TMI Blog2005 (3) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... tion? Assessment years 1998-99 and 1999-2000: "Whether broken period interest paid on purchase of securities is revenue expenditure since the securities constitute stock-in-trade? 2. Though the assessee has raised several issues in the grounds of appeal, since the permission was granted to pursue the appeals only in respect of the abovementioned issues, the other grounds urged by the assessee were not pressed by the learned counsel and accordingly they are not taken up for consideration. 3. With regard to the allowance of interest pertaining to the broken period, the case of the learned counsel for the assessee is that the assessee purchased securities are treated them as stock-in-trade. Since the assessee purchased securities with interest, the broken period interest is allowable as revenue expenditure. The Assessing Officer as well as the CIT(A) did not dispute the fact that the securities were held as stock-in-trade by the assessee but the claim of deduction was rejected mainly by relying upon the decision of Supreme Court in the case of Vijaya Bank Ltd. v. Addl CIT [1991] 187 ITR 541. Learned counsel submitted that the CBDT has considered the decision of the Hon'ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rival submissions and perused the record. The decision of Apex Court in the case of Vijaya Bank Ltd. was explained by the CBDT and on the same lines the Kerala High Court distinguished the decision of Apex Court to hold 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. Admittedly, the assessee purchased securities to hold them as stock-in-trade. Under these circumstances, we are of the view that the interest paid for the broken period is allowable as deduction and accordingly direct to accept the claim of the assessee. 6. The second issue which is relevant to the assessment year 1999-2000 only is with regard to the claim of deduction of interest income, pertaining to the previous year, which was reversed during the current year. The case of the assessee is that certain advances borrowings have become non-performing assets. As per the guidelines issued by the RBI interest on NPAs was quantified and such interest was deducted/reversed in the subsequent year when NPAs are identified after the end of the accounting year. It was pleaded that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... table provision in subsequent year. Since the assessee has followed the norms prescribed by the RBI, the same has to be allowed as deduction from the total income. In other words, without reducing the interest on NPAs, true and correct profits cannot be deduced and hence the claim of the assessee is in order. Learned counsel relied upon the decision of the ITAT-B-Bench, Hyderabad in the case of TCI Finance Ltd. v. Asstt. CIT [2004] 91 ITD 573 and in particular para 29 of the order of the Tribunal to submit that the reversal entries were approved by the Tribunal. He also relied upon the following decisions in support of his contention that in the year of reversal of the entry, the amount referable to such reversal entries should be deducted from the total income. (i) Bank of Madura Ltd. v. CIT [2003] 261 ITR 749 (Mad.). (ii) CIT v. MP Financial Corporation [1997] 227 ITR 888 (MP). Learned counsel has given a note dated 22-12-2003 to explain the reasons for passing such reversal entries. The case of the assessee is that as per the RBI norms 180 days yardstick has to be applied for identifying an asset as standard or NPA. When 180 days falls beyond the balance-sheet date, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the customer. The Court held that the claim of deduction in the year realization of mistake is in the order. It may be noted here that it was a case of excess collection of interest and there was a duty cast upon the bank to refund the excess interest whereas in the instant case interest on NPAs was earlier declared as income on accrual basis and though it has not become bad in all respects, the entry was sought to be reversed only because of RBI guidelines. The assessee has furnished the circular letter of the RBI containing consolidated instructions/guidelines on matters relating to prudential norms on income recognition. In the circular dated 4th July, 2002 the RBI has consolidated all the instructions issued earlier. Paras 3.2, 3.2.1 and 3.2.2, of the Circular read as under: "3.2 Reversal of income 3.2-1 If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realized. This will apply to Government guaranteed accounts also. 3.2.2. In respect of NPAs, fees, commission and similar income that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular year, the income of that year has to be taken into consideration. However, once the income of that year is properly recorded the assessee cannot reduce the income from the subsequent years computation on the ground that in the earlier year income was shown on accrual basis wrongly and thus the income of this year gets reduced if set off is permitted. In the given example, it could be seen that the assessee is not claiming any expenditure against the current year's income but seeking reduction of current year's income though even according to the assessee such income accrued in the year under consideration. In our considered opinion, such a claim is not permissible. In the immediately preceding year the assessee having declared income on the accrual basis, the only course open to the assessee to derecognise that income is to treat the same as bad-debt by following the RBI norms. Our view is supported by the decision of Apex Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 as well as the decision of ITAT, Delhi Bench in the case of Poysha Oxygen (P.) Ltd. v. Dy. CIT [2004] 91 ITD 616. Admittedly, the assessee has not written off the impugned sum as bad-de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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