Banks Can Claim Tax Deductions For Broken Period Interest On HTM Securities If Held As Trading Assets: Supreme Court

The Supreme Court on Wednesday (October 16) held that banks can claim tax deductions for broken period interest on held to maturity (HTM) government securities if they are held as trading asset. “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”, the Court held. A bench of Justice Abhay Oka and Justice Pankaj Mithal observed that whether HTM securities are held as investments or stock-in-trade depends on the facts of each case. If a bank holds HTM securities until maturity and values them at cost, they may be considered investments, in which case the broken period interest would not be deductible. If held as trading assets, the deduction would be available “Whether the Bank has held HMT security as investment or stockintrade 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.” The Court said this while deciding various appeals filed by banks and the Revenue Department concerning how to treat interest paid on securities for the period between the last coupon date and the date of purchase (i.e., the broken period). The appellant in the lead case, Bank of Rajasthan Ltd., had been engaged in the purchase and sale of government securities. These securities are typically held by banks as part of their statutory liquidity ratio (SLR) obligations, mandated by the Banking Regulation Act, 1949, and categorized into three types: Held to Maturity (HTM), Available for Sale (AFS), and Held for Trading (HFT). Interest on these securities is paid periodically by the government on coupon dates, but when a bank purchases a security between two coupon dates, apart from the price, it has to pay an amount equivalent to the interest accrued from the last coupon date till the date of acquisition i.e., the broken period. When the interest becomes due on the next coupon date, the purchaser bank receives interest for the entire period, including the broken period. The issue before the Court was whether this broken period interest could be deducted as a business expenditure by the banks, in the period after sections 18 to 21 of the Income Tax Act were repealed in 1989. These sections had previously governed the taxability of interest on securities and related deductions. Before 1989, interest on securities was taxed under Section 18 of the Income Tax Act, with deductions allowed under Sections 19 and 20 for the expenses incurred in realizing such interest. These provisions were repealed, and after 1989, the taxability of interest on securities shifted to Section 28 (income from business) or Section 56 (income from other sources), depending on the treatment of the securities by the assessee. In this case, the appellant-bank followed a practice of treating government securities as stock-in-trade, claiming deductions for broken period interest and netting this against the interest income from securities when computing taxable income. This practice was initially accepted by the assessing officer, but the Commissioner of Income Tax (CIT) intervened under Section 263 of the Income Tax Act, disallowing the deduction for broken period interest. The CIT relied on the Supreme Court's decision in Vijaya Bank Ltd. v. Additional Commissioner of Income Tax (1991), which held that broken period interest was a capital expenditure and could not be deducted from income. The Income Tax Appellate Tribunal (ITAT) ruled in favor of the banks, holding that the Vijaya Bank decision was rendered in a different legal context under the repealed sections of the Income Tax Act. It emphasized that since the banks held the securities as stock-in-trade, broken period interest was deductible as a business expense. However, the High Court reversed the Tribunal's decision. Thus, the bank approached the Supreme Court in the present appeal. The bank argued that government securities, even when classified as HTM, were held as stock-in-trade as part of their normal banking business. The bank highlighted that it had consistently followed a practice of claiming broken period interest as a business expense, which had been accepted by the department in earlier assessments. The Revenue argued that broken period interest should be treated as a capital expenditure, especially for securities categorized as HTM, since these were held for long-term investment rather than trading. The Court noted that after 1989, interest on securities could be taxed under Section 28 (profits and gains from business) if the securities were held as stock-in-trade, or under Section 56 (income from other sources) if they were held as investments. ...

Banks Can Claim Tax Deductions For Broken Period Interest On HTM Securities If Held As Trading Assets: Supreme Court

Amisha Shrivastava

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