State Bank of Mysore, Bangalore V. CIT, Bangalore

ITA 889/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63641 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 06-09-2012
• Assessment Year: 2000-2001
• Appeal Filed On: 14-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CIT DR I
• Assessee Lawyers: K SUBRAMANIAN
• Keywords: Business income; Depreciation; Business expenditure; Question of law; Revenue expenditure
• Section: 143(3); 260A; 263; 28

Judgement Text

PAGE 1 OF 15 ITA NOS.888 & 889/BA NG/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH A BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NOS.888 & 889/BANG/2011 (ASSESSMENT YEARS 1999-2000 & 2000-01) STATE BANK OF MYSORE, HEAD OFFICE, P B NO.9727, K G ROAD, BANGALORE. PA NO. AACCS0155P VS THE COMMISSIONER OF INCOME TAX (APPEALS), (LTU), BANGALORE. (APPELLANT) (RESPONDENT) DATE OF HEARING : 06.09.2012 DATE OF PRONOUNCEMENT : 14.09.2012 APPELLANT BY : SHRI K SUBRAMANIAN, C.A. RESPONDENT BY : SHRI S K AMBASTHA, CI T (DR-I), ITAT ORD ER PER BENCH : THESE APPEALS INSTITUTED BY THE ASSESSEE ARE DIREC TED AGAINST THE CONSOLIDATED ORDER OF THE CIT(A), LTU, BANGALOR E DATED 12.8.2011. THE RELEVANT ASSESSMENT YEARS ARE 1999-2000 & 2000-01. 2. SINCE COMMON ISSUES ARE INVOLVED IN THESE APPEA LS AND PERTAIN TO THE SAME ASSESSEE, THEY WERE HEARD TOGETHER AND DISP OSED OFF BY THIS CONSOLIDATED ORDER. 3. THE GROUNDS RAISED IN THESE TWO APPEALS ARE IDE NTICAL, EXCEPT FOR VARIATIONS IN FIGURES. THE ISSUE RAISED IN THE SE APPEALS ARE AS FOLLOWS:- PAGE 2 OF 15 ITA NOS.888 & 889/BA NG/2011 2 I) BROKEN PERIOD INTEREST PAID TO THE SELLERS OF T HE SECURITIES FOR THE ASSESSMENT YEAR 1999-00 RS.42,190,806/-. II) BROKEN PERIOD INTEREST PAID IN EARLIER YEARS RS.17,91,46,619/-. III) ADJUSTMENTS ON VALUATION OF SECURITIES AFTER C ONSIDERING THE BROKEN PERIOD INTEREST OF RS.20,91,83,000/- 4. BRIEFLY STATED THE FACTS OF THE CASE ARE AS FOLL OWS :- THE ASSESSEE IS A PUBLIC SECTOR UNDERTAKING AND I S A SUBSIDIARY OF STATE BANK OF INDIA AND GOVERNED BY THE BANKING R EGULATION ACT, 1949. FOR THE ASSESSMENT YEAR 1999-2000, ASSESSMENT UNDER SECTION 143(3) OF THE ACT WAS COMPLETED VIDE ORDER DATED 28/3/2002. THE ASSESSEE-BANK, IN ACCORDANCE WITH ITS INVESTMENT POLICY AND AS PER THE GUIDELINES ISSUED BY THE RESERVE BANK OF INDIA FROM TIME TO TIME, INVESTS IN VARIOUS SECURITIES. AS PER THE RBI GUIDELINES, THE SECURITIES ARE CATEGORI ZED INTO TWO BROAD CATEGORIES, NAMELY, (I) AVAILABLE FOR SALE (WHICH WAS IN THE NATURE OF STO CK-IN-TRADE) AND (II) HELD TO MATURITY (WHICH WAS IN THE NATURE OF INVES TMENT). ON PURCHASE OF SECURITIES FROM SECONDARY MARKET, THE ASSESSEE, IN MANY INSTANCES, PAYS BROKEN PERIOD OF INTEREST TO THE SEL LERS SECURITY. THE ASSESSEE HAD CLAIMED BROKEN PERIOD INTEREST PAID ON ITS PURCHASE OF SECURITIES UNDER AVAILABLE FOR SALE CATEGORY AS R EVENUE EXPENDITURE UNDER THE INCOME TAX ACT, 1961. THE COMMISSIONER O F INCOME TAX IN HER ORDER UNDER SECTION 263 OF THE ACT DATED 29.3.2004, DIRECTED THE ASSESSING OFFICER NOT TO TREAT THE BROKEN PERIOD IN TEREST PAID TO THE SELLERS OF THE SECURITIES AS REVENUE EXPENDITURE BU T TO TREAT THE SAME AS A PART OF COST OF THE SECURITIES AND TO CONSIDER IT FOR VALUATION OF CLOSING PAGE 3 OF 15 ITA NOS.888 & 889/BA NG/2011 3 STOCK. IN PURSUANCE TO 263 ORDER, THE ASST. COMMIS SIONER OF INCOME TAX PASSED ORDER UNDER SECTION 143(3) R.W.S. 263 OF THE ACT BY MAKING THE FOLLOWING ADJUSTMENTS/DISALLOWANCES:- SL. NO. ADJUSTMENTS/DISALLOWANCES AMOUNT (RS.) 1. THE AMOUNT OF BPI PAID DURING THE ASSESSMENT YEAR 1999- 2000 ON THE SECURITIES LYING IN THE STOCK AS AT 31/3/1999. 4,21,90-,806/- 2. THE AMOUNT OF THE BPI PAID IN THE EARLIER YEARS. 17,91,46,619/- 3. THE INCREMENTAL DEPRECIATION ON THE VALUE OF THE SECURITIES AFTER REDUCING THE AMOUNT OF RS.60,77,000/- ALREADY WRITTEN BACK. 20,91,83,000/- 4.1 FOR THE ASSESSMENT YEAR 2000-01, THE ASSESSMEN T UNDER SECTION 143(3) WAS COMPLETED VIDE ORDER DATED 23/3/2002. S UBSEQUENTLY, THE COMMISSIONER PASSED ORDER UNDER SECTION 263 OF THE ACT ON 29/3/2004 DIRECTING THE ASSESSING OFFICER NOT TO TREAT THE BR OKEN PERIOD INTEREST PAID TO THE SELLERS OF SECURITIES AS REVENUE EXPENDITURE BUT TO TREAT AS A PART OF COST OF PURCHASE OF SECURITIES AND TO CONSIDER IT F OR VALUATION OF STOCK. PURSUANT TO 263 ORDER, THE ACIT PASSED ORDER UNDER SECTION 143(3) RWS 263 OF THE ACT MAKING THE FOLLOWING ADJUSTMENTS/DISALLO WANCES:- SL. NO. ADJUSTMENTS/DISALLOWANCES AMOUNT (RS.) 1. THE AMOUNT OF BPI PAID DURING THE ASSESSMENT YEAR 2000- 01 ON THE SECURITIES LYING IN THE STOCK AS AT 31.3.2000. 16,44,49,599/- 2. THE AMOUNT OF THE BPI PAID IN THE EARLIER YEARS. 17,45,99,897/- 3. DEPRECIATION ON VALUATION OF SECURITIES AS AT 31 ST MARCH, 2000. 30,27,62,794/- PAGE 4 OF 15 ITA NOS.888 & 889/BA NG/2011 4 5. AGGRIEVED BY THE ORDERS PASSED UNDER SECTION 143 (3) RWS 263 OF THE ACT (BOTH THE ORDERS DATED 31/3/2005), THE ASSE SSEE PREFERRED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. THE CIT(A) VID E COMMON ORDER IN ITA NO.2 & 3/05-06 DATED 10/10/2005 DISMISSED BOTH THE APPEALS AS NON- MAINTAINABLE ON THE GROUND THAT THE IMPUGNED ORDERS HAD MERGED WITH THE ORDER UNDER SECTION 263 AND THEREFORE THE APPEALS I N QUESTION WERE NOT MAINTAINABLE BEFORE HIM. THE ASSESSEE PREFERRED FUR THER APPEAL BEFORE THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH BOTH ON THE ISSUE OF MAINTAINABILITY OF THE APPEALS AS WELL AS ON MERITS WITH REGARD TO ALLOWABILITY OF BROKEN PERIOD INTEREST EXPENDITURE PAID ON PURCH ASE OF SECURITIES. THE HONBLE TRIBUNAL VIDE ITS ORDER IN ITA NO.21 & 22/B ANG/2006 DATED 29/3/2010 HELD THAT THE FINDING OF THE CIT(A) WAS N OT MAINTAINABLE IN LAW AND SET ASIDE THE COMMON ORDER PASSED BY THE CIT(A) AND REMITTED THE ISSUE TO THE CIT(A) FOR THE DISPOSAL OF THE TWO APPEALS. THE RELEVANT FINDING OF THE HONBLE TRIBUNAL READS AS FOLLOWS:- AN ASSESSMENT ORDER MAY BE REVISED OR REDONE OUT OF MANY COMPULSIONS ROOTED THROUGH ENABLING PROVISIONS OF IT ACT, 1961. BUT THOSE ROOT CAUSES OF AN ASSESSME NT ORDER DOES NOT TAKE AWAY THE JURISDICTION OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN ADJUDICATIN G THE GROUNDS RAISED AGAINST THOSE ORDERS. IN THE PR ESENT CASE, EVEN THOUGH THE ASSESSMENTS WERE REVISED AS A RESULT OF ORDERS PASSED UNDER SECTION 263, THE ASSESSMENT ORDERS ARE STILL ASSESSMENT ORDERS SUBJE CT TO THE APPELLATE JURISDICTION OF THE COMMISSIONER OF I NCOME TAX (APPEALS). THEREFORE, IN FACT AND LAW, THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE DISPOSED OFF THE APPEALS ON MERIT. PAGE 5 OF 15 ITA NOS.888 & 889/BA NG/2011 5 5.1 THEREAFTER, THE CIT(A) TOOK UP THE ISSUE ON ME RITS AND DECIDED THE APPEALS AGAINST THE ASSESSEE AND CONFIRMED THE ASSESSMENT ORDER PASSED UNDER SECTION 143(3) RWS 263 OF THE ACT. 6. THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFOR E US. 7. THE LEARNED AR RELIED ON THE GROUNDS RAISED IN ITS APPEALS, WHICH ARE ARGUMENTATIVE AND NARRATIVE IN NATURE. SINCE T HE GROUNDS RAISED IN BOTH THE ASSESSMENT YEARS ARE IDENTICAL, EXCEPT FOR VARIA TION IN FIGURES, THE GROUNDS RAISED FOR THE ASSESSMENT YEAR 1999-2000 IS REPRODUCED BELOW:- 1. BROKEN PERIOD INTEREST PAID TO THE SELLERS OF T HE SECURITIES FOR THE ASSESSMENT YEAR 1999-00 RS.42,190,806/-. A) THE LEARNED CIT(A) ERRED IN NOT HOLDING THAT THE BROKEN PERIOD INTEREST (BPI) PAID TO THE SELLERS OF THE SECURITIES UNDER THE AVAILABLE FOR SALE CATEGORY AND TYING IN THE STOCK AS ON 31 ST MARCH, 1999 AMOUNTING TO RS.42,190,806/- IS A REVENUE EXPENDITURE. B) THE LEARNED CIT(A) OUGHT TO HAVE PLACED RELIANCE ON THE CIRCULAR NO.599 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES (CBDT) WHEREIN IT WAS CLARIFIED THAT SECURITIES HELD BY BANK CONSTITUTE STOCK-IN- TRADE AND NOT INVESTMENT AND THE CLAIM OF LOSS IF DEBITED IN THE BOOKS OF ACCOUNT, WOULD BE GIVEN THE SAME TREATMENT AS IS NORMALLY GIVEN TO THE STOCK IN TRADE. FURTHER INTEREST PAYMENTS ON THE BROKEN PERIOD MUST BE REGARDED AS REVENUE PAYMENTS. C) THE LEARNED CIT(A) OUGHT TO HAVE OBSERVED THAT CIRCULAR NO.665 ISSUED BY THE CBDT IN EFFECT REITERATES THAT THE BPI PAYMENT IS REVENUE EXPENDITURE IN SO FAR AS IT RELATES TO SECURITIES HELD AS STOCK-IN-TRADE. PAGE 6 OF 15 ITA NOS.888 & 889/BA NG/2011 6 D) THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT THE HONBLE SUPREME COURTS RULING IN THE CASE OF VIJAYA BANK (187 ITR 541) IS NOT APPLICABLE TO THE APPELLANT AS THE FACTS OF APPELLANTS CASE ARE DISTINGUISHABLE FROM THOSE OF VIJAYA BANK IN AS MUCH AS THAT IN THE CASE OF VIJAYA BANK THE INTEREST INCOME INCLUSIVE OF BPI INCOME ON SALE OF SECURITIES WAS OFFERED TO TAX UNDER THE HEAD INTEREST ON SECURITIES. IN THE CASE OF APPELLANT THE INTEREST INCOME INCLUSIVE OF BPI INCOME ON SALE OF SECURITIES WAS OFFERED TO TAX AS BUSINESS INCOME. E) THE LEARNED CIT(A) OUGHT TO HAVE TAKEN INTO COGNIZANCE THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CITIBANK N.A. (CIVIL APPEAL NO.1549 OF 2006) WHEREIN IT WAS HELD THAT THE INTEREST INCOME INCLUDING BPI INCOME ON THE SALE OF SECURITIES WAS OFFERED TO TAX AS BUSINESS INCOME FROM THE INCEPTION AND HENCE THE JUDGMENT IN THE CASE OF VIJAYA BANK HAS NO APPLICATION TO THE FACTS OF THE PRESENT CASE; AND SINCE THE SAME WAS ACCEPTED BY THE INCOME TAX DEPARTMENT , THE BPI EXPENDITURE ON THE PURCHASE OF SECURITIES SHOULD ALSO BE ALLOWED AS DEDUCTION WHILE COMPUTING THE BUSINESS INCOME OF THE ASSESSEE. F) THE LEARNED CIT(A) OUGHT TO HAVE PLACED RELIANCE ON THE FOLLOWING JUDICIAL PRECEDENTS WHERE THE BPI PAID TO THE SELLERS OF THE SECURITIES HAS BEEN HELD TO BE A REVENUE EXPENDITURE: PAGE 7 OF 15 ITA NOS.888 & 889/BA NG/2011 7 APPELLANTS OWN CASE FOR THE ASSESSMENT YEAR 1988-89 IN ITA NO.1838/B/90 VIDE ORDER OF THE ITAT, BANGALORE DATED 16 TH AUGUST, 2002. AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION V CIT 258 ITR 601 (MUMBAI) HC THE BANK OF BARODA V JCIT (ITA NO.47/MUM/2001) DHANALAKSHMI BANK LIMITED V ACIT 2007 (12 SOT 625 TCCH) 2. BROKEN PERIOD INTEREST PAID IN EARLIER YEARS RS.17,91,46,619/- NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE APPELL ANTS CONTENTION THAT THE BPI PAID TO THE SELLERS OF SECU RITY IS REVENUE EXPENDITURE THE LEARNED CIT(A) ERRED IN NOT DELETING THE ADDITI ON OF A SUM OF RS.17,91,46,619/- BEING BPI PAID IN THE EARL IER YEARS, MADE BY THE ASSESSING OFFICER. HE OUGHT TO HA VE OBSERVED THAT THIS SUM IS NOT CLAIMED AS REVENUE EXPENDITURE IN THE ASSESSMENT YEAR 1999-00 AND ACCORDINGLY, REQUIRES NO ADJUSTMENTS FOR THIS ASSESS MENT YEAR. THE LEARNED CIT(A) OUGHT TO HAVE OBSERVED THAT THE ADJUSTMENT TO THE BPI PAID IN THE PREVIOUS YEARS IS NOT IN LINE WITH THE DIRECTIONS GIVEN BY THE COMMISSIONER O F INCOME-TAX IN HER ORDER UNDER SECTION 263 OF THE AC T. 3. ADJUSTMENTS ON VALUATION OF SECURITIES AFTER CON SIDERING THE BROKEN PERIOD INTEREST OF RS.20,91,83,000/- NOTWITHSTANDING AND WITHOUT PREJUDICE TO THE APPELL ANTS CONTENTION THAT THE BPI PAID TO THE SELLERS OF SECU RITY IS REVENUE EXPENDITURE PAGE 8 OF 15 ITA NOS.888 & 889/BA NG/2011 8 THE LEARNED CIT(A) ERRED IN NOT DELETING THE ADJUST MENT OF THE SUM OF RS.20,91,83,000/- ON VALUATION OF TH E CLOSING STOCK OF SECURITIES DONE BY THE ASSESSING OF FICER. THE LEARNED CIT(A) OUGHT TO HAVE OBSERVED THAT THE VALUATION OF SECURITIES WITHOUT CONSIDERING THE BPI PAID, IN THE APPELLANTS RETURN OF INCOME HAS RESULTED IN AN EXCESS DEPRECIATION OF RS.60,77,000/- WHICH WAS OFFERED TO TAX IN THE SAID ASSESSMENT YEAR. THE LEARNED CIT(A) OUGHT TO HAVE OBSERVED THAT IF T HE BPI PAID TO THE SELLERS OF SECURITIES IS CONSIDERED FOR VALUATION OF THE CLOSING STOCK OF THE SECURITIES, T HE SAME RESULTS IN THE INCREMENTAL DEPRECIATION OF RS.21,52,60,000/- OFFERED TO TAX BY THE APPELLANT. THE LEARNED CIT(A) IN NOT ALLOWING THE REDUCTION OF THE INCREMENTAL DEPRECIATION OF RS.21,52,60,000/- AND I N NOT ALLOWING THE REDUCTION OF THE EXCESS DEPRECIATION OFRS.60,77,000/- CONSEQUENT TO THE INCLUSION OF THE BPI IN THE VALUATION OF SECURITIES. 8. THE LEARNED DR SUPPORTED THE ORDERS OF THE INCO ME TAX AUTHORITIES. 8.1 THE CASE WHICH WAS HEARD ON 7/8/2012 WAS REPO STED, TO ASCERTAIN WHETHER THE TRIBUNALS ORDER IN ITA NO.21 & 22/2006 DATED 29/3/2010 WAS SUBJECT MATTER OF THE APPEAL BEFORE T HE HONBLE HIGH COURT UNDER SECTION 260A OF THE ACT. THE LEARNED AR AS W ELL AS THE LEARNED DR SUBMITTED THAT THE REVENUE HAS NOT FILED APPEAL AGA INST THE TRIBUNALS ORDER IN ITA NO.21 & 22/2006 DATED 29/3/2010 AND THE MATT ER HAS NOT ATTAINED FINALITY. HENCE, WE PROCEEDED TO DISPOSE OFF THE AP PEALS ON MERITS. PAGE 9 OF 15 ITA NOS.888 & 889/BA NG/2011 9 9. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED T HE MATERIALS AVAILABLE ON RECORD AND CAREFULLY GONE THROUGH THE C ASE LAWS CITED BY BOTH THE PARTIES. WE ARE OF THE VIEW THAT THE CIT(A) HAS ERRED IN NOT ALLOWING THE BROKEN PERIOD INTEREST PAID ON PURCHASE OF SECU RITIES AS REVENUE EXPENDITURE. THE BANGALORE BENCH OF THE TRIBUNAL I N ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1988-89 IN ITA NO.1838/BANG/90 V IDE ORDER DATED 16 TH AUGUST, 2002 HAD TREATED THE BROKEN PERIOD INTEREST PAID AS AN ALLOWABLE BUSINESS EXPENDITURE UNDER THE ACT. THE RELEVANT F INDING OF THE TRIBUNAL IN ASSESSEES OWN CASE READS AS FOLLOWS:- THE ASSESSEE IS AGGRIEVED BY THE DECISION OF THE FI RST APPELLATE AUTHORITY IN CONFIRMING THE DISALLOWANCE O F INTEREST OF RS.19,07,447/- PAID TO THE SELLERS OF T HE SECURITIES TOWARDS PURCHASE PRICE. THE LEARNED COU NSEL FOR THE ASSESSEE INVITED OUR ATTENTION TO CBDT CIRC ULAR NO.599 DT.24.4.91 ON TREATMENT OF SECURITIES - STOC K-IN- TRADE OR INVESTMENT, WHEREIN CLARIFICATIONS ON THE FOLLOWING ISSUES WERE SOUGHT BY BANKS FROM THE CENTR AL BOARD OF DIRECT TAXES, WHICH ARE REPRODUCED AS UNDE R:- (I) . (II) WHETHER DEDUCTION CLAIMED IN RESPECT OF INTEREST PAID FOR BROKEN PERIOD ON THE PURCHASE OF SECURITIES SHOULD BE ALLOWED AS A DEDUCTION FROM THE TAXABLE PROFITS? (2) AS FAR AS THE SECOND ISSUE IS CONCERNED, BOTH THE INTEREST PAYMENTS AND RECEIPTS MUST BE REGARDED AS REVENUE PAYMENTS/RECEIPTS AND ONLY THE NET INTEREST ON SECURITIES SHALL BE BROUGHT TO TAX AS BUSINESS INCOME. PAGE 10 OF 15 ITA NOS.888 & 889/B ANG/2011 10 THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF ASSESSEE ITSELF HELD THAT BROKEN PERIOD WAS NOT TAX ABLE AS THE INTEREST ON SECURITIES DID NOT ACCRUE FROM D AY TO DAY BUT ON CERTAIN FIXED DAYS. RELIANCE WAS ALSO PLA CED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF VIJAYA BANK REPORTED IN 187 ITR 541. THE SUM OF RS.19,07,447/- REPRESENTING THE INTEREST ACCRUED BU T NOT DUE FROM THE LAST DATE OF ACCRUAL TILL THE DATE OF PURCHASE WAS PAID TO THE SELLERS OF SECURITIES. TH E ASSESSEE TREATED THE SECURITIES SO PURCHASED AS STO CK-IN- TRADE. THE ASSESSING OFFICER DISALLOWED THE ABOVE SUM ON THE GROUND THAT THE EXPENDITURE IS CAPITAL IN NA TURE AS IT GOES TO INCREASE THE COST OF SECURITIES PURCHASE D, WHICH WAS UPHELD BY THE FIRST APPELLATE AUTHORITY. T HIS ISSUE HAS BEEN DECIDED BY THE APEX COURT IN THE CASE OF VIJAYA BANK LTD. V CIT AND SUBSEQUENT TO THE DECISIO N, THE CBDT VIDE CIRCULAR NO.610 WITHDREW THE EARLIER CIRCULAR NO.599. ON FURTHER REPRESENTATION BY THE I NDIAN BANKS ASSOCIATION, CIRCULAR NO.665 WAS ISSUED BY TH E CBDT WHEREIN IT WAS STATED THAT THE DECISION OF THE SUPREME COURT IN THE CASE OF VIJAYA BANK WAS ON THE QUESTION OF BROKEN PERIOD INTEREST AND NOT ON WHETH ER THE SECURITIES CONSTITUTED STOCK-IN-TRADE OR INVEST MENT. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DECISION OF THE APEX COURT IN 187 ITR 541 IS NOT APPLICABLE TO THE FACTS OF THE CASE AS THE ASSESSEE HAS CLASSIFIED THE SECURITIES PURCHASED AS STOCK-IN-TRA DE AND ACCORDINGLY THE CLAIM OF LOSS ON TRADING OF INVESTME NTS AS DEDUCTIBLE IN NATURE. THE LEARNED COUNSEL FURTHER INVITED OUT ATTENTION ON ABOUT THE RBI GUIDELINES AND THE ACCOUNTING STANDARD ISSUED BY THE ICAI AND CLAIMED THAT THE ASSESSEE IS ELIGIBLE FOR DEDUCTION AND FUR THER RELIED UPON THE DECISION OF THE APEX COURT UB CHALL APALLI SUGARS LTD. V CIT (98 ITR 67) AND MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V CIT (225 ITR 802) WHEREIN THE HONBLE SUPREME COURT HOLD THAT THE PRINCIPLES OF ACCOUNTING SHOULD BE CONSIDERED WHILE ALLOWING THE DEDUCTION. IN THE LIGHT OF ABOVE DIS CUSSION, PAGE 11 OF 15 ITA NOS.888 & 889/B ANG/2011 11 THE APPEAL OF THE ASSESSEE IS ALLOWED ON THIS ISSUE AND THE STAND OF THE FIRST APPELLATE AUTHORITY IS REVERS ED. 9.1 THE HONBLE SUPREME COURT IN THE CASE OF CIT V CITIBANK N.A. (CIVIL APPEAL NO.1549 OF 2006) HAD DISTINGUISHED TH E JUDGMENT OF THE HONBLE APEX COURT IN THE CASE OF VIJAYA BANK AND HELD THAT THE BROKEN PERIOD INTEREST EXPENDITURE IS AN ALLOWABLE EXPENDITURE. THE QUESTION OF LAW RAISED BEFORE THE HONBLE SUPREME COURT WAS AS UNDER:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE HIGH COURT WAS RIGHT IN LAW IN HOLDING, T HAT, THE INTEREST PAID FOR BROKEN PERIOD SHOULD BE CONSIDERE D AS PART OF THE PURCHASE PRICE, BUT SHOULD BE ALLOWED A S REVENUE EXPENDITURE IN THE YEAR OF PURCHASE OF SECURITIES. 9.2 WHILE COMING TO THE CONCLUSION THAT THE BROKEN PERIOD INTEREST PAYMENT ON THE PURCHASE OF SECURITIES WHICH ARE HELD AS TRADING ASSETS (I.E. STOCK-IN-TRADE) SHOULD BE ALLOWED AS REVENUE EXPEND ITURE, THE FOLLOWING IMPORTANT OBSERVATIONS WERE MADE BY THE HONBLE SUPR EME COURT:- IN THE CASE OF VIJAYA BANK THE INTEREST INCOME INCLU DING BPI INCOME ON THE SALE OF SECURITIES WAS OFFERED TO TAX UNDER THE HEAD INTEREST ON SECURITIES BUT NOT AS BUSINESS INCOME. HENCE IT WAS HELD THAT OUTLAY O N THE PURCHASE OF AN INCOME-BEARING ASSET IS IN THE NATUR E OF CAPITAL OUTLAY, AND NO PART OF THE CAPITAL SO LAID O UT CAN, FOR INCOME TAX PURPOSES, BE SET OFF AS EXPENDITURE AGAINST INCOME ACCRUING FROM THE ASSET. WHEREAS IN THE INSTANT CASE, THE INTEREST INCOME IN CLUDING BPI INCOME ON THE SALE OF SECURITIES WAS OFFERED TO TAX AS BUSINESS INCOME. SINCE THE BPI INCOME WAS OFFERE D TO TAX AS BUSINESS INCOME AND THE SAME WAS ACCEPTED BY PAGE 12 OF 15 ITA NOS.888 & 889/B ANG/2011 12 THE INCOME TAX DEPARTMENT, THE BPI EXPENDITURE ON T HE PURCHASE OF SECURITIES SHOULD ALSO BE ALLOWED AS DE DUCTION WHILE COMPUTING THE BUSINESS INCOME OF THE ASSESS EE. FURTHER, THE BPI INCOME HAS BEEN OFFERED TO TAX AS BUSINESS INCOME FROM THE INCEPTION. IF THE INCOME TAX DEPARTMENT HAS BROUGHT TO TAX THE BPI INCOME UNDER THE HEAD INTEREST ON SECURITIES NOT AS BUSINESS INCO ME THEN THE VIJAYA BANKS RULING WOULD HAVE BEEN APPLIC ABLE TO THE FACTS OF THE PRESENT CASE. HENCE, THE JUDGMENT IN THE CASE OF VIJAYA BANK HAS NO APPLICATION TO THE FA CTS OF THE PRESENT CASE. THUS, THE SUPREME COURT HAS FINALLY CONCLUDED THAT IN THE LIGHT OF WHAT WE HAVE DISCUSSED HEREINABOVE, WE FIND THAT THE ASSESSEES METHOD OF ACCOUNTING DOES NOT R ESULT IN LOSS OF TAX/REVENUE FOR THE DEPARTMENT. THAT, T HERE WAS NO NEED TO INTERFERE WITH THE METHOD OF ACCOUNT ING ADOPTED BY THE ASSESSEE-BANK. THAT, THE JUDGMENT IN THE CASE OF VIJAYA BANK LTD. (1991) 187 ITR 541 (SC), HA D NO APPLICATION TO THE FACTS OF THE CASE. FOR THE REAS ONS GIVEN ABOVE, THE QUESTION POSED BEFORE US IS ANSWER ED IN THE AFFIRMATIVE I.E. IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 9.3 IN THE INSTANT CASE, THE ASSESSEE-BANK, SINCE ITS INCEPTION, HAS BEEN OFFERING THE BROKEN PERIOD INTEREST INCOME EAR NED FROM THE SALE OF SECURITIES (AFS CATEGORY) AS BUSINESS INCOME UNDER SECTION 28 OF THE ACT AND NOT AS INTEREST INCOME UNDER THE HEAD INCOME F ROM OTHER SOURCES. ACCORDINGLY, THE BROKEN PERIOD INTEREST PAID TO THE SELLERS OF SECURITIES WAS CLAIMED AS AN ALLOWABLE DEDUCTION FROM ITS BUSINESS INCOME, UNDER THE ACT. APPLYING THE PRINCIPLES LAID DOWN BY THE HONBLE SUPR EME COURT IN THE CASE OF CITIBANK, THE BANK IS ENTITLED TO CLAIM THE BROKEN PERIOD INTEREST EXPENDITURE AS REVENUE EXPENDITURE FROM ITS BUSINESS INCOME, SI NCE THE BROKEN PERIOD INTEREST INCOME IS ALSO OFFERED TO TAX AS BUSINESS INCOME. PAGE 13 OF 15 ITA NOS.888 & 889/B ANG/2011 13 9.4 THE FOLLOWING JUDICIAL PRECEDENTS SUPPORTED TH E CLAIM OF THE ASSESSEE THAT THE BROKEN PERIOD INTEREST PAYMENTS AR E IN THE NATURE OF REVENUE EXPENDITURE:- I) AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION V CIT 258 ITR 601 (MUMBAI) HC IT WAS HELD BY THE MUMBAI HIGH COURT THAT WHEN THE B PI RECEIVED WAS TAXABLE AS BUSINESS INCOME, THE DEPART MENT OUGHT TO HAVE ALLOWED DEDUCTION FOR THE BPI PAID ON PURCHASE OF SECURITIES. II) CIT V CITIBANK N.A. 264 ITR 18 (MUMBAI) HC BY PLACING RELIANCE IN THE CASE OF AMERICAN EXPRESS INTERNATIONAL BANKING CORPORATION V CIT (258 ITR 60 1) IT WAS HELD THAT THE BPI PAID TOWARDS PURCHASE OF SECU RITIES IS AN ALLOWABLE EXPENDITURE. III) CIT V NEDUNGADI BANK LIMITED 264 ITR 545 (KERALA) H C IT WAS HELD BY THE HONBLE KERALA HIGH COURT THAT TH E INTEREST PAID FOR THE BROKEN PERIOD WOULD CONSTITUT E ALLOWABLE OUTGO IN THE HANDS OF THE ASSESSEE AND IS AN ADMISSIBLE DEDUCTION IN THE COMPUTATION OF TOTAL IN COME OF THE BANK UNDER THE HEAD PROFITS AND GAINS OF BU SINESS OR PROFESSION. IV) CIT V SOUTH INDIAN BANK LIMITED 154 TAXATION 638 (KERALA) HC THE HONBLE KERALA HIGH COURT RULED THE DECISION IN THE FAVOUR OF THE ASSESSEE AND HELD THAT GOVERNMENT SECURITIES HELD BY THE BANK ARE TRADING IN NATURE AN D BROKEN PERIOD INTEREST PAID ON THE ABOVE IS AN ALLO WABLE EXPENDITURE FOR THE PURPOSE OF COMPUTATION OF TOTAL INCOME UNDER THE HEAD PROFITS AND GAINS FROM BUSIN ESS OR PROFESSION. PAGE 14 OF 15 ITA NOS.888 & 889/B ANG/2011 14 V) STATE BANK OF HYDERABAD V JOINT CIT 95 TTJ 368 (HYD.) ITAT THE HYDERABAD TRIBUNAL HELD THAT IF THE SECURITIES W ERE HELD BY THE BANKING COMPANY AS STOCK-IN-TRADE OF THE BUSINESS, INTEREST PAID FOR THE BROKEN PERIOD WOULD CONSTITUTE ALLOWABLE OUTGO IN THE HANDS OF THE ASSE SSEE BANK. 9.5 IN THE LIGHT OF THE ABOVE JUDGEMENTS OF THE HO NBLE SUPREME COURT AND VARIOUS HIGH COURTS, WE HOLD THAT THE BRO KEN PERIOD INTEREST PAYMENTS ON PURCHASE OF SECURITIES (AFS CATEGORY) OUG HT TO BE ALLOWED AS REVENUE EXPENDITURE. 9.6 BROKEN PERIOD INTEREST (BPI) PAID TO SELLERS OF SECURITIES IN EARLIER YEARS WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIALS ON RECORD. WE HOLD THAT THE AMOUNT IS TO BE DISALL OWED WHEN THE SAME SHOULD HAVE BEEN CLAIMED AS A DEDUCTION BY DEBITING TO THE P&L ACCOUNT. THE BROKEN PERIOD INTEREST PAYMENT MADE IN THE EARLIER Y EAR ACCOUNT CANNOT FORM PART OF THE DISALLOWANCE FOR THE CURRENT ASSESSMENT YEAR SINCE THE SAME WAS NOT DEBITED TO THE P&L ACCOUNT AND HENCE, NO DISALL OWANCE IS CALLED FOR. 9.7 VALUATION OF SECURITIES (INCLUSIVE OF BPI PAYME NT AS PART OF COST OF SECURITIES) THE ABOVE GROUND IS ONLY CONSEQUENTIAL IN NATURE B ASED ON THE OUTCOME OF THE GROUND NOS.(I) AND (II). SINCE WE H AVE ALREADY DECIDED GROUND NOS.(I) AND (II) IN FAVOUR OF THE ASSESSEE, NO ADJU DICATION IS CALLED FOR THE PAGE 15 OF 15 ITA NOS.888 & 889/B ANG/2011 15 ABOVE GROUNDS. ACCORDINGLY, THE SAME IS DISMISSED. IT IS ORDERED ACCORDINGLY. ITA NO.889/BANG/2011 9.8 THE FINDINGS RENDERED IN THE ITA NO.888/BANG/2 011 WILL HOLD GOOD FOR THIS APPEAL ALSO AND HENCE, FOR THE REASON ING STATED IN ITA NO.888/2011, WE ALLOW THE APPEAL OF THE ASSESSEE. IT IS ORDERED ACCORDINGLY. 10. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE ARE ALLOWED. THE ORDER PRONOUNCED ON THE 14 TH DAY OF SEPTEMBER, 2012 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANG ALORE.