Rejecting
the income tax department’s stand, the Supreme Court on Wednesday ruled that
banks are allowed to claim deductions for broken period interest paid on
government securities traded as stock-in-trade.
Broken
period interest is the interest paid by a bank when purchasing government
securities between coupon payment dates.
The
court said it is well-settled that in the banking business, securities
purchased by banks, per se, constitute stockintrade of the bank as normal and
ordinary banking business is to deal in money credit. It said the money is
parked in readily marketable securities so that it is available to meet the
demand of depositors.
“As
we have pointed out above, it is a normal mode of carrying on banking business
to invest moneys in a manner that they are readily available and
that is just as much a part of the mode of conducting a bank’s business as
receiving deposits or lending moneys or discounting hundies or issuing demand
drafts. That is how the circulating capital is employed and that is the normal
course of business of a bank. The moneys laid out in the form of
deposits as in the instant case would not cease to be a part of the circulating
capital of the appellant nor would they cease to form part of its
banking business. The returns flowing from them would form part of its profits
from its business. In a commercial sense the directors of the company owe it to
the bank to make investments which earn them interest instead of
letting moneys lie idle,” the bench of Justices AS Oka and Pankaj Mithal said.
The
court upheld the Bombay High Court view saying, “It cannot be said that the
funds of the bank which were not lent to borrowers but were laid out in the
form of deposits in another bank to add to the profit instead of lying idle
necessarily ceased to be a part of the stockintrade of the bank, or that the
interest arising therefrom did not form part of its business profits.”