Interest on Purchase of Securities for Broken Period Deductible u/s 37 If Securities are Treated as Stock-in-Trade | SC

Case Details: Bank of Rajasthan Ltd. vs. Commissioner of Income-tax - [2024] 167 taxmann.com 430 (SC)[16-10-2024]

Judiciary and Counsel Details

• Abhay S. Oka & Pankaj Mithal, JJ.

Facts of the Case

The main issue in the instant appeal was about the treatment to be given to broken period interest. The question is whether a deduction of the broken period interest can be claimed.

Supreme Court Held

The Supreme Court held that the guidelines dated 16th October 2000 issued by the RBI categorise the government securities into the following three categories:

• Held to Maturity (HTM)
• Available for Sale (AFS)
• Held for Trading (HFT).

As far as AFS and HFT are concerned, there is no difficulty. When these two categories of securities are purchased, they 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 bank’s business. 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. Banks will earn profits by selling the securities. 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 deducting interest for the broken period will be available to Banks.

If a deduction on account of broken-period interest is not allowed, the broken-period interest as a 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. Thus, the department sought to do the academic exercise.

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. HTM Securities can be said to be held as an investment:

1. if the securities are actually held till maturity and have yet to be transferred before and
2. if they are purchased at their cost price or face value.

In the instant case, as the securities were treated as stock-in-trade, the interest on the broken period cannot be considered as capital expenditure. It 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 (2) SCC 147. It also refers to the decision of the Bombay High Court in the case of American Express International Banking Corporation [2002] 125 Taxman 488 (Bombay) and holds that the same was not correct.

The bank-assessee 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.

List of Cases Referred to

• Vijaya Bank Ltd. v. Addl. CIT (2) SCC 147 (para 6)
• American Express International Banking Corpn. v. CIT [2002] 125 Taxman 488/258 ITR 601 (Bombay) (para 8)
• American Express International Banking Corporation v. CIT & Anr 2002 SCC OnLine Bom 944 (para 8)
• CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC) (para 8)
• CIT v. The Cocanada Radhaswami Bank Ltd., Kakinada 1965 SCC OnLine SC 186 (para 8)
• United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC) (para 8)
• United Commercial Bank Ltd.; Calcutta v. CIT 1957 SCC OnLine SC 74 (para 8)
• CIT v. Nawanshahar Central Co-operative Bank Ltd. [2007] 160 Taxman 48/289 ITR 6 (SC) (para 8)
• Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114 (SC) (para 8)
• Radhasoami Satsang v. CIT [1992] 60 Taxman 248/193 ITR 321 (SC) (para 8)
• M/s. Radhasoami Satsang, Saomi Bagh, Agra v. CIT (1992) 1 SCC 659 (para 8)
• CIT (Central) v. Associated Industrial Development Company (P) Ltd. (1972) 4 SCC 447 (para 22)
• CIT v. HDFC Bank Ltd. [2014] 49 taxmann.com 335/226 Taxman 132/366 ITR 505 (Bombay) (para 25).