Bank of Rajasthan Ltd Vs CIT (Supreme Court of India)
Conclusion: 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 should be allowed as revenue expense as broken period interest incurred on securities treated as stock-in-trade and that Income Tax Deduction could be allowed on the same.
Held: Assessee-Bank was engaged in the purchase and sale of government securities. The securities were treated as stock-in-trade in the hands of assessee. The amount received by assessee on the sale of the securities was considered for computing its business income. Assessee 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 was allowed as a deduction, then the entire sale price of the security was taken into consideration for computing assessee’s income. AO allowed this settled practice while passing regular assessment orders for the assessment years 1990-91 to 1992-93. However, CIT exercised jurisdiction under Section 263 and interfered with the assessment orders. CIT held that assessee was not entitled to the deduction of the interest paid by it for the broken period. Tribunal held that as assessee was holding the securities as stock-in-trade, the entire amount paid by assessee for the purchase of such securities, which included interest for the broken period, was deductible. It was held that when securities were held as stock-in-trade, any income generated, including interest income, formed part of business income. Consequently, the broken period interest paid during the purchase of securities was considered a revenue expenditure, not a capital expenditure, which qualified for deduction from business income under Section 28. It was also remarked that, “If deduction on account of broken period interest was not allowed, the broken period interest as capital expense would have to be added to the acquisition cost of the securities, which would then be deducted from the sale proceeds when such securities were sold in the subsequent years. Therefore, the profit earned from the sale would be reduced by the amount of broken period interest. Therefore, the exercise sought to be done by the Department was academic. AO observed that assessee-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 was thus held that, “as the securities were treated as stock in trade, the interest on the broken period could not be considered as capital expenditure and would have to be treated as revenue expenditure, which could be allowed as a deduction. The Apex Court noted that many banks, including assessee, had followed the practice of accounting for broken period interest as part of their trading transactions. This established practice, coupled with the tax treatment of securities income under the business income provisions, supported the Court’s conclusion.
