The Commissioner of Income-tax LTU, Bangalore / The Commissioner of Income-tax (Appeals) LTU, Bangalore v. State Bank of India (SBI)
[Citation -2020-LL-0908-26]

Citation 2020-LL-0908-26
Appellant Name The Commissioner of Income-tax LTU, Bangalore / The Commissioner of Income-tax (Appeals) LTU, Bangalore
Respondent Name State Bank of India (SBI)
Court HIGH COURT OF KARNATAKA
Relevant Act Income-tax
Date of Order 08/09/2020
Assessment Year 2000-01
Judgment View Judgment
Keyword Tags interest on securities • broken period interest • interest income earned • government securities • business expenditure • allowable deduction • capital expenditure • sale of securities • accrued interest • business income
Bot Summary: In the event of purchase of security 7 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, 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. The Commissioner of Income Tax 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. 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 13 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 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. In 15 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.


1 IN HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS 8TH DAY OF SEPTEMBER 2020 PRESENT HON BLE MR. JUSTICE ALOK ARADHE AND 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: 1. COMMISSIONER OF INCOME-TAX LTU, JSS TOWERS BSK III STAGE, BANGALORE. 2. 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 2 NO.889/BANG/2011 FOR ASSESSMENT YEAR 2000-01, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: (I) FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (I) ALLOW APPEAL AND SET ASIDE ORDER OF ITAT, BANGALORE IN ITA NO.889/BANG/2011 DATED 14-09-2012 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. I.T.A. NO.26 OF 2013 BETWEEN: 1. COMMISSIONER OF INCOME-TAX LTU, JSS TOWERS BSK III STAGE, BANGALORE. 2. 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 ASSESSMENT YEAR 1999-2000, PRAYING THAT THIS HON BLE COURT MAY BE PLEASED TO: (I) FORMULATE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (I) ALLOW APPEAL AND SET ASIDE ORDER OF ITAT, BANGALORE IN ITA NO.888/BANG/2011 DATED 14-09-2012 AND CONFIRM ORDER OF APPELLATE COMMISSIONER CONFIRMING ORDER PASSED BY ASSISTANT 3 COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE, IN INTEREST OF JUSTICE AND EQUITY. THESE ITAs COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED FOLLOWING: COMMON JUDGMENT These appeals under Section 260A of Income Tax Act, 1961 (hereinafter referred to as Act for short) has been preferred by revenue. subject matter of I.T.A.No.27/2013 pertains to Assessment year 2000-01, whereas, 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 bench of this Court vide order dated 12.07.2013 on following substantial question of law: (i) Whether Tribunal was correct in holding that broken period interest paid by assessee should 4 not be added to cost of securities purchased by including interest in closing stock of securities, when expenditure towards interest was towards capital outlay? (ii) Whether Tribunal was correct in holding that expenditure incurred towards broken period interest in earlier years is not to be treated as part of closing stock in current year as same was not debited to P & L account without taking into consideration that correct valuation can be arrived at only after taking into consideration broken period interest paid and recorded perverse finding? (iii) Whether Tribunal was correct in not declaring that adjustment on value of securities after considering broken period interest was required for arriving at correct value and consequently recorded 5 perverse finding? I.T.A.No.26/2013 was admitted by bench of this court vide order dated 03.06.2013 to consider following substantial questions of law: (i) Whether Tribunal was correct in holding that broken period interest paid by assessee should not be added to cost of securities purchased by including interest in closing stock of securities, when expenditure towards interest was towards capital outlay? (ii) Whether Tribunal was correct in holding that expenditure incurred towards broken period interest in earlier years is not to be treated as part of closing stock in current year as same was not debited to P & L account without taking into consideration that correct valuation can be arrived at only after taking into consideration broken 6 period interest paid and recorded perverse finding? (iii) Whether Tribunal was correct in not declaring that adjustment on value of securities after considering broken period interest was required for arriving at correct value and consequently recorded perverse finding? 2. Facts leading to filing of these appeals briefly stated are that assessee is public sector undertaking. assessee filed its returns of income for assessment years 1999-00 and 2000-01 respectively. assessments were initially completed under Section 143(3) for both assessment years on 28.03.2002. assessee apart from deriving income from other sources also derived interest from sale of securities. Government securities were purchased by assessee either directly through public auction or in open market. In event of purchase of security 7 from open or secondary market, bank paid interest to sellers of securities for period upto date of transaction or purchase of last open date which is known as broken period interest. 3. Commissioner of Income Tax, Bangalore by order dated 29.03.2004 set aside orders of assessment for assessment year 1999-00 and 2000- 01 on ground that same were erroneous and prejudicial to interest of revenue in light of decision of 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 nature of capital outlay and no part of it can be set off as expenditure against income accruing on securities. Thereupon Assessing officer passed order under Section 143(3) of 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 8 assessment year 1999-00 and Rs.61,48,51,585/- for assessment year 2000-01. assessee thereupon filed appeal before Commissioner of Income Tax (Appeals). Commissioner of Income Tax (Appeals) by order dated 12.08.2011 directed Assessing officer to recast profits in respect of sale of securities after taking into account enhancement in cost of securities purchased in addition of Broken Period Interest. Accordingly, appeals were partly allowed. 4. assessee approached Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short). Tribunal by order dated 14.09.2012 relying on its previous order for assessment year 1988-89, wherein it had treated Broken Period Interest paid as allowable business expenditure as well as decision of Supreme Court in CIT VS. CITIBANK held that assessee since, its inception has been offering broken period interest earned from sale of securities as business income 9 under Section 28 of Act and not as interest income under het head income from other sources . Therefore, broken period interest paid to sellers of securities is allowable deduction from business income under Act. In result, appeals preferred by assessee were allowed. In aforesaid factual background, revenue has filed these appeals. 5. Learned counsel for revenue submitted that increase in capital results in expansion of capital base of company and incidentally that would help in business of company and also helps in profit making and expenses incurred in aforesaid connection retains character of capital expenditure as expenditure is directly related to expansion of capital base of company and therefore, expenditure incurred by assessee was capital expenditure. It is also urged that if assessee bank purchases securities and certain amount of interest accrued thereon payable by government to 10 bank, purchase price comprise of issue price till 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 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). 6. On other hand, learned counsel for assessee while inviting attention of this court to paragraph 9.3 of order passed by Tribunal submitted that assessee has been offering Broken Period Interest income earned from sale of securities as business income under Section 28 of Act and therefore, same is allowable deduction from its 11 business income under Act. It is further submitted that order passed by Tribunal does not call for any interference and substantial questions of law deserves to be answered in favour of assessee. It is also pointed out that decision of 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 assessee has relied on decision in case of CITIBANK supra as well as decision in AMERICAN EXPRESS INTERNATIONAL BANKING CORPN. VS. COMMISSIONER OF INCOME-TAX , (2002) 125 TAXMAN 488 (BOMBAY). 7. We have considered submissions made by learned counsel for parties and have perused record. bank purchases Government securities, which have issue price, they bear interest, they have maturity period, and are purchased by bank. In this 12 background, when bank purchases those securities after certain time, of date of issue, then, by time they are purchased by bank, certain amount of interest is already accrued on that securities, payable by Government to purchase bank, and therefore, bank purchased that security by paying he composite sum, comprising of issue price, and accrued interest uptill date of purchase. It is this element of interest, which is paid by bank, at time of purchase, for period between date of issue, and date of purchase, is known as Broken Period Interest . issue, which arises for our consideration in these appeals, is about taxability of interest paid by assessee commonly known as Broken Period Interest. In VIJAYA BANK LTD. Supra, Supreme Court considered issue whether in case where assessee purchases securities at price determined with reference to their actual value as well as interest accrued thereon till date of purchase, entire 13 price paid for them would be in nature of capital outlay or whether interest portion could be claimed as revenue expenditure. In aforesaid context, Supreme Court held that whatever was consideration which prompted assessee to purchase securities, price paid for them was in nature of capital outlay and no part of it could be set off as expenditure against income accruing on those securities. Supreme Court was not directly concerned with issue whether securities form part of stock in trade or capital assets. After decision of Supreme Court, in VIJAYA BANK supra, 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 Assessing officer should determine on facts and circumstances of each case as to whether particular security constitutes stock in trade or investments, taking into account guidelines issued by Reserve Bank of India in this regard 14 from time to time. 8. Supreme Court in CITIBANK supra, referred to decision in VIJAYA BANK LTD. supra and held that Vijaya Bank had offered amounts as interest on securities under Section 18 and in aforesaid factual background it was held that outlay on purchase of income bearing asset was in nature of capital outlay and no part of capital outlay can set off as expenditure against income accruing from asset in question. It was further held that in Citibank, amount, which assessee received, has been brought to tax under head of business under Section 28 of Act. Therefore, decision in Vijaya Bank Ltd. s case did not apply to facts of case. Similar view was taken by High Court of Bombay in American Express International Banking Corporation supra. 9. In light of aforesaid well settled legal principles, facts of case in hand may be seen. In 15 instant case, assessee bank ever since, its inception has been offering Broken Period Interest income earned from sale of securities as business income under Section 28 of Act and not as income under head income from other sources . Therefore, Broken Period Interest paid to sellers of securities was claimed as allowable deduction from its business income under Act. Tribunal while recording finding in favour of assessee has relied upon decision of Supreme Court in CITIBANK supra. In view of preceding analysis, substantial questions of law framed by bench of this court are answered against revenue and in favour of assessee. 16 In result, appeals fail and are hereby dismissed. Sd/- JUDGE Sd/- JUDGE ss Commissioner of Income-tax LTU, Bangalore / Commissioner of Income-tax (Appeals) LTU, Bangalore v. State Bank of India (SBI)
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