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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 8TH DAY OF SEPTEMBER 2020
PRESENT
THE HON’BLE MR. JUSTICE ALOK ARADHE
AND
THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD
I.T.A. NO.27 OF 2013 C/W I.T.A. NO.26 OF 2013 I.T.A. NO.27 OF 2013 BETWEEN:
THE COMMISSIONER OF INCOME-TAX
LTU, JSS TOWERS
BSK III STAGE, BANGALORE.
THE COMMISSIONER OF INCOME-TAX (APPEALS)
LTU, JSS TOWERS
BSK III STAGE, BANGALORE. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,)
AND:
STATE BANK OF INDIA (SBI) HEAD OFFICE, P.B. NO.9727 K.G. ROAD, BANGALORE. ... RESPONDENT (BY SRI. ANKUR PAI, ADV., A/W SRI. K.R. VASUDEVAN, ADV.,) - - -
THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 14.09.2012 PASSED IN ITA
NO.889/BANG/2011 FOR THE ASSESSMENT YEAR 2000-01, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (I) ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE ITAT, BANGALORE IN ITA NO.889/BANG/2011 DATED 14-09-2012 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY.
I.T.A. NO.26 OF 2013 BETWEEN:
THE COMMISSIONER OF INCOME-TAX
LTU, JSS TOWERS
BSK III STAGE, BANGALORE.
THE COMMISSIONER OF INCOME-TAX (APPEALS)
LTU, JSS TOWERS, BSK III STAGE, BANGALORE. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,)
AND:
STATE BANK OF INDIA (SBI) HEAD OFFICE, P.B. NO.9727 K.G. ROAD, BANGALORE. ... RESPONDENT (BY SRI. ANKUR PAI, ADV., A/W SRI. K.R. VASUDEVAN, ADV.,) - - -
THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 14.09.2012 PASSED IN ITA NO.888/BANG/2011 FOR THE ASSESSMENT YEAR 1999-2000, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (I) ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE ITAT, BANGALORE IN ITA NO.888/BANG/2011 DATED 14-09-2012 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE ASSISTANT
COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY.
THESE ITAs COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:
COMMON JUDGMENT
These appeals under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the I.T.A.No.27/2013 pertains to the Assessment year 2000-01, whereas, the subject matter of I.T.A.No.26/2013 pertains to assessment year 1999- 2000. Since, common substantial questions of law arise for consideration in these appeals, they were heard analogously and are being decided by this common judgment.
I.T.A.No.27/2013 was admitted by a bench of this Court vide order dated 12.07.2013 on the following substantial question of law: (i) Whether the Tribunal was correct in holding that the broken period interest paid by the assessee should
not be added to the cost of the securities purchased by including the interest in the closing stock of the securities, when the expenditure towards interest was towards the capital outlay?
(ii) Whether the Tribunal was correct in holding that the expenditure incurred towards broken period interest in the earlier years is not to be treated as part of closing stock in the current year as the same was not debited to the P & L account without taking into consideration that the correct valuation can be arrived at only after taking into consideration the broken period interest paid and recorded a perverse finding?
(iii) Whether the Tribunal was correct in not declaring that adjustment on value of securities after considering the broken period interest was required for arriving at the correct value and consequently recorded a
perverse finding?
I.T.A.No.26/2013 was admitted by a bench of this court vide order dated 03.06.2013 to consider the following substantial questions of law: (i) Whether the Tribunal was correct in holding that the broken period interest paid by the assessee should not be added to the cost of the securities purchased by including the interest in the closing stock of the securities, when the expenditure towards interest was towards the capital outlay?
(ii) Whether the Tribunal was correct in holding that the expenditure incurred towards broken period interest in the earlier years is not to be treated as part of closing stock in the current year as the same was not debited to the P & L account without taking into consideration that the correct valuation can be arrived at only after taking into consideration the broken
period interest paid and recorded a perverse finding?
(iii) Whether the Tribunal was correct in not declaring that adjustment on value of securities after considering the broken period interest was required for arriving at the correct value and consequently recorded a perverse finding?
Facts leading to filing of these appeals briefly stated are that the assessee is a public sector undertaking. The assessee filed its returns of income for the assessment years 1999-00 and 2000-01 respectively. The assessments were initially completed under Section 143(3) for both the assessment years on 28.03.2002. The assessee apart from deriving income from other sources also derived interest from sale of securities. The Government securities were purchased by the assessee either directly through public auction or in the open market. In the event of purchase of security
from open or secondary market, the bank paid interest to the sellers of securities for the period upto date of transaction or purchase of the last open date which is known as broken period interest.
The Commissioner of Income Tax, Bangalore by an order dated 29.03.2004 set aside the orders of assessment for the assessment year 1999-00 and 2000- 01 on the ground that same were erroneous and prejudicial to the interest of the revenue in the light of the decision of the Supreme Court in ‘VIJAYA BANK LTD., VS. ADDITIONAL COMMISSIONER INCOME TAX’, 187 ITR 541 (SC), wherein it was held that price paid for securities including broken period interest was in the nature of capital outlay and no part of it can be set off as expenditure against income accruing on the securities. Thereupon the Assessing officer passed an order under Section 143(3) of the Act on 31.03.2005 for assessment years 1999-00 and 2000-01 by which total income was assessed at Rs.64,86,46,345/- for
assessment year 1999-00 and Rs.61,48,51,585/- for assessment year 2000-01. The assessee thereupon filed an appeal before Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) by an order dated 12.08.2011 directed the Assessing officer to recast the profits in respect of sale of securities after taking into account the enhancement in cost of securities purchased in addition of Broken Period Interest. Accordingly, the appeals were partly allowed.
The assessee approached the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short). The Tribunal by an order dated 14.09.2012 relying on its previous order for the assessment year 1988-89, wherein it had treated the Broken Period Interest paid as an allowable business expenditure as well as decision of the Supreme Court in ‘CIT VS. CITIBANK’ held that assessee since, its inception has been offering the broken period interest earned from the sale of securities as business income
under Section 28 of the Act and not as interest income under het head ‘income from other sources’. Therefore, the broken period interest paid to the sellers of securities is an allowable deduction from the business income under the Act. In the result, the appeals preferred by the assessee were allowed. In the aforesaid factual background, the revenue has filed these appeals.
Learned counsel for the revenue submitted that increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and also helps in profit making and the expenses incurred in the aforesaid connection retains the character of a capital expenditure as the expenditure is directly related to the expansion of the capital base of the company and therefore, the expenditure incurred by the assessee was a capital expenditure. It is also urged that if an assessee bank purchases securities and certain amount of interest accrued thereon payable by the government to the
bank, the purchase price comprise of issue price till the date of purchase, which is known as Broken Period Interest cannot be claimed as allowable deduction from its income. In support of aforesaid submissions, reliance has been placed on decisions of the Supreme Court in ‘VIJAYA BANK LTD. VS. ADDITIONAL COMMISSIONER OF INCOME TAX’, (1991) 187 ITR 541 (SC), ‘BROOKE BOND INDIA LTD. VS. COMMISSIONER OF INCOME-TAX’, (1997) 91 TAXMAN 26 (SC) and ‘COMMISSIONER OF INCOME- TAX VS. BANK OF RAJASTHAN LTD.,’, (2009) 178 TAXMAN 304 (RAJASTHAN).
On the other hand, learned counsel for the assessee while inviting the attention of this court to paragraph 9.3 of the order passed by the Tribunal submitted that assessee has been offering the Broken Period Interest income earned from the sale of securities as business income under Section 28 of the Act and therefore, the same is an allowable deduction from its
business income under the Act. It is further submitted that the order passed by the Tribunal does not call for any interference and the substantial questions of law deserves to be answered in favour of the assessee. It is also pointed out that the decision of the Supreme Court in VIJAYA BANK supra was clarified by Supreme Court in COMMISSIONER OF INCOME TAX VS. CITIBANK IN CIVIL APPEAL NO.1549/2006 DECIDED ON 12.08.2008. Learned counsel for the assessee has relied on the decision in the case of CITIBANK supra as well as decision in ‘AMERICAN EXPRESS INTERNATIONAL BANKING CORPN. VS. COMMISSIONER OF INCOME-TAX’, (2002) 125 TAXMAN 488 (BOMBAY).
We have considered the submissions made by learned counsel for the parties and have perused the record. The bank purchases Government securities, which have the issue price, they bear interest, they have maturity period, and are purchased by the bank. In this
background, when the bank purchases those securities after certain time, of the date of issue, then, by the time they are purchased by the bank, certain amount of interest is already accrued on that securities, payable by the Government to the purchase bank, and therefore, the bank purchased that security by paying he composite sum, comprising of the issue price, and accrued interest uptill the date of purchase. It is this element of interest, which is paid by the bank, at the time of purchase, for the period between the date of issue, and date of purchase, is known as “Broken Period Interest”. The issue, which arises for our consideration in these appeals, is about taxability of interest paid by the assessee commonly known as Broken Period Interest. In VIJAYA BANK LTD. Supra, the Supreme Court considered the issue whether in a case where the assessee purchases securities at a price determined with reference to their actual value as well as interest accrued thereon till the date of purchase, the entire
price paid for them would be in the nature of capital outlay or whether the interest portion could be claimed as revenue expenditure. In the aforesaid context, the Supreme Court held that whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of capital outlay and no part of it could be set off as expenditure against income accruing on those securities. The Supreme Court was not directly concerned with the issue whether the securities form part of stock in trade or capital assets. After the decision of the Supreme Court, in VIJAYA BANK supra, a clarification dated 05.10.1993 was issued vide Circular No.65 with regard to treatment of securities as stock in trade or investment and it was decided that the Assessing officer should determine on the facts and circumstances of each case as to whether particular security constitutes stock in trade or investments, taking into account the guidelines issued by Reserve Bank of India in this regard
from time to time.
The Supreme Court in CITIBANK supra, referred to decision in VIJAYA BANK LTD. supra and held that Vijaya Bank had offered the amounts as interest on securities under Section 18 and in the aforesaid factual background it was held that outlay on purchase of income bearing asset was in the nature of capital outlay and no part of capital outlay can set off as expenditure against income accruing from the asset in question. It was further held that in Citibank, the amount, which the assessee received, has been brought to tax under the head of business under Section 28 of the Act. Therefore, the decision in Vijaya Bank Ltd.’s case did not apply to the facts of the case. Similar view was taken by High Court of Bombay in American Express International Banking Corporation supra.
In the light of the aforesaid well settled legal principles, the facts of the case in hand may be seen. In
the instant case, the assessee bank ever since, its inception has been offering the Broken Period Interest income earned from the sale of securities as business income under Section 28 of the Act and not as income under the head ‘income from other sources’. Therefore, the Broken Period Interest paid to the sellers of securities was claimed as allowable deduction from its business income under the Act. The Tribunal while recording the finding in favour of the assessee has relied upon the decision of the Supreme Court in CITIBANK supra.
In view of preceding analysis, the substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee.
In the result, the appeals fail and are hereby dismissed.
Sd/- JUDGE
Sd/- JUDGE ss