Broken Period Interest on Securities Considered as Stock-in-Trade is Revenue in Nature: Supreme Court allows Income Tax Deduction

The Supreme Court has held that broken period interest incurred on securities treated as stock-in-trade is in the nature of revenue expense, allowing it as an Income Tax Deduction. The case involved a Scheduled Bank engaged in the purchase and sale of government securities, which treated these securities as stock-in-trade. The bank consistently set off the interest paid on the purchase of securities against the interest recovered on their sale, offering the net interest income to tax. The Commissioner of Income Tax (CIT) had previously disallowed the deduction of broken period interest, but the Income Tax Appellate Tribunal (ITAT) allowed the appeal. The Supreme Court upheld the ITAT’s decision, emphasizing that the interest on the broken period should be treated as revenue expenditure, not capital expenditure. This ruling provides clarity on the tax treatment of broken period interest for banks and other financial institutions.