Interest On Broken Period Can’t Be Considered As Capital Expenditure Where Securities Are Treated As Stock-In-Trade: SC
|The Supreme Court held that the interest on the broken period cannot be considered as capital expenditure and will have to be treated as revenue expenditure where the securities are treated as stock-in-trade.
The Court was dealing with the appeals in which the main issue was about the treatment to be given to broken period interest and the question was whether a deduction of the broken period interest can be claimed.
The two-Judge Bench comprising Justice Abhay S. Oka and Justice Pankaj Mithal observed, “… 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 Bench explained that, 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.
AOR Raj Bahadur Yadav represented the appellants while Senior Advocates Rupesh Kumar, Sanjay Jhanwar, and ASG N. Venkatraman represented the respondents.
Brief Facts -
The appellant-assessee was a Scheduled Bank and was engaged in the purchase and sale of government securities. The securities were treated as stock-in-trade in the hands of the appellant and the amount received by the appellant on the sale of the securities was considered for computing its business income. The appellant consistently followed the method of setting off and netting the amount of interest paid by it on the purchase of securities (i.e., interest for the broken period) against the interest recovered by it on the sale of securities and offering the net interest income to tax. The result was that if the entire purchase price of the security, including the interest for the broken period is allowed as a deduction, then the entire sale price of the security is taken into consideration for computing the appellant’s income.
According to the appellant's case, the assessing officer allowed this settled practice while passing regular assessment orders for the assessment years 1990-¬91 to 1992¬93. However, the Commissioner of Income Tax (CIT) exercised jurisdiction under Section 263 of the Income Tax Act, 1961 (ITA) and interfered with the assessment orders. The CIT held that the appellant was not entitled to the deduction of the interest paid by it for the broken period. Being aggrieved by the orders of the CIT, the appellant preferred an appeal before the Income Tax Appellate Tribunal (ITAT). ITAT allowed the appeal but the High Court interfered with the same and allowed the Department’s appeal. Hence, the appellant was before the Apex Court.
The Supreme Court in view of the above facts, noted, “… the Privy Council and this Court have consistently held that the securities that Banks acquire as a part of the banking business are held as stock¬in¬trade and not as an investment.”
The Court further noted that the profit earned from the sale would be reduced by the amount of broken period interest and 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”, it added.
The Court enunciated that if it is found that HMT Security is held as an investment, the benefit of broken period interest will not be available and the position will be otherwise if it is held as a trading asset.
“As the securities were held as stock¬in¬trade, the income thereof was chargeable under Section 28 of the IT Act. Even the assessing officer observed that considering the repeal of Sections 18 to 21, the interest on securities would be charged as per Section 28 as the securities were held in the normal course of his business. The assessing officer observed that the appellant¬ Bank, in its books of accounts and annual report, offered taxation on the basis of actual interest received and not on a due basis”, it also remarked.
The Court said that the expenditure in the nature of broken period interest was capital expenditure, however, the High Court rightly rejected the contention of the department that the outlay on the purchase of securities was capital outlay.
Accordingly, the Apex Court allowed appeals, set aside the impugned judgment, and restored that of the ITAT.
Cause Title- Bank of Rajasthan Ltd. v. Commissioner of Income Tax (Neutral Citation: 2024 INSC 781)
Appearance:
Appellants: AOR Raj Bahadur Yadav
Respondents: Senior Advocates Rupesh Kumar, Sanjay Jhanwar, ASG N Venkatraman, AORs Raj Bahadur Yadav, Sanjay Kapur, Tarun Gupta, Pranab Kumar Mullick, Advocates V Chandrashekhara Bharathi, Vikrant Yadav, Rajesh Kumar Singh, Surya Prakash, Divya Singh Pundir, Devesh Dubey, Arjun Bhatia, Shubhra Kapur, Mahima Kapur, Isha Virmani, Prakul Khurana, Rajat Sharma, Gourav Asati, Yash Tandon, Soma Mullick, Sanjiv M Shah, and Sebat Kumar Deuria.