Broken period interest paid on purchase of securities was revenue expenditure since the securities constituted stock-in-trade
In a recent judgment, Hon’ble Supreme Court has dismissed the SLP against the judgment of Telangana High Court in holding that broken period interest paid on purchase of securities was revenue expenditure since the securities constituted stock-in-trade.
ABCAUS Case Law Citation:
5011 (2026) (01) abcaus.in SC
In the instant case the respondent assessee was a banking company. In the course of the assessment proceedings, assessee claimed that it had paid an amount as broken period interest on purchase of securities during the previous year.
The Assessing Officer (AO) passed the assessment order under Section 143(3) of the Income Tax Act, 1961 (the Act) and held that claim of the assessee was required to be disallowed in the light of the decision of the Supreme Court wherein it was held that such an expenditure is required to be capitalized and cannot be allowed as a deduction. Explanation of the assessee that the securities be treated as stock-in-trade thereby treating the broken period interest as revenue expenditure was turned down. Consequently, the aforesaid amount was added back to the income of the assessee and assessed accordingly.
The CIT(A) upheld the order of the assessing officer by relying on the decision of the Supreme Court.
The Tribunal noted that the said decision of the Supreme Court was explained by the Central Board of Direct Taxes (CBDT). On the same lines, Kerala High Court distinguished the decision of the Supreme Court and held that if the securities were held by the banking company as stock-in-trade of the business, interest paid for the broken period would constitute an allowable deduction in the hands of the assessee.
The Tribunal held that admittedly assessee had purchased the securities to hold them as stock-in-trade. Therefore, the interest paid for the broken period wass allowable as a deduction.
Before the Hon’ble High Court, the Revenue contended that the price paid by the securities was determined with reference to their actual value as well as the interest which had accrued on them till the date of purchase.
It was submitted that as held by Hon’ble Supreme Court whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of a capital outlay and no part of it can be set off as expenditure against income accruing on those securities.
The Revenue also relied upon the judgment of Rajasthan High Court and contended that ratio laid down by the Supreme Court still holds the field.
Per contra, the assessee submitted that decision of the Supreme Court was distinguishable in the facts of the present case. It was submitted that Bombay High Court had distinguished the judgment of the Supreme Court and held in the facts of that case that the Income Tax Department ought to have allowed deduction for the broken period interest paid.
According to the assessee, after the decision of the Rajasthan High Court, Supreme Court had delivered a judgment where the question which fell for consideration was whether the interest paid for broken period should not be considered as part of the purchase price but should be allowed as revenue expenditure in the year of purchase of securities? In the said decision, Supreme Court accepted the distinction pointed out by the Bombay High Court and agreed with that the view expressed in earlier judgment would have no application.
The Hon’ble High Court observed that as explained by the Bombay High Court, every bank is required to maintain a Statutory Liquidity Ratio (SLR). For that purpose, every bank subscribes to government securities. One such security is known as Subsidiary General Ledger (SGL) which is maintained in the Public Debt Office in the Reserve Bank of India. Every bank is required as a part of its banking business to subscribe to this loan. Like any other security, such a loan/SGL is also transferable. Reserve Bank of India pays interest on due dates on such securities to the holders of the securities every six months. After subscribing to the said loans, banks are free to transfer such loans for consideration to other banks. Reserve Bank of India pays interest to the holder on the balances in a security if in its books the said security stands in the name of that holder on the due date for payment of interest. The above exercise, is a part of the banking business. However, after so subscribing, the banks are free to deal with such securities like any other trader. Therefore, there are two activities involved – one of subscribing to the loan and the other is trading.
The Hon’ble High Court further observed that after considering the judgment of the Hon’ble Supreme Court, the Bombay High Court held that having assessed the income of the assessee under Section 28 of the Act, Revenue ought to have taxed the broken period interest received but at the same time ought to have allowed deduction for the broken period interest paid.
The Hon’ble High Court also noted that the Kerala High Court had also examined the effect of the said decision of the Supreme Court. The Kerala High Court confirmed the view taken by the Tribunal that securities held by the assessee bank were stock-in-trade of the business of the assessee bank and that the notional loss suffered on account of revaluation of the said securities at the close of the year was an allowable deduction in the computation of profits of the assessee bank.
The Hon’ble High Court noted that in the present case, for successive assessment years, Revenue had accepted the fact that Bank was holding the securities as stock-in-trade. Circular No.665 dated 05.10.1993 of the CBDT had clarified the decision of the Supreme Court. CBDT had clarified that where the banks are holding securities as stock- in-trade and not as investments, principles of law enunciated by Hon’ble Supreme Court would not be applicable. Therefore, CBDT had clarified that assessing officer should determine on the facts and circumstances of each case as to whether any particular security constitute stock-in-trade or investment taking into account the guidelines issued by Reserve Bank of India from time to time.
The Hon’ble High Court expressed agreement with the finding returned by the Tribunal and declined to disturb a finding of fact observing that the legal position is very clear.
Not satisfied with the judgment of the High Court, the Department challenged it before the Hon’ble Supreme Court by way of filing a Special Leave Petition. However, the Apex Court dismissed the SLP with the following observations,
“There is a gross delay ……….. in filing the Special Leave Petition which has not been satisfactorily explained by the petitioner. …… Even otherwise, we see no reason to interfere with the impugned order passed by the High Court. The Special Leave Petition is, therefore, dismissed on the ground of delay as well as merits.”
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