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TMI Blog2024 (10) TMI 875X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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. - with Civil Appeal Nos.11200-11201 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies issuing securities on specific fixed dates called coupon dates, say after an interval of six months. When a Bank purchases a security on a date which falls between the dates on which the interest is payable on the security, the purchaser Bank, in addition to the price of the security, has to pay an amount equivalent to the interest accrued for the period from the last interest payment till the date of purchase. This interest is termed as the interest for the broken period. When the interest becomes due after the purchase of the security by the Bank, interest for the entire period is paid to the purchaser Bank, including the broken period interest. Therefore, in effect, the purchaser of securities gets interest from a date anterior to the date of acquisition till the date on which interest is first due after the date of purchase. 5. Under the Income Tax Act, 1961 (for short, the IT Act ), Section 18, which was repealed by the Finance Act, 1988, dealt with tax leviable on the interest on securities. Section 19 provided for the deduction of (i) expenses in realising the interest and (ii) the interest payable on the money borrowed for investment. Section 20 dealt with the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal held that as the appellant was holding the securities as stock-in-trade, the entire amount paid by the appellant for the purchase of such securities, which included interest for the broken period, was deductible. The respondent Department preferred an appeal before the High Court against the decision of the Appellate Tribunal. By the impugned judgment, the High Court interfered and, relying upon the decision of this Court in the case of Vijaya Bank Ltd. (1991) Supp (2) SCC 147 , allowed the appeal. This order was impugned in Civil Appeal Nos. 3291-3294 of 2009. 7. All other appeals that are the subject matter of this group are preferred by the Revenue. These are the cases where the deduction of interest for the broken period was allowed. 8. The learned counsel appearing for the appellant in Civil Appeal Nos. 3291-3294 of 2009 and learned counsel representing the respondents/Banks in other appeals have made extensive submissions. The submissions made by the learned counsel appearing for the assessees can be summarised as follows : a. Reliance was placed on a decision of the Bombay High Court in the case of American Express International Banking Corporation v. Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that in the case of Commissioner of Income Tax, Jalandhar v. Nawanshahar Central Cooperative Bank Ltd. (2007) 289 ITR 6 : (2007) 15 SCC 611 , it was held that investments are a part of the Banking business, particularly when statutorily mandated. It was submitted that Banking companies buy government securities to comply with SLR requirements. d. It is wellsettled that in the Banking business, securities purchased by Banks, per se, constitute stock-in-trade of the Bank as normal and ordinary Banking business is to deal in money credit. The money is parked in readily marketable securities so that it is available to meet the demand of depositors. This argument is supported by a decision of this Court in the case of Bihar State Cooperative Bank Ltd. v. Commissioner of Income Tax (1960) 39 ITR 114 : 1960 SCC OnLine SC 193 . e. It was contended that when the interest income of securities is uniformly assessed under the head profits and gains from business or profession , the decision of this Court in the case of Citi Bank NA3 will squarely apply. It was submitted that in the case of many Banks, for several assessment years, the assessment officer allowed the deduction of interest for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom business or profession . This contention is raised by HDFC Bank. It was submitted that in accordance with the wellsettled and accepted method of accounting, the amount of broken period of interest which is debited in the profit and loss account of the Bank is claimed as a deduction while computing the income from business under the head income from business and profession as the entire interest income is offered to tax under the said head. h. Reliance was placed on the RBI Circular dated 1st July 2009, which permits the debit of broken period interest to the profit and loss account. Reliance was also placed on a Circular dated 2nd November 2015 issued by the CBDT. The Circular provides that the investments made by a Banking company are a part of the business of the Bank. Therefore, income from such investments is attributable to the business of Banking falling under the head profit and gain of business and profession . i. It was submitted that assuming that as per the mandate of the 1949 Act, the securities are treated as investments in the books of accounts, it cannot be held that even for the purposes of the IT Act, securities would continue to be investments and not stock-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of broken period interest. CONSIDERATION OF LEGAL POSITION 10. We deal with the legal position at the outset. As noted, Sections 18 to 21 were deleted from 1st April 1989. In this group of appeals, we are not concerned with cases before the financial year 1988-89. Section 14 of the IT Act reads thus: 14. Heads of income. Save as otherwise provided by this Act, all income shall, for the purposes of charge of incometax and computation of total income, be classified under the following heads of income: A. Salaries. B. * * * * * C. Income from house property. D. Profits and gains of business or profession. E. Capital gains. F. Income from other sources. Clause B was of interest on securities . It was deleted with effect from 1st April 1989 along with Sections 18 to 21, which dealt with interest on securities. Head D is of income from profits and gains of business or profession covered by Section 28 of the IT Act. Profits and gains from any business or profession that the assessee carried out at any time during the previous year are chargeable to income tax. Under Section 36(1)(iii), the assessee is entitled to a deduction of the amount of interest paid in respect of capital borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or broken period interest. The assessing officer had disallowed the deduction for the payment made by the assessee for broken period interest. The assessing officer followed the decision in the case of Vijaya Bank Ltd1. The Bombay High Court distinguished the decision in the case of Vijaya Bank Ltd.1 and held thus: 18. The assessee-Bank, like several other Banks, were consistently following the practice of valuing the securities/interest held by it at the end of each year and offer for taxation, the appreciation in their value by way of profit/interest earned due to efflux of time. The Bank also claimed deduction for broken period interest payments. However, the department did not accept the assessee's method in the assessment year in question in view of the judgment of the Karnataka High Court in the case of (Commissioner of Incometax, Mysore v. Vijaya Bank)5, reported in 1976 Tax Law Reporter page 524. This judgment has been subsequently upheld by the Supreme Court in 187 I.T.R. page 541. In view of the judgment of the Karnataka High Court, the department took the view that broken period interest payment cannot be allowed as a deduction because it came within the ambit of int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.O. disallowed the broken period interest payment, which gave rise to the dispute. It was open to the department to assess the above difference under the head interest on securities under section 18. However, they chose to assess the interest under the head business and, while doing so, the department taxed broken period interest received, but disallowed broken period interest payment. It is in this light that one has to read the judgment of the Karnataka High Court and the Supreme Court in Vijaya Bank's case. In that case, the facts were as follows. During the Assessment Year under consideration, Vijaya Bank entered into an agreement with Jayalakshmi Bank Limited, whereby Vijaya Bank took over the liabilities of Jayalakshmi Bank. They also took over assets belonging to Jayalakshmi Bank. These assets consisted of two items viz. Rs. 58,568.00 and Rs. 11,630.00. The said amount of Rs. 58,568.00 represented interest, which accrued on securities taken over by Vijaya Bank from Jayalakshmi Bank and Rs. 11,630.00 was the interest which accrued upto the date of purchase of securities by the assessee Bank from the open market. These too amounts were brought to tax by the A.O. under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in the subsequent decision reported in 57 I.T.R. Page 306, in the case of C.I.T. Andhra Pradesh v. Cocanada Radhaswami Bank Limited, that income from securities can also come under section 28 as income from business. This judgment is very important. It analyzes the judgment of the Supreme Court in UCO Bank's case reported in 53 I.T.R. page 250, which has been followed by the Supreme Court in Vijaya Bank's case. It is true that once an income falls under section 18, it cannot come under section 28. However, as laid down by the Supreme Court in Cocanada Radhaswami Bank's case (supra), income from securities treated as trading assets can come under section 28. In the present case, the department has treated income from securities under section 28. Lastly, the facts in the case of UCO Bank reported in 53 I.T.R. page 250, also support our view in the present case. In UCO Bank's case, the assessee Bank claimed a set off under section 24(2) of the Incometax Act, 1922 (section 71(1) of the present Act) against its income from interest on securities under section 8 of the 1922 Act (similar to section 28 of the present Act). It was held that UCO Bank was not entitled to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are similar to the facts in American Express (supra). Agreeing with this view and accepting the distinction pointed out by the Bombay High Court, this Court dismissed the two special leave petitions filed by the revenue, one of which was dismissed by a three Judge Bench. After going through the facts which are similar to the facts in American Express (supra), since the tax effect is neutral, the method of computation adopted by the assessee and accepted by the revenue cannot be interfered with. We agree with the view expressed by the Bombay High Court in American Express (supra) that on the facts of the present case, the judgment in Vijaya Bank Ltd. (supra) would have no application. Thus, this Court approved the view taken by the Bombay High Court that the interest paid for the broken period should not be considered as part of the purchase price, but it should be allowed as revenue expenditure in the year of purchase of securities. This Court has reiterated the view taken by the Bombay High Court in the case of American Express International Banking Corporation2. WHETHER SECURITIES ARE HELD AS STOCK-IN-TRADE 14. In the case of Cocanada Radhaswami Bank Ltd.4, the Bank had shown i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any, of the assessee from the same business, profession or vocation, for that year; and if it cannot be wholly set off, the amount of loss not so set off shall be carried forward to the following year . While subsection (1) of Section 24 provides for setting off of the loss in a particular year under one of the heads mentioned in Section 6 against the profit under a different head in the same year, subsection (2) provides for the carrying forward of the loss of one year and setting off of the same against the profit or gains of the assessee from the same business in the subsequent year or years The crucial words, therefore, are profits and gains of the assessee from the same business i.e. the business in regard to which he sustained loss in the previous year. The question, therefore, is whether the securities formed part of the trading assets of the business and the income therefrom was income from the business. The answer to this question depends upon the scope of Section 6 of the Act. Section 6 of the Act classified taxable income under the following several heads : (i) salaries; (ii) interest on securities; (iii) income from property; (iv) profits and gains of business, profess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the loss to the subsequent year or years and set off the said loss against the profit in the business. Be it noted that clause (2) of Section 24, in contradistinction to clause (1) thereof, is concerned only with the business and not with its heads under Section 6 of the Act. Section 24, therefore, is enacted to give further relief to an assessee carrying on a business and incurring loss in the business though the income therefrom falls under different heads under Section 6 of the Act. 7. Some of the decisions cited at the Bar may conveniently be referred to at this stage. The Judicial Committee in Punjab Cooperative Bank Ltd. v. CIT [(1940) 8 ITR 635, 645] has clearly brought out the business connection between the securities of a Bank and its business, thus: In the ordinary case of a Bank, the business consists in its essence of dealing with money and credit. Numerous depositors place their money with the Bank often receiving a small rate of interest on it. A number of borrowers receive loans of a large part of these deposited funds at somewhat higher rates of interest. But the Banker has always to keep enough cash or easily realisable securities to meet any probable demand by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is well settled that a legal fiction is limited to the purpose for which it is created and should not be extended beyond its legitimate field The profits and gains of business and capital gains are two distinct concepts in the Income Tax Act : the former arises from the activity which is called business and the latter accrues because capital assets are disposed of at a value higher than what they cost the assessee. They are placed under different heads; they are derived from different sources; and the income is computed under different methods. The fact that the capital gains are connected with the capital assets of the business cannot make them the profit of the business. They are only deemed to be income of the previous year and not the profits or gains arising from the business during that year. It will be seen that the reason for the conclusion was that capital gains were not income from the business. Though some observations divorced from content may appear to be wide, the said decision was mainly based upon the character of the capital gains and not upon their noninclusion under the heading business . The limited scope of the earlier decision was explained by this Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time being registered under the Cooperative Societies Act, 1912 (Act 2 of 1912), the Bombay Cooperative Societies Act, 1925 (Bombay Act 7 of 1925), or the Madras Cooperative Societies Act, 1932 (Madras Act 6 of 1932), or the dividends or other payments received by the members of any such society out of such profits. Explanation : For this purpose the profits of a cooperative society shall not be deemed to include any income, profits or gains from: (1) Investments in (a) securities of the nature referred to in Section 8 of the Indian Income Tax Act; or (b) property of the nature referred to in Section 9 of that Act; (2) dividends, or (3) the other sources referred to in Section 12 of the Indian Income Tax Act. The Appellate Assistant Commissioner, however, repelled the contention of the appellant. He held that the business of the appellant consisted of lending money, and selling agricultural and other products to its constituents which could be planned ahead and required no provision for extraordinary claims He remarked that it appeared from the balance sheets that in the Accounting Year 1945 the Bank invested Rs 13,50,000 as fixed deposits, which, in the following year was rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt of interest on fixed deposits was an income under the head of other sources : and (2) Whether in the facts and circumstances of this case, the receipt of interest from the fixed deposits was an income not exempt from taxation under the CBR Notification No. 35 dated 20101934 and No. 33 dated 1881945. In paragraphs 9 and 10, this Court proceeded to hold thus: 9. In the instant case the cooperative society (the appellant) is a Bank. One of its objects is to carry on the general business of Banking. Like other Banks money is its stock-in-trade or circulating capital and its normal business is to deal in money and credit. It cannot be said that the business of such a Bank consists only in receiving deposits and lending money to its members or such other societies as are mentioned in the objects and that when it lays out its moneys so that they may be readily available to meet the demand of its depositors if and when they arise, it is not a legitimate mode of carrying on of its Banking business. The Privy Council in Punjab Cooperative Bank Ltd. v. CIT Lahore [24 ITR 346, 350] where the profits arose from the sale of government securities pointed out at p. 645 that in the ordinary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Company owe it to the Bank to make investments which earn them interest instead of letting moneys lie idle. It cannot be said that the funds of the Bank which were not lent to borrowers but were laid out in the form of deposits in another Bank to add to the profit instead of lying idle necessarily ceased to be a part of the stock-in-trade of the Bank, or that the interest arising therefrom did not form part of its business profits. Under the byelaws one of the objects of the appellant Bank is to carry on the general business of Banking and therefore subject to the Cooperative Societies Act, it has to carry on its business in the manner that ordinary Banks do. It may be added that the various heads under Section 6 of the Income Tax Act and the provisions of that Act applicable to these various heads are mutually exclusive. Section 12 is a residuary section and does not come into operation until the preceding heads are excluded. CIT v. Basant Rai Takht Singh [(1933) ITR 197, 201]. (emphasis added) 16. The decision of the Privy Council in the case of Punjab Cooperative Bank v. Commissioner of Income Tax (1940) SCC Online PC 46 is also very relevant. It was held thus : The principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he securities that Banks acquire as a part of the banking business are held as stock-in-trade and not as an investment. OUR CONCLUSIONS 18. 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. 19. As stated earlier, Banks are require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 23. Now, we turn to the factual aspects. As far as Civil Appeal No. 329194 of 2009 is concerned, the Tribunal, in a detailed judgment, recorded the following conclusions: a. Interest income on securities right from assessment year 198990 is being treated as interest on securities and is taxed under Section 28 of the IT Act; b. Since the beginning, securities are treated as Stock-In-Trade which has been upheld by the Department right from the assessment year 198283 onwards; c. Securities were held by the respondent Bank as Stock-In-Trade. The findings of the Tribunal have been upset by the High Court. The impugned judgment proceeds on the footing that the decision in the case of Vijaya Bank Ltd.1 case would still apply. Thus, as far as Civil Appeal Nos. 3291-3294 of 2009 are concerned, as a finding of fact, it was found that the appellant Bank was treating the securities as Stock-In-Trade. The said view was upset by the High Court only on the ground of the decision of this Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the Bombay High Court in the case of HDFC Bank Ltd. v. CIT11. We find no error in the view taken in this case. 26. In Civil Appeal @ Special Leave Petition (C) No.4843 of 2020, the High Court held in favour of the respondentBank by allowing a deduction for broken period interest relying upon the decision in the case of HDFC Bank Ltd (2014) 366 ITR 505 . In this case, the assessing officer did not accept the claim of the Bank that the securities held were in the nature of stock-in-trade. However, the CIT (Appeals) and the Appellate Tribunal accepted the respondent Bank s case. In this case, before the Appellate Tribunal, the department conceded in favour of the assessee. 27. In Civil Appeal @ Special Leave Petition (C) No. 7055 of 2021, neither the assessment officer nor the CIT allowed a deduction on account of the broken period interest. However, the Tribunal allowed the same. Before the High Court, Revenue argued that the increase in capital results in the expansion of the Bank's capital base, which helps in profit making. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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