Summary
The Supreme Court held that a bank holding government securities as stock-in-trade may deduct broken period interest paid on purchase as revenue expenditure in computing business income under Section 28 of the Income Tax Act. Vijaya Bank, decided under the repealed Sections 18 to 21 on the head 'interest on securities', does not apply after 1 April 1989. Securities classed as AFS and HFT are always stock-in-trade; whether HTM securities are investments or stock-in-trade depends on the facts.
Issues
- Whether, after the repeal of Sections 18 to 21 of the Income Tax Act from 01.04.1989, a bank may deduct broken period interest paid on purchasing government securities.
- Whether securities acquired by banks in the course of banking business, including for SLR, are stock-in-trade or investments.
- Whether Vijaya Bank Ltd. v. Additional CIT still governs the question, or the view in American Express International Banking Corporation, approved in CIT v. Citi Bank NA, applies.
- How securities in the Held to Maturity category are to be treated.
Provisions considered
- Sections 18 to 21 (repealed) and Section 14 head B, Income Tax Act, 1961Head B, 'interest on securities', and Sections 18 to 21 were deleted by the Finance Act, 1988 with effect from 01.04.1989. Vijaya Bank had refused the deduction because the income there was assessed under Section 18 and the claim was made under Sections 19 and 20. That reasoning does not govern assessments after the repeal. (¶¶ 5, 10, 11, 12)
- Section 28, Income Tax Act, 1961Where securities are held as stock-in-trade, the interest on them is business income under Section 28. Broken period interest paid on purchase is then revenue expenditure deductible in computing that income, and the entire interest received is taxed. (¶¶ 10, 12, 13, 19, 23, 24)
- Sections 36(1)(iii), 37, 56 and 57, Income Tax Act, 1961The Court outlined the scheme after the repeal: interest on borrowed capital and non-capital business expenditure are deductible under Sections 36(1)(iii) and 37. Interest on securities held as investments may instead fall under 'income from other sources', where Section 57 allows only non-capital expenditure. (¶ 10)
- SLR requirement read with RBI guidelines dated 16.10.2000, Banking Regulation Act, 1949Banks must buy government securities to maintain the SLR, and RBI classifies them as HTM, AFS or HFT. The Court held that AFS and HFT securities are always stock-in-trade, while the character of HTM securities turns on the facts. (¶¶ 3, 19, 21)
Held
- Vijaya Bank was decided on facts where interest was assessed under Section 18 and deduction was claimed under Sections 19 and 20. It does not apply where, after the 1989 repeal, the income is assessed as business income under Section 28. The view of the Bombay High Court in American Express, approved by this Court in Citi Bank NA, is that broken period interest is not part of the purchase price and is allowable as revenue expenditure in the year of purchase. (¶¶ 11, 12, 13, 24)
- Following Cocanada Radhaswami Bank, Bihar State Co-operative Bank and the Privy Council in Punjab Co-operative Bank, securities that banks acquire as part of banking business to keep funds readily realisable are stock-in-trade, not investments, and the income from them is business income. (¶¶ 14, 15, 16, 17)
- AFS and HFT securities are always held as stock-in-trade. For these, broken period interest is deductible and the whole interest earned or accrued in the year is taxed. Disallowing the deduction would only add the amount to the cost of acquisition and reduce the profit on sale, so the Revenue's position is academic. (¶¶ 19, 20)
- Whether HTM securities are held as investment or as stock-in-trade depends on the facts of each case. They may be treated as investments if they are actually held to maturity without transfer and were bought at cost price or face value, and in that case the deduction is not available. (¶¶ 21, 22)
- In the lead appeal, the Tribunal had found as fact that the bank consistently treated the securities as stock-in-trade. The High Court reversed that finding only by relying on Vijaya Bank, which was erroneous, so the Tribunal's view allowing the deduction was restored. The Revenue's appeals, in which the deduction had been allowed, were dismissed subject to the clarification on HTM securities. (¶¶ 23, 24, 25, 26, 27, 28, 29, 30)
Result
Bank's appeals (Civil Appeal Nos. 3291-3294 of 2009) allowed, High Court judgment set aside and the Tribunal's orders of 29.05.2003 and 15.07.2004 restored; all Revenue appeals dismissed, subject to the clarification on HTM securities; no order as to costs.