2023 (1) TMI 1438 - HC - Income Tax

Broken period interest paid on purchase of securities - entitlement to claim deduction of interest paid on purchase of securities constituting stock for the broken period till the date of acquisition in terms of Section 37 - whether interest paid by the assessee on purchase of securities constituting stock-in-trade but paid for the broken period is allowable as a deduction? - HELD THAT - Revenue has accepted the fact that respondent had been holding the securities as stock-in-trade. Circular No. 665 dated 05.10.1993 of the CBDT has clarified the decision of the Supreme Court in Vijaya Bank Ltd. 1990 (9) TMI 5 - SUPREME COURT CBDT has clarified that where the banks are holding securities as stock-in-trade and not as investments, principles of law enunciated in Vijaya Bank Ltd. would not be applicable. Therefore, CBDT has clarified that assessing officer should determine on the facts and circumstances of each case as to whether any particular security constitute stock-in-trade or investment taking into account the guidelines issued by Reserve Bank of India from time to time. It is in the above back drop that Tribunal has held that the respondent had purchased securities to hold them as stock-in-trade. Therefore, interest paid on such securities would be an allowable deduction. We are in agreement with the finding returned by the Tribunal. That apart, this is a finding of fact rendered by the Tribunal and in an appeal under Section 260A of the Act, we are not inclined to disturb such a finding of fact, that too, when the legal position is very clear. Decided in favour of assessee.

2023 (6) TMI 1461 - HC

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the Tribunal was justified in holding that interest paid by the assessee on the purchase of securities constituting stock-in-trade, but paid for the broken period, is allowable as a deduction?
Whether the assessee is entitled to claim a deduction of interest paid on the purchase of securities constituting stock for the broken period till the date of acquisition in terms of Section 37 of the Income Tax Act?

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deduction of Broken Period Interest

Relevant Legal Framework and Precedents: The case primarily revolves around the interpretation of Section 37 of the Income Tax Act and the precedent set by the Supreme Court in Vijaya Bank Ltd. v. Additional Commissioner of Income Tax. The Central Board of Direct Taxes (CBDT) Circular No. 665 dated 05.10.1993 also plays a crucial role in clarifying the application of the Supreme Court's decision.
Court's Interpretation and Reasoning: The court examined whether the securities were held as stock-in-trade or as investments. The Tribunal had held that since the securities were stock-in-trade, the interest paid for the broken period was an allowable deduction. The court agreed with this interpretation, distinguishing it from the Vijaya Bank case where the securities were treated as capital assets.
Key Evidence and Findings: The court noted that the respondent had consistently held securities as stock-in-trade, a fact accepted by the Revenue in previous assessments. The CBDT circular clarified that the principles in Vijaya Bank do not apply when securities are held as stock-in-trade.
Application of Law to Facts: The court applied the law by acknowledging the distinction between securities held as investments and those held as stock-in-trade. The Tribunal's finding that the securities were stock-in-trade was upheld.
Treatment of Competing Arguments: The Revenue argued based on the Vijaya Bank precedent, whereas the respondent cited the CBDT circular and subsequent case law like the Bombay High Court's decision in American Express International Banking Corporation and the Supreme Court's decision in Citibank N.A. The court found the respondent's arguments more persuasive.
Conclusions: The court concluded that the interest paid for the broken period on securities held as stock-in-trade is an allowable deduction.

3. SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: "We are in agreement with the finding returned by the Tribunal. That apart, this is a finding of fact rendered by the Tribunal and in an appeal under Section 260A of the Act, we are not inclined to disturb such a finding of fact, that too, when the legal position is very clear."
Core Principles Established: The judgment establishes that when securities are held as stock-in-trade, the interest paid for the broken period is deductible as revenue expenditure. The distinction between stock-in-trade and capital assets is crucial in determining the applicability of deductions.
Final Determinations on Each Issue: The court answered the questions in favor of the respondent assessee, confirming that the interest paid for the broken period is deductible when securities are held as stock-in-trade.

The court dismissed the appeal by the Revenue, thereby upholding the Tribunal's decision that allowed the deduction of broken period interest as revenue expenditure. The judgment underscores the importance of the nature of securities (stock-in-trade vs. investment) in determining the applicability of deductions under the Income Tax Act.

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