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

ITTA/155/2006

AI Insights

The case revolves around the dispute concerning the deductibility of broken period interest paid on the purchase of securities by the State Bank of India, which were treated as stock-in-trade. The Income Tax Department challenged the Tribunal's decision that allowed such a deduction, arguing based on precedents that such interest should be capitalized. However, the Tribunal and subsequently the High Court found that the securities were indeed held as stock-in-trade, making the interest paid for the broken period a deductible revenue expenditure. The decision referenced various precedents and interpretations of the Income Tax Act, particularly focusing on the distinction between capital and revenue expenditures in the context of securities held as stock-in-trade.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 727924 (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. Bank of Rajasthan Limited, American Express International Banking Corporation v. Commissioner of Income Tax, Commissioner of Income Tax v. Citibank N.A.
• 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: Broken Period Interest; Income Tax; Revenue expenditure; Stock-in-Trade
• Section: 143(3); 37; 260-4

Judgement Text

"IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD WEDNESDAY, THE FOURTH DAY OF JANUARY TWO 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 order dated 18-03-2005 passed by the lnccme Tax Appellate Tribunal, Hyderabad Bench Hyderabad in lTA.No. B93lHl2O02 for the Assessment Year 1998-99 preferred against the order of the Commissioner of lncome Tax (Appeals)-lV, Hyderabad in Appeal No. 28lDC-3(1)lClT(A)-lV/2002-03 dated 19-08-2002 preferred against the order 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 ...APPELLANT AND State Bank of lndia, Gunfoundry, Hyderabad (Cause title is amended as per court order dated 31.01.2018 in lA.No. 1/2018 in 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 PUTTAMREDDY The Court delivered the following: JUDGMENT THE HON ,BLE THE CHIEF JUSTICEUJJAL BHIryAN AND THE HON'BLE SRI JUSTICE N. TUKARAMJI 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' 2 This is an appeal by the Revenue under Section 26OL of the Income Tax Act, 1961 (briefly referred to hereinafter as the Act') against the order dated 18'O3'2005 passed by the Income Tax Appellate Tribunal, Hyderabad 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. ) l.T.T.A.No.155 of 2OO6 i](LI & NTRJ I.T.T.A.I I. 1 5:; of 2O06 4. Hov ever, we find from the appeal lnerrro that appellant has 1 roposed the following questions as substantiai questions of la r': Whetrer on the facts and in the circumstances of th : case, Tribunal was justified in hold:.ng that nterest paid by the assessee on prlrqhilss of sr curities constituting stock_in_tra clr: but paid for the broken period is allowab ie as; a dedu:tion? Whetrer on the facts.and irr the circum stances of tt e case, assessee is entitled tc cle.im dedu :tion of interest paid on purcl rase of secut ities constituting stock for the brol:en perio I till the date of acquisition in t:rms ol Section 37 of the Act? 2 1l 5. Restondent is an assessee under the ,Act having the status of a banking company. For the asse ssment year 1998-99, it fiie i return of income declaring taxab r: income at Rs. 183,25,58,560.00. In the course of the assessment proceedings, a:isessee claimed that it had paid a:i amount of t. HCJ & NTRJ LT.T.A.No.155 of 2O06 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 capitalized and cannot be allowed as a deduction' 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) 3 |TCJ & NTRJ I.'I'.T.A.I o. 1 55 of 2O06 7. The aforesaid order of the assessing officer was assailed by tht assessee before the first appella.e aurthorit5r i.e., Commissioner of Income-Tax (Appeals) IV, Hy,lerabad (for short, 'CIT(A)' rereinafter). By the order dated |9.OB.2OO2, CIT(A) upheld he order of the assessing officer by rel.Ting on the decision of the Supreme Court in Vijaya Bank Ltd. (supra l) holding thrrt expenditure claimed being broken period interest is not r [iowable as a revenue expenditure. 8. Agg rieved by the a-foresaid order.. ASSESSEC preferred furth:r appeal before the friUunaf. 9 Tril ,una_l framed the question for cons iderzrtion as under: Whe }rer broken period interest p aid on purchase of securities is revenue expenditure the 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 4 L sl nce HCJ & NTRJ I.T.T.A.No.155 of 2006 1),TribunalnotedthatthedecisionoftheSupremeCourtin Vijaya Bank Ltd. (supra 1) was explained by the Central BoardofDirectTaxes(forshort,'CBDT'hereinafter)'Onthe same lines, Kerala High Court in Commissioner of Income Taxv.NedungadiBankLtd.2distinguishedthedecisionof the Supreme Court in Vijaya Bank Ltd' (supra 1)' which held thatifthesecuritieswereheldbythebankingcompanyaS stock-in-trade of the business, interest paid for the broken period would constitute an allowable deduction in the hands .'''oftheassessee.Tribunalheldthatadmittedlyassesseehad 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 (2003) 264 ITR 545 5 ) f]CT & NTRJ L'l'.T. A.I t. 1 5!; of 2006 securities. It was contended that the price t,aid by the securities was letermined with reference to their rctua-l value as well as the interest which had accrued on t.rem till the date of purchase. But Supreme court noted that whatever was the cons ideration which prompted the tssessee to purchase the r;ecurities, the price paid for them was in the nature of a callital outlay and no part of it can lle set off as expenditure a;lainst income accruing on thosr sec:urities. Relying on the said decision, he further submits tlrat claim for deduction can be sustained only when an asse isee is in _ai. position to shr,w that any reasonable expenditur.e had been incurred for th,: purpose of realizing the interest or securities. 12. Mr. prasad has also placed reliartce ot a decision of the Rajasth an High Court in Commissioner of lncome Tax v. Bank cf Rajasthan Limite{e wherein ltre question before the C< ,urt was whether taxability of r nterest on securities sub. ect to transaction price on sale or securitv 3 2009 (316) ITR i 91 6 HCJ & NTRJ LT.T.A.No.155 of 2006 continues to be governed by the ratio of the decision in Vijaya Bank Ltd. (supra 1). In that case, Ra,iasthan High Court applied the decision of the Supreme Court and answered the above question in favour of the Revenue. Mr. Prasad submits that ratio laid down by the Supreme Court in Vijaya Bank Ltd. (supra 1) still holds the field. Therefore, the questions framed may be answered in favour of the Revenue. 13. Per contra, Mr. Karthik Ramana Puttam Reddy, learned counsel for the respondent submits that decision of the Supreme Court in Vijaya Bank Ltd. (supra 1) is distinguishable in the facts of the present case. He submits that Bombay High Court in American Express International Baoking Corporation v. Commissioner of Income Tax+ has distinguished the judgment of the Supreme Court in Vijaya Bank Ltd. (supra 1) and held in the facts of that case that the Income Tax Department ought to have allowed deduction for the broken period interest paid. According to him, after the + 1zOO2l 2s8 ITR 601 (Bom) 7 ) 4<) & NTRI I.T.T.A.No l:15 c,f 2OO6 decision of the Rajasthan High Court, Supreme (lourt has delivered a ju(gment in Civil Appeal No. 1549 r;f 2006, Commissioner of Income Tax v. Citibank N.A.s lrhere the question which iell lor consideration was whether t he interest paid for broken period should not be considered as pa-rt of the purchase price rut should be allowed as revenue r:xperrditure in the year of p rrchase of securities? He submits that in the said decision, S upreme Court accepted the distinc'ir:n pointed out by the E ombay High Court in American Express International Banking Corporatiorr (suprri 4) zrnd agreed with the view ,rxpressed that judgment in Vijaya Barrk Ltd. (supra 1) woulC have no application. He theref :re s;ubmits that appeal h, the Revenue has no merit anc should be dismissed. 14. Sulrmissions made by learned courrsel for the parties have re ceived the due consideration ofthe Court. s 2008 (8) TMr T( 6 8 HC] & N-7:RJ I.T.T.A.No.155 of 2O06 15. Issue before the Court is whether broken period interest paid on purchase ol securities is revenue expenditure since the securities constitute stock-in-trade? 16. To appreciate the above question, it would be appropriate to first examine the meaning of the expression 'broken period interest\". This has been explained by the Bombay High Court in American Express International Banking Corporation (supra 4) in the following manner: ' \"6.- Before coming to the facts of the case; a short preface needs to be mentioned. This preface explains the concept of broken period interest. Every bank is required to maintain Statutory Liquidity Ratio (hereinafter referred to as \"SLR\"). For that purpose, every bank subscribes to Government securities. One such security is known as SGL (Subsidiary General Ledger). This ledger is maintained in the Public Debt Office in the Reserve Bank of India. Every bank is required, as a part of banking business, to subscribe to this loan. This loan/SGL is also transferable like any other security. In this case, for example, we are concerned with 4.75 per cent. Government of India Loan, 198O, f. v. Rs. 5 lakhs. On the SGL, the Reserve Bank of India pays half yearly interest. ln tlre case of the said 4.75 per cent. Government of India 9 ) ) 10 ilc) &, NTRJ LT.T.A.NI,. J 55 )f 2006 Loan. 198(, f. v. Rs. 5 lakhs, the Reserve Bank of India was requir, :d to pay half yearly interest on May 12, 1976, and Noverr ber 12, 1976. The Reserve Bank of India pays interest on due dates on such securities to the hold:rs of the securi ies, every six months. The Reserve Banl: of India pays interest on the balaace to the banks, ,vtrose narnes af pear as holders in the pDO ledgcr. After subscribir g to the said loans, the banks r,r,ere f:r:r: tc transfer sr,ch loans for consideration to the other t :urks Consequer ttly, the Reserve Baltk of India pays inte, (:st tc, the holder on the balances in a security if, in its lr,r,rks the said s:curit5z stood in the name of that holder ,)n tho due date for palment of interest. As stated abc r r:, to maintain SLR levels, every bank subscribes to such loans. Thi r is a part of banking.business. However, afte r so subscl ibing, the banks are free to deal with such securities like any other trader. Therefore, there are twr) activities mvolved--one activity is that of subscril,ing t,t the 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: saiC bank war required to lodge tie transfer form w tl: the PDO. On such lodgement, the name of the bar I< was entered i r the PDO ledger. Therefore, on the n€xt due date for J alrment of interest, namely, November lit.19T6, the l-.ank .r,as endtleC to receive ha-lf 5rerly intere;t fi-orn the Rese: ve Bank of India for the period May 12 197tt, up to No'ember 12, 1976, even though it had boueJrt the said secr rity on August 11, 1926. Therefore, it r er:eivr:s / 11 HCJ & NTRJ I.T.T.A.No.155 of 2OO6 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 had accrued 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 t2 I:IC] & NTRJ I.T T.A.N t. t 55 of 2006 in the name of that holder on the due date for cayment of interest. The allove exercise, if we may say so, is a part. of the banking business. However, after so subscribing the banks are free to dea I with such securities like any or her trader. Therefore, the -e are two activities involved _ one of subscribing to I he loal and the other is trading. 18. One of the questions before the Bcrnba.y High Court was whr :ther broken period interest payn rent by the assessee was € llo$'able as a revenue gxpendityre unrler the head lncome fr om business or profession? Whil: ansrvering this question, 3ombay High Court examine,l the clec.sion of the Supreme C rurt in Vijaya Bank Ltd. (supra 1). 19. In Vijaya Baak Ltd. (supra l), rluring the assessment y(:ar under consideration, Vij aya llank had entered into ,rn agreement with Jayalakshmi Bank Ltd. whereby Vijayz Bank took over the liabitities of .Izrya.lakshmi Bank. It aiso [ook over the assets belonging to .Jayalakshmi Bank. One cf the two items taken over by 'li.iaya Bank 13 HCJ & NTRJ I.T.T.A.No.155 of 2O06 represented interest which accrued on securities taken over by Vrjaya Bank from Jayalakshmi Bank. Such amount was brought to tax by the assessing officer under Section 18 of ttre 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 l) 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 same 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 ) I4 .t(., & NTRJ I.T.T.A.No ,t 55 c'f 2OO6 the Supreme C rurl- in Citibank N.A. (supra 5 is dated 12.O8.2OO8 whe-eas decision of the Rajastha:r HigrL Court in Bank 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 in Nedungadi Bank Ltd. (supra 2). In that appeal, Iierala High Court also exarrined the effect of the decision of tlre Supreme Court in Vijala Bank Ltd. (supra 1). Out of the four substantial qu(:stions of law which were considr:rr:d by the Kerala High ( )ourt, question No.1 pertained to whether investments mitde by the assessee in the form of government securities acqr Lired for the purpose of compiyir rg with the requirements cf the provisions of the Banking Rezulat.ion Act i.e., to maintai r SLR, could be treated as trading rsse(/stock- in-trade ol thr business of the assessee? The 4th question considered by the Kerala High Court was as to .whether interest paid for the broken period in the purchase of securities is an allowable deduction? Refer ring to the HCJ & NTRJ I.T.T.A.No.155 of 2OO6 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\" Finally, in 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,KeralaHighCourt held 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 ) 6 (2000) 241 ITR 374 (Ker) 15 I]C-'& NTRJ I.I'.T.A.Ib 155 of 2006 broken period vould constitute allowable outgo irr the hands of the assess€ e and was an admissible deduction in the computation ol total income ol the assessee (banl:) under the head 'profits ar d gains of business or profession,. 23. Adv:rting to the facts of the present cl.se, we find that it is the ,)ontention of the respondent that respondent had been holcing its securities all along as sttck_in_trade which is not i r dispute. For successive assessmenl. yea_rs, , Revenue has rccepted the fact that responden t. had- been holding the s:curities as stock_in_trade. Circrrlar No.66S dated O5.10.1993 of the CBDT has clarified the dec:rsion of the Supreme Court in Vijaya Bank Ltd. (supra i). CBDT has clarilied that rrr here the banks are holding securit es as stock- in-trade and n;t as investments, principles of lau. enunciated in Vijaya Barrk Ltd. (supra 1) would not be applicable. Therefore, CBI)T has clarified that assessing olficer should determine on lhe facts and circumstances of each case as to whether any J articular securitJr constitute stocl:-in-trade or 16 HC] & NTRJ l.T.T.A.No.155 of 2006 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,interestpaidonsuchsecurities would 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 ZAOA 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 questions in favour of the respondent assessee and against the apPellant Revenue ' 27. App.al is accordingly dismissed' However' there shall be no order as to costs' 18 H(U & NTRJ I T-T.A No. 1:;S of 2aO6 28. As a sequel, miscellaneous applicatior s pending, if any, in this Wr it Appeal, shall stand closed. Sd/- g. 1;. CHTRAN JOINT REGIS //TRUE COPY// SEt:TIoN FFICER JEEVI To, VI{ ' il:\":tt:tJ'n: Registrar, lncorne Tax Appeflate Triburrar, Hyderabad Bench 2. '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 5. One CC to SF l. KARTHTK RAMANA PURAMREDDy, r dvoiate [OPUC] 6. Two Spare Cr pies ,- * K HIGH COT'RT UBJ & NTRJ DATED: O4/A tnAZZ JUDGMENT ITTA.No.155 of 2006 Dismissing tt e ITTA, rvithout cost _.\"I (:. .{. +., s GrX\" 7' "