THE COMMISSIONER OF INCOME TAX-III, HYDERABAD. vs. STATE BANK OF HYDERABAD, HYDERABAD.

f;t It I i I [3311] HIGH COURT FOR THE STATE OF TELANGANA WEDNESDAY,THE SEVENTH DAY OF JUNE TWO THOUSAND AND TWENTY THREE PRESENT THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUYAN ANT) THE HONOURABLE SRI JUSTICE N.TUKARAMJI INCOME TAX TRIBUNAL APPEAL NO: 378 OF 2006 (lncome Tax Tribunal Appeal Under Section 260-4 of the lncome Tax Act, against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench 'A', Hyderabad in ITA No.663Hyd 12003, for assessment Year 1998-1999 dated 28-10-2005 preferred against the Order of the Commissioner of lncome Tax (Appeals) lV, Hyderabad, Appeal No.25lDC-3(1yClT(A)-1V12002-03 dated 19-08-2002, preferred against the Order of the Joint Commissioner of lncome Tax(Assts.) Special. Range-4, Hyderabad, PAN/GIR No.S-31 , dated 29-03-2001.) Between: The Commissioner of lncome Tax-lll, Hyderabad ...APPELLANT AND State Bank of Hyderabad, Finance and Accounts Department, Head Office, Gunfoundry, Hyderabad. ...RESPONDENT lA NO: 1 OF 2018 Petition under Section 151 CPC praying that in the circumstances stated in the affidavit filed in support of the petition, the High Court may be pleased Permit the petitioner to substitute its name as respondent in the appeal as "State Bank of lndia, Gunfoundry, Hyderabad" by amending the caused title accordingly in the interest of justice Counsel forthe Appellant: SRl. J. V. PRASAD (SC FOR INCOME TAX) Counsel for the Respondent: Mr. K.P.AMARNATH REDDY The Court made the following:

T}Ip-rpNll_rlp !IlE- CHIEF JUSTICE UJJAL BHIIYAN AND THE HON 'BLE SRI JUSTICE N. TUKARAMJI I.T.T.A.No.37a of 2o06 JUDGMENT t1'e. tlk rl,,!,I)k il!, | )nt! J\lstic.e Uial Bhuyan) Hearcl Xilr. ,i.V.Prasad, learned Standing Counsel. Income 'l;rx Dcpartmer)t, for the appellant and N,lr. K.P.Arnarnatlr Reddr, learned counsel for the responden t 2. This anpeal has beerr preferred by the revenue as the appeliant Lrnder Scction 260A of the Income Tax Act, 1961 (briefly, 'thr Act' herc-initfter) against the order dated 28.10.2005 passecl br. rhc Income Tax Appellate Tribunal, Hyderabad Bench 'A', Hyderabad (Tribunal) in I.T.A.No.663,tHydl2OO3 for the assessment year 1998- t999. 3. Learnerl counsel for the parties are in agreement that issue raised in this altpcarl 1S squarely covered by the : I

,-:t 2 decision of this court dated 04 -Ol -2023 passed It1 LT.T.A.No.32a of 2006 (Commissioner of Income Tax-III v' State Bank of Hyderabad) wherein parties r'vere the same' 4. In fact, I.T.T.A.No.328 of 2006 arose out of the same order of the Tribunat dated 28.10'2005 passed in I.T.A.No.661/Hydl2OO3 for the assessment year 7996' t997. 5. Relevant portion of the judgment and order dated O4.O1.2023 passed in I.T.T.A.No'328 of 2OO6 reads as follows: 15. Issue before the Court is whether broken period interest paid on purchase of securities is revenue expenditure since tJle securities constitute stock-in- trade? 16- To appreciate the above question. it would be appropriate to first examine the meaning of the exprcssion "broken period interest". This has been explarned by the Bombay High Court in American Express Lrteraational Balking CorPoration v. Commissioner of Income Tax ((2OO2) 258 ITR 601 (Bom)) in the following manner: I

''6. iJr'lirrc .orlrir!t to the facts of the r:ase, a sfrort l)!raact' ')(.ds to be mentioned This prefac<: r'xplai rs tire aoncept o[ broken period Lnterc:j1 t \ ( r'. IIrnK rs required to maintain Statul,,rr [-r(l( ,ll\ Ratio (hereinafter rc[crred lo i1s 'Sl-R ) l( I rhat purposc, every l;ank sLtbscr rlres to ( ,,,\ ( rnntent securities. Onc such sccuritr rs knorrrr as SGL (Subsidiary Gencral I-cdger) i his llrlqt r is maintained in the Pubtic Debt Oflr< e rir 1 lr( Reser ve Bank of [ndia. Every 5ank is reclLrrrrrl, as a part of banking lusincss, to sLrlrscribe to this loan. This loan/S(ll, is irl:j() transferable like any other sccurit\'. In tlrisi case, for example, rve are ronccrrcd $ltll 1.75 per cent. Government of 'r.rclia Lrirn. i9l]o, l. v. Rs. 5 lakhs. On the SGL, he llt'stric Il:rnii ol Indra pays half vearly ntcrest In llrc , irs( ol the said 4.75 per cent. ';overnrre!rr ol lnrlia Loan, 1980, f. v. Rs. 5 lakhs, tlrc Resr,,-r't, Bank of India was required ro pa\' [r.ill' re:i.lv interest on May 12, 1976, irnd NovernbL'r- 12. i976. The Reserve Bank of lrdia pavs inl(.('sr on due dates on such securrtres to t[r(. llolders of the securities, every slr months. TIrc Rescrve Bank of India pays intercst on thc baiance to the banks, whose names appear as holders in the PDO ledger. /\fter subs(:ribin!., lo rhe said loans, the banks \ cre l|ec to transfcr such loans for coDsi(lc-rirlro|t Lo the other banks. (onseqtrt,nth, llr(. Reserve Bank of India pays interest to thr: lrolder on the balances in a s,rcurity i[, rn it:i l)ooks, the said security stood irr the rrarnr: o[ r lrr t holder on the due date for

- + .,1 pajment of interest. As stated above, to maintain SLR levels, every bank subscribes to such loans. This is a part of banking business. llorr,ever, after so subscribing, the banks are frec to deal wrth such securities like any other tradcr. Therefore, there are two activities involved--one activity is that of subscribrng to the loan and the other is trading. Now, if a bank purchased 4.ZS per cent_ GOI Loan, 1980, f. v. Rs. 5 lakhs on August 11, 19|6. then, on purchase, the said bank was required to lodgc the transfer form with the pDO. On such lodgement, the name of the bank was entered in the pDO ledger. Therefore, on the next due date for payment of interest, namely, November 12,1976, the bank was entided to receive half yearlv interest from the Reserve Bank of [ndia for the period May 12, 1926, up to November 12, 1976, even though it had bought the sard security on August 11, 1976. Therefore, it receives interest for the entire six months, though it bought the security on August l l, 1976. In the above example, since the security was sold/ transferred on August ll, 1976 (i.e., after due date for payment of interest), interest had accrued to the transferor/ seller from the last due date, i.e,, May 12, t976 up to August tl, 1976." 17. As exptajned by the Bombay High Court, every bank is required to maintain a Statutory Liquidity Ratio (SLR). For that purpose, every barrk subscribes to government securities. One such security is known as

) Subsitliary Gcrrcral I_r'riricr (SGL) r,,,hich is matntaincd tn the h.i)lic Dcl:lr Otfir.r rn rhe Rcsen.e Bank of India. Every irank is rcclrrr:'cri ir:i ii part of its bankrng business to subscribe tc ihrs irt;rn Like an-v- other security, such a loan,'SGL is rrlso -ransfr'rablc Reserve Bank of India pays intcrest on due (lirtes on such securities to the holders of the se<:'rritics every six months. After subscribing to the sald ioans, banks are free to transfer such l,)ajts for consrclcrrrtron to other banks. Reserye Bank of India p:r_r's rnier-est to the holder on the balanc,rs in a sccurirv il in its books the sard security stands in the nanre oi tlrirL holder on the due date for payment of intcrcst. 'l-hc above exercise, if we may say so, is a part o[ thc banl<ins business. However, after so subscrrl:ing, thc barl<s are free to deal wrth such securlties like airv otn.! tr;lder. 'l'herefore, there are two actiwities tnvoh,cd ,;nc of subscribrng to the loal ard the othcr is trading, 18. One of tl)c questrons before the Bombay High Court u.as whether l;roken period interest payment by the assc:ssee was allou,irble as a revenue expenditure under the head 'incom<' from business or profession? While answering rhrs rltrcstion, Bombay High Court examined the decision ()l the Supreme Court in ViJaya Bank Ltd, v. Additional Commissioner of Income Tax, Bangalore ((199 1) iflT lTR 54 I (SC)). 19. [n ViJaya Bank Ltd. v. Additlonal Commissioner of Income Tax, Bangalore ((1991) 1g7 ITR 54 I (SC)), dr-rrin q rhe assessment year under

- 6 consideratlon. Vrla-va tsank had entered into al agrcemenL with Jayalakshmi Bank Ltd. whereby Vijaya Balrk took over the liabilities of Jayalakshmi Bank. It also took over the assets belonging to Jayalakshmi Bank. One of the two items taken over by Vijaya Bank represented interest which accrued on securities taken over by Vij aya Bank from Jayalakshmi Bank. Such arnount was brought to tax by the assessing ofhcer under Section l8 of the Act. However, assessee claimed that such amount was deductable under Sections 19 & 2O of thc Act. It $,as in thc light of such facts that the dccision rn Vijaya Bank Ltd. v. Additional Commissioner of Iacome Tax, Baugalore ((19911 187 ITR 54 I (SC)) uas rendercd. 20. Therefore, Bombay High Court rn American E:(press Internatlonal Banking Corporation v. Commissioner of Income Tax (.l2OO2l 258 ITR 601 (Bom)), in the facts of that case, held that having assessed thc income of the assessee under Section 28 of the Act, Revenue ought to have taxed-the broken period interest received but at the same time ought to have allowed deduction for the broken period interest paid. 21. As already noticed above, this decision of the Bombay High Court has found favour with the Supreme Court in Commissioner of Income Tax v. Citibank N.A. (2008 (8) TMI 766) where Supreme Court agreed with the views expressed by the Bombay High Court. Decision of the Supreme Court in Commissioner of Income Tax v. Citibank N.A. (2008 (8) TMI 766) is

dat-ed i2.08.2008 q4r('r.-'as deciston o[ the Ralasthan I{igh Court in Commissioner of Income Ta:i v. Bank of Rajasthan Limited ((2009) 316 iTR 291) is dated 24.O3.2AOA. 22. Before we advert to ihe facts of the present appeal, rve may refer io the decision of the Kerala High Court in Commissioner of Income Tax v. Nedungadi Bank Ltd. ((2003) 2b4 I1'R 545). ln that appeal, Kcrala High Corrrt also examrncd the effect of the dccision of the Suprr:me Court in Vijaya Bank Ltd, v. Additional Commissioner of Income Tax, Bangalore (( 199 I ) 187 ITR 541 iSC)). Out of the four substantial questions of law which were considcred by the Kcrala High Court, question No.I pertained to rvhether investments made by tJle assessee in the lorm of government securities acquired for the purpose of complying with the requiremcnts of the pror isions of the Banking Regulation Act i.e., to mirintain SLR, could be treated as trading rLsset/stock-in tradc of thc business of the assessee? The 4,h questron considercd by the Kerala High Cou rt was as to rvhcther interest paid for the broken pcriod in the purchase of securities is an allowable deduction? Referring to the Circular dated 24.04.1991issued by thc CBDT, Kerala High Court held that securities held by banks constitute their stock-in- trade or investment and consequently loss claimed by bar-rks on the valuation of their securities should be atlowed as a deductlon rrr conrputing the taxablc profits. Therefore, Kerala High Clorrrt confirmed the vrew taken by the Tribune that sc.t:uriLies held by the assessee I I I

3 balk were stock-trl-trade tlf tt.tc business o[ thc asscssce bank and that the nottonltl loss suflered on account of reva-luation of the said sccuri'.ies at the close of the year was an eJlowablc dcduction in the computation of profits of the assessec bzrnk. Finally, in respect of tl're 4th question as to whether the Tribunal was justified in allowing the claim for dcduct.ion of interest paid for the broken period for acquisition of the securities till the date of such securities, Kerala High Court held that the said question was squarely covered by its earlier decision in Cornmissioner of Income Tax v. South Indian Bank Ltd. ((2000) 241 ITR 374 lKetll wherein it was held that interest paid for the broken period would constitute allowable outgo in the hands of the assessee and was an admissible deduction in the computation of total incorne of the assessee (bank) under the head 'profits and gains of business or profession'. 23. Adverting to the facts of the present case, we find that it is the contention of the respondent that respondent had been holding its securities all along as stock-in-tradc which is not in dispute. For successive assessment years, Revenue has accepted the fact that respondent had been holding the securities as stock-in- trade. Circula-r No.665 dated 05.10. 1993 of the CBDT has clarified thc decision of the Supreme Court in Vijaya Bank Ltd. v. Additional Commissioner of rncone Tax, Bangalore ((1991) 187 ITR 541 (SC)). CBDT has clarified that where the banks are holding securities as stock-in-trade and not as investments, principles of law enunciated in Vijaya Bank Ltd. v.

Additional Commissioner of Income Tax, Bangaiore ((1991) 187 ITR 5+ I (SC)) -wouid not be airplicable. Thercfrrre, CBDT has clarified that assessrng cfficer sl.rould determine on the facts and circurnstances of each rase as to \\'hcther any particular security constitute stock-in-trircle or investment taklng into accoun t the guidelines isstrcd by Rcserve Btrnk of IndLa from time to time. 24. I t rs in the abrtt'e back drop that Tribu nai has held that the responrlcnt had purchased securitles to hold them as stock-in tradc. Therefore, interest paid on such securities would be an allowable deduction. 25. We are in agreement with the ltnding returned by the Tribunal. Thar :1part, this is a finding of fact renclered by the Tribunal and in an appcal under Section 260A of the Act. \ve are not inclined to disturb such a hnding of fact. that too, when the legal position is very clear. 26. For the aforesaid reason, we answer the above questions in favour of the respondent assessce and against the appellant Revenue. 27. Appeat is accordingly dismissed. Howevcr, there shall be no order as to .-osls. I I t

l0 6. Follo',r,'ing the same, the issue raised in this appeal is decidedinfavouroftherespondent_assesseeandagainst the appellant - revenue' Consequently, the appeal is dismissed' 7 Miscellaneous applications pending' if any' shall stand closed. However, there shall be no order as to costs,,"- Sd/.K.SRINIVASA RAO JOINT REGISTRAR eD I/TRUE COPY// SECTION OFFICER To, DL 1. The lncome Tax Appellate Tribunal' Hyderabad Bench'A " Hvderabad. , ?,tH;;issione' of lncome Tax (Appeals),lV' Hvderabad' a. The Joint commisti";;;;i;;;e iax(nssts') special' Ranse-4' ^BI3E'f gi!l.*y;I^y"T,o*(R:SS.l[?3g[i6l]#vocateroPucl 5. One CC to Mr' K'P'AMAR} 6. Two CD CoPies \-y

HIGH COURT DATED:07 tO6t2023 JUDGMENT lTTA.No.378 of 2006 -iliE sr tlJt Ii Art c\ 1- c.+' ,i i\.I rl flr8 v, OISMISSING THE APPEAL t I l i l I I