Supreme Court of India
BANK OF RAJASTHAN LTD.versusCOMMISSIONER OF INCOME TAX
- Citation
- 2024 INSC 781
- Decided
- 16 October 2024
- Disposal
- Appeal(s) allowed
- Bench
- ABHAY S OKA
Holding
Broken‑period interest on government securities held as stock‑in‑trade is a revenue expense deductible under Section 28, but the deduction is unavailable if the securities are held as investments.
Summary
The case concerned whether a scheduled bank could claim a tax deduction for the broken‑period interest paid when it purchased government securities that are classified as Held‑to‑Maturity (HTM). The bank argued that the securities are stock‑in‑trade, so the broken‑period interest is a revenue expense deductible under Section 28, while the Revenue contended that the interest is a capital outlay and should be added to the acquisition cost. The Supreme Court examined the post‑repeal provisions of the Income Tax Act, the classification of income under Section 14, and the nature of securities held by banks as part of their ordinary business. Relying on earlier decisions (American Express, Citi Bank, Cocanada Radhaswami Bank) that treat such securities as trading assets, the Court held that broken‑period interest is a deductible revenue expense when the securities are held as stock‑in‑trade. Consequently, the Tribunal’s orders allowing the deduction were restored and the Revenue’s appeals dismissed, with a clarification that HTM securities held as investments would not qualify for the deduction.
Issues considered
- Whether interest paid for the broken period on government securities purchased by a bank is a capital expenditure or a revenue expenditure for tax purposes.
- Whether such broken‑period interest can be deducted under Section 28 of the Income Tax Act when the securities are held as stock‑in‑trade.
- How the classification of securities (HTM, AFS, HFT) affects the tax treatment of broken‑period interest.
- Whether the precedent set in Vijaya Bank Ltd. is applicable post‑repeal of Sections 18‑21 of the Income Tax Act.
Legislation cited
- Banking Regulation Act, 1949
- Finance Act, 1988
- Income Tax Act, 1961s. 14, s. 24, s. 24(2), s. 263, s. 28, s. 36(1)(iii), s. 37, s. 56, s. 56(2)(d), s. 57, s. 57(3), s. 6
Subjects
Broken period interestDeduction of broken period interestPurchaser of government securitiesInterest on securitiesHeld to Maturity (HTM) government securitiesStock-in-tradeCapital expenditureRevenue expenditureHTM SecurityInvestment
Judgment
[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.
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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.
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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 post-
repeal 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.
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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.
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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
[2024] 10 S.C.R. 873
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
874 [2024] 10 S.C.R.
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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
[2024] 10 S.C.R. 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.”
876 [2024] 10 S.C.R.
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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
[2024] 10 S.C.R. 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
878 [2024] 10 S.C.R.
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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. Section 6 only classifies the taxable
income under different heads for the purpose of
computation of the net income of the assessee. Though
for the purpose of computation of the income, interest
on securities is separately classified, income by way
of interest from securities does not cease to be part
of the income from business if the securities are part
of the trading assets. Whether a particular income is
part of the income from a business falls to be decided
not on the basis of the provisions of Section 6 but on
commercial principles. To put it in other words, did the
securities in the present case which yielded the income
form part of the trading assets of the assessee? The
Tribunal and the High Court found that they were the
assessee’s trading assets and the income therefrom
was, therefore, the income of the business. If it was the
income of the business, Section 24(2) of the Act was
immediately attracted. If the income from the securities
was the income from its business, the loss could, in terms
of that section, be set off against that income.
6. A comparative study of sub-sections (1) and (2) of
Section 24 yields the same result. While in sub-section (1)
the expression “head” is used, in sub-section (2) the
said expression is conspicuously omitted. This designed
distinction brings out the intention of the legislature. The
Act provides for the setting off of loss against profits in
four ways. To illustrate, take the head “profits and gains of
business, profession or vocation”. An assessee may have
two businesses. In ascertaining the income in each of the
two businesses, he is entitled to deduct the losses incurred
in respect of each of the said businesses. So calculated,
if he has loss in one business and profit in the other both
falling under the same head, he can set off the loss in
one against the profit in the other in arriving at the income
under that head. Even so, he may still sustain loss under
the same head. He can then set off the loss under the
[2024] 10 S.C.R. 879
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
head “business” against profits under another head, say
“income from investments”, even if investments are not
part of the trading assets of the business. Notwithstanding
this process he may still incur loss in his business.
Section 24(2) says that in that event he can carry forward
the loss to the subsequent year or years and set off the
said loss against the profit in the business. Be it noted that
clause (2) of Section 24, in contradistinction to clause (1)
thereof, is concerned only with the business and not with
its heads under Section 6 of the Act. Section 24, therefore,
is enacted to give further relief to an assessee carrying
on a business and incurring loss in the business though
the income therefrom falls under different heads under
Section 6 of the Act.
7. Some of the decisions cited at the Bar may conveniently
be referred to at this stage. The Judicial Committee in
Punjab Cooperative Bank Ltd. v. CIT [(1940) 8 ITR 635,
645] has clearly brought out the business connection
between the securities of a Bank and its business, thus:
“In the ordinary case of a Bank, the business
consists in its essence of dealing with money and
credit. Numerous depositors place their money with
the Bank often receiving a small rate of interest on
it. A number of borrowers receive loans of a large
part of these deposited funds at somewhat higher
rates of interest. But the Banker has always to keep
enough cash or easily realisable securities to meet
any probable demand by the depositors….”
In the present case the Tribunal held, on the evidence, and
that was accepted by the High Court, that the assessee
was investing its amounts in easily realisable securities
and, therefore, the said securities were part of the trading
assets of the assessee’s Banking business. The decision
of this Court in United Commercial Bank Ltd. v. CIT
[(1958) SCR 79] does not lay down any different
proposition. It held, after an exhaustive review of
the authorities, that under the scheme of the Income
Tax Act, 1922, the head of income, profits and gains
880 [2024] 10 S.C.R.
Digital Supreme Court Reports
enumerated in the different clauses of Section 6
were mutually exclusive, each specific head covering
items of income arising from a particular source.
On that reasoning this Court held that even though
the securities were part of the trading assets of the
company doing business, the income therefrom had to
be assessed under Section 8 of the Act. This decision
does not say that the income from securities is not
income from the business. Nor does the decision of
this Court in East India Housing and Land Development
Trust Ltd. v. CIT [(1961) 42 ITR 49] support the
contention of the Revenue. There, a company, which
was incorporated with the objects of buying and developing
landed properties and promoting and developing markets,
purchased 10 bighas of land in the town of Calcutta and
set up a market therein. The question was whether the
income realised from the tenants of the shops and stalls
was liable to be taxed as “business income” under Section
10 of the Income Tax Act or as income from property under
Section 9 thereof. This Court held that the said income
fell under the specific head mentioned in Section 9 of the
Act. This case also does not lay down that the income
from the shops is not the income in the business. In CIT
v. Express Newspapers Ltd [(1964) 53 ITR 250, 260] this
Court held that both Section 26(2) and the proviso thereto
dealt only with profits and gains of a business, profession,
or vocation and they did not provide for the assessment
of income under any other head e.g. capital gains. The
reason for that conclusion is stated thus:
“It (the deeming clause in Section 12-B) only introduces
a limited fiction, namely, that capital gains accrued will
be deemed to be income of the previous year in which
the sale was effected. The fiction does not make them
the profits or gains of the business. It is well settled
that a legal fiction is limited to the purpose for which
it is created and should not be extended beyond its
legitimate field … The profits and gains of business and
capital gains are two distinct concepts in the Income
Tax Act : the former arises from the activity which is
[2024] 10 S.C.R. 881
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
called business and the latter accrues because capital
assets are disposed of at a value higher than what
they cost the assessee. They are placed under different
heads; they are derived from different sources; and the
income is computed under different methods. The fact
that the capital gains are connected with the capital
assets of the business cannot make them the profit of
the business. They are only deemed to be income of
the previous year and not the profits or gains arising
from the business during that year.”
It will be seen that the reason for the conclusion was
that capital gains were not income from the business.
Though some observations divorced from content may
appear to be wide, the said decision was mainly based
upon the character of the capital gains and not upon their
non-inclusion under the heading “business”. The limited
scope of the earlier decision was explained by this Court
in CIT v. Chugandas & Co. [(1965) 55 ITR 17, 24]. Therein
this Court held that interest from securities formed part
of the assessee’s business income for the purpose of
exemption under Section 25(3). Shah, J., speaking for
the Court, observed:
“The heads described in Section 6 and further
elaborated for the purpose of computation of income
in Sections 7 to 10 and 12, 12-A, 12-AA and 12-B
are intended merely to indicate the classes of income
: the heads do not exhaustively delimit sources
from which income arises. This is made clear in the
judgment of this Court in the United Commercial Bank
Ltd. case [(1958) SCR 79], that business income is
broken up under different heads only for the purposes
of computation of the total income : by that break
up the income does not cease to be income of the
business, the different heads of income being only
the classification prescribed by the Indian Income
Tax Act for computation of income.””
(emphasis added)
The same principles apply to the cases in hand.
882 [2024] 10 S.C.R.
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15. In the case of Bihar State Co-operative Bank Ltd.,7 in paragraph 2
(SCC report), this Court set out the questions involved which read thus:
“2. In its return the appellant showed these various sums
as “other sources”, but nothing turns on the manner in
which the appellant chose to show this income in its return.
The Income Tax Officer, however, assessed the interest
for these three years under Section 12 of the Income Tax
Act, as income from “other sources”. The appellant took
an appeal to the Appellate Assistant Commissioner where
it was contended that as the business of the appellant
Bank consisted of lending money and the deposits had
been made not for the purpose of investment but for that
business and thereby fulfilling the purpose for which the
cooperative Bank was constituted, these various sums
of interest were not subject to income tax because of
the notification issued by the Central Government under
Section 60 of the Income Tax Act. The relevant portion of
that notification, CBR Notification 35 dated 20-10-1934,
and No. 33 dated 18-8-1945, was:
“The following classes of income shall be exempt
from the tax payable under the said Act, but shall be
taken into account in determining the total income of
an assessee for the purpose of the said Act:
***
(2) The profits of any cooperative society other than
the Sanikatta Salt Owners’ Society in the Bombay
Presidency for the time being registered under the
Cooperative Societies Act, 1912 (Act 2 of 1912), the
Bombay Cooperative Societies Act, 1925 (Bombay
Act 7 of 1925), or the Madras Cooperative Societies
Act, 1932 (Madras Act 6 of 1932), or the dividends
or other payments received by the members of any
such society out of such profits.
Explanation : For this purpose the profits of a
cooperative society shall not be deemed to include
any income, profits or gains from:
[2024] 10 S.C.R. 883
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
(1) Investments in (a) securities of the nature referred
to in Section 8 of the Indian Income Tax Act; or
(b) property of the nature referred to in Section 9 of
that Act;
(2) dividends, or
(3) the ‘other sources’ referred to in Section 12 of
the Indian Income Tax Act.”
The Appellate Assistant Commissioner, however, repelled
the contention of the appellant. He held that the business
of the appellant consisted of ‘lending money, and selling
agricultural and other products to its constituents’ which
could be planned ahead and required no provision for
extraordinary claims He remarked that it appeared from
the balance sheets that in the Accounting Year 1945 the
Bank invested Rs 13,50,000 as fixed deposits, which, in
the following year was raised to Rs 15,00,000 and it was
only in the Accounting Year 1947 that the fixed deposits,
“were realised on maturity with interest”. He was also
of the opinion that the length of the period during which
this money “was kept locked in this way” showed clearly
that “not the exigencies of pressing necessities, but the
motives of investment of surplus fund had actuated the
deposits”. He therefore held that the fixed deposits with
Imperial Bank were held as an investment quite apart from
the business of the appellant and the interest from these
deposits was not exempt from income tax. He further
held that the exemption as to the profit of a cooperative
society extended to its sphere of cooperative activities
and therefore interest from investments was no part of the
appellant’s business profits exempt from taxation. Against
this order an appeal was taken to the Income Tax Appellate
Tribunal and it was there contended that the Bank did not
make the deposits as investments, but in order that cash
might be available to the appellant “continuously” for the
carrying on of the purposes of its business, and that the
deposits were intimately connected with the business of
the appellant and therefore the interest should have been
held to be profits arising from the business activities of the
884 [2024] 10 S.C.R.
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Bank, and that the finding that the short-term deposits in
Imperial Bank were separate from the appellant’s Banking
business was erroneous. The Income Tax Appellate
Tribunal, by its order dated 11-4-1955, held:
“(1) That the interest was an income rightly to be
included under the head of ‘other sources’.
***
(2) The profits of a cooperative society indicates
the profit derived from the business which can be
truly called the business of the cooperative society.
Investments by the society either in securities or
in shares or in Bank fixed deposits are made out
of surplus funds. The interest or dividend derived
from such investment cannot be regarded as part
of the profits of the business (sic) qua such Bank
and therefore, it is not exempt from income tax
(vide Hoshiarpur Central Cooperative Bank v. CIT
[24 ITR 346, 3501], 24 I.T.R. 346, 350).”
Against this order a case was stated at the instance of the
appellant under Section 66(1) of the Act, and the following
two questions of law were referred for the opinion of the
High Court:
(1) Whether, in the facts and circumstances of this case,
the receipt of interest on fixed deposits was an income
under the head of “other sources”: and
(2) Whether in the facts and circumstances of this case, the
receipt of interest from the fixed deposits was an income
not exempt from taxation under the CBR Notification No.
35 dated 20-10-1934 and No. 33 dated 18-8-1945.”
In paragraphs 9 and 10, this Court proceeded to hold thus:
“9. In the instant case the cooperative society (the
appellant) is a Bank. One of its objects is to carry on
the general business of Banking. Like other Banks
money is its stock-in-trade or circulating capital and
its normal business is to deal in money and credit.
It cannot be said that the business of such a Bank
[2024] 10 S.C.R. 885
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
consists only in receiving deposits and lending money
to its members or such other societies as are mentioned
in the objects and that when it lays out its moneys so
that they may be readily available to meet the demand
of its depositors if and when they arise, it is not a
legitimate mode of carrying on of its Banking business.
The Privy Council in Punjab Cooperative Bank Ltd. v.
CIT Lahore [24 ITR 346, 350] where the profits arose
from the sale of government securities pointed out at
p. 645 that in the ordinary cases the business of a Bank
essentially consists of dealing with money and credit.
Depositors put their money in the Bank at a small rate
of interest and in order to meet their demands if and
when they arise the Bank has always to keep sufficient
cash or easily realisable securities. That is a normal
step in the carrying on of the Banking business. In
other words that is an act done in what is truly the
carrying on or carrying out of a business. It may be
added that another mode of conducting business of a
Bank is to place its funds in deposit with other Banks
and that also is to meet demands which may be made
on it. It was however argued that in the instant case the
moneys had been deposited with Imperial Bank on long
term deposits inasmuch as they were deposited for one
year and were renewed from time to time also for a year;
but as is shown by the accounts these deposits fell due
at short intervals and would have been available to the
appellant had any need arisen.
10. Stress was laid on the use of the word “surplus” both
by the Tribunal as well as by the High Court and it was also
contended before us that in the bye-laws under the heading
“business of the Bank” it was provided that the Bank could
“invest surplus funds when not required for the business
of the Bank in one or more ways specified in Section 19
of the Bihar Act (Clause 4 III(i) of the bye-Laws). Whether
funds invested as provided in Section 19 of the Bihar Act
would be surplus or not does not arise for decision in this
case, but it has not been shown that the moneys which
were in deposit with other Banks were “surplus” within
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that bye-law so as to take it out of Banking business. As
we have pointed out above, it is a normal mode of
carrying on Banking business to invest moneys in a
manner that they are readily available and that is just
as much a part of the mode of conducting a Bank’s
business as receiving deposits or lending moneys or
discounting hundies or issuing demand drafts. That
is how the circulating capital is employed and that is
the normal course of business of a Bank. The moneys
laid out in the form of deposits as in the instant case
would not cease to be a part of the circulating capital
of the appellant nor would they cease to form part of
its Banking business. The returns flowing from them
would form part of its profits from its business. In a
commercial sense the directors of the Company owe
it to the Bank to make investments which earn them
interest instead of letting moneys lie idle. It cannot be
said that the funds of the Bank which were not lent to
borrowers but were laid out in the form of deposits in
another Bank to add to the profit instead of lying idle
necessarily ceased to be a part of the stock-in-trade
of the Bank, or that the interest arising therefrom
did not form part of its business profits. Under the
bye-laws one of the objects of the appellant Bank is to
carry on the general business of Banking and therefore
subject to the Cooperative Societies Act, it has to carry on
its business in the manner that ordinary Banks do. It may
be added that the various heads under Section 6 of the
Income Tax Act and the provisions of that Act applicable
to these various heads are mutually exclusive. Section 12
is a residuary section and does not come into operation
until the preceding heads are excluded. CIT v. Basant Rai
Takht Singh [(1933) ITR 197, 201].”
(emphasis added)
16. The decision of the Privy Council in the case of Punjab Co-operative
Bank v. Commissioner of Income Tax9 is also very relevant. It
was held thus:
9 (1940) SCC Online PC 46
[2024] 10 S.C.R. 887
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
“The principle to be applied in such a case is now well
settled. It was admirably stated in a Scottish case,
Californian Copper Syndicate v. Harris [(1904) 6 F. 894 : 5
Tax Cas. 159.] and the statement has been more than once
approved both in the House of Lords and in the Judicial
Committee: See for example Commissioner of Taxes v.
Melbourne Trust Ltd. [1914 A.C. 1001 at p. 1010.]. Some
dicta which appear to support the view that it is necessary
to prove that the taxpayer has carried on a separate or
severable business of buying and selling investments
with a view to profit in order to establish that profits made
on the sale of investments are taxable, for example, the
dicta in the case of Commissioners of Inland Revenue v.
Scottish Automobile and General Insurance Co. [(1913-16)
6 Tax Cas. 381, at pp. 388, 389.], cannot now be relied
on. It is well established, to cite the exact words used in
Californian Copper Syndicate v. Harris [(1904) 6 F. 894 :
5 Tax Cas. 159.].
“that enhanced values obtained from realization or
conversion of securities may be so assessable where
what is done is not merely a realization or change
of investment, but an act done in what is truly the
carrying on, or carrying out, of a business”.
In the ordinary case of a Bank, the business consists
in its essence of dealing with money and credit.
Numerous depositors place their money with the
Bank often receiving a small rate of interest on it. A
number of borrowers receive loans of a large part of
these deposited funds at somewhat higher rates of
interest. But the Banker has always to keep enough
cash or easily realisable securities to meet any
probable demand by the depositors. No doubt there will
generally be loans to persons of undoubted solvency
which can quickly be called in, but it may be very
undesirable to use this second line of defence. If as in
the present case some of the securities of the Bank are
realised in order to meet withdrawals by depositors,
it seems to their Lordships to be quite clear that this
is a normal step in carrying on the Banking business,
888 [2024] 10 S.C.R.
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or, in other words, that it is an act done in “what is
truly the carrying on” of the Banking business. This,
it appears to their Lordships, is the more appropriate
and satisfactory ground for dealing with the question
arising in the present case.”
(emphasis added)
17. Therefore, 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.
OUR CONCLUSIONS
18. Initially, CBDT issued Circular No. 599 of 1991 and observed that the
securities held by Banks must be recorded as their stock-in-trade.
The circular was withdrawn in view of the decision of this Court in
the case of Vijaya Bank Ltd.1 In the year 1998, RBI issued a circular
dated 21st April 1998, stating that the Bank should not capitalise
broken period interest paid to the seller as a part of cost but treat
it as an item of expenditure under the profit and loss account. A
similar circular was issued on 21st April 2001, stating that the Bank
should not capitalise the broken period interest paid to the seller as
a cost but treated it as an item of expenditure under the profit and
loss account. In 2007, the CBDT issued Circular No. 4 of 2007,
observing that a taxpayer can have two portfolios. The first can be
an investment portfolio comprising securities, which are to be treated
as capital assets, and the other can be a trading portfolio comprising
stock-in-trade, which are to be treated as trading assets.
19. As stated earlier, Banks are required to purchase Government
securities to maintain the SLR. As per RBI’s guideline dated 16th
October 2000, there are three categories of securities: HTM, AFS
and HFT. As far as AFS and HFT are concerned, there is no difficulty.
When these two categories of securities are purchased, obviously,
the same are not investments but are always held by Banks as
stock-in-trade. Therefore, the interest accrued on the said two
categories of securities will have to be treated as income from the
business of the Bank. Thus, after the deduction of broken period
interest is allowed, the entire interest earned or accrued during the
particular year is put to tax. Thus, what is taxed is the real income
earned on the securities. By selling the securities, Banks will earn
[2024] 10 S.C.R. 889
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
profits. Even that will be the income considered under Section 28 after
deducting the purchase price. Therefore, in these two categories of
securities, the benefit of deduction of interest for the broken period
will be available to Banks.
20. 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.
21. The securities of the HTM category are usually held for a long term
till their maturity. Therefore, such securities usually are valued at
cost price or face value. In many cases, Banks hold the same as
investments. Whether the Bank has held HTM security as investment
or stock-in-trade will depend on the facts of each case. HTM Securities
can be said to be held as an investment (i) if the securities are
actually held till maturity and are not transferred before and (ii) if
they are purchased at their cost price or face value.
22. At this stage, we may refer to a decision of this Court in the case of
Commissioner of Income Tax (Central), Calcutta v. Associated
Industrial Development Company (P) Ltd., Calcutta.10 In the said
decision, this Court held that whether a particular holding of shares is
by way of investments or forms part of the stock-in-trade is a matter
which is within the knowledge of the assessee. Therefore, on facts,
if it is found that HTM Security is held as an investment, the benefit
of broken period interest will not be available. The position will be
otherwise if it is held as a trading asset.
23. Now, we turn to the factual aspects. As far as Civil Appeal No.
3291-94 of 2009 is concerned, the Tribunal, in a detailed judgment,
recorded the following conclusions:
a. Interest income on securities right from assessment year
1989-90 is being treated as interest on securities and is taxed
under Section 28 of the IT Act;
10 (1972) 4 SCC 447
890 [2024] 10 S.C.R.
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b. Since the beginning, securities are treated as stock-in-trade
which has been upheld by the Department right from the
assessment year 1982-83 onwards;
c. Securities were held by the respondent Bank as stock-in-trade.
The findings of the Tribunal have been upset by the High Court. The
impugned judgment proceeds on the footing that the decision in the
case of Vijaya Bank Ltd.1 case would still apply. Thus, as far as Civil
Appeal Nos. 3291-3294 of 2009 are concerned, as a finding of fact,
it was found that the appellant Bank was treating the securities as
stock-in-trade. The said view was upset by the High Court only on
the ground of the decision of this Court in the case of Vijaya Bank
Ltd.1 As the securities were held as stock-in-trade, the income thereof
was chargeable under Section 28 of the IT Act. Even the assessing
officer observed that considering the repeal of Sections 18 to 21,
the interest on securities would be charged as per Section 28 as
the securities were held in the normal course of his business. The
assessing officer observed that the appellant-Bank, in its books of
accounts and annual report, offered taxation on the basis of actual
interest received and not on a due basis.
24. Therefore, in the facts of the case, 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. The impugned
judgment is based on the decision in the case of Vijaya Bank Ltd.1
It also refers to the decision of the Bombay High Court in the case of
American Express International Banking Corporation2 and holds
that the same was not correct. As noted earlier, the view taken in
the American Express International Banking Corporation2 case
has been expressly upheld by this Court in the case of Citi Bank
NA.3 Therefore, the impugned judgment cannot be sustained, and
the view taken by the Tribunal will have to be restored.
25. Now, we come to other appeals which are part of this group. In
Civil Appeal @Special Leave Petition (C) Nos.1445-1446 of 2021,
the assessing officer held that the respondent Bank was liable to
pay the broken period of interest as part of the price paid for the
securities. Hence, a deduction on the said amount was disallowed.
The assessee could not succeed before the CIT (Appeals). Before
the Appellate Tribunal, reliance was placed on the decision of this
[2024] 10 S.C.R. 891
Bank of Rajasthan Ltd. v. Commissioner of Income Tax
Court in the case of Vijaya Bank Ltd.1 The Tribunal observed that
the assessing officer had treated the interest income earned by
the respondent Bank on securities as income from other sources.
The Tribunal observed that the investments in securities are in
stock-in-trade, and this fact has been accepted in the past by the
Income Tax department. It was held that the securities in the category
of HTM were also held as stock-in-trade, and income/loss arising
out of such securities, including HTM securities, has been treated as
business income/loss. The Appellate Tribunal held that the interest
for the broken period would be admissible as a deduction, and the
High Court confirmed the same. We may note here that the Tribunal
followed the decision of the Bombay High Court in the case of HDFC
Bank Ltd. v. CIT.11 We find no error in the view taken in this case.
26. In Civil Appeal @ Special Leave Petition (C) No.4843 of 2020, the
High Court held in favour of the respondent-Bank by allowing a
deduction for broken period interest relying upon the decision in
the case of HDFC Bank Ltd.11 In this case, the assessing officer
did not accept the claim of the Bank that the securities held were
in the nature of stock-in-trade. However, the CIT (Appeals) and the
Appellate Tribunal accepted the respondent Bank’s case. In this
case, before the Appellate Tribunal, the department conceded in
favour of the assessee.
27. In Civil Appeal @ Special Leave Petition (C) No. 7055 of 2021,
neither the assessment officer nor the CIT allowed a deduction on
account of the broken period interest. However, the Tribunal allowed
the same. Before the High Court, Revenue argued that the increase
in capital 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. However, The High
Court rightly rejected the contention of the department that the outlay
on the purchase of securities was capital outlay.
28. In Civil Appeal @ Special Leave Petition (C) No.7404 of 2021, the
CIT, the High Court took a similar view. The same is the case with
Civil Appeals @ Special Leave Petition (C) Nos.15281 and 1686
of 2021.
11 (2014) 366 ITR 505
892 [2024] 10 S.C.R.
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29. In Civil Appeal @ Special Leave Petition (C) No.1687 of 2021 and
Civil Appeal @ Special Leave Petition (C) No.8968 of 2018, the High
Court allowed interest deduction on broken period. In Civil Appeal @
Special Leave Petition (C) No.24841 of 2019, though the assessment
officer held that the broken period interest has to be capitalised, the
Appellate Tribunal upset the said view. In Civil Appeal No.4755 of
2023, deduction for broken period interest has been allowed.
30. Hence, in Civil Appeal No.3291-3294 of 2009, the judgment of the
High Court cannot be sustained, and the decisions of the Tribunal
dated 29th May 2003 and 15th July 2004 will have to be restored. All
other appeals preferred by the Revenue will have to be dismissed
subject to clarification regarding securities of the HTM category.
31. Accordingly, we pass the following order:
a. Civil Appeal Nos.3291 to 3294 of 2009 are hereby allowed by
setting aside the impugned judgment and the judgments dated
29th May 2003 and 15th July 2004 of the Appellate Tribunal are
restored.
b. All other Civil Appeals are dismissed.
c. There will be no order as to costs.
Result of the Case: A
ppeals filed by the Bank allowed and
Appeals filed by the Revenue dismissed.
†
Headnotes prepared by: Nidhi Jain
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