Vijaya Bank Ltd. v. Additional Commissioner Of Income Tax, Bangalore ., Supreme Court Of India, Judgment, Law, casemine.com

Citation Codes

Equivalent Citations

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Case Number

Civil Appeal No. 1498 of 1976, decided on September 19, 1990

Disposition

dismissed

Judges

Dr. Justice T.K. Thommen
Justice S.C. Agrawal

Acts

Sections 19, 20 and 37 of the Income Tax Act, 1961
Section 18 of the Act
Section 18 of the Income Tax Act, 1961

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Smart Summary

Factual and Procedural Background

The appeal arose from the judgment of the Karnataka High Court in I.T. Referred Case No. 33 of 1973. The assessee, a banking company, had purchased securities both from Jayalakshmi Bank Ltd. and from the open market during the accounting year relevant to the assessment year 1968-69. Two amounts—Rs 58,568 (interest accrued on securities taken over from Jayalakshmi Bank Ltd.) and Rs 11,630 (interest accrued up to the date of purchase on securities bought on the open market)—were assessed to tax by the Income-tax Officer under Section 18 of the Income-tax Act, 1961.

The assessee’s claim for deduction of these sums under Sections 19, 20 and 37 was rejected by the Income-tax Officer and the Appellate Assistant Commissioner. However, the Income-tax Appellate Tribunal allowed the deductions. On reference, the Karnataka High Court reversed the Tribunal and held the amounts taxable. The present appeal challenged that High Court decision; the Supreme Court has now affirmed the High Court and dismissed the appeal with costs.

Legal Issues Presented

Whether the two sums of Rs 58,568 and Rs 11,630, representing interest accrued on securities up to the date of their purchase by the assessee-bank, were admissible deductions under Sections 19, 20 and 37 of the Income-tax Act, 1961.

Arguments of the Parties

Assessee’s Arguments

The purchase price of the securities was determined with reference not only to their intrinsic value but also to the interest that had accrued up to the purchase date; therefore, the accrued interest component constituted expenditure incurred for earning future income and should be deductible.
Sections 19, 20 and 37 of the Act permit deduction of such amounts when computing taxable income from interest on securities.

Revenue’s Arguments

Any amount paid for acquiring the securities forms part of the capital outlay on an income-bearing asset; under established law, capital outlay cannot be set off as expenditure against the income later accruing from that asset.
The assessee failed to demonstrate that any part of the sums claimed was expended solely for the purpose of realizing interest; hence no deduction is permissible under Sections 19, 20 or 37.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
IRC v. Pilcher (1949) 31 Tax Cases 314; (1949) 2 All ER 1097	Outlay on the purchase of an income-bearing asset is capital in nature; no part of that capital can be offset as expenditure against the income generated by the asset.	The Court relied on this principle to hold that the price paid for the securities, including the element attributable to accrued interest, was capital outlay and therefore not deductible.

Court's Reasoning and Analysis

The Court adopted the principle articulated in IRC v. Pilcher that sums spent on purchasing an income-bearing asset constitute capital expenditure. Applying this principle, it found:

The amounts of Rs 58,568 and Rs 11,630 formed part of the consideration for acquiring the securities and were therefore capital in nature.
Sections 19, 20 and 37 permit deduction only of expenditure laid out wholly and exclusively for the purpose of earning the interest income; the assessee failed to establish that any identifiable expenditure, distinct from the capital outlay, was incurred for realizing interest.
Consequently, the interest subsequently earned on the securities is taxable under Section 18, and no portion of the purchase price can be deducted from such income.

Holding and Implications

APPEAL DISMISSED WITH COSTS.

The Supreme Court affirmed the Karnataka High Court’s ruling that the amounts in question are not deductible and are taxable under Section 18 of the Income-tax Act, 1961. The decision applies existing principles on capital versus revenue expenditure and does not create new precedent, but it reinforces the treatment of accrued interest included in the purchase price of securities as non-deductible capital outlay.

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Vijaya Bank Ltd. v. Additional Commissioner Of Income Tax, Bangalore .

Judgment

1. This appeal arises from the judgment of the Karnataka High Court in I.T Referred Case No. 33 of 1973. The question which arose for consideration was:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the following two sums were admissible as deductions under Sections 19, 20 and 37 of the Income Tax Act, 1961:

(a) Rs 58,568, interest accrued on securities taken over by the assessee bank from Jayalakshmi Bank Ltd., and

(b) Rs 11,630, interest accrued up to the date of purchase in the case of securities purchased by the assessee bank from the open market?”

2. During the accounting year relevant to the assessment year 1968-69, the assessee which is a banking company received the abovementioned amounts as interest on securities purchased from another banking company as well as in the open market. These two amounts were brought to tax by the Income Tax Officer under Section 18 of the Income Tax Act, 1961. The assessee's claim that these amounts were deductible under Sections 19, 20 and 37 was rejected by the officer. The order of the assessment was confirmed by the Appellant Assistant Commissioner. However, on further appeal, the Income Tax Appellate Tribunal held that the interest earned from the securities was deductible under Sections 19, 20 and 37.

3. The High Court on a reference at the instance of the revenue held that the amounts received by the assessee as interest on securities were taxable under Section 18 of the Act. The High Court referred to IRC v. Pilcher (1949) 31 Tax Cases 314, (1949) 2 All ER 1097, and other cases, and observed that the amounts expended by the assessee for the purchase of securities were in the nature of capital outlay, and they could not be set off as expenditure against income accruing on the securities.

4. In IRC v. Pilcher (1949) 31 Tax Cases 314, (1949) 2 All ER 1097 Lord Justice Jenkins stated : (All ER p. 1103)

“It is a well settled principle that outlay on the purchase of an income-bearing asset is in the nature of capital outlay, and no part of the capital so laid out can, for income tax purposes, be set off as expenditure against income accruing from the asset in question.”

5. In the instant case, the assessee purchased securities. It is contended that the price paid for the securities was determined with reference to their actual value as well as the interest which had accrued on them till the date of purchase. But the fact is, whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of a capital outlay, and no part of it can be set off as expenditure against income accruing on those securities. Subsequently when these securities yielded income by way of interest, such income was attracted by Section 18.

6. Claim for deduction can be sustained only when the assessee is in a position to show that any reasonable expenditure had been incurred for the purpose of realising the interest on securities. The amounts claimed by the assessee for deduction are not shown to have been expended for the purpose of realising the interest, and are therefore not allowable as deductible expenditure.

7. We see no merit in the appeal. It is accordingly dismissed with coss throughout.

Vijaya Bank Ltd. v. Additional Commissioner Of Income Tax, Bangalore .

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee’s Arguments

Revenue’s Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Vijaya Bank Ltd. v. Additional Commissioner Of Income Tax, Bangalore .

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