THE COMMISSIONER OF INCOME TAX-III, HYDERABAD V. STATE BANK OF HYDERABAD

ITTA/328/2006

AI Insights

The case revolves around an appeal by the Commissioner of Income Tax against the decision of the Income Tax Appellate Tribunal, which allowed the deduction of broken period interest paid by the State Bank of India on securities purchased for trading purposes. The primary legal question was whether such interest constitutes a revenue expenditure when the securities are treated as stock-in-trade. The Tribunal had earlier distinguished the Supreme Court's decision in Vijaya Bank Ltd. based on the specific facts and circumstances of the case, leading to the High Court's agreement with the Tribunal's decision.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 742766 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 04-01-2023
• Assessment Year: misc
• Other Referred Cases: Vijaya Bank Ltd v. Additional Commissioner of Income Tax, Bangalore, Commissioner of Income Tax v. Nedungadi Bank Ltd, Commissioner of Income Tax v. Citibank N.A., Commissioner of Income Tax v. Bank of Rajasthan Limited, American Express International Banking Corporation v. Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: KARTHIK RAMANA PUTTAMREDDY
• Assessee Lawyers: J V PRASAD
• Keywords: Assessment Year 1996-97; Broken Period Interest; Deduction; Revenue expenditure; Stock-in-Trade
• Section: 143(3); 37; 260A

Judgement Text

"i. i i i : ii IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD WEDNESDAY ,THE FOURTH DAY OF JANUARY TWO THOUSAND AND TWENTY THREE PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE 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 on the file of the lncome Tax Appellate Tribunal, Hyderabad Bench A, Hyderabgd preferred against the order dated 26-02-1999 of the Commissioner of lncome Tax ( Appeals ) lV, Hyderabad preferred againit the order of the Joint Commissioner of lncome tax , (ASSTS) Special Range- 4, Hyderabad dated 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.T o.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 passed by the Income Tax Appellate Tribunal, Hyderabad Bench A\" Hyderabad (briefly referred to hereinafter as the Tribuna{ in ITA No.66llHydl2003 for the assessment year 1996-97. 3.Thoughbyorderdated09'08'2006,theappeal was ad.mitted for hearing, no substantial question of law was framed. I I d - HCJ &' /VTRJ LT.T.A.No.32B of 2006 4. However, we find from the appeal memo that appellant has proposed the following questions as substantial questions of law: 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 a deduction? Whether on the facts and in the circumstances 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 of Section 37 of the Act? 5. Respondent is an assessee under the Act having 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 assessment proceedings, assessee claimed that it had paid an amount of 2 { l. ii - HCJ & IVTRJ LTT.A.No.328 of 2006 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. 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 capitalized and cannot be allowed as a deduction. 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) 3 w HCJ & A/TRJ I.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 1) holding that expenditure claimed being broken period 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 on purchase 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 4 : i .! -,I HC] & NTRJ I.T.T.A.No.328 of 2006 1), Tribunal noted that the decision of the Supreme Court in Vijaya Bank Ltd. (supra 1) was explained by the Central Board of Direct Taxes (for short, 'CBDT'hereinafter). On the s€une lines, Kerala High Court in Commissioner of Income Tax v\" Nedungadi Bank Ltd,.2 distinguished the decision of the Supreme Court in Vijaya Bank Ltd. (supra 1), which held that if the securities were held by the banking company as stock-in-trade of the business, interest paid for the broken period would constitute an allowable deduction in the hands of the assessee. Tribunal held that admittedly assessee had purchased the securities to hold them as stock-in-trade Therefore, the interest paid for the broken period is allowable 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 (2OO3l264 rTR 545 5 , ; f t I t x I I T I I t * i - HCJ & NTRJ I.T.T.A.No.328 of 2006 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