Income Tax Appellate Tribunal - Bangalore
State Bank Of Mysore , Bangalore vs Assessee on 6 September, 2012
Page 1 of 15 1 ITA Nos.888 & 889/Bang/2011
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH 'A'
BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT
AND SHRI GEORGE GEORGE K, J.M
ITA Nos.888 & 889/Bang/2011
(Assessment years 1999-2000 & 2000-01)
State Bank of Mysore, Head The Commissioner of
Office, P B No.9727, Income Tax (Appeals),
K G Road, Bangalore. vs (LTU), Bangalore.
PA No. AACCS0155P
(Appellant) (Respondent)
Date of Hearing : 06.09.2012
Date of Pronouncement : 14.09.2012
Appellant by : Shri K Subramanian, C.A.
Respondent by : Shri S K Ambastha, CIT (DR-I), ITAT
ORDER
PER BENCH :
These appeals instituted by the assessee are directed against the consolidated order of the CIT(A), LTU, Bangalore dated 12.8.2011. The relevant assessment years are 1999-2000 & 2000-01.
2. Since common issues are involved in these appeals and pertain to the same assessee, they were heard together and disposed off by this consolidated order.
3. The grounds raised in these two appeals are identical, except for variations in figures. The issue raised in these appeals are as follows:- Page 2 of 15 2 ITA Nos.888 & 889/Bang/2011
i) Broken period interest paid to the sellers of the securities for the assessment year 1999-00 - Rs.42,190,806/-.
ii) Broken period interest paid in earlier years -
Rs.17,91,46,619/-.
iii) Adjustments on valuation of securities after considering the Broken period interest of Rs.20,91,83,000/-
4. Briefly stated the facts of the case are as follows :-
The assessee is a Public Sector Undertaking and is a subsidiary of State Bank of India and governed by the Banking Regulation Act, 1949.
For the assessment year 1999-2000, assessment under section 143(3) of the Act was completed vide order dated 28/3/2002. The assessee-bank, in accordance with its investment policy and as per the guidelines issued by the Reserve Bank of India from time to time, invests in various securities. As per the RBI guidelines, the securities are categorized into two broad categories, namely,
(i) available for sale (which was in the nature of 'stock-in-trade') and
(ii) held to maturity (which was in the nature of 'investment').
On purchase of securities from secondary market, the assessee, in many instances, pays broken period of interest to the sellers security. The assessee had claimed broken period interest paid on its purchase of securities under "available for sale" category as revenue expenditure under the Income Tax Act, 1961. The Commissioner of Income Tax in her order under section 263 of the Act dated 29.3.2004, directed the Assessing Officer not to treat the broken period interest paid to the sellers of the securities as revenue expenditure but to treat the same as a part of cost of the securities and to consider it for valuation of closing Page 3 of 15 3 ITA Nos.888 & 889/Bang/2011 stock. In pursuance to 263 order, the Asst. Commissioner of Income Tax passed order under section 143(3) r.w.s. 263 of the Act by making the following adjustments/disallowances:-
Sl. No. Adjustments/Disallowances Amount (Rs.)
1. The amount of BPI paid during the 4,21,90-,806/-
assessment year 1999-2000 on the securities lying in the stock as at 31/3/1999.
2. The amount of the BPI paid in the 17,91,46,619/-
earlier years.
3. The incremental depreciation on the 20,91,83,000/-
value of the securities after reducing the amount of Rs.60,77,000/- already written back.
4.1 For the assessment year 2000-01, the assessment under section 143(3) was completed vide order dated 23/3/2002. Subsequently, the Commissioner passed order under section 263 of the Act on 29/3/2004 directing the Assessing Officer not to treat the broken period interest paid to the sellers of securities as revenue expenditure but to treat as a part of cost of purchase of securities and to consider it for valuation of stock. Pursuant to 263 order, the ACIT passed order under section 143(3) rws 263 of the Act making the following adjustments/disallowances:-
Sl. No. Adjustments/Disallowances Amount (Rs.)
1. The amount of BPI paid during the 16,44,49,599/-
assessment year 2000-01 on the securities lying in the stock as at 31.3.2000.
2. The amount of the BPI paid in the 17,45,99,897/-
earlier years.
3. Depreciation on valuation of securities 30,27,62,794/-
as at 31st March, 2000.
Page 4 of 15 4 ITA Nos.888 & 889/Bang/2011
5. Aggrieved by the orders passed under section 143(3) rws 263 of the Act (both the orders dated 31/3/2005), the assessee preferred appeal before the first appellate authority. The CIT(A) vide common order in ITA No.2 & 3/05-06 dated 10/10/2005 dismissed both the appeals as non- maintainable on the ground that the impugned orders had merged with the order under section 263 and therefore the appeals in question were not maintainable before him. The assessee preferred further appeal before the Income Tax Appellate Tribunal, Bangalore Bench both on the issue of maintainability of the appeals as well as on merits with regard to allowability of broken period interest expenditure paid on purchase of securities. The Hon'ble Tribunal vide its order in ITA No.21 & 22/Bang/2006 dated 29/3/2010 held that the finding of the CIT(A) was not maintainable in law and set aside the common order passed by the CIT(A) and remitted the issue to the CIT(A) for the disposal of the two appeals. The relevant finding of the Hon'ble Tribunal reads as follows:-
"An assessment order may be revised or redone out of many compulsions rooted through enabling provisions of IT Act, 1961. But those root causes of an assessment order does not take away the jurisdiction of the Commissioner of Income Tax (Appeals) in adjudicating the grounds raised against those orders. In the present case, even though the assessments were revised as a result of orders passed under section 263, the assessment orders are still assessment orders subject to the appellate jurisdiction of the Commissioner of Income Tax (Appeals). Therefore, in fact and law, the Commissioner of Income Tax (Appeals) ought to have disposed off the appeals on merit".Page 5 of 15 5 ITA Nos.888 & 889/Bang/2011
5.1 Thereafter, the CIT(A) took up the issue on merits and decided the appeals against the assessee and confirmed the assessment order passed under section 143(3) rws 263 of the Act.
6. The assessee being aggrieved is in appeal before us.
7. The learned AR relied on the grounds raised in its appeals, which are argumentative and narrative in nature. Since the grounds raised in both the assessment years are identical, except for variation in figures, the grounds raised for the assessment year 1999-2000 is reproduced below:-
1. Broken period interest paid to the sellers of the securities for the assessment year 1999-00 -
Rs.42,190,806/-.
a) The learned CIT(A) erred in not holding that the Broken Period Interest (BPI) paid to the sellers of the securities under the Available for Sale category and tying in the stock as on 31st March, 1999 amounting to Rs.42,190,806/- is a revenue expenditure.
b) The learned CIT(A) ought to have placed reliance on the Circular No.599 issued by the Central Board of Direct Taxes (CBDT) wherein it was clarified that securities held by Bank constitute stock-in-
trade and not investment and the claim of loss if debited in the books of account, would be given the same treatment as is normally given to the stock in trade. Further interest payments on the broken period must be regarded as revenue payments.
c) The learned CIT(A) ought to have observed that Circular No.665 issued by the CBDT in effect reiterates that the BPI payment is revenue expenditure in so far as it relates to securities held as stock-in-trade.
Page 6 of 15 6 ITA Nos.888 & 889/Bang/2011
d) The learned CIT(A) ought to have appreciated that the Hon'ble Supreme Court's ruling in the case of Vijaya Bank (187 ITR 541) is not applicable to the appellant as the facts of appellant's case are distinguishable from those of Vijaya Bank in as much as that -
• In the case of Vijaya Bank - the interest income inclusive of BPI income on sale of securities was offered to tax under the head "interest on securities".
• In the case of appellant - the interest income inclusive of BPI income on sale of securities was offered to tax as "business income".
e) The learned CIT(A) ought to have taken into cognizance the decision of the Hon'ble Supreme Court in the case of Citibank N.A. (Civil appeal No.1549 of 2006) wherein it was held that -
• The interest income including BPI income on the sale of securities was offered to tax as "Business income" from the inception and hence the judgment in the case of Vijaya Bank has no application to the facts of the present case; and • Since the same was accepted by the Income Tax Department , the BPI expenditure on the purchase of securities should also be allowed as deduction while computing the "Business income"
of the assessee.
f) The learned CIT(A) ought to have placed reliance on the following judicial precedents where the BPI paid to the sellers of the securities has been held to be a revenue expenditure:Page 7 of 15 7 ITA Nos.888 & 889/Bang/2011
• Appellant's own case for the assessment year 1988-89 in ITA No.1838/B/90 vide order of the ITAT, Bangalore dated 16th August, 2002.
• American Express International Banking Corporation v CIT - 258 ITR 601 (Mumbai) HC • The Bank of Baroda v JCIT - (ITA No.47/MUM/2001) • Dhanalakshmi Bank Limited v ACIT - 2007 (12 SOT 625 - TCCH)
2. Broken period interest paid in earlier years -
Rs.17,91,46,619/-
Notwithstanding and without prejudice to the appellant's contention that the BPI paid to the sellers of security is revenue expenditure -
The learned CIT(A) erred in not deleting the addition of a sum of Rs.17,91,46,619/- being BPI paid in the earlier years, made by the Assessing Officer. He ought to have observed that this sum is not claimed as revenue expenditure in the assessment year 1999-00 and accordingly, requires no adjustments for this assessment year.
The learned CIT(A) ought to have observed that the adjustment to the BPI paid in the previous years is not in line with the directions given by the Commissioner of Income-tax in her order under section 263 of the Act.
3. Adjustments on valuation of securities after considering the Broken period interest of Rs.20,91,83,000/- Notwithstanding and without prejudice to the appellant's contention that the BPI paid to the sellers of security is revenue expenditure -
Page 8 of 15 8 ITA Nos.888 & 889/Bang/2011The learned CIT(A) erred in not deleting the adjustment of the sum of Rs.20,91,83,000/- on valuation of the closing stock of securities done by the Assessing Officer. The learned CIT(A) ought to have observed that the valuation of securities without considering the BPI paid, in the appellant's return of income has resulted in an excess depreciation of Rs.60,77,000/- which was offered to tax in the said assessment year.
The learned CIT(A) ought to have observed that if the BPI paid to the sellers of securities is considered for valuation of the closing stock of the securities, the same results in the incremental depreciation of Rs.21,52,60,000/- offered to tax by the appellant. The learned CIT(A) in not allowing the reduction of the incremental depreciation of Rs.21,52,60,000/- and in not allowing the reduction of the excess depreciation ofRs.60,77,000/- consequent to the inclusion of the BPI in the valuation of securities.
8. The learned DR supported the orders of the Income Tax Authorities.
8.1 The case which was heard on 7/8/2012 was reposted, to ascertain whether the Tribunal's order in ITA No.21 & 22/2006 dated 29/3/2010 was subject matter of the appeal before the Hon'ble High Court under section 260A of the Act. The learned AR as well as the learned DR submitted that the revenue has not filed appeal against the Tribunal's order in ITA No.21 & 22/2006 dated 29/3/2010 and the matter has not attained finality. Hence, we proceeded to dispose off the appeals on merits. Page 9 of 15 9 ITA Nos.888 & 889/Bang/2011
9. We have heard the rival submissions, perused the materials available on record and carefully gone through the case laws cited by both the parties. We are of the view that the CIT(A) has erred in not allowing the broken period interest paid on purchase of securities as revenue expenditure. The Bangalore Bench of the Tribunal in assessee's own case for the assessment year 1988-89 in ITA No.1838/Bang/90 vide order dated 16th August, 2002 had treated the broken period interest paid as an allowable business expenditure under the Act. The relevant finding of the Tribunal in assessee's own case reads as follows:-
"The assessee is aggrieved by the decision of the first appellate authority in confirming the disallowance of interest of Rs.19,07,447/- paid to the sellers of the securities towards purchase price. The learned counsel for the assessee invited our attention to CBDT Circular No.599 dt.24.4.91 on treatment of securities - stock-in- trade or investment, wherein clarifications on the following issues were sought by banks from the Central Board of Direct Taxes, which are reproduced as under:-
(i) .......................................................
(ii) Whether deduction claimed in respect of interest paid for broken period on the purchase of securities should be allowed as a deduction from the taxable profits?
(2) .................................... As far as the second issue is concerned, both the interest payments and receipts must be regarded as revenue payments/receipts and only the net interest on securities shall be brought to tax as business income.Page 10 of 15 10 ITA Nos.888 & 889/Bang/2011
The Hon'ble High Court of Karnataka in the case of assessee itself held that broken period was not taxable as the interest on securities did not accrue from day to day but on certain fixed days. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Vijaya Bank reported in 187 ITR 541. The sum of Rs.19,07,447/- representing the interest accrued but not due from the last date of accrual till the date of purchase was paid to the sellers of securities. The assessee treated the securities so purchased as stock-in- trade. The Assessing Officer disallowed the above sum on the ground that the expenditure is capital in nature as it goes to increase the cost of securities purchased, which was upheld by the first appellate authority. This issue has been decided by the Apex Court in the case of Vijaya Bank Ltd. v CIT and subsequent to the decision, the CBDT vide Circular No.610 withdrew the earlier circular no.599. On further representation by the Indian Bank's Association, Circular No.665 was issued by the CBDT wherein it was stated that the decision of the Supreme Court in the case of Vijaya Bank was on the question of broken period interest and not on whether the securities constituted stock-in-trade or investment. The learned counsel for the assessee submitted that the decision of the Apex Court in 187 ITR 541 is not applicable to the facts of the case as the assessee has classified the securities purchased as stock-in-trade and accordingly the claim of loss on trading of investments as deductible in nature. The learned counsel further invited out attention on about the RBI guidelines and the Accounting Standard issued by the ICAI and claimed that the assessee is eligible for deduction and further relied upon the decision of the Apex Court ub Challapalli Sugars Ltd. v CIT (98 ITR 67) and Madras Industrial Investment Corporation Ltd. v CIT (225 ITR 802) wherein the Hon'ble Supreme Court hold that the principles of accounting should be considered while allowing the deduction. In the light of above discussion, Page 11 of 15 11 ITA Nos.888 & 889/Bang/2011 the appeal of the assessee is allowed on this issue and the stand of the first appellate authority is reversed". 9.1 The Hon'ble Supreme Court in the case of CIT v Citibank N.A. (Civil Appeal No.1549 of 2006) had distinguished the judgment of the Hon'ble Apex Court in the case of Vijaya Bank and held that the broken period interest expenditure is an allowable expenditure. The question of law raised before the Hon'ble Supreme Court was as under:-
"Whether on the facts and in the circumstances of the case, the High Court was right in law in holding, that, the interest paid for broken period should be considered as part of the purchase price, but should be allowed as revenue expenditure in the year of purchase of securities".
9.2 While coming to the conclusion that the broken period interest payment on the purchase of securities which are held as trading assets (i.e. stock-in-trade) should be allowed as revenue expenditure, the following important observations were made by the Hon'ble Supreme Court:-
In the case of Vijaya Bank the interest income including BPI income on the sale of securities was offered to tax under the head "Interest on securities" but not as "Business Income". Hence it was held that outlay on the purchase of an income-bearing asset is in the nature of capital outlay, and no part of the capital so laid out can, for income tax purposes, be set off as expenditure against income accruing from the asset. Whereas in the instant case, the interest income including BPI income on the sale of securities was offered to tax as "Business Income". Since the BPI income was offered to tax as "Business Income" and the same was accepted by Page 12 of 15 12 ITA Nos.888 & 889/Bang/2011 the Income Tax Department, the BPI expenditure on the purchase of securities should also be allowed as deduction while computing the "Business Income" of the assessee. Further, the BPI income has been offered to tax as "Business Income" from the inception. If the Income Tax Department has brought to tax the BPI income under the head "Interest on securities" not as "Business Income"
then the Vijaya Bank's ruling would have been applicable to the facts of the present case. Hence, the judgment in the case of Vijaya Bank has no application to the facts of the present case.
Thus, the Supreme Court has finally concluded that "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 Ltd. (1991) 187 ITR 541 (SC), had no application to the facts of the case. For the reasons given above, the question posed before us is answered in the affirmative i.e. in favour of the assessee and against the revenue".
9.3 In the instant case, the assessee-bank, since its inception, has been offering the broken period interest income earned from the sale of securities (AFS category) as business income under section 28 of the Act and not as interest income under the head "Income from other sources". Accordingly, the broken period interest paid to the sellers of securities was claimed as an allowable deduction from its business income, under the Act. Applying the principles laid down by the Hon'ble Supreme Court in the case of Citibank, the Bank is entitled to claim the broken period interest expenditure as revenue expenditure from its business income, since the broken period interest income is also offered to tax as business income. Page 13 of 15 13 ITA Nos.888 & 889/Bang/2011 9.4 The following judicial precedents supported the claim of the assessee that the broken period interest payments are in the nature of revenue expenditure:-
i) American Express International Banking Corporation v CIT 258 ITR 601 (Mumbai) HC It was held by the Mumbai High Court that when the BPI received was taxable as business income, the Department ought to have allowed deduction for the BPI paid on purchase of securities.
ii) CIT v Citibank N.A. - 264 ITR 18 (Mumbai) HC By placing reliance in the case of American Express International Banking Corporation v CIT (258 ITR 601) it was held that the BPI paid towards purchase of securities is an allowable expenditure.
iii) CIT v Nedungadi Bank Limited 264 ITR 545 (Kerala) HC It was held by the Hon'ble Kerala High Court that the interest paid for the broken period would constitute allowable outgo in the hands of the assessee and is an admissible deduction in the computation of total income of the Bank under the head "profits and gains of business or profession".
iv) CIT v South Indian Bank Limited 154 Taxation 638 (Kerala) HC The Hon'ble Kerala High Court ruled the decision in the favour of the assessee and held that government securities held by the Bank are trading in nature and broken period interest paid on the above is an allowable expenditure for the purpose of computation of total income under the head "profits and gains from business or profession".Page 14 of 15 14 ITA Nos.888 & 889/Bang/2011
v) State Bank of Hyderabad v Joint CIT 95 TTJ 368 (Hyd.) ITAT The Hyderabad Tribunal 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 allowable outgo in the hands of the assessee bank.
9.5 In the light of the above judgements of the Hon'ble Supreme Court and various High Courts, we hold that the broken period interest payments on purchase of securities (AFS category) ought to be allowed as revenue expenditure.
9.6 Broken period interest ("BPI") paid to sellers of securities in earlier years We have heard the rival submissions and perused the materials on record. We hold that the amount is to be disallowed when the same should have been claimed as a deduction by debiting to the P&L account. The broken period interest payment made in the earlier year account cannot form part of the disallowance for the current assessment year since the same was not debited to the P&L account and hence, no disallowance is called for. 9.7 Valuation of securities (inclusive of BPI payment as part of Cost of securities) The above ground is only consequential in nature based on the outcome of the ground nos.(i) and (ii). Since we have already decided ground nos.(i) and (ii) in favour of the assessee, no adjudication is called for the Page 15 of 15 15 ITA Nos.888 & 889/Bang/2011 above grounds. Accordingly, the same is dismissed. It is ordered accordingly.
ITA No.889/Bang/2011 9.8 The findings rendered in the ITA No.888/Bang/2011 will hold good for this appeal also and hence, for the reasoning stated in ITA No.888/2011, we allow the appeal of the assessee. It is ordered accordingly.
10. In the result, both the appeals filed by the assessee are allowed.
The order pronounced on the 14th day of September, 2012 at Bangalore.
Sd/- Sd/-
(N BARATHVAJA SANKAR) (GEORGE GEORGE K)
VICE PRESIDENT JUDICIAL MEMBER
Copy to :
1. The Revenue
2. The Assessee
3. The CIT concerned.
4. The CIT(A) concerned.
5. DR
6. GF
MSP/ By order
Senior Private Secretary, ITAT, Bangalore.