2012 (12) TMI 418 - HC - Income Tax

Broken period interest on securities - banking business - The assessee claimed the loss on the difference of interest received and paid on the ground that the securities in which the assessee was investing constituted part of its stock-in-trade in the banking business. - held that - The interest in respect of current securities, which are held in stock-in-trade has to be allowed as the revenue expenditure based on the Bombay High Court decision in the case of American Express Bank Vs. Commissioner of Income Tax 2002 (9) TMI 96 - BOMBAY HIGH COURT . - After citing the decision in Vijaya Bank Ltd s case 1990 (9) TMI 5 - SUPREME COURT , distinguishing the case of the assessee on the securities held as stock-in-trade, the Bombay High Court pointed out that the decision in Vijaya Bank 1990 (9) TMI 5 - SUPREME COURT would have no application to the case, where securities were held as trading assets and interest income were assessed as business income under Section 28 of the Act. - No substance in remanding the matter once again back to the Assessing Officer for the self same exercise. Valuation of investments and stock-in-trade - held that - securities held as stock-in-trade and investment being stock in trade are to be treated on par and to be valued either at the cost or market price, whichever is lower. In the circumstances, keeping in the background the decision in the case of UCO Bank Vs. CIT 1999 (9) TMI 4 - SUPREME COURT , we direct the Assessing Officer to redo the valuation in respect of stock-in-trade at cost or market value, whichever is lower. Disallowance on the payment of additional interest on deposits made by Public Sector Undertakings - held that - the assessee is entitled to succeed on its claim for deduction under Section 37 of the Act and the view of the Income Tax Appellate Tribunal that payment of additional interest on Fixed Deposits by PSUs as contrary to public policy cannot be sustained.

Summary

Issues Involved:
1. Broken period interest on securities.
2. Assessment of income under 'undisclosed income'.
3. Specific grounds raised before the Tribunal (estimated expenditure on securities, disallowance under Section 115J, disallowance of bonus, deletion of additional tax).
4. Appreciation in the value of investments.

Detailed Analysis:

1. Broken Period Interest on Securities:
The Tribunal's decision to not fully accept the appellant's claim regarding broken period interest was challenged. The appellant argued that the securities were part of its stock-in-trade and should be treated as such for tax purposes. The CIT (Appeals) and Tribunal classified securities into permanent and current, treating interest on permanent securities as a capital outlay and on current securities as revenue expenditure. The Court upheld the CIT (Appeals) decision, referencing the Bombay High Court's ruling in American Express Bank vs. CIT, which allowed broken period interest as a deductible expense for securities held as stock-in-trade.

2. Assessment of Income under 'Undisclosed Income':
The appellant contested the addition of Rs.14,73,91,000/- as undisclosed income, arguing that the payment was made to PSUs through a broker as additional interest on deposits. The CIT (Appeals) and Tribunal found the payment contrary to RBI guidelines, thus disallowing it under Section 37 of the IT Act. However, the Court found that the RBI circular allowed banks to fix interest rates on term deposits, thus permitting the appellant's claim for deduction. The Court also noted that the additional interest payments were properly accounted for, referencing the CBI Court's findings.

3. Specific Grounds Raised Before the Tribunal:
The Tribunal did not consider the grounds relating to estimated expenditure on securities, disallowance under Section 115J, disallowance of bonus, and deletion of additional tax. The Court directed the Tribunal to consider these issues and pass orders on merits.

4. Appreciation in the Value of Investments:
The appellant argued that appreciation in the value of investments should not be included as income. The CIT (Appeals) directed the Assessing Officer to add appreciation for permanent securities but not for current securities, which should be valued at cost or market value, whichever is lower. The Court upheld this approach, citing the Supreme Court's decision in UCO Bank vs. CIT, which allowed valuation of stock-in-trade at cost or market value for tax purposes, irrespective of statutory balance sheet requirements.

Conclusion:
The Court partly allowed the appeal, confirming the CIT (Appeals) decision on broken period interest and valuation of securities. It directed the Tribunal to reconsider specific grounds not addressed previously and accepted the appellant's claim for deduction of additional interest paid to PSUs as per RBI guidelines. The third question of law was remanded back to the Assessing Officer for further consideration.