Case Law (SC) -- Broken period interest can be claimed as deduction/expenditure in the case where securities are treated as stock-in-trade and interest income on securities is taxed under Section 28 of the IT Act'

Bank of Rajasthan Ltd v. CIT [2024 INSC 781] dated 16.10.2024

The question is whether a deduction of the broken period interest can be claimed in the case where securities are treated as stock-in-trade and interest income on securities is taxed under Section 28 of the IT Act.

Holding

“22. At this stage, we may refer to a decision of this Court in the   case   of  Commissioner   of   Income  Tax   (Central), Calcutta v. Associated Industrial Development Company (P)  Ltd.,  Calcutta10 .   In the said decision, this Court held that   whether   a   particular   holding   of   shares   is   by   way   of investments or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee.  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. 3291­3294 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 in the case of  Vijaya Bank Ltd1 .  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. 

24. Therefore, 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   impugned   judgment   is   based   on   the decision in the case of Vijaya Bank Ltd.1     It also refers to the   decision   of   the   Bombay   High   Court   in   the   case   of American   Express   International   Banking   Corporation2 and holds that the same was not correct.   As noted earlier, the   view   taken   in   the  American   Express   International Banking   Corporation2   case has been expressly upheld by this Court in the case of  Citi   Bank   NA3. Therefore, the impugned judgment cannot be sustained, and the view taken by the Tribunal will have to be restored.”