Interest on Securities as Stock-in-Trade Deductible: Court Upholds Tribunal Decision

The Court held that interest paid by the assessee on the purchase of securities constituting stock-in-trade for the broken period is allowable as a deduction. The Tribunal's decision was upheld, concluding that the assessee, a banking company, had purchased securities to hold them as stock-in-trade, making the interest paid for the broken period deductible. The Court distinguished the Supreme Court's decision in *Vijaya Bank Ltd.* and relied on the CBDT's clarification and precedents like *Commissioner of Income Tax v. Nedungadi Bank Ltd.* The appeal by the Revenue was dismissed, and the Tribunal's decision in favor of the respondent assessee was affirmed.

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Issues Involved:
1. Whether the Tribunal was justified in holding that interest paid by the assessee on the purchase of securities constituting stock-in-trade but paid for the broken period is allowable as a deduction.
2. Whether the assessee is entitled to claim deduction of interest paid on the purchase of securities constituting stock for the broken period till the date of acquisition in terms of Section 37 of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deductibility of Broken Period Interest:

The core issue was whether broken period interest paid on the purchase of securities, which constitute stock-in-trade, is allowable as a revenue expenditure. The Tribunal noted that the assessee, a banking company, had purchased securities to hold them as stock-in-trade. The assessee claimed an amount of Rs. 22,95,11,354.00 as broken period interest on the purchase of securities during the relevant assessment year. The assessing officer disallowed this claim, relying on the Supreme Court's decision in *Vijaya Bank Ltd. v. Additional Commissioner of Income Tax* (1991) 187 ITR 541 (SC), which held that such expenditure should be capitalized and not allowed as a deduction. The CIT(A) upheld this decision.

However, the Tribunal, after considering rival submissions and the Supreme Court's decision in *Vijaya Bank Ltd.*, noted that the Central Board of Direct Taxes (CBDT) had issued a clarification distinguishing the decision. The Kerala High Court in *Commissioner of Income Tax v. Nedungadi Bank Ltd.* (2003) 264 ITR 545 also distinguished the Supreme Court's decision, holding that if the securities were held as stock-in-trade, the broken period interest would be an allowable deduction. The Tribunal thus concluded that since the assessee had purchased the securities to hold them as stock-in-trade, the interest paid for the broken period was allowable as a deduction.

2. Applicability of Section 37 of the Income Tax Act, 1961:

The Tribunal's decision was challenged by the Revenue, which argued that the Supreme Court's decision in *Vijaya Bank Ltd.* still held the field. The Revenue also cited the Rajasthan High Court's decision in *Commissioner of Income Tax v. Bank of Rajasthan Limited* 2009 (316) ITR 291, which applied the Supreme Court's decision and answered a similar question in favor of the Revenue.

Conversely, the respondent's counsel argued that the Supreme Court's decision in *Vijaya Bank Ltd.* was distinguishable. The Bombay High Court in *American Express International Banking Corporation v. Commissioner of Income Tax* (2002) 258 ITR 601 (Bom) had distinguished the Supreme Court's judgment and held that the Income Tax Department should have allowed the deduction for broken period interest paid. The Supreme Court in *Commissioner of Income Tax v. Citibank N.A.* 2008 (8) TMI 766 accepted this distinction, agreeing with the Bombay High Court's view that the judgment in *Vijaya Bank Ltd.* would not apply in such cases.

Court's Conclusion:

The Court examined the meaning of "broken period interest" as explained by the Bombay High Court and noted that every bank is required to maintain a Statutory Liquidity Ratio (SLR) and subscribes to government securities, which are transferable. The Reserve Bank of India pays interest on such securities every six months. The Court referred to the Kerala High Court's decision in *Nedungadi Bank Ltd.*, which confirmed that securities held by banks as stock-in-trade allowed for the deduction of broken period interest.

The Court agreed with the Tribunal's finding that the assessee had been holding its securities as stock-in-trade, which was not disputed by the Revenue for successive assessment years. The CBDT's Circular No. 665 dated 05.10.1993 clarified that the principles of law enunciated in *Vijaya Bank Ltd.* would not apply where banks hold securities as stock-in-trade. The Tribunal's finding that the interest paid on such securities was an allowable deduction was upheld by the Court.

Final Judgment:

The Court answered the questions in favor of the respondent assessee and against the appellant Revenue, dismissing the appeal. There was no order as to costs, and any pending miscellaneous applications in the writ appeal were also closed.

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