2019 (4) TMI 1779 - AT - Income Tax

Disallowance of broken period interest paid on deposits and borrowings etc - HELD THAT - As decided in assessee's own case for 2009-10 If pre acquisition interest on purchase of a Govt. Security is the cost of purchase of such security, then pre acquisition interest on sale of the same security should be treated as sale price of security. Otherwise in both cases the pre acquisition interest should be treated as revenue transactions. The assessee is consistently follow the method of accounting wherein, pre-acquisition interest of security is treated as revenue expenditure and preacquisition interest on sale of a govt. security is taken as income. The Central Board of Direct Taxes in circular no.559 dated 24.04.1999 189 ITR (ST) 126 has clarified that securities held by bank must be regarded as stock in trade and that interest payments and receipts from broken period on purchase of securities must be regarded as stock in trade and that the net interest on securities should be brought to tax as business as business income. This circular was later withdrawn by CBDT and it was clarified that the issue whether a particular investment in security would constitute stock in trade or not is a question of fact. All these issues have not been properly considered by the A.O. or the Ld. CIT-A. The addition under such circumstances cannot be sustained - Decided against revenue.

Summary

Issues involved:
Whether the Commissioner of Income Tax (Appeals) was justified in deleting the disallowance of broken period interest paid by the assessee on deposits and borrowings.

Detailed Analysis:

1. Background and Identical Issues:
The appeals filed by the Revenue against the orders of the Commissioner of Income Tax (Appeals)-12, Kolkata involved the issue of disallowance of broken period interest paid by the assessee on deposits and borrowings. Both appeals were taken together due to identical issues.

2. Previous Tribunal Orders:
The issue was previously addressed in Assessment Years 2009-10 & 2010-11. The Appellant cited a Tribunal order for Assessment Year 2009-10 where the matter was remanded back to the Assessing Officer for examination. The Assessing Officer, in a subsequent order, allowed the claim of broken period interest on the purchase of Government securities as a deduction.

3. Agreement on Coverage:
The Appellant's representative confirmed that the issue was covered in favor of the assessee by the Tribunal's order and the Assessing Officer's decision for Assessment Year 2009-10.

4. Tribunal's Observations:
The Tribunal reviewed the Assessing Officer's actions for Assessment Year 2009-10, where the claim of broken period interest was allowed based on the matching principle of accounting. The Tribunal noted that interest paid on purchases of securities should be considered as revenue expenditure, aligning with the principle of matching income and expenses.

5. Legal Precedents and Circulars:
The Tribunal highlighted the consistency in the assessee's accounting method and referred to the Central Board of Direct Taxes circular clarifying that interest payments and receipts on securities should be treated as stock in trade. The Tribunal also mentioned the decision of the Bombay High Court supporting the assessee's position.

6. Decision and Conclusion:
The Tribunal found no infirmity in the order of the Commissioner of Income Tax (Appeals) for both appeals, as the Assessing Officer had allowed the claim of broken period interest based on previous Tribunal orders and legal principles. Consequently, the appeals of the Revenue were dismissed.

This detailed analysis of the judgment highlights the key legal arguments, precedents, and decisions that led to the dismissal of the Revenue's appeals regarding the disallowance of broken period interest paid by the assessee on deposits and borrowings.