# Bank of Rajasthan Ltd v. Commissioner of Income Tax

- **Citation:** 2024 INSC 781
- **Court:** Supreme Court of India
- **Decided:** 2024-10-16
- **Case number:** Civil Appeal Nos. 3291-3294 of 2009
- **Bench:** Abhay S. Oka, Pankaj Mithal
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/bank-of-rajasthan-ltd-v-commissioner-of-income-tax-37335
- **Pages:** 33

## Headnote

Issue arose as regards the treatment to be given to broken period
interest, whether a deduction of the broken period interest can
be claimed by the Bank, purchaser of the government Securities.
Headnotes†
Income Tax Act, 1961 - s.28 - Interest on securities - Interest
on Held to Maturity (HTM) government securities - Interest
for the broken period, if allowed as a deduction:
Held: As the securities were treated as stock-in-trade, the
interest on the broken period cannot be considered as capital
expenditure and will have to be treated as revenue expenditure,
which can be allowed as a deduction - Whether the Bank holds
the HTM security as investment or stock-in-trade will depend on
the facts of each case - If it is found that HTM Security is held
as an investment, the benefit of broken period interest will not
be available and if it is held as a trading asset, deduction for
broken period interest can be claimed - If deduction on account
of broken period interest is not allowed, the broken period interest
as capital expense will have to be added to the acquisition cost
of the securities, which will then be deducted from the sale
proceeds when such securities are sold in the subsequent years -
Profit earned from the sale would be reduced by the amount of
broken period interest. [Paras 20, 21, 24-30]

## Text

_Characters 0–39,892 of 71,214. This is a partial read: ask again with offset=39892 for what follows._

[2024] 10 S.C.R. 860 : 2024 INSC 781
Bank of Rajasthan Ltd.
v.
Commissioner of Income Tax
(Civil Appeal Nos. 3291-3294 of 2009)
16 October 2024
[Abhay S. Oka* and Pankaj Mithal, JJ.]
Issue for Consideration
Issue arose as regards the treatment to be given to broken period
interest, whether a deduction of the broken period interest can
be claimed by the Bank, purchaser of the government Securities.
Headnotes†
Income Tax Act, 1961 - s.28 - Interest on securities - Interest
on Held to Maturity (HTM) government securities - Interest
for the broken period, if allowed as a deduction:
Held: As the securities were treated as stock-in-trade, the
interest on the broken period cannot be considered as capital
expenditure and will have to be treated as revenue expenditure,
which can be allowed as a deduction - Whether the Bank holds
the HTM security as investment or stock-in-trade will depend on
the facts of each case - If it is found that HTM Security is held
as an investment, the benefit of broken period interest will not
be available and if it is held as a trading asset, deduction for
broken period interest can be claimed - If deduction on account
of broken period interest is not allowed, the broken period interest
as capital expense will have to be added to the acquisition cost
of the securities, which will then be deducted from the sale
proceeds when such securities are sold in the subsequent years -
Profit earned from the sale would be reduced by the amount of
broken period interest. [Paras 20, 21, 24-30]
Case Law Cited
Vijaya Bank Ltd. v. Additional Commissioner of IncomeTax,
Bangalore (1991) Supp 2 SCC 147; American Express International
Banking Corporation v. Commissioner of Income Tax & Anr
(2002) 258 ITR 601 (Bombay) : 2002 SCC OnLine Bom 944;
Commissioner of Income Tax, Bombay v. Citi Bank NA Civil Appeal
* Author
[2024] 10 S.C.R.
861
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
No. 1549 of 2006; Commissioner of Income Tax, Andhra Pradesh,
Hyderabad v. The Cocanada Radhaswami Bank Ltd., Kakinada
(1965) 57 ITR 306 : 1965 SCC OnLine SC 186; United Commercial
Bank Ltd., Calcutta v. Commissioner of Income Tax, West Bengal
(1957) 32 ITR 688 : 1957 SCC OnLine SC 74; Commissioner of
Income Tax, Jalandhar v. Nawanshahar Central Cooperative Bank
Ltd (2007) 289 ITR 6 : (2007) 15 SCC 611; Bihar State Cooperative
Bank Ltd. v. Commissioner of Income Tax (1960) 39 ITR 114 :
1960 SCC OnLine SC 193; M/s. Radhasoami Satsang, Saomi
Bagh, Agra v. Commissioner of Income Tax [1991] Supp. 2 SCR
312 : (1992) 193 ITR 321: (1992) 1 SCC 659; Commissioner of
Income Tax (Central), Calcutta v. Associated Industrial Development
Company (P) Ltd., Calcutta (1972) 4 SCC 447; HDFC Bank Ltd.
v. CIT (2014) 366 ITR 505 - referred to.
List of Acts
Banking Regulation Act, 1949; Income Tax Act, 1961; Finance
Act, 1988.
List of Keywords
Broken period interest; Deduction of broken period interest;
Purchaser of the government securities; Interest on securities;
Interest on Held to Maturity (HTM) government securities;
Stock-in-trade; Capital expenditure; Revenue expenditure; HTM
Security; Investment.
Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 3291-3294
of 2009
From the Judgment and Order dated 24.03.2008 of the High Court
of Rajasthan at Jodhpur in ITA Nos. 12, 117, 119 and 120 of 2005
With
Civil Appeal Nos. 11200-11201, 11202, 11203, 11204, 11205, 11196,
11197, 11198 and 11199 of 2024 And Civil Appeal No. 4755 of 2023
Appearances for Parties
Balbir Singh, A.S.G., Sanjay Jhanwar, Jehangir Mistri, Sr. Advs.,
Ms. Kavita Jha, Anant Mann, Aditya Rathore, Naman Tandon,
Samarvir Singh, Shyam Gopal, Raj Bahadur Yadav, H R Rao,
862
[2024] 10 S.C.R.
Digital Supreme Court Reports
Prahlad Singh, Manoj Mishra, Ms. Kritgya Kait, Rupesh Kumar,
Zoheb Hussain, Satya Prakash Gautam, Sridhar Potaraju, Aayush,
Rajat Srivastava, Ms. Zeba Zoariah, Sanjay Kapur, Surya Prakash,
Ms. Divya Singh Pundir, Tarun Gupta, Rajat Sharma, Aryan Singh
Chaudhary, Gaurav Asati, Sanjiv M. Shah, Pranab Kumar Mullick,
Mrs. Soma Mullick, Ms. Banani Sikdar, Sebat Kumar Deuria, Anil
Rana, Advs. for the appearing parties.
Judgment / Order of the Supreme Court
Judgment
Abhay S. Oka, J.
1.
Leave granted in the Special Leave Petitions.
FACTUAL ASPECTS
2.
The main issue in this group of appeals is about the treatment to be
given to broken period interest. The question is whether a deduction
of the broken period interest can be claimed. We must provide a
brief background of how the issue arises.
3.
A Scheduled Bank is governed by the provisions of the Banking
Regulation Act, 1949 (for short, "the 1949 Act"). The 1949 Act, read
with the guidelines of the Reserve Bank of India (for short, 'RBI'),
requires Banks to purchase government securities to maintain the
Statutory Liquidity Ratio (for short, 'SLR'). The guidelines dated 16th
October 2000 issued by the RBI categorise the government securities
into the following three categories: (a) Held to Maturity (HTM);
(b) Available for Sale (AFS); and (c) Held for Trading (HFT).
4.
The interest on the securities is paid by the Government or the
authorities issuing securities on specific fixed dates called coupon
dates, say after an interval of six months. When a Bank purchases
a security on a date which falls between the dates on which the
interest is payable on the security, the purchaser Bank, in addition
to the price of the security, has to pay an amount equivalent to the
interest accrued for the period from the last interest payment till
the date of purchase. This interest is termed as the interest for the
broken period. When the interest becomes due after the purchase of
the security by the Bank, interest for the entire period is paid to the
purchaser Bank, including the broken period interest. Therefore, in
effect, the purchaser of securities gets interest from a date anterior
[2024] 10 S.C.R.
863
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
to the date of acquisition till the date on which interest is first due
after the date of purchase.
5.
Under the Income Tax Act, 1961 (for short, 'the IT Act'), Section 18,
which was repealed by the Finance Act, 1988, dealt with tax leviable
on the interest on securities. Section 19 provided for the deduction
of (i) expenses in realising the interest and (ii) the interest payable
on the money borrowed for investment. Section 20 dealt with the
deduction of (i) expenses in realising the interest and (ii) the interest
payable on money borrowed for investment in the case of a Banking
company. Section 21 provided that the interest payable outside India
was not admissible for deduction. Sections 18 to 21 were repealed by
the Finance Act, 1988, effective from 1st April 1989. We are dealing
with cases involving the period post the deletion of the four Sections.
6.
In Civil Appeal Nos.3291-3294 of 2009, which is the lead case,
the appellant-assessee is a Scheduled Bank. The appellant was
engaged in the purchase and sale of government securities.
The securities were treated as stock-in-trade in the hands of the
appellant. The amount received by the appellant on the sale of the
securities was considered for computing its business income. The
appellant 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 is that if the entire purchase price of the security,
including the interest for the broken period is allowed as a deduction,
then the entire sale price of the security is taken into consideration
for computing the appellant's income. According to the appellant's
case, the assessing officer allowed this settled practice while passing
regular assessment orders for the assessment years 1990-91 to
1992-93. However, the Commissioner of Income Tax (for short, 'CIT')
exercised jurisdiction under Section 263 of the IT Act and interfered
with the assessment orders. The CIT held that the appellant was
not entitled to the deduction of the interest paid by it for the broken
period. The Commissioner relied upon a decision of this Court in the
case of Vijaya Bank Ltd. v. Additional Commissioner of Income
Tax, Bangalore.1 This Court held that under the head "interest on
securities", the interest for a broken period was not an allowable
1
(1991) Supp (2) SCC 147
864
[2024] 10 S.C.R.
Digital Supreme Court Reports
deduction. Being aggrieved by the orders of the CIT, the appellant
preferred an appeal before the Income Tax Appellate Tribunal
(for short, 'Appellate Tribunal'). The Tribunal allowed the appeal by
holding that the decision of this Court in the case of Vijaya Bank
Ltd.1 was rendered after considering Sections 18 to 21 of the IT
Act, which have been repealed. Therefore, the Tribunal held that as
the appellant was holding the securities as stock-in-trade, the entire
amount paid by the appellant for the purchase of such securities,
which included interest for the broken period, was deductible. The
respondent Department preferred an appeal before the High Court
against the decision of the Appellate Tribunal. By the impugned
judgment, the High Court interfered and, relying upon the decision
of this Court in the case of Vijaya Bank Ltd.,1 allowed the appeal.
This order was impugned in Civil Appeal Nos. 3291-3294 of 2009.
7.
All other appeals that are the subject matter of this group are preferred
by the Revenue. These are the cases where the deduction of interest
for the broken period was allowed.
8.
The learned counsel appearing for the appellant in Civil Appeal Nos.
3291-3294 of 2009 and learned counsel representing the respondents/
Banks in other appeals have made extensive submissions. The
submissions made by the learned counsel appearing for the
assessees can be summarised as follows:
a.
Reliance was placed on a decision of the Bombay High Court
in the case of American Express International Banking
Corporation v. Commissioner of Income Tax & Anr.2 Learned
counsel pointed out that in the said decision, the Bombay High
Court distinguished the decision in the case of Vijaya Bank
Ltd.1 by holding that in the case of Vijaya Bank Ltd.,1 the claim
for deduction of interest on broken period was made under
Sections 19 and 20 of the IT Act. This was done on the footing
that the Department had brought to tax the interest accrued
on the securities up to the date of purchase as "interest on
securities" under Section 18. It was held that the decision in
the case of Vijaya Bank Ltd.1 will not apply to the cases postrepeal of Sections 18 to 21 of the IT Act. In the said case, the
amount of interest was brought into tax under Section 28.
2
(2002) 258 ITR 601 (Bombay) : 2002 SCC OnLine Bom 944
[2024] 10 S.C.R.
865
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
b.
The learned counsel appearing for the assessees pointed out
that the view taken by the Bombay High Court in the case of
American Express International Banking Corporation2 has
been approved by the order dated 12th August 2008 of this
Court in the case of Commissioner of Income Tax, Bombay
v. Citi Bank NA.3 The learned counsel pointed out that this
Court affirmed the decision of the Bombay High Court in the
case of Citi Bank NA,3 which in turn relied upon its earlier
decision in the case of American Express International
Banking Corporation.2
c.
Our attention was also invited to a decision by this Court in
the case of Commissioner of Income Tax, Andhra Pradesh,
Hyderabad v. The Cocanada Radhaswami Bank Ltd.,
Kakinada.4 Inviting our attention to the said decision, it is pointed
out that this Court accepted that the securities held by Banking
companies are held as stock-in-trade. He pointed out that this
Court, in the case of United Commercial Bank Ltd.; Calcutta
v. Commissioner of Income Tax, West Bengal,5 held that
government securities are held as stock-in-trade by Banking
companies. He submitted that the assessee pays interest for the
broken period to which he is not entitled as after the purchase,
when the interest becomes due, the assessee gets income for
the entire period even covering the interest payable before the
date on which the assessee makes the acquisition. It is submitted
that there cannot be any dispute that such securities held by
Banking companies constitute stock-in-trade. He submitted that
in the case of Commissioner of Income Tax, Jalandhar v.
Nawanshahar Central Cooperative Bank Ltd.,6 it was held that
investments are a part of the Banking business, particularly when
statutorily mandated. It was submitted that Banking companies
buy government securities to comply with SLR requirements.
d.
It is well-settled that in the Banking business, securities
purchased by Banks, per se, constitute stock-in-trade of the Bank
3
Civil Appeal No. 1549 of 2006
4
(1965) 57 ITR 306 : 1965 SCC OnLine SC 186
5
(1957) 32 ITR 688 : 1957 SCC OnLine SC 74
6
(2007) 289 ITR 6 : (2007) 15 SCC 611
866
[2024] 10 S.C.R.
Digital Supreme Court Reports
as normal and ordinary Banking business is to deal in money
credit. The money is parked in readily marketable securities
so that it is available to meet the demand of depositors. This
argument is supported by a decision of this Court in the case
of Bihar State Co-operative Bank Ltd. v. Commissioner of
Income Tax.7
e.
It was contended that when the interest income of securities
is uniformly assessed under the head "profits and gains from
business or profession", the decision of this Court in the case
of Citi Bank NA3 will squarely apply. It was submitted that in
the case of many Banks, for several assessment years, the
assessment officer allowed the deduction of interest for the
broken period. Reliance was placed on a decision of this Court
in the case of M/s. Radhasoami Satsang, Saomi Bagh, Agra
v. Commissioner of Income Tax.8
f.
It was submitted that IndusInd Bank Ltd. is following a practice
that interest accrued on a security but not due on the date of
purchase of security is debited to the profit and loss account
as expenditure and is claimed as such in return of income.
The balance amount remaining after reducing the broken
period interest is capitalised to the balance sheet covering
the acquisition cost of such securities. It is submitted that the
department has accepted the said methodology for several
years. It was submitted that the exercise undertaken by Revenue
in disallowing broken period interest on the footing that it is a
capital expenditure is revenue neutral. It was pointed out that if
the deduction of broken period interest as a capital expense is
disallowed, it will have to be added to the acquisition cost of the
securities, which will then be deducted from the sale proceeds
when such securities are sold in the subsequent years. It was
submitted that, consequently, the related interest received would
have to be excluded from the income and truncated from the
purchase cost, or alternatively, both the broken interest period
and interest received thereof will be netted and added/subtracted
from the cost of acquisition. Therefore, the exercise done by
7
(1960) 39 ITR 114 : 1960 SCC OnLine SC 193
8
[1991] Supp. 2 SCR 312 : (1992) 193 ITR 321 : (1992) 1 SCC 659
[2024] 10 S.C.R.
867
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
the Department is academic. It was submitted that the decision
of this Court in the case of Vijaya Bank Ltd.1 is per incuriam
as it was rendered in ignorance of the decisions of this Court
in the case of Cocanada Radhaswami Bank Ltd.4 Reliance
was also placed on the Central Board of Direct Taxes (for short,
"the CBDT") Circular No. 665 of 1993.
g.
It was also pointed out that though Banks are required to maintain
SLR by investing amounts in specified securities, as long as
Banks maintain a specified percentage of reserve, they are
permitted to buy and sell such securities, irrespective of their
categorisation. There is no embargo on the Bank to hold security
in SLR up to the maturity date of the security. It was submitted
that Banks always treat interest income from all securities as
profit or loss, irrespective of the categorisation of investments.
The interest on securities held by Banks is always taxed under
the head "income from business or profession". This contention
is raised by HDFC Bank. It was submitted that in accordance
with the well-settled and accepted method of accounting, the
amount of broken period of interest which is debited in the profit
and loss account of the Bank is claimed as a deduction while
computing the income from business under the head "income
from business and profession" as the entire interest income is
offered to tax under the said head.
h.
Reliance was placed on the RBI Circular dated 1st July 2009,
which permits the debit of broken period interest to the profit
and loss account. Reliance was also placed on a Circular dated
2nd November 2015 issued by the CBDT. The Circular provides
that the investments made by a Banking company are a part
of the business of the Bank. Therefore, income from such
investments is attributable to the business of Banking falling
under the head "profit and gain of business and profession".
i.
It was submitted that assuming that as per the mandate of
the 1949 Act, the securities are treated as investments in the
books of accounts, it cannot be held that even for the purposes
of the IT Act, securities would continue to be investments
and not stock-in-trade. It was submitted that this Court has
repeatedly held that the entries in the books of accounts are
not relevant for determining the taxability under the provisions
868
[2024] 10 S.C.R.
Digital Supreme Court Reports
of the IT Act. Reliance is placed on the RBI Circular dated 1st
July 2009, which provides that broken period interest is not to
be capitalised as part of the cost and is required to be debited
to the profit and loss account.
j.
It is submitted that as required by the Banking Regulation Act,
all three categories of securities are treated in the same manner,
and there is no distinction between the securities which are HTM
and the other two categories of securities. It was submitted that
Banks can always shift the securities falling in the category of
HTM to the other two categories.
k.
It was further urged on behalf of the assessee that the plea
based on distinguishing the nature of the treatment of SLR
securities viz-a-viz non-SLR securities has been raised for the
first time by the Revenue before this Court.
l.
Considering the fact that securities are held as stock-in-trade,
interest paid on them constitutes an expense which is liable to
be claimed as a deduction.
9.
The submission of learned ASG is that the broken period interest on
security held to maturity constitutes an investment and, therefore,
should be treated as capital expenditure. It was submitted that since
HTM securities are held up to maturity for maintaining the SLR
ratio and as the same are treated as investment in the books of
accounts of Banks, the same should be treated as investment and
not stock-in-trade. Another submission of ASG is that Circular No.
18 of 2015 applies only to non-SLR securities. Another submission
of learned ASG is that the decision of Vijaya Bank Ltd.1 would
squarely apply as while omitting Sections 18 to 21, corresponding
amendments have been made in Sections 28, 56(2)(d) and 57(3)
of the IT Act, and the securities are now taxable under the head of
"Income from other Sources". Therefore, the principles laid down
in the case of Vijaya Bank Ltd.1 will squarely apply. He argued
that the increase in capital by the acquisition of securities results
in the expansion of the Bank's capital base, which helps in profit
making. Therefore, the expenditure in the nature of broken period
interest was capital expenditure. Learned ASG, thus, submitted that
the assessees in these cases will not be entitled to a deduction of
broken period interest.
[2024] 10 S.C.R.
869
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
CONSIDERATION OF LEGAL POSITION
10. We deal with the legal position at the outset. As noted, Sections 18
to 21 were deleted from 1st April 1989. In this group of appeals, we
are not concerned with cases before the financial year 1988-89.
Section 14 of the IT Act reads thus:
"14. Heads of income.- Save as otherwise provided by
this Act, all income shall, for the purposes of charge of
income-tax and computation of total income, be classified
under the following heads of income:-
A. -Salaries.
B. * * * * *
C. -Income from house property.
D. -Profits and gains of business or profession.
E. -Capital gains.
F. -Income from other sources."
Clause B was of "interest on securities". It was deleted with effect
from 1st April 1989 along with Sections 18 to 21, which dealt with
interest on securities. Head 'D' is of income from "profits and gains of
business or profession" covered by Section 28 of the IT Act. Profits
and gains from any business or profession that the assessee carried
out at any time during the previous year are chargeable to income
tax. Under Section 36(1)(iii), the assessee is entitled to a deduction
of the amount of interest paid in respect of capital borrowed for the
purposes of the business or profession. Section 37 provides that
any expenditure which is not covered by Sections 30 to 36 and not
being in the nature of capital expenditure, laid out or expended wholly
and exclusively for the purposes of the business or profession shall
be allowed for computing the income chargeable under the head
"profits and gains of business or profession". Section 56 of the IT Act
provides that income of every kind which is not to be excluded from
the total income under the IT Act shall be chargeable to income tax
under the head "income from other sources" if it is not chargeable
to income tax under any of the five heads provided in Section 14.
Therefore, interest on investments may be covered by Section 56.
Section 57 provides for the deduction of expenditure not being in the
nature of capital expenditure expended wholly and exclusively for the
870
[2024] 10 S.C.R.
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purposes of making or earning such income. In the case of interest
on securities, any reasonable sum paid for the purposes of realising
interest is also entitled to deduction under Section 57 of the IT Act.
DECISIONS STARTING FROM THE CASE OF VIJAYA BANK LTD.1
11. The first decision which needs consideration is in the case of Vijaya
Bank Ltd.1 Regarding the facts of the said case, it must be noted that
the income of the Bank was not assessed under Section 28 of the
IT Act but under Section 18 under the Head "interest on securities".
In the context of the applicability of Section 18 of the IT Act, the
Bank claimed that the broken period's interest was deductible under
Sections 19 and 20. In light of these facts, this Court held that the
outlay on the purchase of income-bearing assets was a capital outlay.
Therefore, no part of the capital outlay can be set off as expenditure
against income from the asset in question.
12. A Division Bench of the Bombay High Court, in the case of American
Express International Banking Corporation,2 dealt with the decision
in the case of Vijaya Bank Ltd.1 We are extensively referring to the
decision of the Bombay High Court in the case of American Express
International Banking Corporation2 for the reason that this Court
in Citi Bank NA3 has expressly approved the view of the Bombay
High Court in the said decision. We may note that the Bombay High
Court dealt with assessment years 1974-75 to 1977-78. This was
a case where the assessee made adjustments for broken period
interest. The assessing officer had disallowed the deduction for
the payment made by the assessee for broken period interest. The
assessing officer followed the decision in the case of Vijaya Bank
Ltd.1 The Bombay High Court distinguished the decision in the case
of Vijaya Bank Ltd.1 and held thus:
"18. The assessee-Bank, like several other Banks,
were consistently following the practice of valuing
the securities/interest held by it at the end of each
year and offer for taxation, the appreciation in their
value by way of profit/interest earned due to efflux
of time. The Bank also claimed deduction for broken
period interest payments. However, the department
did not accept the assessee's method in the assessment
year in question in view of the judgment of the Karnataka
High Court in the case of (Commissioner of Income-tax,
[2024] 10 S.C.R.
871
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
Mysore v. Vijaya Bank),5 reported in 1976 Tax Law Reporter
page 524. This judgment has been subsequently upheld
by the Supreme Court in 187 I.T.R. page 541. In view of
the judgment of the Karnataka High Court, the department
took the view that broken period interest payment cannot
be allowed as a deduction because it came within the
ambit of interest on securities under section 18 of the
Income-tax Act. It is the contention of the department
that the assessee-Bank received interest on Dated
Government Securities from R.B.I. on half-yearly
basis. That, the assessee Bank also traded in such
securities. That the assessee Bank bought Dated
Government Securities during the intervening period
between two due dates. That, on purchase of the dated
Government Security, the assessee became the holder
of the security and accordingly, the assessee received
half-yearly interest on the due dates from R.B.I. on
purchase. Therefore, according to the department,
the income which the assessee-Bank received came
under section 18 of the Income-tax Act interest on
securities. Under the circumstances, it was not open to the
assessee Bank to claim deduction for broken period interest
payment made to the selling/transferor Bank. That, it was
not open to the assessee to claim deduction as revenue
expenditure for broken period interest payment as no such
deduction was permissible under sections 19 and 20 of the
Income-tax Act. That, it was not a sum expended by
the assessee for realizing interest under section 19
and, therefore, the assessee was not entitled to claim
deduction for broken period interest payment as a revenue
expenditure under section 28 of the Income-tax Act. In this
connection, the department followed the judgment of the
Karnataka High Court in Vijaya Bank's case. Therefore,
the point which we are required to consider in this case
is: Whether the judgment of the Karnataka High Court
in Vijaya Bank's case was applicable to the facts of the
present case.
19. Before going further we may mention at the very outset
that the security in this case was of the face value of Rs. 5,
872
[2024] 10 S.C.R.
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lakhs. It was bought for a lesser amount of Rs. 4,92,000.00.
The difference was of Rs. 8,000.00. The assessee has
revalued the security. The assessee offered the notional
profit for taxation, as explained herein above, on accrual
basis in the appropriate assessment year during which the
assessee held the security. This difference could have been
treated by the department as interest on securities under
section 18. However, in the instant case, the department
has assessed the said difference under, section 28 under
the head "Business" and not under the head "interest on
securities". Having treated the difference under the head
"Business", the A.O. disallowed the broken period interest
payment, which gave rise to the dispute. It was open to
the department to assess the above difference under the
head "interest on securities" under section 18. However,
they chose to assess the interest under the head "business"
and, while doing so, the department taxed broken period
interest received, but disallowed broken period interest
payment. It is in this light that one has to read the judgment
of the Karnataka High Court and the Supreme Court in
Vijaya Bank's case. In that case, the facts were as follows.
During the Assessment Year under consideration, Vijaya
Bank entered into an agreement with Jayalakshmi Bank
Limited, whereby Vijaya Bank took over the liabilities of
Jayalakshmi Bank. They also took over assets belonging
to Jayalakshmi Bank. These assets consisted of two
items viz. Rs. 58,568.00 and Rs. 11,630.00. The said
amount of Rs. 58,568.00 represented interest, which
accrued on securities taken over by Vijaya Bank from
Jayalakshmi Bank and Rs. 11,630.00 was the interest which
accrued upto the date of purchase of securities by the
assessee-Bank from the open market. These too amounts
were brought to tax by the A.O. under section 18 of the
Income-tax Act. The assessee Bank claimed that these
amounts were deductible under sections 19 and 20. This
was on the footing that the department had brought to tax,
the aforestated two amounts as interest on securities under
section 18. It is in the light of these facts that one has; to
read the judgment in Vijaya Bank's case. In the light of the
above facts, it was held that outlay on purchase of income
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Bank of Rajasthan Ltd. v. Commissioner of Income Tax
bearing asset was in the nature of capital outlay and no
part of the capital outlay can be set off as expenditure
against income accruing from the asset in question. In
our case, the amount which the assessee received
has been brought to tax under the head "business"
under section 28. The amount is not brought to tax
under section 18 of the Income-tax Act. After bringing
the amount to tax under the head "business", the
department taxed the broken period interest received
on sale, but at the same time, disallowed broken period
interest payment at the time of purchase and this led
to the dispute. Having assessed the amount received
by the assessee under section 28, the only limited
dispute was whether the impugned adjustments in
the method of accounting adopted by the assessee
Bank should be discarded. Therefore, the judgment
in Vijaya Bank's case has no application to the facts
of the present case. If the department had brought to
tax, the amounts received by the assessee Bank under
section 18, then Vijaya Bank's case was applicable.
But,in the present case, the department brought
to tax such amounts under section 28 right from
the inception. Therefore, the Tribunal was right in
coming to the conclusion that the judgment in Vijaya
Bank's case did not apply to the facts of the present
case. However, before us, it was argued on behalf of the
revenue that in view of the judgment in Vijaya Bank's
case, even if the securities were treated as part of the
trading assets, the income therefrom had to be assessed
under section 18 of the Act and not under section 28 of
the Act as income from securities can only come within
section 18 and not under section 28. We do not find any
merit in this argument. Firstly, as stated above, Vijaya
Bank's case has no application to the facts of this case.
Secondly, in the present case, the Tribunal has found that
the securities were held as trading assets. Thirdly, it has
been held by the Supreme Court in the subsequent
decision reported in 57 I.T.R. Page 306, in the case
of C.I.T. Andhra Pradesh v. Cocanada Radhaswami
Bank Limited, that income from securities can also
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come under section 28 as income from business. This
judgment is very important. It analyzes the judgment
of the Supreme Court in UCO Bank's case reported
in 53 I.T.R. page 250, which has been followed by
the Supreme Court in Vijaya Bank's case. It is true
that once an income falls under section 18, it cannot
come under section 28. However, as laid down by
the Supreme Court in Cocanada Radhaswami Bank's
case (supra), income from securities treated as trading
assets can come under section 28. In the present case,
the department has treated income from securities
under section 28. Lastly, the facts in the case of UCO
Bank reported in 53 I.T.R. page 250, also support our
view in the present case. In UCO Bank's case, the
assessee Bank claimed a set off under section 24(2) of
the Income-tax Act, 1922 (section 71(1) of the present
Act) against its income from interest on securities
under section 8 of the 1922 Act (similar to section 28
of the present Act). It was held that UCO Bank was not
entitled to such a set off as the income from interest
on securities came under section 8 of the 1922 Act.
Therefore, even in UCO Bank's case, the department
had assessed income from interest on securities right
from the inception under section 8 of the 1922 Act and,
therefore, the set-off was not allowed under, section
24(2) of the Act. Therefore, UCO Bank's case has also
no application to the facts of the present case in which
the assessee's income from interest on securities is
assessed under section 28 right from inception, in
fact, in UCO Bank's case, the matter was remitted back
as it was contended on behalf of UCO Bank that the
securities in question were a part of trading assets
held by the assessee in the course of its business
and the income by way of interest on such securities
was assessable under section 10 of the Income-tax
Act, 1922 (similar to section 28 of the present Act). It
is for this reason that in the subsequent judgment of
the Supreme Court in the case of Radhaswami Bank
Limited (supra), that the Supreme Court has observed,
after reading UCO Bank's case, that where securities
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875
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
were part of trading assets, income by way of interest
on such securities could come under section 10 of
the Income tax Act 1922.
20. In the light of what we have discussed hereinabove,
we find that the assessee's method of accounting does not
result in loss of tax/revenue for the department. That, there
was no need to interfere with the method of accounting
adopted by the assessee-Bank. That, the judgment in the
case of Vijaya Bank had no application to the facts of the
case. That, having assessed the income under section 28,
the department ought to have taxed interest for broken
period interest received and the department ought to
have allowed deduction for broken period interest paid."
(emphasis added)
13. In the case of Citi Bank NA,3 the question before this Court was
whether interest paid for the broken period should not be considered
part of the purchase price and whether it should be allowed as
revenue expenditure in the year of purchase of securities. In this
decision, this Court quoted the above paragraphs from the decision
of the Bombay High Court in the case of American Express
International Banking Corporation.2 This Court expressly approved
the conclusions recorded by the Bombay High Court. This Court
held thus:
"The facts in the present case are similar to the facts in
American Express (supra).Agreeing with this view and
accepting the distinction pointed out by the Bombay High
Court, this Court dismissed the two special leave petitions
filed by the revenue, one of which was dismissed by a
three Judge Bench.
After going through the facts which are similar to the facts
in American Express (supra), since the tax effect is neutral,
the method of computation adopted by the assessee
and accepted by the revenue cannot be interfered with.
We agree with the view expressed by the Bombay High
Court in American Express (supra) that on the facts of the
present case, the judgment in Vijaya Bank Ltd. (supra)
would have no application."
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Thus, this Court approved the view taken by the Bombay High Court
that the interest paid for the broken period should not be considered
as part of the purchase price, but it should be allowed as revenue
expenditure in the year of purchase of securities. This Court has
reiterated the view taken by the Bombay High Court in the case of
American Express International Banking Corporation.2
WHETHER SECURITIES ARE HELD AS STOCK-IN-TRADE
14. In the case of Cocanada Radhaswami Bank Ltd.,4 the Bank had
shown interest on securities held by it as a source of income. The
Bank claimed loss against other banking activities and set off the
interest on securities against the higher amount shown as loss in
other banking activities. The department allowed the loss to be set
off against the income under the head "business" and disallowed
it under the income under the head "interest on securities". The
Appellate Tribunal confirmed the view. This Court, in paragraphs
nos. 3 to 7, held thus:
"3. Learned counsel for the Revenue argued that the
income from business and securities fell under different
heads, namely, Section 10 and Section 8 of the Act
respectively, that they were mutually exclusive and,
therefore, the losses under the head "business" could
not be carried forward from the preceding year to the
succeeding year and set off under Section 22(4) of the Act
against the income from securities held by the assessee.
4. Learned counsel for the assessee, on the other hand,
contended that though for the purpose of computation
of income, the income from securities and the income
from business were calculated separately, in a case
where the securities were part of the trading assets
of the business, the income therefrom was part of
the income of the business and, therefore, the losses
incurred under the head "business" could be set off
during the succeeding years against the total income
of the business i.e. income from the business including
the income from the securities.
5. The relevant section of the Act which deals with the
matter of set off of losses in computing the aggregate
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877
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
income is Section 24. The relevant part of it, before the
Finance Act, 1955, read:
"(1) Where any assessee sustains a loss of profits or
gains in any year under any of the heads mentioned
in Section 6, he shall be entitled to have the amount
of the loss set off against his income, profits or gains
under any other head in that year:
***
(2) Where any assessee sustains a loss of profits or
gains in any year, being a previous year not earlier
than the previous year for the year ending on the
31st day of March, 1940, in any business, profession
or vocation, and the loss cannot be wholly set off
under sub-section (1), so much of the loss as is not
so set off or the whole loss where the assessee had
no other head of income shall be carried forward to
the following year and set off against the profits and
gains, if any, of the assessee from the same business,
profession or vocation, for that year; and if it cannot
be wholly set off, the amount of loss not so set off
shall be carried forward to the following year...."
While sub-section (1) of Section 24 provides for setting
off of the loss in a particular year under one of the heads
mentioned in Section 6 against the profit under a different
head in the same year, sub-section (2) provides for the
carrying forward of the loss of one year and setting off
of the same against the profit or gains of the assessee
from the same business in the subsequent year or years
The crucial words, therefore, are "profits and gains of the
assessee from the same business" i.e. the business in
regard to which he sustained loss in the previous year.
The question, therefore, is whether the securities
formed part of the trading assets of the business and
the income therefrom was income from the business.
The answer to this question depends upon the scope
of Section 6 of the Act. Section 6 of the Act classified
taxable income under the following several heads :
(i) salaries; (ii) interest on securities; (iii) income from
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property; (iv) profits and gains of business, profession
or vocation; (v) income from other sources; and
(vi) capital gains. The scheme of the Act is that income
tax is one tax.