2008 (8) TMI 766 - SC - Income Tax

Broken-period interest paid on purchased securities deductible as revenue expenditure in year of purchase; corresponding receipt taxable

The SC held that interest paid for a broken period on purchased securities need not be treated as part of purchase price but may be allowed as revenue ... Interest paid for broken period - Whether, the High Court was right in law in holding, that, the interest paid for broken period should not be considered as part of the purchase price, but should be allowed as revenue expenditure in the Year of purchase of securities - assessee purchased securities - contended that the price paid for 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 - HELD THAT:- We find that the assessee's method of accounting does not result in loss of tax/revenue for the Department. That, there was no need to interfere with the method of accounting adopted by the assessee- bank. That, the judgment in the case of Vijaya Bank Ltd. [1990 (9) TMI 5 - SUPREME COURT], had no application to the facts of the case. That, having assessed income under section 28, the Department ought to have taxed interest for the broken period interest received and the Department ought to have allowed deduction for the broken period interest paid. After going through the facts which are similar to the facts in American Express [2002 (9) TMI 96 - BOMBAY HIGH COURT], since the tax effect is neutral, the method of computation adopted by the assessee and accepted by the revenue cannot be interfered with. We agree with the view expressed by the Bombay High Court in American Express (supra). Thus, the question posed before us is answered in the affirmative i.e. in favour of the assessee and against the revenue. Issues:Interpretation of whether interest paid for broken period should be considered as part of the purchase price or allowed as revenue expenditure in the year of purchase of securities.Analysis:The Supreme Court was presented with the issue of whether interest paid for a broken period should be treated as part of the purchase price or considered as revenue expenditure in the year of purchasing securities. The High Court had ruled in favor of the assessee, following its earlier decision in the case of American Express vs. CIT. The revenue had filed special leave petitions which were dismissed on various grounds. The counsel for the assessee argued that previous orders concluded the issue against the revenue. However, the revenue relied on a judgment in the case of Vijaya Bank Ltd. to argue in favor of their position.The Bombay High Court had distinguished the Vijaya Bank Ltd. case by emphasizing specific details of the securities transaction in question. The Court highlighted that the method of accounting adopted by the assessee did not result in loss of tax revenue for the Department. It was noted that the tax effect was neutral, and therefore, there was no need to interfere with the assessee's method of computation. The Court agreed with the Bombay High Court's view that the judgment in Vijaya Bank Ltd. did not apply to the present case due to similar facts with American Express and neutral tax implications.The Supreme Court ultimately dismissed the appeal, upholding the decision in favor of the assessee and against the revenue. The Court agreed that the method of computation adopted by the assessee, which was accepted by the revenue, should not be interfered with. The judgment emphasized the importance of analyzing the specific facts of each case to determine the appropriate tax treatment, as demonstrated by the distinctions made between different cases cited during the proceedings.In conclusion, the Supreme Court's judgment clarified the treatment of interest paid for broken periods in securities transactions, emphasizing the significance of specific factual details and the neutral tax effect on the decision-making process. The Court's ruling in this case favored the assessee based on the specific circumstances and the method of computation adopted, as accepted by the revenue.