2017 (2) TMI 1468 - HC - Income Tax

Broken period interest - ITAT treated it as revenue expenditure - substantial question of law - HELD THAT - The question is a substantial question of law that merits consideration. Accordiongly, we admit the same. The finding of fact is to the effect that securities are held as stock-in-trade and that the income from sale therefrom is offered to tax as revenue. In the light of the admitted facts as seen from the order of the authorities, the expenditure incurred by the assessee towards broken period is liable to be allowed as revenue expenditure. There is no infirmity in the order of the Tribunal in this regard. Question stands answered in favour of the assessee, following the judgment of the Bombay High Court in American Express International Banking Corporation Vs. CIT 2002 (9) TMI 96 - BOMBAY HIGH COURT -The appeals are dismissed.

Summary

Issues:
1. Interpretation of Supreme Court judgment on capital outlet and expenditure on securities
2. Allowability of depreciation on investments as expenditure
3. Classification of securities as stock in trade for tax purposes
4. Treatment of broken period interest as revenue expenditure

Interpretation of Supreme Court judgment on capital outlet and expenditure on securities:
The High Court considered the challenge by the Revenue against the Income Tax Appellate Tribunal's order for assessment years 1999-2000 and 2000-2001. The first question of law raised was whether the Tribunal erred in not following the Supreme Court judgment in the case of Vijaya Bank Ltd regarding the nature of expenditure on securities. The court noted previous judgments on similar issues and ultimately ruled in favor of the assessee, holding that the price paid for securities was a capital outlet and not allowable as expenditure.

Allowability of depreciation on investments as expenditure:
The second question of law revolved around the allowance of depreciation on investments as expenditure. The Tribunal had allowed the depreciation, citing a Supreme Court judgment. However, the High Court analyzed the facts and circumstances, including the nature of the securities held by the bank, and concluded that the depreciation of investments was allowable expenditure. The court referred to the Supreme Court's decision in the case of Madhya Pradesh Cooperative Bank vs. Addl. CIT to support its ruling.

Classification of securities as stock in trade for tax purposes:
The third issue pertained to whether the securities held by the bank should be classified as stock in trade for tax purposes. The court noted the absence of evidence from the financial statements or accounting methods of the bank to prove that the securities were held as stock in trade. Despite this, the court found that the income from the sale of securities was offered for tax as revenue, leading to the conclusion that the expenditure incurred by the assessee towards broken period interest was allowable as revenue expenditure.

Treatment of broken period interest as revenue expenditure:
The final issue addressed was the treatment of broken period interest as revenue expenditure. The court acknowledged the significance of this question as a substantial issue of law. After considering the facts and the nature of securities held by the bank, the court held that the broken period interest should be treated as revenue expenditure. The decision was supported by a judgment of the Bombay High Court in a similar case. Consequently, the appeals were dismissed in favor of the assessee, with no costs imposed.