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The Bank of Rajasthan Ltd. vs. Commissioner of Income Tax

Not available · 2024 INSC 781Decided 16 Oct 2024
Not available
Justice Abhay S. Oka · Justice Pankaj Mithal

Background

Banks that trade in government securities and bonds often buy them mid-way through an interest-accrual period, paying the seller a price that includes the interest already accrued since the last interest payment date: this component is called "broken period interest." The core question in this batch of appeals (led by Bank of Rajasthan's case) was whether a bank holding such securities as stock-in-trade (i.e., as part of its trading business, not as a long-term investment) could deduct this broken-period interest as a business expense when computing its taxable income, or whether the tax authorities were right to treat it as a capital cost that couldn't be deducted.

Decision Breakdown

The Supreme Court held that where securities are held by a bank as stock-in-trade, the broken period interest paid on their purchase is deductible as a revenue expense, following the reasoning previously accepted in cases like HDFC Bank v. CIT. Applying this principle across the batch, the Court allowed Bank of Rajasthan's appeal and restored the Income Tax Appellate Tribunal's orders permitting the deduction, and disposed of the remaining connected appeals in line with this reasoning (largely against the Revenue), while clarifying that securities held in the "Held to Maturity" (HTM) category needed separate treatment.

Lesson Learnt

For businesses like banks that treat certain assets as trading stock rather than fixed investments, ordinary costs of acquiring and dealing in that stock, even something as technical as "broken period interest", are treated as everyday business expenses for tax purposes, not as capital costs that can't be written off.

Official source (sci.gov.in)View Judgment (PDF)

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