Bombay HC Strikes Down Reassessment in Bank of India Case: Broken Period Interest on HTM Securities No Longer an Open Question

Background and Overview

The Bombay High Court, in Bank of India Vs ACIT, delivered a significant ruling by annulling reassessment proceedings that the Revenue had initiated against the assessee — Bank of India — concerning the deductibility of broken period interest (BPI) on securities classified under the Hold to Maturity (HTM) category for Assessment Year 2018-19. The Court held that the legal position surrounding BPI deductibility had long been settled through a consistent line of decisions emanating from both the Supreme Court and the Bombay High Court itself, rendering the reassessment action legally untenable.

The case serves as an important reminder that Revenue authorities cannot selectively disregard binding judicial precedents merely on the ground that departmental appeals against such rulings are pending before higher courts — particularly when no stay has been obtained against the operation of those judgments.

Factual Matrix

Original Return and Assessment Proceedings

For AY 2018-19, the assessee filed its return of income declaring a total loss of Rs. 63,96,27,72,352/- (revised). The computation of income filed alongside the return disclosed, at Sr. No. 1.12, the details of broken period interest paid on purchase of securities.

Pursuant to the filing:

• A notice under Section 143(2) of the Income Tax Act, 1961 was issued on 22 September 2019
• This was followed by notices under Section 142(1) dated 1 January 2020, 14 January 2020, and 19 March 2021
• In response to these notices, the assessee, through its letter dated 26 March 2021, submitted comprehensive details of the broken period interest paid on securities, which aggregated to Rs. 249,45,00,000/-

Draft Assessment Order and Final Assessment

On 4 August 2021, the National Faceless Assessment Centre (NFAC) issued a draft assessment order under Section 143(3) read with Section 144B, proposing a total addition of Rs. 9,557.32 crores, which included an addition of Rs. 249.45 crores on account of BPI. The draft order characterised the broken period interest as capital expenditure rather than revenue expenditure.

The assessee replied to the consequential show cause notice on 10 August 2021 and appeared for a hearing on 23 September 2021, filing written submissions a day later. Ultimately, in the final assessment order dated 28 September 2021, the NFAC — while retaining an addition of Rs. 9,307.87 crores on other counts — deleted the proposed addition on broken period interest, accepting the assessee's position.

The Impugned Reassessment Proceedings

Nearly three years after the final assessment order was passed, the Revenue issued a notice dated 1 August 2024 under Section 148A(b) of the Income Tax Act, 1961, asserting that income had escaped assessment. The foundation for this notice was:

1. Audit objections raised by the Revenue audit wing
2. The observation that although the draft assessment order had proposed a disallowance of Rs. 249.45 crores on account of BPI, no such addition found its way into the final assessment order
3. Reference to scrutiny assessments for AY 2015-16 and AY 2016-17 where BPI additions were allegedly made
4. Comparison with assessment orders in the cases of Central Bank of India and Dena Bank for AY 2018-19 where similar additions had been made

The notice quantified the alleged under-assessment as follows:

Assessee's Objections and Revenue's Rejection

In its reply dated 8 August 2024 to the show cause notice, the assessee placed the following on record:

• The settled judicial position on BPI deductibility based on Supreme Court and Bombay High Court decisions
• Orders of the CIT(A) for AY 2015-16 and AY 2016-17 in its own case, where BPI deduction was allowed
• An ITAT order for AY 2011-12 in its own case, which similarly allowed the BPI claim

Despite this, the Assessing Officer, by his order dated 30 August 2024 under Section 148A(d), rejected the assessee's objections on two grounds: