2020 (9) TMI 493 - HC - Income Tax

Taxability of interest paid commonly known as Broken Period Interest - correct head of income - Business income or income from other sources - HELD THAT - In the instant case, the assessee bank ever since, its inception has been offering the Broken Period Interest income earned from the sale of securities as business income under Section 28 of the Act and not as income under the head 'income from other sources'. Therefore, Broken Period Interest paid to the sellers of securities was claimed as allowable deduction from its business income under the Act. The Tribunal while recording the finding in favour of the assessee has relied upon the decision of the Supreme Court in CITIBANK 2008 (8) TMI 766 - SUPREME COURT . - Decided in favour of assessee.

Summary

Issues:
1. Whether broken period interest paid by the assessee should be added to the cost of securities purchased?
2. Whether the expenditure towards broken period interest should be treated as part of closing stock?
3. Whether adjustment on the value of securities after considering broken period interest is required for arriving at the correct value?

Analysis:

Issue 1: The appeals under Section 260A of the Income Tax Act were preferred by the revenue regarding the treatment of broken period interest paid by the assessee in relation to the cost of securities purchased. The Tribunal held that the broken period interest should not be added to the cost of securities purchased, considering it as a capital outlay. The revenue contended that the expenditure retains the character of a capital expenditure directly related to the expansion of the capital base of the company. Legal precedents like 'VIJAYA BANK LTD. VS. ADDITIONAL COMMISSIONER OF INCOME TAX' were cited to support this argument.

Issue 2: The question of whether the expenditure towards broken period interest should be treated as part of closing stock was raised. The Commissioner of Income Tax (Appeals) directed the Assessing officer to recast the profits by considering the enhancement in the cost of securities purchased, including broken period interest. The Tribunal, relying on past decisions and the nature of the income earned by the assessee, allowed the appeals, considering the broken period interest as an allowable deduction from the business income under the Act.

Issue 3: The need for adjustment on the value of securities after considering broken period interest for arriving at the correct value was another point of contention. The Supreme Court's decision in 'CIT VS. CITIBANK' was cited to support the assessee's position that the broken period interest paid to the sellers of securities is an allowable deduction from the business income. The Tribunal's decision in favor of the assessee was upheld based on the interpretation of the broken period interest income as business income under Section 28 of the Act.

In conclusion, the High Court answered the substantial questions of law against the revenue and in favor of the assessee, dismissing the appeals. The judgment emphasized the treatment of broken period interest income earned from the sale of securities as business income under the Act, following legal precedents and clarifications provided by the Supreme Court and other relevant judgments.