AI Drafter 
TaxTMI 
TaxTMI 
2024 (10) TMI 875
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....Mr. Rupesh Kumar, Sr. Adv. Mr. Raj Bahadur 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 main....
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....f setting off and netting the amount of interest paid 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. Bei....
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....ees pointed out that the view taken by the Bombay High Court in the case 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 ....
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.... period interest on the footing that it is a capital expenditure is revenue neutral. It was pointed 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....
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....to the other two categories. k. It was further urged on behalf of the assessee that the plea based on distinguishing the nature 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 n....
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....ome tax under any of the five heads provided in Section 14. Therefore, interest on investments may be covered by Section 56. Section 57 provides for the deduction of expenditure not being in 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 ques....
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....e department, the income which the assessee Bank received came under section 18 of the Incometax Act interest on securities. Under the circumstances, it was not open to the assessee Bank to claim deduction for 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 lesse....
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....et in question. In our case, the amount which the assessee received has been brought to tax under the head "business" under section 28. The amount is not brought to tax under section 18 of the Incometax Act. After bringing 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 ar....
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.... was remitted back as it was contended on behalf of UCO Bank that the securities in question were a part of trading assets held by the assessee in the course of its business and the income by way of interest on such 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....
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....Revenue argued that the income from business and securities fell under different heads, namely, Section 10 and Section 8 of the Act respectively, that they were mutually exclusive and, therefore, the losses under the head "business" could not be carried forward 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) W....
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....me from business if the securities are part of the trading assets. Whether a particular income is part of the income from a business falls to be decided not on the basis of the provisions of Section 6 but on commercial principles. To put it in other words, did the securities in the present case 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 vocat....
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....own any different proposition. It held, after an exhaustive review of the authorities, that under the scheme of the Income Tax Act, 1922, the head of income, profits and gains enumerated in the different clauses of Section 6 were mutually exclusive, each specific head covering items of income arising from a particular 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 Sectio....
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.... 7 to 10 and 12, 12A, 12AA and 12B are intended merely to indicate the classes of income : the heads do not exhaustively delimit sources from which income arises. This is made clear in the judgment of this Court in the United Commercial Bank Ltd. case [(1958) SCR 79] , that business income is broken up under different heads only for the 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 C....
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....d clearly that "not the exigencies of pressing necessities, but the motives of investment of surplus fund had actuated the deposits". He therefore held that the fixed deposits with Imperial Bank were held as an investment quite apart from the business of the appellant and the interest from these deposits was not exempt from income tax. He further held that the exemption as to the profit of a cooperative 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....
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....et their demands if and when they arise the Bank has always to keep sufficient cash or easily realisable securities. That is a normal step in the carrying on of the Banking business. In other words that is an act done in what is truly the carrying on or carrying out of a business. It may be added that another mode of conducting business of a Bank is to place its funds in deposit with other Banks and that also is to meet demands which may be 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 ....
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....e v. Harris [(1904) 6 F. 894 : 5 Tax Cas. 159.] and the statement has been more than once approved both in the House of Lords and in the Judicial Committee: See for example Commissioner of Taxes v. Melbourne Trust Ltd. [1914 A.C. 1001 at p. 1010.]. Some dicta which appear to support the view that it is necessary to prove that the taxpayer has carried on a separate or severable business of buying and selling investments with a view to profit in order to establish that 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 wit....
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....e dated 16th October 2000, there are three categories of securities: HTM, AFS and HFT. As far as AFS and HFT are concerned, there is no difficulty. When these two categories of securities are purchased, obviously, the same are not investments but are always held by Banks as stock-in-trade. Therefore, the interest accrued on the said two categories of securities will have to be treated as income from the business of the Bank. Thus, after the deduction of broken period interest is allowed, the 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 subseque....
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....he securities were held as stock-in-trade, the income thereof was chargeable under Section 28 of the IT Act. Even the assessing officer observed that considering the repeal of Sections 18 to 21, the interest on securities would be charged as per Section 28 as the securities were held in the normal course of his business. The assessing officer observed that the appellantBank, in its books of accounts and annual report, offered taxation on the basis of actual interest received and not on a due basis. 24. Therefore, in the 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 ....