2013 (1) TMI 105 - AT - Income Tax

Broken period interest paid to the sellers of the securities - revenue v/s capital - order u/s 263 of CIT(A) directing AO not to treat the broken period interest as revenue expenditure but as a part of cost of purchase of securities and to consider it for valuation of stock - Held that - In the instant case, the assessee-bank, since its inception, has been offering the broken period interest income earned from the sale of securities (AFS category) as business income under section 28 and not as interest income under the head Income from other sources . Accordingly, the broken period interest paid to the sellers of securities was claimed as an allowable deduction from its business income, under the Act. Applying the principles laid down in the case of CIT v Citibank N.A. 2008 (8) TMI 766 - SUPREME COURT OF INDIA the Bank is entitled to claim the broken period interest expenditure as revenue expenditure from its business income, since the broken period interest income is also offered to tax as business income. Also following judicial precedents supported the claim of the assessee that the broken period interest payments are in the nature of revenue expenditure American Express International Banking Corporation v CIT (2002 (9) TMI 96 - BOMBAY HIGH COURT)wherein held that when the BPI received was taxable as business income, the Department ought to have allowed deduction for the BPI paid on purchase of securities. CIT v Citibank N.A.(2003 (4) TMI 36 - BOMBAY HIGH COURT) & CIT v Nedungadi Bank Limited (2002 (11) TMI 29 - KERALA HIGH COURT) stating that the interest paid for the broken period would constitute allowable outgo in the hands of the assessee and is an admissible deduction in the computation of total income of the Bank under the head profits and gains of business or profession & State Bank of Hyderabad v Joint CIT (2005 (3) TMI 403 - ITAT HYDERABAD-B) stating that if the securities were held by the banking company as stock-in-trade of the business, interest paid for the broken period would constitute allowable outgo in the hands of the assessee bank. Disallowance of broken period interest paid to sellers of securities in earlier years - Held that - The amount is to be disallowed when the same should have been claimed as a deduction by debiting to the P&L account. The broken period interest payment made in the earlier year account cannot form part of the disallowance for the current assessment year since the same was not debited to the P&L account and hence, no disallowance is called for - appeal decided in favour of the assessee

Summary

Issues Involved:

1. Broken period interest (BPI) paid to the sellers of securities for the assessment year 1999-2000.
2. Broken period interest (BPI) paid in earlier years.
3. Adjustments on valuation of securities after considering the broken period interest.

Issue-wise Detailed Analysis:

1. Broken Period Interest (BPI) Paid to the Sellers of Securities for the Assessment Year 1999-2000:

The assessee, a subsidiary of State Bank of India, categorized its securities into "available for sale" (stock-in-trade) and "held to maturity" (investment) as per RBI guidelines. The assessee claimed BPI paid on securities under the "available for sale" category as revenue expenditure under the Income Tax Act, 1961. However, the Commissioner of Income Tax directed the Assessing Officer to treat the BPI as part of the cost of securities and to consider it for valuation of closing stock. The Tribunal, referencing the assessee's own case for the assessment year 1988-89 and the Supreme Court ruling in Citibank N.A., concluded that BPI paid on the purchase of securities should be allowed as revenue expenditure. The Tribunal emphasized that since the BPI income was offered to tax as "Business Income," the corresponding expenditure should also be allowed as a deduction.

2. Broken Period Interest (BPI) Paid in Earlier Years:

The assessee contended that BPI paid in earlier years should not be disallowed in the current assessment year since it was not claimed as revenue expenditure for the year 1999-2000. The Tribunal agreed, noting that the BPI paid in earlier years was not debited to the Profit & Loss account for the current year, and thus, no disallowance was warranted.

3. Adjustments on Valuation of Securities After Considering the Broken Period Interest:

This issue was deemed consequential based on the outcomes of the first two issues. Since the Tribunal decided the first two issues in favor of the assessee, it concluded that no further adjudication was necessary for the adjustments on valuation of securities.

Conclusion:

The Tribunal allowed both appeals filed by the assessee, confirming that BPI paid on the purchase of securities should be treated as revenue expenditure and that BPI paid in earlier years should not be disallowed in the current assessment year. The adjustments on valuation of securities were dismissed as they were consequential to the favorable decisions on the first two issues.