2005 (3) TMI 823 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of interest on NPAs reversed during the current year for the assessment year 1999-2000.
2. Deduction of broken period interest paid on the purchase of securities treated as stock in trade for the assessment years 1998-99 and 1999-2000.

Issue 1: Deduction of Interest on NPAs Reversed During the Current Year (Assessment Year 1999-2000)

The primary issue pertains to whether interest pertaining to the previous year, which was reversed during the current year on NPAs identified for the first time during the financial year 1998-99, is allowable as a deduction. The assessee argued that as per RBI guidelines, interest on NPAs should not be recognized as income, and any interest already shown as income in the preceding year should be reversed in the subsequent year. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] rejected this contention, stating that the income of the preceding year is not an expenditure for earning interest income of the current year, and thus, netting of interest income is not proper. They relied on the decision of the ITAT, Jaipur Bench in the case of Bank of Rajasthan Limited (68 ITD 69).

The Tribunal, after considering rival submissions, noted that the Income-tax Act is a self-contained code and any deduction must be explicitly provided within it. The Tribunal highlighted that non-recognition of income by following RBI norms is permissible, but reversing already recognized income from a previous year without treating it as a bad debt under Section 36(1)(vii) is not allowable. The Tribunal concluded that the claim of the assessee to reduce the current year's income by the reversed interest from the previous year is contrary to law and rejected the contention.

Issue 2: Deduction of Broken Period Interest Paid on Purchase of Securities Treated as Stock in Trade (Assessment Years 1998-99 and 1999-2000)

The second issue was whether broken period interest paid on the purchase of securities, which are treated as stock in trade, is allowable as revenue expenditure. The assessee contended that since the securities were purchased and held as stock in trade, the broken period interest should be deductible under Section 37 of the Act. The AO and CIT(A) rejected this claim, relying on the Supreme Court decision in Vijaya Bank Limited (187 ITR 541).

The Tribunal considered the rival submissions and noted that the Central Board of Direct Taxes (CBDT) had clarified that the Supreme Court's decision in Vijaya Bank Limited did not directly address whether securities constitute stock in trade or capital assets. The Tribunal also referred to decisions of the Kerala High Court in CIT v. Nedungadi Bank Ltd. (264 ITR 545) and South Indian Bank Ltd. (241 ITR 374), which were affirmed by the Supreme Court, supporting the view that broken period interest is deductible if the securities are held as stock in trade.

The Tribunal concluded that since the tax authorities did not dispute that the securities were held as stock in trade, the interest paid for the broken period is allowable as a deduction. The Tribunal directed the AO to accept the claim of the assessee.

Conclusion:

The Tribunal allowed the appeal in part, granting the deduction for broken period interest paid on the purchase of securities treated as stock in trade but rejecting the deduction of interest on NPAs reversed during the current year.