The Supreme Court has recently held that broken period interest incurred on securities treated as stock-in-trade is in the nature of revenue expense and that Income Tax Deduction can be allowed on the same.
The treatment to be given to broken period interest was taken to the Supreme Court and the question as to whether a deduction of the broken period interest can be claimed was adjudicated upon by the Two-Judge Bench of Justice Abhay S Oka and Justice Pankaj Mithal.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
The appellant 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. However the Supreme Court noted that, “the Privy Council and this Court have consistently held that the securities that Banks acquire as a part of the banking business are held as stock-in-trade and not as an investment.”
The Court held that when securities are held as stock-in-trade, any income generated, including interest income, forms part of business income. Consequently, the broken period interest paid during the purchase of securities is considered a revenue expenditure, not a capital expenditure, which qualifies for deduction from business income under Section 28 of the Income Tax Act.
It was also remarked that, “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. 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 is academic.”
It was also noted that, “The assessing officer observed that the appellantBank, 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 cannot be considered as capital expenditure and will have to be treated as revenue expenditure, which can be allowed as a deduction.”
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
The Apex Court noted that many banks, including the appellant, 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.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
