No Acts & Articles mentioned in this case
2024 INSC 781 REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS. 32913294 OF 2009
Bank of Rajasthan Ltd. … Appellant
versus
Commissioner of Income Tax … Respondent
with
Civil Appeal Nos.1120011201 of 2024
(Arising out of S.L.P. (C) Nos. 14451446 of 2021)
Civil Appeal No.11202 of 2024
(Arising out of S.L.P. (C) No. 4843 of 2020)
Civil Appeal No.11203 of 2024
(Arising out of S.L.P. (C) No. 7055 of 2021)
Civil Appeal No.11204 of 2024
(Arising out of S.L.P. (C) No. 7404 of 2021)
Civil Appeal No.11205 of 2024
(Arising out of S.L.P. (C) No. 15281 of 2021)
Civil Appeal No.11196 of 2024
(Arising out of S.L.P. (C) No. 1686 of 2021)
Civil Appeal No.11197 of 2024
(Arising out of S.L.P. (C) No. 1687 of 2021)
Civil Appeal No.32913294 of 2009, etc. Page 1 of 45
Civil Appeal No.11198 of 2024
(Arising out of S.L.P. (C) No. 8968 of 2018)
Civil Appeal No.11199 of 2024
(Arising out of S.L.P. (C) No. 24841 of 2019)
and
Civil Appeal No. 4755 of 2023
(Arising out of S.L.P. (C) No. 16299 of 2023)
J U D G M E N T
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, ‘SLR’). The guidelines dated 16
th
October
2000 issued by the RBI categorise the government securities
Civil Appeal No.32913294 of 2009, etc. Page 2 of 45
into the following three categories: (a) Held to Maturity (HTM);
(b) Available for Sale (AFS); and (c) Held for Trading (HFT).
4.The interest on the securities is paid by the Government
or the authorities issuing securities on specific fixed dates
called coupon dates, say after an interval of six months.
When a Bank purchases a security on a date which falls
between the dates on which the interest is payable on the
security, the purchaser Bank, in addition to the price of the
security, has to pay an amount equivalent to the interest
accrued for the period from the last interest payment till the
date of purchase. This interest is termed as the interest for
the broken period. When the interest becomes due after the
purchase of the security by the Bank, interest for the entire
period is paid to the purchaser Bank, including the broken
period interest. Therefore, in effect, the purchaser of
securities gets interest from a date anterior to the date of
acquisition till the date on which interest is first due after the
date of purchase.
5.Under the Income Tax Act, 1961 (for short, ‘the IT Act’),
Section 18, which was repealed by the Finance Act, 1988,
dealt with tax leviable on the interest on securities. Section 19
provided for the deduction of (i) expenses in realising the
interest and (ii) the interest payable on the money borrowed
for investment. Section 20 dealt with the deduction of (i)
expenses in realising the interest and (ii) the interest payable
on money borrowed for investment in the case of a Banking
Civil Appeal No.32913294 of 2009, etc. Page 3 of 45
company. Section 21 provided that the interest payable
outside India was not admissible for deduction. Sections 18 to
21 were repealed by the Finance Act, 1988, effective from 1
st
April 1989. We are dealing with cases involving the period
post the deletion of the four Sections.
6. In Civil Appeal Nos.32913294 of 2009, which is the
lead case, the appellantassessee is a Scheduled Bank. The
appellant was engaged in the purchase and sale of
government securities. The securities were treated as stock
intrade in the hands of the appellant. The amount received
by the appellant on the sale of the securities was considered
for computing its business income. The appellant
consistently followed the method of 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
Civil Appeal No.32913294 of 2009, etc. Page 4 of 45
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,
Bangalore
1
. 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 preferred an appeal before the Income Tax
Appellate Tribunal (for short, ‘Appellate Tribunal’). The
Tribunal allowed the appeal by holding that the decision of
this Court in the case of Vijaya Bank Ltd.
1
was rendered
after considering Sections 18 to 21 of the IT Act, which have
been repealed. Therefore, the Tribunal held that as the
appellant was holding the securities as stockintrade, the
entire amount paid by the appellant for the purchase of such
securities, which included interest for the broken period, was
deductible. The respondent Department preferred an appeal
before the High Court against the decision of the Appellate
Tribunal. By the impugned judgment, the High Court
interfered and, relying upon the decision of this Court in the
case of Vijaya Bank Ltd.
1
, allowed the appeal. This order
was impugned in Civil Appeal Nos. 32913294 of 2009.
7.All other appeals that are the subject matter of this
group are preferred by the Revenue. These are the cases
where the deduction of interest for the broken period was
allowed.
1 (1991) Supp (2) SCC 147
Civil Appeal No.32913294 of 2009, etc. Page 5 of 45
8.The learned counsel appearing for the appellant in Civil
Appeal Nos. 32913294 of 2009 and learned counsel
representing the respondents/Banks in other appeals have
made extensive submissions. The submissions made by the
learned counsel appearing for the assessees can be
summarised as follows:
a.Reliance was placed on a decision of the Bombay High
Court in the case of American Express International
Banking Corporation v. Commissioner of Income
Tax & Anr.
2
Learned counsel pointed out that in the
said decision, the Bombay High Court distinguished the
decision in the case of Vijaya Bank Ltd.
1
by holding
that in the case of Vijaya Bank Ltd.
1
, the claim for
deduction of interest on broken period was made under
Sections 19 and 20 of the IT Act. This was done on the
footing that the Department had brought to tax the
interest accrued on the securities up to the date of
purchase as “interest on securities” under Section 18.
It was held that the decision in the case of Vijaya Bank
Ltd.
1
will not apply to the cases postrepeal of Sections
18 to 21 of the IT Act. In the said case, the amount of
interest was brought into tax under Section 28.
b.The learned counsel appearing for the assessees pointed
out that the view taken by the Bombay High Court in
2 (2002) 258 ITR 601 (Bombay) : 2002 SCC OnLine Bom 944
Civil Appeal No.32913294 of 2009, etc. Page 6 of 45
the case of American Express International Banking
Corporation
2
has been approved by the order dated 12
th
August 2008 of this Court in the case of Commissioner
of Income Tax, Bombay v. Citi Bank NA
3
. The
learned counsel pointed out that this Court affirmed the
decision of the Bombay High Court in the case of Citi
Bank NA
3,
which in turn relied upon its earlier decision
in the case of American Express International
Banking Corporation
2
.
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
4
. 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 stockintrade. He pointed out
that this Court, in the case of United Commercial
Bank Ltd.; Calcutta v. Commissioner of Income Tax,
West Bengal
5
, held that government securities are held
as stockintrade by Banking companies. He submitted
that the assessee pays interest for the broken period to
which he is not entitled as after the purchase, when the
interest becomes due, the assessee gets income for the
3 Civil Appeal No. 1549 of 2006
4 (1965) 57 ITR 306 : 1965 SCC OnLine SC 186
5 (1957) 32 ITR 688 : 1957 SCC OnLine SC 74
Civil Appeal No.32913294 of 2009, etc. Page 7 of 45
entire period even covering the interest payable before
the date on which the assessee makes the acquisition.
It is submitted that there cannot be any dispute that
such securities held by Banking companies constitute
stockintrade. He submitted that in the case of
Commissioner of Income Tax, Jalandhar v.
Nawanshahar Central Cooperative Bank Ltd.
6
, it
was held that investments are a part of the Banking
business, particularly when statutorily mandated. It
was submitted that Banking companies buy government
securities to comply with SLR requirements.
d.It is wellsettled that in the Banking business, securities
purchased by Banks, per se, constitute stockintrade of
the Bank as normal and ordinary Banking business is
to deal in money credit. The money is parked in readily
marketable securities so that it is available to meet the
demand of depositors. This argument is supported by a
decision of this Court in the case of Bihar State Co
operative Bank Ltd. v. Commissioner of Income
Tax
7
.
e.It was contended that when the interest income of
securities is uniformly assessed under the head “profits
and gains from business or profession”, the decision of
this Court in the case of Citi Bank NA
3
will squarely
6 (2007) 289 ITR 6 : (2007) 15 SCC 611
7 (1960) 39 ITR 114 : 1960 SCC OnLine SC 193
Civil Appeal No.32913294 of 2009, etc. Page 8 of 45
apply. It was submitted that in the case of many Banks,
for several assessment years, the assessment officer
allowed the deduction of interest for the broken period.
Reliance was placed on a decision of this Court in the
case of M/s. Radhasoami Satsang, Saomi Bagh, Agra
v. Commissioner of Income Tax
8
.
f.It was submitted that IndusInd Bank Ltd. is following a
practice that interest accrued on a security but not due
on the date of purchase of security is debited to the
profit and loss account as expenditure and is claimed as
such in return of income. The balance amount
remaining after reducing the broken period interest is
capitalised to the balance sheet covering the acquisition
cost of such securities. It is submitted that the
department has accepted the said methodology for
several years. It was submitted that the exercise
undertaken by Revenue in disallowing broken 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,
8 (1992) 193 ITR 321 : (1992) 1 SCC 659
Civil Appeal No.32913294 of 2009, etc. Page 9 of 45
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
Ltd
4
. 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 categorisation.
There is no embargo on the Bank to hold security in
SLR up to the maturity date of the security. It was
submitted that Banks always treat interest income from
all securities as profit or loss, irrespective of the
categorisation of investments. The interest on securities
held by Banks is always taxed under the head “income
from business or profession”. This contention is raised
by HDFC Bank. It was submitted that in accordance
with the wellsettled and accepted method of
accounting, the amount of broken period of interest
Civil Appeal No.32913294 of 2009, etc. Page 10 of 45
which is debited in the profit and loss account of the
Bank is claimed as a deduction while computing the
income from business under the head “income from
business and profession” as the entire interest income is
offered to tax under the said head.
h.Reliance was placed on the RBI Circular dated 1
st
July
2009, which permits the debit of broken period interest
to the profit and loss account. Reliance was also placed
on a Circular dated 2
nd
November 2015 issued by the
CBDT. The Circular provides that the investments made
by a Banking company are a part of the business of the
Bank. Therefore, income from such investments is
attributable to the business of Banking falling under the
head “profit and gain of business and profession”.
i.It was submitted that assuming that as per the mandate
of the 1949 Act, the securities are treated as
investments in the books of accounts, it cannot be held
that even for the purposes of the IT Act, securities would
continue to be investments and not stockintrade. It
was submitted that this Court has repeatedly held that
the entries in the books of accounts are not relevant for
determining the taxability under the provisions of the IT
Act. Reliance is placed on the RBI Circular dated 1st
July 2009, which provides that broken period interest is
not to be capitalised as part of the cost and is required
to be debited to the profit and loss account.
Civil Appeal No.32913294 of 2009, etc. Page 11 of 45
j.It is submitted that as required by the Banking
Regulation Act, all three categories of securities are
treated in the same manner, and there is no distinction
between the securities which are HTM and the other two
categories of securities. It was submitted that Banks can
always shift the securities falling in the category of HTM
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 nonSLR securities has been
raised for the first time by the Revenue before this
Court.
l.Considering the fact that securities are held as stockin
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
stockintrade. 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
Civil Appeal No.32913294 of 2009, etc. Page 12 of 45
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 apply. He argued that
the increase in capital by the acquisition of securities results
in the expansion of the Bank's capital base, which helps in
profit making. Therefore, the expenditure in the nature of
broken period interest was capital expenditure. Learned
ASG, thus, submitted that the assessees in these cases will
not be entitled to a deduction of broken period interest.
CONSIDERATION OF LEGAL POSITION
10.We deal with the legal position at the outset. As noted,
Sections 18 to 21 were deleted from 1
st
April 1989. In this
group of appeals, we are not concerned with cases before the
financial year 198889. Section 14 of the IT Act reads thus:
“14. Heads of income.— Save as otherwise
provided by this Act, all income shall, for the
purposes of charge of incometax and
computation of total income, be classified under
the following heads of income:—
A.—Salaries.
B. * * * * *
C.—Income from house property.
D.—Profits and gains of business or
profession.
E.—Capital gains.
F.—Income from other sources.”
Civil Appeal No.32913294 of 2009, etc. Page 13 of 45
Clause B was of “interest on securities”. It was deleted with
effect from 1
st
April 1989 along with Sections 18 to 21, which
dealt with interest on securities. Head ‘D’ is of income from
“profits and gains of business or profession” covered by
Section 28 of the IT Act. Profits and gains from any business
or profession that the assessee carried out at any time during
the previous year are chargeable to income tax. Under
Section 36(1)(iii), the assessee is entitled to a deduction of the
amount of interest paid in respect of capital borrowed for the
purposes of the business or profession. Section 37 provides
that any expenditure which is not covered by Sections 30 to
36 and not being in the nature of capital expenditure, laid out
or expended wholly and exclusively for the purposes of the
business or profession shall be allowed for computing the
income chargeable under the head “profits and gains of
business or profession”. Section 56 of the IT Act provides that
income of every kind which is not to be excluded from the
total income under the IT Act shall be chargeable to income
tax under the head “income from other sources” if it is not
chargeable to income 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.
Civil Appeal No.32913294 of 2009, etc. Page 14 of 45
DECISIONS STARTING FROM THE CASE OF VIJAYA BANK
LTD.
1
11.The first decision which needs consideration is in the
case of Vijaya Bank Ltd
1
. 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 incomebearing 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 Corporation
2
,
dealt with the decision in the case of Vijaya Bank Ltd
1
. We
are extensively referring to the decision of the Bombay High
Court in the case of American Express International
Banking Corporation
2
for the reason that this Court in Citi
Bank NA
3
has expressly approved the view of the Bombay
High Court in the said decision. We may note that the
Bombay High Court dealt with assessment years 197475 to
197778. This was a case where the assessee made
adjustments for broken period interest. The assessing officer
had disallowed the deduction for the payment made by the
Civil Appeal No.32913294 of 2009, etc. Page 15 of 45
assessee for broken period interest. The assessing officer
followed the decision in the case of Vijaya Bank Ltd
1
. The
Bombay High Court distinguished the decision in the case of
Vijaya Bank Ltd.
1
and held thus:
“18. The assesseeBank, like several other
Banks, were consistently following the practice
of valuing the securities/interest held by it at
the end of each year and offer for taxation, the
appreciation in their value by way of
profit/interest earned due to efflux of time.
The Bank also claimed deduction for broken
period interest payments. However, the
department did not accept the assessee's method
in the assessment year in question in view of the
judgment of the Karnataka High Court in the case
of (Commissioner of Incometax, Mysore v. Vijaya
Bank)
5
, reported in 1976 Tax Law Reporter page
524. This judgment has been subsequently upheld
by the Supreme Court in 187 I.T.R. page 541. In
view of the judgment of the Karnataka High Court,
the department took the view that broken period
interest payment cannot be allowed as a deduction
because it came within the ambit of interest on
securities under section 18 of the Incometax Act.
It is the contention of the department that the
assesseeBank received interest on Dated
Government Securities from R.B.I. on half
yearly basis. That, the assessee Bank also
traded in such securities. That the assessee
Bank bought Dated Government Securities
during the intervening period between two due
dates. That, on purchase of the dated
Government Security, the assessee became the
holder of the security and accordingly, the
assessee received halfyearly interest on the
Civil Appeal No.32913294 of 2009, etc. Page 16 of 45
due dates from R.B.I. on purchase. Therefore,
according to the department, the income which
the assesseeBank 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
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 appropriate assessment year during
which the assessee held the security. This
difference could have been treated by the
department as interest on securities under section
18. However, in the instant case, the department
has assessed the said difference under, section 28
under the head “Business” and not under the head
“interest on securities”. Having treated the
Civil Appeal No.32913294 of 2009, etc. Page 17 of 45
difference under the head “Business”, the A.O.
disallowed the broken period interest payment,
which gave rise to the dispute. It was open to the
department to assess the above difference under
the head “interest on securities” under section 18.
However, they chose to assess the interest under
the head “business” and, while doing so, the
department taxed broken period interest received,
but disallowed broken period interest payment. It
is in this light that one has to read the judgment of
the Karnataka High Court and the Supreme Court
in Vijaya Bank's case. In that case, the facts were
as follows. During the Assessment Year under
consideration, Vijaya Bank entered into an
agreement with Jayalakshmi Bank Limited,
whereby Vijaya Bank took over the liabilities of
Jayalakshmi Bank. They also took over assets
belonging to Jayalakshmi Bank. These assets
consisted of two items viz. Rs. 58,568.00 and Rs.
11,630.00. The said amount of Rs. 58,568.00
represented interest, which accrued on securities
taken over by Vijaya Bank from Jayalakshmi Bank
and Rs. 11,630.00 was the interest which accrued
upto the date of purchase of securities by the
assesseeBank from the open market. These too
amounts were brought to tax by the A.O. under
section 18 of the Incometax Act. The assessee
Bank claimed that these amounts were deductible
under sections 19 and 20. This was on the footing
that the department had brought to tax, the
aforestated two amounts as interest on securities
under section 18. It is in the light of these facts
that one has; to read the judgment in Vijaya
Bank's case. In the light of the above facts, it was
held that outlay on purchase of income bearing
asset was in the nature of capital outlay and no
part of the capital outlay can be set off as
expenditure against income accruing from the
asset in question. In our case, the amount which
the assessee received has been brought to tax
Civil Appeal No.32913294 of 2009, etc. Page 18 of 45
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
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 the Act and not under section
28 of the Act as income from securities can only
come within section 18 and not under section 28.
We do not find any merit in this argument. Firstly,
as stated above, Vijaya Bank's case has no
application to the facts of this case. Secondly, in
the present case, the Tribunal has found that the
securities were held as trading assets. Thirdly, it
has been held by the Supreme Court in the
Civil Appeal No.32913294 of 2009, etc. Page 19 of 45
subsequent decision reported in 57 I.T.R. Page
306, in the case of C.I.T. Andhra
Pradesh v. Cocanada Radhaswami Bank
Limited, that income from securities can also
come under section 28 as income from
business. This judgment is very important. It
analyzes the judgment of the Supreme Court
in UCO Bank's case reported in 53 I.T.R. page
250, which has been followed by the Supreme
Court in Vijaya Bank's case. It is true that
once an income falls under section 18, it
cannot come under section 28. However, as laid
down by the Supreme Court in Cocanada
Radhaswami Bank's case (supra), income from
securities treated as trading assets can come
under section 28. In the present case, the
department has treated income from securities
under section 28. Lastly, the facts in the case
of UCO Bank reported in 53 I.T.R. page 250,
also support our view in the present case.
In UCO Bank's case, the assessee Bank claimed
a set off under section 24(2) of the Incometax
Act, 1922 (section 71(1) of the present Act)
against its income from interest on securities
under section 8 of the 1922 Act (similar to
section 28 of the present Act). It was held
that UCO Bank was not entitled to such a set
off as the income from interest on securities
came under section 8 of the 1922 Act.
Therefore, even in UCO Bank's case, the
department had assessed income from interest
on securities right from the inception under
section 8 of the 1922 Act and, therefore, the
setoff was not allowed under, section 24(2) of
the Act. Therefore, UCO Bank's case has also
no application to the facts of the present case
in which the assessee's income from interest
Civil Appeal No.32913294 of 2009, etc. Page 20 of 45
on securities is assessed under section 28 right
from inception, in fact, in UCO Bank's case, the
matter 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 assesseeBank. 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 NA
3
, the question before this
Court was whether interest paid for the broken period should
not be considered part of the purchase price and whether it
should be allowed as revenue expenditure in the year of
Civil Appeal No.32913294 of 2009, etc. Page 21 of 45
purchase of securities. In this decision, this Court quoted the
above paragraphs from the decision of the Bombay High
Court in the case of American Express International
Banking Corporation
2
. This Court expressly approved the
conclusions recorded by the Bombay High Court. This Court
held thus:
“The facts in the present case are similar to the
facts in American Express (supra). Agreeing with
this view and accepting the distinction pointed out
by the Bombay High Court, this Court dismissed
the two special leave petitions filed by the revenue,
one of which was dismissed by a three Judge
Bench.
After going through the facts which are similar to
the facts in American Express (supra), 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) that on the facts of the
present case, the judgment in Vijaya Bank Ltd.
(supra) would have no application.”
Thus, this Court approved the view taken by the Bombay
High Court that the interest paid for the broken period should
not be considered as part of the purchase price, but it should
be allowed as revenue expenditure in the year of purchase of
securities. This Court has reiterated the view taken by the
Bombay High Court in the case of American Express
International Banking Corporation
2
.
Civil Appeal No.32913294 of 2009, etc. Page 22 of 45
WHETHER SECURITIES ARE HELD AS STOCKINTRADE
14.In the case of Cocanada Radhaswami Bank Ltd.
4
, the
Bank had shown interest on securities held by it as a source
of income. The Bank claimed loss against other banking
activities and set off the interest on securities against the
higher amount shown as loss in other banking activities. The
department allowed the loss to be set off against the income
under the head “business” and disallowed it under the income
under the head “interest on securities”. The Appellate
Tribunal confirmed the view. This Court, in paragraphs nos. 3
to 7, held thus:
“3. Learned counsel for the 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
Civil Appeal No.32913294 of 2009, etc. Page 23 of 45
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 assessee sustains a loss
of profits or gains in any year, being a
previous year not earlier than the
previous year for the year ending on the
31st day of March, 1940, in any
business, profession or vocation, and
the loss cannot be wholly set off under
subsection (1), so much of the loss as is
not so set off or the whole loss where the
assessee had no other head of income
shall be carried forward to the following
year and set off against the profits and
gains, if any, of the assessee from the
same business, profession or vocation,
for that year; and if it cannot be wholly
set off, the amount of loss not so set off
shall be carried forward to the following
year….”
While subsection (1) of Section 24 provides for
setting off of the loss in a particular year under
one of the heads mentioned in Section 6 against
the profit under a different head in the same
year, subsection (2) provides for the carrying
Civil Appeal No.32913294 of 2009, etc. Page 24 of 45
forward of the loss of one year and setting off of
the same against the profit or gains of the
assessee from the same business in the
subsequent year or years The crucial words,
therefore, are “profits and gains of the assessee
from the same business” i.e. the business in
regard to which he sustained loss in the
previous year. The question, therefore, is
whether the securities formed part of the
trading assets of the business and the income
therefrom was income from the business. The
answer to this question depends upon the
scope of Section 6 of the Act. Section 6 of
the Act classified taxable income under the
following several heads : (i) salaries; (ii)
interest on securities; (iii) income from
property; (iv) profits and gains of business,
profession or vocation; (v) income from other
sources; and (vi) capital gains. The scheme of
the Act is that income tax is one tax. Section
6 only classifies the taxable income under
different heads for the purpose of
computation of the net income of the
assessee. Though for the purpose of
computation of the income, interest on
securities is separately classified, income by
way of interest from securities does not cease
to be part of the income 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
Civil Appeal No.32913294 of 2009, etc. Page 25 of 45
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 set off the loss in
one against the profit in the other in arriving at
the income under that head. Even so, he may
still sustain loss under the same head. He can
then set off the loss under the head “business”
against profits under another head, say “income
from investments”, even if investments are not
part of the trading assets of the business.
Notwithstanding this process he may still incur
loss in his business. Section 24(2) says that in
that event he can carry forward the loss to the
subsequent year or years and set off the said
loss against the profit in the business. Be it
noted that clause (2) of Section 24, in
contradistinction to clause (1) thereof, is
concerned only with the business and not with
its heads under Section 6 of the Act. Section 24,
Civil Appeal No.32913294 of 2009, etc. Page 26 of 45
therefore, is enacted to give further relief to an
assessee carrying on a business and incurring
loss in the business though the income
therefrom falls under different heads under
Section 6 of the Act.
7. Some of the decisions cited at the Bar may
conveniently be referred to at this stage. The
Judicial Committee in Punjab Cooperative Bank
Ltd. v. CIT [(1940) 8 ITR 635, 645] has clearly
brought out the business connection between
the securities of a Bank and its business, thus:
“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….”
In the present case the Tribunal held, on the
evidence, and that was accepted by the High
Court, that the assessee was investing its
amounts in easily realisable securities and,
therefore, the said securities were part of the
trading assets of the assessee's Banking
business. The decision of this Court in United
Commercial Bank Ltd. v. CIT [(1958) SCR 79]
does not lay down 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,
Civil Appeal No.32913294 of 2009, etc. Page 27 of 45
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 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 proviso thereto dealt
only with profits and gains of a business,
profession, or vocation and they did not provide
for the assessment of income under any other
head e.g. capital gains. The reason for that
conclusion is stated thus:
“It (the deeming clause in Section 12B)
only introduces a limited fiction, namely,
that capital gains accrued will be
deemed to be income of the previous
year in which the sale was effected. The
Civil Appeal No.32913294 of 2009, etc. Page 28 of 45
fiction does not make them the profits or
gains of the business. It is well settled
that a legal fiction is limited to the
purpose for which it is created and
should not be extended beyond its
legitimate field … The profits and gains
of business and capital gains are two
distinct concepts in the Income Tax Act :
the former arises from the activity which
is called business and the latter accrues
because capital assets are disposed of at
a value higher than what they cost the
assessee. They are placed under
different heads; they are derived from
different sources; and the income is
computed under different methods. The
fact that the capital gains are connected
with the capital assets of the business
cannot make them the profit of the
business. They are only deemed to be
income of the previous year and not the
profits or gains arising from the
business during that year.”
It will be seen that the reason for the conclusion
was that capital gains were not income from the
business. Though some observations divorced
from content may appear to be wide, the said
decision was mainly based upon the character of
the capital gains and not upon their non
inclusion under the heading “business”. The
limited scope of the earlier decision was
explained by this Court in CIT v. Chugandas &
Co. [(1965) 55 ITR 17, 24] . Therein this Court
held that interest from securities formed part of
the assessee's business income for the purpose
of exemption under Section 25(3). Shah, J.,
speaking for the Court, observed:
“The heads described in Section 6 and
further elaborated for the purpose of
Civil Appeal No.32913294 of 2009, etc. Page 29 of 45
computation of income in Sections 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 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
Civil Appeal No.32913294 of 2009, etc. Page 30 of 45
fulfilling the purpose for which the cooperative
Bank was constituted, these various sums of
interest were not subject to income tax because
of the notification issued by the Central
Government under Section 60 of the Income Tax
Act. The relevant portion of that notification,
CBR Notification 35 dated 20101934, and No.
33 dated 1881945, was:
“The following classes of income shall be
exempt from the tax payable under the
said Act, but shall be taken into account
in determining the total income of an
assessee for the purpose of the said Act:
***
(2) The profits of any cooperative society
other than the Sanikatta Salt Owners'
Society in the Bombay Presidency for the
time being registered under the
Cooperative Societies Act, 1912 (Act 2 of
1912), the Bombay Cooperative Societies
Act, 1925 (Bombay Act 7 of 1925), or the
Madras Cooperative Societies Act, 1932
(Madras Act 6 of 1932), or the dividends
or other payments received by the
members of any such society out of such
profits.
Explanation : For this purpose the
profits of a cooperative society shall not
be deemed to include any income,
profits or gains from:
(1) Investments in (a) securities of the
nature referred to in Section 8 of the
Indian Income Tax Act; or (b) property of
the nature referred to in Section 9 of
that Act;
(2) dividends, or
Civil Appeal No.32913294 of 2009, etc. Page 31 of 45
(3) the ‘other sources’ referred to in
Section 12 of the Indian Income Tax
Act.”
The Appellate Assistant Commissioner, however,
repelled the contention of the appellant. He held
that the business of the appellant consisted of
‘lending money, and selling agricultural and
other products to its constituents’ which could
be planned ahead and required no provision for
extraordinary claims He remarked that it
appeared from the balance sheets that in the
Accounting Year 1945 the Bank invested Rs
13,50,000 as fixed deposits, which, in the
following year was raised to Rs 15,00,000 and it
was only in the Accounting Year 1947 that the
fixed deposits, “were realised on maturity with
interest”. He was also of the opinion that the
length of the period during which this money
“was kept locked in this way” showed 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
Civil Appeal No.32913294 of 2009, etc. Page 32 of 45
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 114
1955, 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 fixed
deposits are made out of surplus funds.
The interest or dividend derived from
such investment cannot be regarded as
part of the profits of the business (sic)
qua such Bank and therefore, it is not
exempt from income tax
(vide Hoshiarpur Central Cooperative
Bank v. CIT [24 ITR 346, 3501], 24 I.T.R.
346, 350).”
Against this order a case was stated at the
instance of the appellant under Section 66(1) of
the Act, and the following two questions of law
were referred for the opinion of the High Court:
(1) Whether, in the facts and circumstances of
this case, the receipt of interest on fixed deposits
was an income under the head of “other
sources”: and
Civil Appeal No.32913294 of 2009, etc. Page 33 of 45
(2) Whether in the facts and circumstances of
this case, the receipt of interest from the fixed
deposits was an income not exempt from
taxation under the CBR Notification No. 35
dated 20101934 and No. 33 dated 1881945.”
In paragraphs 9 and 10, this Court proceeded to hold thus:
“9. In the instant case the cooperative society
(the appellant) is a Bank. One of its objects is
to carry on the general business of Banking.
Like other Banks money is its stockintrade or
circulating capital and its normal business is to
deal in money and credit. It cannot be said that
the business of such a Bank consists only in
receiving deposits and lending money to its
members or such other societies as are
mentioned in the objects and that when it lays
out its moneys so that they may be readily
available to meet the demand of its depositors
if and when they arise, it is not a legitimate
mode of carrying on of its Banking business.
The Privy Council in Punjab Cooperative Bank
Ltd. v. CIT Lahore [24 ITR 346, 350] where the
profits arose from the sale of government
securities pointed out at p. 645 that in the
ordinary cases the business of a Bank
essentially consists of dealing with money and
credit. Depositors put their money in the Bank
at a small rate of interest and in order to meet
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
Civil Appeal No.32913294 of 2009, etc. Page 34 of 45
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 III(i) of the
byeLaws). 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 available and that is just as much a part
of the mode of conducting a Bank's business as
receiving deposits or lending moneys or
discounting hundies or issuing demand drafts.
That is how the circulating capital is employed
and that is the normal course of business of a
Bank. The moneys laid out in the form of
deposits as in the instant case would not cease
to be a part of the circulating capital of the
appellant nor would they cease to form part of
its Banking business. The returns flowing from
Civil Appeal No.32913294 of 2009, etc. Page 35 of 45
them would form part of its profits from its
business. In a commercial sense the directors
of the Company owe it to the Bank to make
investments which earn them interest instead
of letting moneys lie idle. It cannot be said that
the funds of the Bank which were not lent to
borrowers but were laid out in the form of
deposits in another Bank to add to the profit
instead of lying idle necessarily ceased to be a
part of the stockintrade of the Bank, or that
the interest arising therefrom did not form part
of its business profits. Under the byelaws one of
the objects of the appellant Bank is to carry on the
general business of Banking and therefore subject
to the Cooperative Societies Act, it has to carry on
its business in the manner that ordinary Banks
do. It may be added that the various heads under
Section 6 of the Income Tax Act and the provisions
of that Act applicable to these various heads are
mutually exclusive. Section 12 is a residuary
section and does not come into operation until the
preceding heads are excluded. CIT v. Basant Rai
Takht Singh [(1933) ITR 197, 201].”
(emphasis added)
16.The decision of the Privy Council in the case of Punjab
Cooperative Bank v. Commissioner of Income Tax
9
is
also very relevant. It was held thus:
“The principle to be applied in such a case is
now well settled. It was admirably stated in a
Scottish case, Californian Copper
Syndicate 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
9 (1940) SCC Online PC 46
Civil Appeal No.32913294 of 2009, etc. Page 36 of 45
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 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
undesirable to use this second line of
defence. If as in the present case some of the
securities of the Bank are realised in order to
meet withdrawals by depositors, it seems to
their Lordships to be quite clear that this is a
Civil Appeal No.32913294 of 2009, etc. Page 37 of 45
normal step in carrying on the Banking
business, or, in other words, that it is an act
done in “what is truly the carrying on” of the
Banking business. This, it appears to their
Lordships, is the more appropriate and
satisfactory ground for dealing with the
question arising in the present case.”
(emphasis added)
17.Therefore, the Privy Council and this Court have
consistently held that the securities that Banks acquire as a
part of the banking business are held as stockintrade and
not as an investment.
OUR CONCLUSIONS
18.Initially, CBDT issued Circular No. 599 of 1991 and
observed that the securities held by Banks must be recorded
as their stockintrade. The circular was withdrawn in view of
the decision of this Court in the case of Vijaya Bank Ltd
1
. In
the year 1998, RBI issued a circular dated 21
st
April 1998,
stating that the Bank should not capitalise broken period
interest paid to the seller as a part of cost but treat it as an
item of expenditure under the profit and loss account. A
similar circular was issued on 21
st
April 2001, stating that the
Bank should not capitalise the broken period interest paid to
the seller as a cost but treated it as an item of expenditure
under the profit and loss account. In 2007, the CBDT issued
Circular No. 4 of 2007, observing that a taxpayer can have
two portfolios. The first can be an investment portfolio
Civil Appeal No.32913294 of 2009, etc. Page 38 of 45
comprising securities, which are to be treated as capital
assets, and the other can be a trading portfolio comprising
stockintrade, which are to be treated as trading assets.
19.As stated earlier, Banks are required to purchase
Government securities to maintain the SLR. As per RBI’s
guideline dated 16
th
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 stockintrade.
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 subsequent years. Therefore,
Civil Appeal No.32913294 of 2009, etc. Page 39 of 45
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 stockintrade will
depend on the facts of each case. HTM Securities can be said
to be held as an investment (i) if the securities are actually
held till maturity and are not transferred before and (ii) if they
are purchased at their cost price or face value.
22.At this stage, we may refer to a decision of this Court in
the case of Commissioner of Income Tax (Central),
Calcutta v. Associated Industrial Development Company
(P) Ltd., Calcutta
10
. In the said decision, this Court held
that whether a particular holding of shares is by way of
investments or forms part of the stockintrade is a matter
which is within the knowledge of the assessee. Therefore, on
facts, if it is found that HMT Security is held as an
investment, the benefit of broken period interest will not be
available. The position will be otherwise if it is held as a
trading asset.
10 (1972) 4 SCC 447
Civil Appeal No.32913294 of 2009, etc. Page 40 of 45
23.Now, we turn to the factual aspects. As far as Civil
Appeal No. 329194 of 2009 is concerned, the Tribunal, in a
detailed judgment, recorded the following conclusions:
a.Interest income on securities right from assessment year
198990 is being treated as interest on securities and is
taxed under Section 28 of the IT Act;
b.Since the beginning, securities are treated as stockin
trade which has been upheld by the Department right
from the assessment year 198283 onwards;
c.Securities were held by the respondent Bank as stock
intrade.
The findings of the Tribunal have been upset by the High
Court. The impugned judgment proceeds on the footing that
the decision in the case of Vijaya Bank Ltd.
1
case would still
apply. Thus, as far as Civil Appeal Nos. 32913294 of 2009
are concerned, as a finding of fact, it was found that the
appellant Bank was treating the securities as stockintrade.
The said view was upset by the High Court only on the
ground of the decision of this Court in the case of Vijaya
Bank Ltd
1
. As the securities were held as stockintrade, 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
Civil Appeal No.32913294 of 2009, etc. Page 41 of 45
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 stockintrade, 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 Corporation
2
and holds that the same was not correct. As noted earlier,
the view taken in the American Express International
Banking Corporation
2
case has been expressly upheld by
this Court in the case of Citi Bank NA
3
. 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 placed on the decision of this Court in the case
of Vijaya Bank Ltd
1
. The Tribunal observed that the
Civil Appeal No.32913294 of 2009, etc. Page 42 of 45
assessing officer had treated the interest income earned by
the respondent Bank on securities as income from other
sources. The Tribunal observed that the investments in
securities are in stockintrade, and this fact has been
accepted in the past by the Income Tax department. It was
held that the securities in the category of HTM were also held
as stockintrade, and income/loss arising out of such
securities, including HTM securities, has been treated as
business income/loss. The Appellate Tribunal held that the
interest for the broken period would be admissible as a
deduction, and the High Court confirmed the same. We may
note here that the Tribunal followed the decision of the
Bombay High Court in the case of HDFC Bank Ltd. v. CIT
11
.
We find no error in the view taken in this case.
26. In Civil Appeal @ Special Leave Petition (C) No.4843 of
2020, the High Court held in favour of the respondentBank
by allowing a deduction for broken period interest relying
upon the decision in the case of HDFC Bank Ltd
11
. In this
case, the assessing officer did not accept the claim of the
Bank that the securities held were in the nature of stockin
trade. However, the CIT (Appeals) and the Appellate Tribunal
accepted the respondent Bank’s case. In this case, before the
Appellate Tribunal, the department conceded in favour of the
assessee.
11 (2014) 366 ITR 505
Civil Appeal No.32913294 of 2009, etc. Page 43 of 45
27.In Civil Appeal @ Special Leave Petition (C) No. 7055 of
2021, neither the assessment officer nor the CIT allowed
a deduction on account of the broken period interest.
However, the Tribunal allowed the same. Before the High
Court, Revenue argued that the increase in capital results in
the expansion of the Bank's capital base, which helps in profit
making. Therefore, the expenditure in the nature of broken
period interest was capital expenditure. However, The High
Court rightly rejected the contention of the department that
the outlay on the purchase of securities was capital outlay.
28.In Civil Appeal @ Special Leave Petition (C) No.7404 of
2021, the CIT, the High Court took a similar view. The same
is the case with Civil Appeals @ Special Leave Petition (C)
Nos.15281 and 1686 of 2021.
29.In Civil Appeal @ Special Leave Petition (C) No.1687 of
2021 and Civil Appeal @ Special Leave Petition (C) No.8968 of
2018, the High Court allowed interest deduction on broken
period. In Civil Appeal @ Special Leave Petition (C) No.24841
of 2019, though the assessment officer held that the broken
period interest has to be capitalised, the Appellate Tribunal
upset the said view. In Civil Appeal No.4755 of 2023,
deduction for broken period interest has been allowed.
30.Hence, in Civil Appeal No.32913294 of 2009, the
judgment of the High Court cannot be sustained, and the
decisions of the Tribunal dated 29
th
May 2003 and 15
th
July
2004 will have to be restored. All other appeals preferred by
Civil Appeal No.32913294 of 2009, etc. Page 44 of 45
the Revenue will have to be dismissed subject to clarification
regarding securities of the HTM category.
31.Accordingly, we pass the following order:
a.Civil Appeal Nos.3291 to 3294 of 2009 are hereby
allowed by setting aside the impugned judgment
and the judgments dated 29
th
May 2003 and 15
th
July 2004 of the Appellate Tribunal are restored.
b. All other Civil Appeals are dismissed.
c.There will be no order as to costs.
………………………….J.
(Abhay S Oka)
………………………….J.
(Pankaj Mithal)
New Delhi;
October 16, 2024.
Civil Appeal No.32913294 of 2009, etc. Page 45 of 45
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