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2024 (10) TMI 875 - SC - Income TaxTreatment to be given to broken period interest - securities were treated as stock-in-trade - whether a deduction of the broken period interest can be claimed? - HELD THAT - Initially, CBDT issued Circular No. 599 of 1991 and observed that the securities held by Banks must be recorded as their stock-in-trade. The circular was withdrawn in view of the decision of this Court in the case of Vijaya Bank Ltd1. In the year 1998, RBI issued a circular dated 21st April 1998, stating that the Bank should not capitalise broken period interest paid to the seller as a part of cost but treat it as an item of expenditure under the profit and loss account. A similar circular was issued on 21st April 2001, stating that the Bank should not capitalise the broken period interest paid to the seller as a cost but treated it as an item of expenditure under the profit and loss account. In 2007, the CBDT issued Circular No. 4 of 2007, observing that a taxpayer can have two portfolios. The first can be an investment portfolio comprising securities, which are to be treated as capital assets, and the other can be a trading portfolio comprising stock-in-trade, which are to be treated as trading assets. Banks are required to purchase Government securities to maintain the SLR. As per RBI s guideline dated 16th October 2000, there are three categories of securities HTM, AFS and HFT. As far as AFS and HFT are concerned, there is no difficulty. When these two categories of securities are purchased, obviously, the same are not investments but are always held by Banks as stock-in-trade. Therefore, the interest accrued on the said two categories of securities will have to be treated as income from the business of the Bank. Thus, after the deduction of broken period interest is allowed, the entire interest earned or accrued during the particular year is put to tax. Thus, what is taxed is the real income earned on the securities. By selling the securities, Banks will earn profits. Even that will be the income considered under Section 28 after deducting the purchase price. Therefore, in these two categories of securities, the benefit of deduction of interest for the broken period will be available to Banks. If deduction on account of broken period interest is not allowed, the broken period interest as capital expense will have to be added to the acquisition cost of the securities, which will then be deducted from the sale proceeds when such securities are sold in the subsequent years. Therefore, the profit earned from the sale would be reduced by the amount of broken period interest. Therefore, the exercise sought to be done by the Department is academic. The securities of the HTM category are usually held for a long term till their maturity. Therefore, such securities usually are valued at cost price or face value. In many cases, Banks hold the same as investments. Whether the Bank has held HMT security as investment or stock-in-trade will depend on the facts of each case. HTM Securities can be said to be held as an investment (i) if the securities are actually held till maturity and are not transferred before and (ii) if they are purchased at their cost price or face value. We may refer to a decision of this Court in Associated Industrial Development Company (P) Ltd., Calcutta 1971 (9) TMI 3 - SUPREME COURT In the said decision, this Court held that whether a particular holding of shares is by way of investments or forms part of the STOCK-IN-TRADE is a matter which is within the knowledge of the assessee. Therefore, on facts, if it is found that HMT Security is held as an investment, the benefit of broken period interest will not be available. The position will be otherwise if it is held as a trading asset. In the facts of the case, as the securities were treated as stock-in-trade, the interest on the broken period cannot be considered as capital expenditure and will have to be treated as revenue expenditure, which can be allowed as a deduction. The impugned judgment is based on the decision in the case of Vijaya Bank Ltd 1990 (9) TMI 5 - SUPREME COURT It also refers to the decision of the Bombay High Court in the case of American Express International Banking Corporation2 and holds that the same was not correct. As noted earlier, the view taken in the American Express International Banking Corporation case has been expressly upheld by this Court in the case of Citi Bank NA3. Therefore, the impugned judgment cannot be sustained, and the view taken by the Tribunal will have to be restored. AO held that the respondent Bank was liable to pay the broken period of interest as part of the price paid for the securities. hence, a deduction on the said amount was disallowed - The assessee could not succeed before the CIT (A). Before the Appellate Tribunal, reliance was placed on the decision of this Court in the case of Vijaya Bank Ltd 1990 (9) TMI 5 - SUPREME COURT Tribunal observed that the assessing officer had treated the interest income earned by the respondent Bank on securities as income from other sources. The Tribunal observed that the investments in securities are in stock-in-trade, and this fact has been accepted in the past by the Income Tax department. It was held that the securities in the category of HTM were also held as stock-in-trade, and income/loss arising out of such securities, including HTM securities, has been treated as business income/loss. The Appellate Tribunal held that the interest for the broken period would be admissible as a deduction, and the High Court confirmed the same. We may note here that the Tribunal followed the decision of HDFC Bank Ltd 2014 (8) TMI 119 - BOMBAY HIGH COURT We find no error in the view taken in this case.
Issues Involved:
1. Treatment of broken period interest in the context of income tax deductions. 2. Classification of government securities as stock-in-trade or investment. 3. Applicability of the decision in Vijaya Bank Ltd. v. Additional Commissioner of Income Tax to post-1989 scenarios. 4. Treatment of securities under the Banking Regulation Act and Income Tax Act. 5. Assessment of interest income under the appropriate head of income. Issue-wise Detailed Analysis: 1. Treatment of Broken Period Interest: The core issue in these appeals was whether broken period interest should be treated as a deductible expense under the Income Tax Act. The appellants argued that broken period interest should be deductible as revenue expenditure, as it is an inherent part of the banking business where securities are held as stock-in-trade. The Supreme Court held that broken period interest should not be considered part of the purchase price but should be allowed as revenue expenditure in the year of purchase of securities. This aligns with the decision of the Bombay High Court in American Express International Banking Corporation, which was approved by the Supreme Court in the case of Citi Bank NA. 2. Classification of Government Securities: The classification of securities as stock-in-trade or investment is pivotal in determining the tax treatment of interest income. The Court noted that securities held by banks as part of their statutory liquidity requirements (SLR) could be classified into three categories: Held to Maturity (HTM), Available for Sale (AFS), and Held for Trading (HFT). AFS and HFT securities are generally treated as stock-in-trade, allowing the deduction of broken period interest. However, HTM securities, typically held until maturity, could be considered investments, and the deduction might not be applicable unless proven otherwise. 3. Applicability of Vijaya Bank Ltd. Decision: The decision in Vijaya Bank Ltd. was based on the provisions of Sections 18 to 21 of the Income Tax Act, which were repealed in 1989. The Supreme Court clarified that the Vijaya Bank decision does not apply to cases post-1989, where securities are assessed under Section 28 as business income. The Court emphasized that the income from securities, when held as stock-in-trade, should be assessed under the head "profits and gains of business or profession." 4. Treatment of Securities under Banking and Income Tax Laws: The Court reiterated that securities held by banks are typically part of their trading assets and should be treated as stock-in-trade. This is consistent with the Reserve Bank of India's guidelines and the Central Board of Direct Taxes' circulars, which recognize that banks may hold securities as part of their business operations rather than as long-term investments. The Court concluded that the treatment of securities in the books of accounts does not determine their classification for tax purposes. 5. Assessment of Interest Income: The assessment of interest income from securities should be under the head "profits and gains of business or profession" if the securities are held as stock-in-trade. The Court noted that the method of accounting adopted by the banks, which included the deduction of broken period interest, did not result in any loss of tax revenue. The consistent practice of treating securities as stock-in-trade was upheld, and the broken period interest was allowed as a deductible expense. Conclusion: The Supreme Court allowed Civil Appeal Nos. 3291-3294 of 2009, setting aside the High Court's judgment and restoring the Tribunal's decisions. The Court dismissed the Revenue's appeals in other cases, subject to clarification regarding HTM securities. The judgment reinforced the principle that securities held as stock-in-trade by banks should be assessed as business income, allowing the deduction of broken period interest as revenue expenditure.
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