Banks Can Claim Tax Deductions For Broken Period Interest On HTM Securities If Held As Trading Assets: Supreme Court

 

Facts:
1. 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.

2. 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.

3. 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.

4. 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.

Hon SC held as below:

1. 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.

2. 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.

3. Thus, 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 copy of the order is as under:

bank-of-rajasthan-ltd-v-commissioner-of-income-taxwatermark-1660651