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CIT vs. CitiBank N.A. (Supreme Court)
July, 08th 2016

Interest paid for broken period should not be considered as part of the purchase price, but should be allowed as revenue expenditure in the year of purchase of securities. American Express vs. CIT 258 ITR 601 (Bom) affirmed, Vijaya Bank 187 ITR 541 (SC) distinguished

Having treated the difference under the head “Business”, the Assessing Officer 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 Ltd’s case [1991] 187 ITR 541. 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 and Rs.11,630.00. The said amount ofRs.58,568 represented interest, which accrued on securities taken over by Vijaya Bank from Jayalakshmi Bank and Rs.11,630 was the interest which accrued up to the date of purchase of securities by the assessee-bank from the open market. These two amounts were brought to tax by the Assessing Officer 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 afore stated 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 Ltd.’s case [1991] 187 ITR 541 (SC). In the light of the above facts, it was held that the outlay on purchase of income- 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 atthe 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 Ltd.’s case [1991] 187 ITR 541 (SC) 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 Ltd.’s case [1991]187 ITR 541 (SC) 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 Ltd.’s case[1991] 187 ITR 541 (SC) 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 Ltd.’s case [1991] 187 ITR 541 (SC), even if the securities were treated as part of the trading assets, the income therefrom had to be assessed under section 18of 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 Ltd.’s case [1991] 187 ITR 541 (SC)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 bythe Supreme Court in the subsequent decision reported in the case of CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, that income from securities can also come under section 28 as income from business. This judgment is very important. It analyses the judgment of the Supreme Court in United Commercial Bank Ltd.’s case[1957] 32 ITR 688, which has been followed by the Supreme Court in Vijaya Bank Ltd.’s case [1991] 187 ITR 541. 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 Ltd.’s case [1965] 57 ITR 306, 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 United Commercial Bank Ltd. [1957] 32 ITR 688 (SC), also support our view in the present case.

In United Commercial Bank Ltd.’s case [1957] 32 ITR 688(SC), the assessee-bank claimed a set-off under section 24(2) of the Indian 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 18 of the present Act). It was held that United Commercial 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 United Commercial Bank Ltd.’s case [1957] 32 ITR 688 (SC), the Department had assessed income from interest on securities right from the inception under section8 of the 1922 Act and, therefore, the set-off was not allowed under section 24(2) ofthe Act. Therefore, United Commercial Bank Ltd.’s case [1957] 32 ITR 688 (SC), 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 United Commercial Bank Ltd.’s case [1957] 32 ITR 688 (SC), the matter was remitted back as it was contended on behalf of United Commercial Bank that the securities in question were a part of the 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 Indian 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 thecase of Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306, the Supreme Court has observed, after reading United Commercial Bank Ltd.’s case [1957] 32 ITR 688 (SC),that where securities were part of trading assets, income by way of interest on such securities could come under section 10 of the Indian Income-tax Act, 1922.

 
 
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