2023 (6) TMI 1461 - HC - Income Tax

Broken period interest paid on purchase of securities - Whether revenue expenditure since the securities constitute stock-in-trade? - HELD THAT - As decided in STATE BANK OF HYDERABAD 2023 (1) TMI 1438 - TELANGANA HIGH COURT 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. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal question presented in this judgment is whether the broken period interest paid on the purchase of securities should be considered a revenue expenditure since the securities constitute stock-in-trade.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant Legal Framework and Precedents

The legal framework revolves around the interpretation of the Income Tax Act, 1961, particularly Section 260A, and relevant case law. The judgment references several precedents, including the Bombay High Court decision in American Express International Banking Corporation v. Commissioner of Income Tax and the Supreme Court's decision in Vijaya Bank Ltd. v. Additional Commissioner of Income Tax, Bangalore. Additionally, the judgment considers the Kerala High Court's decision in Commissioner of Income Tax v. Nedungadi Bank Ltd. and the Supreme Court's affirmation in Commissioner of Income Tax v. Citibank N.A.

Court's Interpretation and Reasoning

The court interprets the broken period interest as an integral part of the banking business, which involves both subscribing to government securities and trading them. The court relies on the precedent set by the Bombay High Court, which held that broken period interest paid should be allowable as a revenue expenditure when the securities are treated as stock-in-trade.

Key Evidence and Findings

The court finds that the respondent had consistently held its securities as stock-in-trade, a fact that the Revenue had accepted in successive assessment years. The Central Board of Direct Taxes (CBDT) Circular No. 665 further clarifies that when securities are held as stock-in-trade, the principles from the Vijaya Bank Ltd. case do not apply.

Application of Law to Facts

The court applies the legal principles from the cited precedents to the facts of the case, concluding that the respondent's securities were indeed held as stock-in-trade. Therefore, the interest paid on these securities qualifies as a deductible revenue expenditure.

Treatment of Competing Arguments

The court considers the appellant Revenue's arguments but finds them insufficient to overturn the Tribunal's findings. The court emphasizes that the Tribunal's decision is a finding of fact, which should not be disturbed in an appeal under Section 260A unless there is a clear legal error.

Conclusions

The court concludes that the broken period interest paid on securities held as stock-in-trade is an allowable deduction. The appeal by the Revenue is dismissed, and the decision is in favor of the respondent assessee.

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, broken period interest paid is considered a revenue expenditure and is deductible under the head 'income from business or profession'. This principle aligns with the precedent set by the Bombay High Court and affirmed by the Supreme Court.

Final Determinations on Each Issue

The court determines that the issue of broken period interest is resolved in favor of the respondent assessee. The appeal is dismissed, and the judgment of the Income Tax Appellate Tribunal is upheld. There is no order as to costs.