In a big relief to banks including SBI, the Supreme Court on Wednesday clarified that banks are allowed to claim deductions for broken period interest paid on securities traded as stock-in-trade.
It rejected the income tax departmentтАЩs stand that broken period interest on security held till maturity constitutes an investment and, therefore, should be treated as capital expenditure and not stockintrade, thus deduction would not be available for the broken period interest.
Upholding the Bombay High Court view, a Bench led by Justice Abhay S Oka held that if the banks were treating the securities as stockintrade, 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.
тАЬIt is well ┬нsettled that in the banking business, securities purchased by banks, per se, constitute stock-┬нin-┬нtrade of the bank 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,тАЭ it said.
While the Bombay High Court had held that such amount of broken period interest is an allowable deduction, the Rajasthan High Court had taken a contrary view.
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.
