TaxTMI 
TaxTMI 
2024 (10) TMI 875
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....adur Yadav, AOR Mr. V Chandrashekhara Bharathi, Adv. Mr. Vikrant Yadav, Adv. Mr. Rajesh Kumar Singh, Adv. Mr. Sanjay Kapur, AOR Mr. Surya Prakash, Adv. Ms. Divya Singh Pundir, Adv. Mr. Devesh Dubey, Adv. Mr. Arjun Bhatia, Adv. Mrs. Shubhra Kapur, Adv. Ms. Mahima Kapur, Adv. Ms. Isha Virmani, Adv. Mr. Sanjay Jhanwar, Sr. Adv. Mr. Prakul Khurana, Adv. Mr. Rajat Sharma, Adv. Mr. Gourav Asati, Adv. Mr. Yash Tandon, Adv. Mr. Tarun Gupta, AOR Mr. Pranab Kumar Mullick, AOR Mrs. Soma Mullick, Adv. Mr. Sanjiv M Shah, Adv. Mr. Sebat Kumar Deuria, Adv JUDGMENT ABHAY S. OKA, J. 1. Leave granted in the Special Leave Petitions. FACTUAL ASPECTS 2. The main issue in this group of appeals is about the treatment to be given to broken period interest. The question is whether a deduction of the broken period interest can be claimed. We must provide a brief background of how the issue arises. 3. A Scheduled Bank is governed by the provisions of the Banking Regulation Act, 1949 (for short, "the 1949 Act"). The 1949 Act, read with the guidelines of the Reserve Bank of India (for short, 'RBI'), requires Banks to purchase government securities to maintain the Statutory Liquidity Ratio (for short, '....
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....by it on the purchase of securities (i.e., interest for the broken period) against the interest recovered by it on the sale of securities and offering the net interest income to tax. The result is that if the entire purchase price of the security, including the interest for the broken period is allowed as a deduction, then the entire sale price of the security is taken into consideration for computing the appellant's income. According to the appellant's case, the assessing officer allowed this settled practice while passing regular assessment orders for the assessment years 199091 to 199293. However, the Commissioner of Income Tax (for short, 'CIT') exercised jurisdiction under Section 263 of the IT Act and interfered with the assessment orders. The CIT held that the appellant was not entitled to the deduction of the interest paid by it for the broken period. The Commissioner relied upon a decision of this Court in the case of Vijaya Bank Ltd. v. Additional Commissioner of Income Tax, Bangalore1. This Court held that under the head "interest on securities", the interest for a broken period was not an allowable deduction. Being aggrieved by the orders of the CIT, the appellant p....
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.... of American Express International Banking Corporation2 has been approved by the order dated 12th August 2008 of this Court in the case of Commissioner of Income Tax, Bombay v. Citi Bank NA Civil Appeal No. 1549 of 2006. The learned counsel pointed out that this Court affirmed the decision of the Bombay High Court in the case of Citi Bank NA3, which in turn relied upon its earlier decision in the case of American Express International Banking Corporation2. c. Our attention was also invited to a decision by this Court in the case of Commissioner of Income Tax, Andhra Pradesh, Hyderabad v. The Cocanada Radhaswami Bank Ltd., Kakinada (1965) 57 ITR 306 : 1965 SCC OnLine SC 186. Inviting our attention to the said decision, it is pointed out that this Court accepted that the securities held by Banking companies are held as stock-in-trade. He pointed out that this Court, in the case of United Commercial Bank Ltd.; Calcutta v. Commissioner of Income Tax, West Bengal (1957) 32 ITR 688 : 1957 SCC OnLine SC 74, held that government securities are held as stock-in-trade by Banking companies. He submitted that the assessee pays interest for the broken period to which he is not entitled as aft....
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....out that if the deduction of broken period interest as a capital expense is disallowed, it will have to be added to the acquisition cost of the securities, which will then be deducted from the sale proceeds when such securities are sold in the subsequent years. It was submitted that, consequently, the related interest received would have to be excluded from the income and truncated from the purchase cost, or alternatively, both the broken interest period and interest received thereof will be netted and added/subtracted from the cost of acquisition. Therefore, the exercise done by the Department is academic. It was submitted that the decision of this Court in the case of Vijaya Bank Ltd.1 is per incuriam as it was rendered in ignorance of the decisions of this Court in the case of Cocanada Radhaswami Bank Ltd4. Reliance was also placed on the Central Board of Direct Taxes (for short, "the CBDT") Circular No. 665 of 1993. g. It was also pointed out that though Banks are required to maintain SLR by investing amounts in specified securities, as long as Banks maintain a specified percentage of reserve, they are permitted to buy and sell such securities, irrespective of their categoris....
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....e of the treatment of SLR securities vizaviz non SLR securities has been raised for the first time by the Revenue before this Court. l. Considering the fact that securities are held as stock-in-trade, interest paid on them constitutes an expense which is liable to be claimed as a deduction. 9. The submission of learned ASG is that the broken period interest on security held to maturity constitutes an investment and, therefore, should be treated as capital expenditure. It was submitted that since HTM securities are held up to maturity for maintaining the SLR ratio and as the same are treated as investment in the books of accounts of Banks, the same should be treated as investment and not Stock-In-Trade. Another submission of ASG is that Circular No. 18 of 2015 applies only to nonSLR securities. Another submission of learned ASG is that the decision of Vijaya Bank Ltd.1 would squarely apply as while omitting Sections 18 to 21, corresponding amendments have been made in Sections 28, 56(2)(d) and 57(3) of the IT Act, and the securities are now taxable under the head of "Income from other Sources". Therefore, the principles laid down in the case of Vijaya Bank Ltd.1 will squarely app....
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....the nature of capital expenditure expended wholly and exclusively for the purposes of making or earning such income. In the case of interest on securities, any reasonable sum paid for the purposes of realising interest is also entitled to deduction under Section 57 of the IT Act. DECISIONS STARTING FROM THE CASE OF VIJAYA BANK LTD .1 11. The first decision which needs consideration is in the case of Vijaya Bank Ltd1. Regarding the facts of the said case, it must be noted that the income of the Bank was not assessed under Section 28 of the IT Act but under Section 18 under the Head "interest on securities". In the context of the applicability of Section 18 of the IT Act, the Bank claimed that the broken period's interest was deductible under Sections 19 and 20. In light of these facts, this Court held that the outlay on the purchase of income bearing assets was a capital outlay. Therefore, no part of the capital outlay can be set off as expenditure against income from the asset in question. 12. A Division Bench of the Bombay High Court, in the case of American Express International Banking Corporation2, dealt with the decision in the case of Vijaya Bank Ltd1. We are extensiv....
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.... broken period interest payment made to the selling/transferor Bank. That, it was not open to the assessee to claim deduction as revenue expenditure for broken period interest payment as no such deduction was permissible under sections 19 and 20 of the Incometax Act. That, it was not a sum expended by the assessee for realizing interest under section 19 and, therefore, the assessee was not entitled to claim deduction for broken period interest payment as a revenue expenditure under section 28 of the Incometax Act. In this connection, the department followed the judgment of the Karnataka High Court in Vijaya Bank's case. Therefore, the point which we are required to consider in this case is: Whether the judgment of the Karnataka High Court in Vijaya Bank's case was applicable to the facts of the present case. 19. Before going further we may mention at the very outset that the security in this case was of the face value of Rs. 5, lakhs. It was bought for a lesser amount of Rs. 4,92,000.00. The difference was of Rs. 8,000.00. The assessee has revalued the security. The assessee offered the notional profit for taxation, as explained herein above, on accrual basis in the appr....
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....ringing the amount to tax under the head "business", the department taxed the broken period interest received on sale, but at the same time, disallowed broken period interest payment at the time of purchase and this led to the dispute. Having assessed the amount received by the assessee under section 28, the only limited dispute was whether the impugned adjustments in the method of accounting adopted by the assessee Bank should be discarded. Therefore, the judgment in Vijaya Bank's case has no application to the facts of the present case. If the department had brought to tax, the amounts received by the assessee Bank under section 18, then Vijaya Bank's case was applicable. But,in the present case, the department brought to tax such amounts under section 28 right from the inception. Therefore, the Tribunal was right in coming to the conclusion that the judgment in Vijaya Bank's case did not apply to the facts of the present case. However, before us, it was argued on behalf of the revenue that in view of the judgment in Vijaya Bank's case, even if the securities were treated as part of the trading assets, the income therefrom had to be assessed under section 18 of th....
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.... securities was assessable under section 10 of the Incometax Act, 1922 (similar to section 28 of the present Act). It is for this reason that in the subsequent judgment of the Supreme Court in the case of Radhaswami Bank Limited (supra), that the Supreme Court has observed, after reading UCO Bank's case, that where securities were part of trading assets, income by way of interest on such securities could come under section 10 of the Income tax Act 1922. 20. In the light of what we have discussed hereinabove, 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 had no application to the facts of the case. That, having assessed the income under section 28, the department ought to have taxed interest for broken period interest received and the department ought to have allowed deduction for broken period interest paid." (emphasis added) 13. In the case of Citi Bank NA3, the question before this Court was whether interest paid for the broken period should not be considered ....
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....ard from the preceding year to the succeeding year and set off under Section 22(4) of the Act against the income from securities held by the assessee. 4. Learned counsel for the assessee, on the other hand, contended that though for the purpose of computation of income, the income from securities and the income from business were calculated separately, in a case where the securities were part of the trading assets of the business, the income therefrom was part of the income of the business and, therefore, the losses incurred under the head "business" could be set off during the succeeding years against the total income of the business i.e. income from the business including the income from the securities. 5. The relevant section of the Act which deals with the matter of set off of losses in computing the aggregate income is Section 24. The relevant part of it, before the Finance Act, 1955, read: "(1) Where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in Section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year: *** (2) Where any assesse....
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....e which yielded the income form part of the trading assets of the assessee? The Tribunal and the High Court found that they were the assessee's trading assets and the income therefrom was, therefore, the income of the business. If it was the income of the business, Section 24(2) of the Act was immediately attracted. If the income from the securities was the income from its business, the loss could, in terms of that section, be set off against that income. 6. A comparative study of subsections (1) and (2) of Section 24 yields the same result. While in subsection (1) the expression "head" is used, in subsection (2) the said expression is conspicuously omitted. This designed distinction brings out the intention of the legislature. The Act provides for the setting off of loss against profits in four ways. To illustrate, take the head "profits and gains of business, profession or vocation". An assessee may have two businesses. In ascertaining the income in each of the two businesses, he is entitled to deduct the losses incurred in respect of each of the said businesses. So calculated, if he has loss in one business and profit in the other both falling under the same head, he can ....
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....r source. On that reasoning this Court held that even though the securities were part of the trading assets of the company doing business, the income therefrom had to be assessed under Section 8 of the Act. This decision does not say that the income from securities is not income from the business. Nor does the decision of this Court in East India Housing and Land Development Trust Ltd. v. CIT [(1961) 42 ITR 49] support the contention of the Revenue. There, a company, which was incorporated with the objects of buying and developing landed properties and promoting and developing markets, purchased 10 bighas of land in the town of Calcutta and set up a market therein. The question was whether the income realised from the tenants of the shops and stalls was liable to be taxed as "business income" under Section 10 of the Income Tax Act or as income from property under Section 9 thereof. This Court held that the said income fell under the specific head mentioned in Section 9 of the Act. This case also does not lay down that the income from the shops is not the income in the business. In CIT v. Express Newspapers Ltd [(1964) 53 ITR 250, 260] this Court held that both Section 26(2) and the....
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....he purposes of computation of the total income : by that break up the income does not cease to be income of the business, the different heads of income being only the classification prescribed by the Indian Income Tax Act for computation of income."" (emphasis added) The same principles apply to the cases in hand. 15. In the case of Bihar State Cooperative Bank Ltd.7, in paragraph 2 (SCC report), this Court set out the questions involved which read thus : "2. In its return the appellant showed these various sums as "other sources", but nothing turns on the manner in which the appellant chose to show this income in its return. The Income Tax Officer, however, assessed the interest for these three years under Section 12 of the Income Tax Act, as income from "other sources". The appellant took an appeal to the Appellate Assistant Commissioner where it was contended that as the business of the appellant Bank consisted of lending money and the deposits had been made not for the purpose of investment but for that business and thereby fulfilling the purpose for which the cooperative Bank was constituted, these various sums of interest were not subject to income tax because of the ....
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....rative society extended to its sphere of cooperative activities and therefore interest from investments was no part of the appellant's business profits exempt from taxation. Against this order an appeal was taken to the Income Tax Appellate Tribunal and it was there contended that the Bank did not make the deposits as investments, but in order that cash might be available to the appellant "continuously" for the carrying on of the purposes of its business, and that the deposits were intimately connected with the business of the appellant and therefore the interest should have been held to be profits arising from the business activities of the Bank, and that the finding that the shortterm deposits in Imperial Bank were separate from the appellant's Banking business was erroneous. The Income Tax Appellate Tribunal, by its order dated 1141955, held: "(1) That the interest was an income rightly to be included under the head of 'other sources'. *** (2) The profits of a cooperative society indicates the profit derived from the business which can be truly called the business of the cooperative society. Investments by the society either in securities or in shares or in Bank....
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.... made on it. It was however argued that in the instant case the moneys had been deposited with Imperial Bank on long term deposits inasmuch as they were deposited for one year and were renewed from time to time also for a year; but as is shown by the accounts these deposits fell due at short intervals and would have been available to the appellant had any need arisen. 10. Stress was laid on the use of the word "surplus" both by the Tribunal as well as by the High Court and it was also contended before us that in the byelaws under the heading "business of the Bank" it was provided that the Bank could "invest surplus funds when not required for the business of the Bank in one or more ways specified in Section 19 of the Bihar Act (Clause 4 III(i) of the bye Laws). Whether funds invested as provided in Section 19 of the Bihar Act would be surplus or not does not arise for decision in this case, but it has not been shown that the moneys which were in deposit with other Banks were "surplus" within that byelaw so as to take it out of Banking business. As we have pointed out above, it is a normal mode of carrying on Banking business to invest moneys in a manner that they are readily ....
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....t profits made on the sale of investments are taxable, for example, the dicta in the case of Commissioners of Inland Revenue v. Scottish Automobile and General Insurance Co. [(191316) 6 Tax Cas. 381, at pp. 388, 389.] , cannot now be relied on. It is well established, to cite the exact words used in Californian Copper Syndicate v. Harris [(1904) 6 F. 894 : 5 Tax Cas. 159.]. "that enhanced values obtained from realization or conversion of securities may be so assessable where what is done is not merely a realization or change of investment, but an act done in what is truly the carrying on, or carrying out, of a business". In the ordinary case of a Bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the Bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the Banker has always to keep enough cash or easily realisable securities to meet any probable demand by the depositors. No doubt there will generally be loans to persons of undoubted solvency which can quickly be called in, but it may be very....
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....he entire interest earned or accrued during the particular year is put to tax. Thus, what is taxed is the real income earned on the securities. By selling the securities, Banks will earn profits. Even that will be the income considered under Section 28 after deducting the purchase price. Therefore, in these two categories of securities, the benefit of deduction of interest for the broken period will be available to Banks. 20. If deduction on account of broken period interest is not allowed, the broken period interest as capital expense will have to be added to the acquisition cost of the securities, which will then be deducted from the sale proceeds when such securities are sold in the subsequent years. Therefore, the profit earned from the sale would be reduced by the amount of broken period interest. Therefore, the exercise sought to be done by the Department is academic. 21. The securities of the HTM category are usually held for a long term till their maturity. Therefore, such securities usually are valued at cost price or face value. In many cases, Banks hold the same as investments. Whether the Bank has held HMT security as investment or stock-in-trade will depend on the fa....
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....e facts of the case, as the securities were treated as stock-in-trade, the interest on the broken period cannot be considered as capital expenditure and will have to be treated as revenue expenditure, which can be allowed as a deduction. The impugned judgment is based on the decision in the case of Vijaya Bank Ltd.1 It also refers to the decision of the Bombay High Court in the case of American Express International Banking Corporation2 and holds that the same was not correct. As noted earlier, the view taken in the American Express International Banking Corporation2 case has been expressly upheld by this Court in the case of Citi Bank NA3. Therefore, the impugned judgment cannot be sustained, and the view taken by the Tribunal will have to be restored. 25. Now, we come to other appeals which are part of this group. In Civil Appeal @Special Leave Petition (C) Nos.1445-1446 of 2021, the assessing officer held that the respondent Bank was liable to pay the broken period of interest as part of the price paid for the securities. Hence, a deduction on the said amount was disallowed. The assessee could not succeed before the CIT (Appeals). Before the Appellate Tribunal, reliance was pla....