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TMI Blog2013 (1) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of the assessee that the broken period interest payments are in the nature of revenue expenditure American Express International Banking Corporation v CIT (2002 (9) TMI 96 - BOMBAY HIGH COURT)wherein held that when the BPI received was taxable as business income, the Department ought to have allowed deduction for the BPI paid on purchase of securities. CIT v Citibank N.A.(2003 (4) TMI 36 - BOMBAY HIGH COURT) & CIT v Nedungadi Bank Limited (2002 (11) TMI 29 - KERALA HIGH COURT) stating that the interest paid for the broken period would constitute allowable outgo in the hands of the assessee and is an admissible deduction in the computation of total income of the Bank under the head “profits and gains of business or profession & State Bank of Hyderabad v Joint CIT (2005 (3) TMI 403 - ITAT HYDERABAD-B) stating that if the securities were held by the banking company as stock-in-trade of the business, interest paid for the broken period would constitute allowable outgo in the hands of the assessee bank. Disallowance of broken period interest paid to sellers of securities in earlier years - Held that:- The amount is to be disallowed when the same should have been claimed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, 1961. The Commissioner of Income Tax in her order under section 263 of the Act dated 29.3.2004, directed the Assessing Officer not to treat the broken period interest paid to the sellers of the securities as revenue expenditure but to treat the same as a part of cost of the securities and to consider it for valuation of closing stock. In pursuance to 263 order, the Asst. Commissioner of Income Tax passed order under section 143(3) r.w.s. 263 of the Act by making the following adjustments/disallowances:- Sl. No. Adjustments/Disallowances Amount (Rs.) 1. The amount of BPI paid during the assessment year 1999-2000 on the securities lying in the stock as at 31/3/1999. 4,21,90-,806/- 2. The amount of the BPI paid in the earlier years. 17,91,46,619/- 3. The incremental depreciation on the value of the securities after reducing the amount of Rs.60,77,000/- already written back. 20,91,83,000/- 4.1 For the assessment year 2000-01, the assessment under section 143(3) was completed vide order dated 23/3/2002. Subsequently, the Commissioner passed order under section 263 of the Act on 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, in fact and law, the Commissioner of Income Tax (Appeals) ought to have disposed off the appeals on merit . 5.1 Thereafter, the CIT(A) took up the issue on merits and decided the appeals against the assessee and confirmed the assessment order passed under section 143(3) rws 263 of the Act. 6. The assessee being aggrieved is in appeal before us. 7. The learned AR relied on the grounds raised in its appeals, which are argumentative and narrative in nature. Since the grounds raised in both the assessment years are identical, except for variation in figures, the grounds raised for the assessment year 1999-2000 is reproduced below:- 1. Broken period interest paid to the sellers of the securities for the assessment year 1999-00 Rs.42,190,806/-. a) The learned CIT(A) erred in not holding that the Broken Period Interest (BPI) paid to the sellers of the securities under the Available for Sale category and tying in the stock as on 31st March, 1999 amounting to Rs.42,190,806/- is a revenue expenditure. b) The learned CIT(A) ought to have placed reliance on the Circular No.599 issued by the Central Board of Direct Taxes (CBDT) wherein it was clarified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ier years Rs.17,91,46,619/- Notwithstanding and without prejudice to the appellant s contention that the BPI paid to the sellers of security is revenue expenditure The learned CIT(A) erred in not deleting the addition of a sum of Rs.17,91,46,619/- being BPI paid in the earlier years, made by the Assessing Officer. He ought to have observed that this sum is not claimed as revenue expenditure in the assessment year 1999-00 and accordingly, requires no adjustments for this assessment year. The learned CIT(A) ought to have observed that the adjustment to the BPI paid in the previous years is not in line with the directions given by the Commissioner of Income-tax in her order under section 263 of the Act. 3. Adjustments on valuation of securities after considering the Broken period interest of Rs.20,91,83,000/- Notwithstanding and without prejudice to the appellant s contention that the BPI paid to the sellers of security is revenue expenditure - The learned CIT(A) erred in not deleting the adjustment of the sum of Rs.20,91,83,000/- on valuation of the closing stock of securities done by the Assessing Officer. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntral Board of Direct Taxes, which are reproduced as under:- (i) . (ii) Whether deduction claimed in respect of interest paid for broken period on the purchase of securities should be allowed as a deduction from the taxable profits? (2) As far as the second issue is concerned, both the interest payments and receipts must be regarded as revenue payments/receipts and only the net interest on securities shall be brought to tax as business income. The Hon ble High Court of Karnataka in the case of assessee itself held that broken period was not taxable as the interest on securities did not accrue from day to day but on certain fixed days. Reliance was also placed on the decision of the Hon ble Supreme Court in the case of Vijaya Bank reported in 187 ITR 541. The sum of Rs.19,07,447/- representing the interest accrued but not due from the last date of accrual till the date of purchase was paid to the sellers of securities. The assessee treated the securities so purchased as stock-intrade. The Assessing Officer disallowed the above sum on the ground that the expenditure is capital in nature as it goes to increase the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - In the case of Vijaya Bank the interest income including BPI income on the sale of securities was offered to tax under the head Interest on securities but not as Business Income . Hence it was held that outlay on the purchase of an income-bearing asset is in the nature of capital outlay, and no part of the capital so laid out can, for income tax purposes, be set off as expenditure against income accruing from the asset. - Whereas in the instant case, the interest income including BPI income on the sale of securities was offered to tax as Business Income . Since the BPI income was offered to tax as Business Income and the same was accepted by the Income Tax Department, the BPI expenditure on the purchase of securities should also be allowed as deduction while computing the Business Income of the assessee. - Further, the BPI income has been offered to tax as Business Income from the inception. If the Income Tax Department has brought to tax the BPI income under the head Interest on securities not as Business Income then the Vijaya Bank s ruling would have been applicable to the facts of the present case. Hence, the judgment in the case of Vijaya Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits and gains of business or profession . iv) CIT v South Indian Bank Limited 154 Taxation 638 (Kerala) HC The Hon ble Kerala High Court ruled the decision in the favour of the assessee and held that government securities held by the Bank are trading in nature and broken period interest paid on the above is an allowable expenditure for the purpose of computation of total income under the head profits and gains from business or profession . v) State Bank of Hyderabad v Joint CIT 95 TTJ 368 (Hyd.) ITAT The Hyderabad Tribunal held that if the securities were held by the banking company as stock-in-trade of the business, interest paid for the broken period would constitute allowable outgo in the hands of the assessee bank. 9.5 In the light of the above judgements of the Hon ble Supreme Court and various High Courts, we hold that the broken period interest payments on purchase of securities (AFS category) ought to be allowed as revenue expenditure. 9.6 Broken period interest ( BPI ) paid to sellers of securities in earlier years We have heard the rival submissions and perused the materials on record. We hold that the amount is to be disallowed w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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