). This ledger ismaintained in the public Debt office in the Reserve Bankof India. Every bank is required, as a part of bankingof 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 afe concerned with 4.75 per cent.Government of India Loan, l9go, f. v. Rs. 5 lakhs. On thesGL, the Reserve Bank of India pays half yearly interest.In the case of the said 4.ZS per cent. Government of IndiaGovernment of India Loan, l9go, f. v. Rs. 5 lakhs. On thesGL, the Reserve Bank of India pays half yearly interest.In the case of the said 4.ZS per cent. Government of India Loan, 1980, f. v. Rs. 5 lakhs, the Reserve Bank of Indiawas required to pay half yearly interest on May 12, 1976,and November 12, 1976. The Reserve Bank of India paysinterest on due dates on such securities to the holders ofthe securities, every six months. The Reserve Bank ofIndia pays interest on the balance to the banks, whosenames appear as holders in the PDO ledger. Aftersubscribing to the said loans, the banks were free totransfer such loans for consideration to the other banks.Consequently, the Reserve Bank of India pays interest tothe holder on the balances in a security il in its books,the said security stood in the name of that holder on thedue date for payment of interest. As stated above, tomaintain SLR levels, every bank subscribes to suchloans. This is a part of banking business. However, afterso subscribing, the banks are free to deal with suchsecurities like any other trader. Therefore, there are twoactivities involved--one activity is that of subscribing tothe loan and the other is trading. Now, if a bankpurchased 4.75 per cent. GOI [oan, 1980, f. v. Rs. 5lakhs on August LL, L976, then,_on purchase, the saidbank was required to lodge the transfer form with thePDO. On such lodgement, the name of the bank wasentered in the PDO ledger. Therefore, on the next duedate for payment of interest, namely, November L2,I976,the bank was entitled to receive half yearly interest fromthe Reserve Bank of India for the period May 12, 1976,up to November L2, L976, even though it had bought thesaid security on August Ll, 1976. Therefore, it receives -- interest for the entire six months, though it bought thesecurity on August ll, 1976.In the above example, sincethe security was sold/transferred on August 11, 1976(i.e., after due date for payment of interest), interest hadaccrued to the transferor/seller from the last due date,i.e., May 12, 1976 up to August LL, 1976." -- interest for the entire six months, though it bought thesecurity on August ll, 1976.In the above example, sincethe security was sold/transferred on August 11, 1976(i.e., after due date for payment of interest), interest hadaccrued to the transferor/seller from the last due date,i.e., May 12, 1976 up to August LL, 1976." 17. As explained by the Bombay High Court, everybank is required to maintain a Statutory Liquidity Ratio(SLR). For that purpose, every bank subscribes togovernment securities. One such security is known asSubsidiary General Ledger (SGL) which is maintained in thePublic Debt Office in the Reserve Bank of India. Every bankis required as a part of its banking business to subscribe.tothis loan. Like any other security, such a loan/SGL is alsotransferable. Reserve Bank of India pays interest on duedates on such securities to the holders of the securities everysix months. After subscribing to the said loans, banks arefree to transfer such loans for consideration to other banks.Reserve Bank of India pays interest to the holder on thebalances in a security if in its books the said security stands in the name of that holder on the due date for [payment ][of]interest. The above exercise, if we may say so, is a [part ][of ][the]banking business. Horvever, after so subscribing, the [banks]are free to deal with such securities like any other [trader.]Therefore, there are two activities involvedone ofsubscribing to the loan and the other is trading. 18. One of the questions before the Bombay [High] Court was whether broken period interest [payment ][by ][the]assessee rvas allowable as a revenue expenditure under [the]head tncome from business or profession'? While answeringthis question, Bombay High Court examined the [decision ][of]the Supreme Court in Viiaya Bank Ltd. [(supra ][1).] 19. In Vijaya Bank Ltd.' (supra 1), during [the] assessment year under consideration, [Vijaya ][Bank ][had]entered into an agreement with [Jayalakshmi ][Bank ][Ltd.]whereby Vijaya Bank 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 Vijaya Bank from Jayalakshmi Bank. [Such amount ][was]brought to tax by the assessing [officer ][under Section ][18 ][of ][the]Act. However, assessee claimed that [such ][amount ][was]deductable under Sections 19 & 20 [of ][the ][Act. ][It ][was ][in ][the]light of such facts that the decision in [Vijaya Bank ][Ltd.](supra 1) was rendered. 20. Therefore, Bombay High Court in [American] Express International Banking Corporation [(supra ][4), ][in]the facts of that case, held that having [assessed ][the income ][of]the assessee under Section 28 of the Act, [Revenue ][ought ][to]have taxed the broken period interest received but at [the]sarne time ought to have allowed deduction [for the ][broken]period interest paid. 21. As already noticed above, this [decision ][of ][the]Bombay High Court has found favour [with ][the ][Supreme ][Court]in Citibank N.A. (supra 5) where [Supreme ][Court ][agreed ][with]the views expressed by the Bombay [High ]Court. [Decision ][of] the Supreme Court in Citibank N.A. (supra 5) is dated12.08.2008 rvhereas decision of the Rajasthan High Court inBank of Rajasthan Limited (supra 3) is dated 24.03.2008. 20. Therefore, Bombay High Court in [American] Express International Banking Corporation [(supra ][4), ][in]the facts of that case, held that having [assessed ][the income ][of]the assessee under Section 28 of the Act, [Revenue ][ought ][to]have taxed the broken period interest received but at [the]sarne time ought to have allowed deduction [for the ][broken]period interest paid. 21. As already noticed above, this [decision ][of ][the]Bombay High Court has found favour [with ][the ][Supreme ][Court]in Citibank N.A. (supra 5) where [Supreme ][Court ][agreed ][with]the views expressed by the Bombay [High ]Court. [Decision ][of] the Supreme Court in Citibank N.A. (supra 5) is dated12.08.2008 rvhereas decision of the Rajasthan High Court inBank of Rajasthan Limited (supra 3) is dated 24.03.2008. 22. Before we advert to the facts of the present appeal,we may refer to the decision of the Kerala High Court inNedungadi Bank Ltd. (supra 2). In that appeal, Kerala HighCourt also examined the effect of the decision of the SupremeCourt in Vijaya Bank Ltd. (supra 1). Out of the foursubstantial questions of law which were considered by theKerala High Court, question No.1 pertained to whetherinvestments made by the assessee in the form of governmentsecurities acquired for the purpose of complying with therequirements of the provisions of the Banking Regulation Acti.e., to maintain SLR, could be treated as trading asset/stock-in-trade of the business of tJ'e assessee? The 4tt" questionconsidered by the Kerala High Court was as to whetherinterest paid for the broken period in the purchase ofsecurities is an allowable deduction? Referring to the A 'i'i'. '. 'l i l, ': q Circular dated 24.04.1991 issued by the CBDT, Keraia HighCourt held that securities held by banks constitute theirstock-in-trade or investment and consequently loss claimedbanks on the valuation of their securities should beby allowed as a deduction in computing the ta<able profits.Therefore, Kerala High Court confirmed the view taken by theTribunal that securities held by the assessee bank werestock-in-trade of the business of the assessee bank and thatthe notional loss suffered on account of revaluation of thesaid securities at the close of the year was an allowablededuction in the computation of profits of the assessee bankFinally, in respect of the 4tt, question as to whether theTribunal was justified in allowing the claim for deduction ofinterest paid for the broken period for acquisition of thesecurities till the date of such securities, Kerala High Courtheld that the said question was squarely covered by its earlierdecision in Commissioner of Income Tax v. South IndianBank Ltd.6 wherein it was held that interest paid for the 6 (2OO0) 241 ITR 374 (Kerl broken period would constitute allowable outgo in the handsof the assessee and was an admissible deduction in thecomputation of total income of the assessee (bank) under thehead '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 that respondenthad been holding its securities all along as stock-in-tradewhich is not in dispute. For successive assessment years,Revenue has accepted the fact that respondent had beenholding the securities as stock-in-trade. Circular No.665dated 05.10.1993 of the CBDT has clarified the decision of theSupreme Court in Vijaya Bank Ltd. (supra 1). CBDT hasclarified that where the banks are holding securities as stock-in-trade and not as investments, principles of law enunciatedin V[iaya Bank Ltd. (supra 1) would not be applicable.Therefore, CBDT has clarified that assessing officer shoulddetermine on the facts and circumstances of each case as towhether any particular securit5l constitute stock-in-trade or -- HCJ & /VTRJ investment taking into account the guidelines issued. byReserve Bank of India from time to time.Reserve Bank of India from time to time. -- HCJ & /VTRJ investment taking into account the guidelines issued. byReserve Bank of India from time to time.Reserve Bank of India from time to time. 24. It is in the above back drop that Tribunal has heldthat the respondent had purchased securities to hold them asstock-in-trade. Therefore, interest paid on such securitieswould 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. bythe Tribunal anc in an appeal under section 26olof the Actwe are not inclined to disturb such a finding 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 respond.ent assessee and againstthe appellant Revenue.the appellant Revenue. 27. Appeal is accordingly dismissed. However, there shall be no order as to costs. {I \l 18HCJ & NTRJI.T.T.A.No.32B [of ][2O06] - 2S.Asasequel,miscellaneousapplicationspending'if any, in this Writ Appeal, shall [stand ][closed'] Sd/. C.V. JOINT REGISTRAR //TRUE COPY// SECTION OFFICER To 1. The lncome Tax Appellate Tribunal, Hyderabad [Bench ]- [,.Hyderabad] 2. The Commissionei bt tncome Tax [( ]Adpeals ) [lV, Hyderabad]3. The Joint Commissioner of lncomeTa*, [(ASSTS) ][Special Range- ][4,]Hyderabad3. The Joint Commissioner of lncomeTa*, [(ASSTS) ][Special Range- ][4,]Hyderabad a. o'ne cc to sri J.V. PRASAD, Standing [Counsel, ][lncome ][Tax, ][(OP^U_C)] 5. One CC to Sri KARTHIK nntr{nNn [REDDY, ][Advocate ][(OPUC)]6. Two CD Copies6. Two CD CopiesRutz- t. HIGH COURT DATED i0410112023 JUDGMENTlTTA.No.328 of 2006 DISMISSING THE ITTAWITHOUT COSTS. IirESTAIp(Z(:)? [$ ][ttrn ][z$n]*:ll