Bombay High Court Bars Reassessment on Broken Period Interest Where Legal Position Is Settled

1. Background of the Dispute

The Bombay High Court in Bank of India Vs ACIT examined whether the Revenue could reopen an already completed assessment solely to revisit the deduction of broken period interest (BPI) on purchase of held-to-maturity (HTM) securities, when this issue had already been conclusively settled by binding judicial precedents.

The proceedings related to Assessment Year (AY) 2018-19. The assessee, a banking company, had:

  • Filed its original return declaring a substantial business loss.
  • Filed a revised return slightly modifying the reported loss.
  • Disclosed, in the computation notes, the quantum and details of broken period interest paid on purchase of securities.

The case was selected for scrutiny under Section 143(2) and detailed notices were issued under Section 142(1). During these proceedings, the assessee submitted comprehensive workings of BPI aggregating to ₹249.45 crore, including a detailed calculation sheet.

The National Faceless Assessment Centre (NFAC) later issued a draft assessment order under Section 143(3) read with Section 144B proposing, inter alia, an addition of ₹249.45 crore by treating the BPI on securities held as stock-in-trade as capital in nature.

However, in the final assessment order passed under Section 143(3) read with Section 144B, NFAC:

  • Sustained other large additions, and
  • Deleted the proposed addition on broken period interest.

Almost three years after the final assessment, the Jurisdictional Assessing Officer (JAO) issued a notice under Section 148A(b) alleging that income had escaped assessment because:

  • The draft assessment order had proposed disallowance of BPI on HTM securities.
  • No such disallowance was ultimately made in the final order.
  • Revenue audit had raised objections on this point.
  • Similar additions had been made in AY 2015-16 and AY 2016-17, and in assessment orders of other banks such as Central Bank of India and Dena Bank for AY 2018-19.

This resulted in a chain of impugned actions:

  1. Notice under Section 148A(b) – show cause as to why reassessment should not be initiated.
  2. Order under Section 148A(d) – rejecting the assessee’s objections.
  3. Notice under Section 148 – reopening the assessment based on the alleged escapement of income.

The assessee approached the Bombay High Court under Article 226 of the Constitution challenging the entire reassessment exercise.

2. Assessee’s Core Challenges to Reassessment

2.1 Reliefs Sought

In the writ petition, the assessee sought:

  • Certiorari to quash:

    • The show cause notice dated 1 August 2024 under Section 148A(b),
    • The order dated 30 August 2024 under Section 148A(d), and
    • The consequential notice dated 30 August 2024 under Section 148.

  • Mandamus directing withdrawal/cancellation of the above notices and order.

  • Prohibition restraining the Assessing Officer from proceeding further with reassessment based on the impugned notices/orders.

2.2 Factual Matrix Emphasised by the Assessee

The assessee highlighted that:

  • For AY 2018-19, it had fully disclosed in the return and in correspondence:

    • The nature and amount of BPI,
    • That BPI pertained to purchase of securities held as stock-in-trade, and
    • That deduction had been claimed as revenue expenditure.

  • In response to scrutiny notices, the assessee had furnished a detailed statement showing BPI of ₹249.45 crore with supporting working.

  • The NFAC draft order proposed to disallow BPI by treating it as capital. However, after considering the assessee’s objections and submissions, the final NFAC order:

    • Made other large additions totalling ₹9307.87 crore, but
    • Did not disallow the BPI of ₹249.45 crore.

Thus, the assessee argued that there was no failure to disclose material facts, and that the question of BPI was already examined during original assessment.

The assessee advanced two major legal planks:

(a) Issue of Broken Period Interest is Conclusively Settled

The assessee contended that allowability of BPI paid on purchase of securities held as stock-in-trade as a revenue deduction is no longer open to debate, in light of authoritative precedents, including:

  • Bank of Rajasthan Ltd. vs. Commissioner of Income-tax
  • CIT vs. Citibank N.A.
  • American Express International Banking Corporation vs. CIT
  • HDFC Bank Ltd. vs. DCIT
  • Earlier decisions in the assessee’s own case and in `CIT vs.