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

ITTA/378/2006

AI Insights

The case involves an appeal by the Commissioner of Income Tax against the State Bank of Hyderabad concerning the deductibility of broken period interest paid on purchased securities for the assessment year 1998-1999. The Income Tax Appellate Tribunal had previously ruled in favor of the bank, allowing the deduction. The High Court of Telangana, referencing a similar case (I.T.T.A.No.328 of 2006), affirmed the Tribunal's decision, noting that the securities were held as stock-in-trade and the interest paid was a necessary business expenditure. The court dismissed the appeal, maintaining that the legal position regarding the treatment of such interest payments was clear and supported by precedents.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 728089 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 07-06-2023
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax-III v. State Bank of Hyderabad, American Express International Banking Corporation v. Commissioner of Income Tax, Vijaya Bank Ltd. v. Additional Commissioner of Income Tax, Bangalore, Commissioner of Income Tax v. Citibank N.A., Commissioner of Income Tax v. Bank of Rajasthan Limited, Commissioner of Income Tax v. Nedungadi Bank Ltd., Commissioner of Income Tax v. South Indian Bank Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K P AMARNATH REDDY
• Assessee Lawyers: J V PRASAD
• Keywords: Broken Period Interest; Income Tax; Revenue expenditure; Securities; Stock-in-Trade
• Section: 260A; 151 CPC

Judgement Text

"f; t I t I i I [3311] HIGH COURT FOR THE STATE OF TELANGANA WEDNESDAY,THE SEVENTH DAY OF JUNE TWO THOUSAND AND TWENTY THREE PRESENT THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUYAN ANT) THE HONOURABLE SRI JUSTICE N.TUKARAMJI INCOME TAX TRIBUNAL APPEAL NO: 378 OF 2006 (lncome Tax Tribunal Appeal Under Section 260-4 of the lncome Tax Act, against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench 'A', Hyderabad in ITA No.663Hyd 12003, for assessment Year 1998-1999 dated 28-10-2005 preferred against the Order of the Commissioner of lncome Tax (Appeals) lV, Hyderabad, Appeal No.25lDC-3(1yClT(A)-1V12002-03 dated 19-08-2002, preferred against the Order of the Joint Commissioner of lncome Tax(Assts.) Special. Range-4, Hyderabad, PAN/GIR No.S-31 , dated 29-03-2001.) Between: The Commissioner of lncome Tax-lll, Hyderabad ...APPELLANT AND State Bank of Hyderabad, Finance and Accounts Department, Head Office, Gunfoundry, Hyderabad. ...RESPONDENT lA NO: 1 OF 2018 Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased Permit the petitioner to substitute its name as respondent in the appeal as \"State Bank of lndia, Gunfoundry, Hyderabad\" by amending the caused title accordingly in the interest of justice Counsel forthe Appellant: SRl. J. V. PRASAD (SC FOR INCOME TAX) Counsel for the Respondent: Mr. K.P.AMARNATH REDDY The Court made the following: T}Ip-rpNll_rlp !IlE- CHIEF JUSTICE UJJAL BHIIYAN AND THE HON 'BLE SRI JUSTICE N. TUKARAMJI I.T.T.A.No.37a of 2o06 JUDGMENT t1'e. tlk rl,,!,I)k il!, | )nt! J lstic.e Uial Bhuyan) Hearcl Xilr. ,i.V.Prasad, learned Standing Counsel. Income 'l;rx Dcpartmer)t, for the appellant and N,lr. K.P.Arnarnatlr Reddr, learned counsel for the responden t 2. This anpeal has beerr preferred by the revenue as the appeliant Lrnder Scction 260A of the Income Tax Act, 1961 (briefly, 'thr Act' herc-initfter) against the order dated 28.10.2005 passecl br. rhc Income Tax Appellate Tribunal, Hyderabad Bench 'A', Hyderabad (Tribunal) in I.T.A.No.663,tHydl2OO3 for the assessment year 1998- t999. 3. Learnerl counsel for the parties are in agreement that issue raised in this altpcarl 1S squarely covered by the : I ,-:t 2 decision of this court dated 04 -Ol -2023 passed It1 LT.T.A.No.32a of 2006 (Commissioner of Income Tax-III v' State Bank of Hyderabad) wherein parties r'vere the same' 4. In fact, I.T.T.A.No.328 of 2006 arose out of the same order of the Tribunat dated 28.10'2005 passed in I.T.A.No.661/Hydl2OO3 for the assessment year 7996' t997. 5. Relevant portion of the judgment and order dated O4.O1.2023 passed in I.T.T.A.No'328 of 2OO6 reads as follows: 15. Issue before the Court is whether broken period interest paid on purchase of securities is revenue expenditure since tJle securities constitute stock-in- trade? 16- To appreciate the above question. it would be appropriate to first examine the meaning of the exprcssion \"broken period interest\". This has been explarned by the Bombay High Court in American Express Lrteraational Balking CorPoration v. Commissioner of Income Tax ((2OO2) 258 ITR 601 (Bom)) in the following manner: I ''6. iJr'lirrc .orlrir!t to the facts of the r:ase, a sfrort l)!raact' ')(.ds to be mentioned This prefac<: r'xplai rs tire aoncept o[ broken period Lnterc:j1 t ( r'. IIrnK rs required to maintain Statul,,rr [-r(l( ,ll Ratio (hereinafter rc[crred lo i1s 'Sl-R ) l( I rhat purposc, every l;ank sLtbscr rlres to ( ,,, ( rnntent securities. Onc such sccuritr rs knorrrr as SGL (Subsidiary Gencral I-cdger) i his llrlqt r is maintained in the Pubtic Debt Oflr< e rir 1 lr( Reser ve Bank of [ndia. Every 5ank is reclLrrrrrl, as a part of banking lusincss, to sLrlrscribe to this loan. This loan/S(ll, is irl:j() transferable like any other sccurit '. In tlrisi case, for example, rve are ronccrrcd $ltll 1.75 per cent. Government of 'r.rclia Lrirn. i9l]o, l. v. Rs. 5 lakhs. On the SGL, he llt'stric Il:rnii ol Indra pays half vearly ntcrest In llrc , irs( ol the said 4.75 per cent. ';overnrre!rr ol lnrlia Loan, 1980, f. v. Rs. 5 lakhs, tlrc Resr,,-r't, Bank of India was required ro pa ' [r.ill' re:i.lv interest on May 12, 1976, irnd NovernbL'r- 12. i976. The Reserve Bank of lrdia pavs inl(.('sr on due dates on such securrtres to t[r(. llolders of the securities, every slr months. TIrc Rescrve Bank of India pays intercst on thc baiance to the banks, whose names appear as holders in the PDO ledger. / fter subs(:ribin!., lo rhe said loans, the banks cre l|ec to transfcr such loans for coDsi(lc-rirlro|t Lo the other banks. (onseqtrt,nth, llr(. Reserve Bank of India pays interest to thr: lrolder on the balances in a s,rcurity i[, rn it:i l)ooks, the said security stood irr the rrarnr: o[ r lrr t holder on the due date for - + .,1 pajment of interest. As stated above, to maintain SLR levels, every bank subscribes to such loans. This is a part of banking business. llorr,ever, after so subscribing, the banks are frec to deal wrth such securities like any other tradcr. Therefore, there are two activities involved--one activity is that of subscribrng to the loan and the other is trading. Now, if a bank purchased 4.ZS per cent_ GOI Loan, 1980, f. v. Rs. 5 lakhs on August 11, 19|6. then, on purchase, the said bank was required to lodgc the transfer form with the pDO. On such lodgement, the name of the bank was entered in the pDO ledger. Therefore, on the next due date for payment of interest, namely, November 12,1976, the bank was entided to receive half yearlv interest from the Reserve Bank of [ndia for the period May 12, 1926, up to November 12, 1976, even though it had bought the sard security on August 11, 1976. Therefore, it receives interest for the entire six months, though it bought the security on August l l, 1976. In the above example, since the security was sold/ transferred on August ll, 1976 (i.e., after due date for payment of interest), interest had accrued to the transferor/ seller from the last due date, i.e,, May 12, t976 up to August tl, 1976.\" 17. As exptajned by the Bombay High Court, every bank is required to maintain a Statutory Liquidity Ratio (SLR). For that purpose, every barrk subscribes to government securities. One such security is known as ) Subsitliary Gcrrcral I_r'riricr (SGL) r,,,hich is matntaincd tn the h.i)lic Dcl:lr Otfir.r rn rhe Rcsen.e Bank of India. Every irank is rcclrrr:'cri ir:i ii part of its bankrng business to subscribe tc ihrs irt;rn Like an-v- other security, such a loan,'SGL is rrlso -ransfr'rablc Reserve Bank of India pays intcrest on due (lirtes on such securities to the holders of the se<:'rritics every six months. After subscribing to the sald ioans, banks are free to transfer such l,)ajts for consrclcrrrtron to other banks. Reserye Bank of India p:r_r's rnier-est to the holder on the balanc,rs in a sccurirv il in its books the sard security stands in the nanre oi tlrirL holder on the due date for payment of intcrcst. 'l-hc above exercise, if we may say so, is a part o[ thc banl