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Issues: (i) Whether broken period interest paid by a bank on purchase of securities is allowable as a deduction after deletion of sections 18 to 21 of the Income-tax Act, 1961. (ii) Whether the Tribunal was justified in setting aside the Commissioner's revision under section 263 of the Income-tax Act, 1961.
Issue (i): Whether broken period interest paid by a bank on purchase of securities is allowable as a deduction after deletion of sections 18 to 21 of the Income-tax Act, 1961.
Analysis: The Court held that the deletion of sections 18 to 21 did not materially alter the legal position governing the tax treatment of broken period interest. The governing principle remained that the price paid for securities, including the accrued interest component embedded in the purchase price, is part of the capital cost of acquiring the income-bearing asset and cannot be split out as a deductible expenditure. The Court followed the ratio of the Supreme Court decision in Vijaya Bank Ltd. and rejected the view that assessment of the interest component under the head of business income under section 28 automatically converted the paid broken period interest into an allowable business deduction. The decision in American Express International Banking Corporation was not accepted as laying down a correct contrary principle.
Conclusion: Broken period interest paid on purchase of securities is not allowable as a deduction; the issue is decided against the assessee.
Issue (ii): Whether the Tribunal was justified in setting aside the Commissioner's revision under section 263 of the Income-tax Act, 1961.
Analysis: Once the Court held that the assessee was not entitled to deduct broken period interest, the assessment order allowing such claim was erroneous and prejudicial to the interests of the Revenue. The Tribunal's view that the Commissioner had erred in exercising revisionary power could not be sustained because it rested on the incorrect assumption that the deduction was legally permissible.
Conclusion: The Tribunal was not justified in interfering with the Commissioner's order under section 263; the issue is decided in favour of the Revenue.
Final Conclusion: The appeals succeeded for the Revenue, the Tribunal's order was set aside, and the Commissioner's revisionary order was restored.
Ratio Decidendi: Broken period interest paid on acquisition of securities forms part of the cost of the securities and is not deductible as revenue expenditure merely because the corresponding interest income is assessed under the head of business income.
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