Deputy Commissioner of Income Tax Circle-5(2)(1), Bangalore V. M/s Sree Subramanyeswara Co-op Bank Ltd , Bangalore

ITA 1387/BANG/2017

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 4794 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 16-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P V PRADEEP KUMAR
• Assessee Lawyers: RAGHAVENDRA CHAKRABORTHY
• Keywords: Capital asset; Business income; Depreciation; Rule of consistency; Fair market value
• Section: 45(2); 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, B ENGALURU BEFORE S HRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER I TA NO. 1387 / B ANG/2 0 1 7 (ASSESSMENT YEAR: 2012 - 13 ) DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 5(2)(1), BENGALURU. VS. APPELLANT SREE SUBRAMANYESWARA CO - OP BANK LTD., R.V ROAD,V V PURAM BENGALURU. PAN:AAAAS4418F RESPONDENT APPELLANT BY : DR.P.V.PRADEEP KUMAR, ADDL.CIT(DR) RESPONDENT BY : SHRI RAGHAVENDRA CHAKRABORTHY, CA. DATE O F HEARING : 11 /0 4 /2018 DATE OF PRONOUNCEMENT : 31 /05/2018 O R D E R PER I NTURI RAMA RAO, AM : THIS IS AN APPEAL FILED BY THE REVENUE DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (A PPEALS ) - 5 , [CIT(A)], BANGALORE DATED 28 / 0 3 / 20 17 FOR THE ASSESSMENT YEAR 2012 - 13 . 2. BRIEFLY FACTS OF THE CASE ARE AS UNDER: T HE RESPONDENT - ASSESSEE IS A COOPERATIVE BANK ENGAGED IN THE BUSINESS OF BANKING . T HE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2012 - 13 WAS FILED ON 24 /09/ 2012 DECLARING TOTAL INCOME OF RS. 4 ,29, 49 , 560 / - . AGAINST THE SAID RETURN OF INCOME, THE ASSESSMENT WAS COMPLETED AT TOTAL INCOME OF RS.62,22, 55 , 382 / - VIDE ORDER DATED 4 /3/ 2015 PASSED U/S 143( 3 ) OF THE INCOME TAX ACT 1961 [ THE ACT FOR SHORT] . WHILE DOING SO , THE A SSESSING O FFICER (AO) DISALLOWED (I) DEPRECIATION IN THE VALUE OF INVESTM ENTS OF RS. 1,86, 80 , 002 / - (II) A SUM OF RS. RS. 4 , 64 , 010 / - U /S 1 4 A (III) DONATION OF RS. 1 , 00 , 000 / - AND (IV) DEPRECIATION CLAIMED OF RS. 61 , 812 / - . ITA NO. 1387 /BA NG/2017 PAGE 2 OF 6 3. BEING AGGRIEVED , AN APPEAL WAS PREFERRED BEFORE THE LD.CIT(A) WHO , VIDE IMPUGNED ORDER HAD CONFIRM ED THE ADDITION ON ACCOUNT OF 14 A BUT DELETED THE ADDITION ON ACCOUNT OF FALL IN THE VALUE OF INVESTMENTS HELD BY THE BANK . 4. THE REVENUE IS IN APPE AL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) - 5, BANGALORE, IS OPPOSED TO THE LAW AND NOT ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT(A) ERRED IN ALLOWING THE DEPRECIATION ON INVESTMENTS BY RELYING ON THE HON'BLE HIGH COURT OF KARNATAKA DECISION IN THE CASE KARNATAKA BANK LTD VS. ACIT REPORTED 356 ITR 549 WITHOUT APPRECIATING THE FACT THAT THE EXPENDITURE MADE WAS NOTIONAL TO MEET THE RBI GUIDELINES AND THE EXPENSES CANNOT BE ALLOWED UNLESS SPECIFICALLY ALLOWED BY THE PROVISIONS OF THE INCOME - TAX ACT, 1961. 3. THE CIT(A) RIGHT IN RELYING UPON THE HON'BLE HIGH COURT OF KARNATAKA DECISION IN THE CASE KARNATAKA BANK LTD VS. ACIT REPORTED 356 ITR 549 WHICH WAS NOT ACCEPTED BY THE REVENUE AND FURTHER APPEAL FILED BEFORE THE HON'BLE SUPREME COURT. 4. HE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR DELETE ANY OTHER GROUNDS ON OR BEFORE HEARING OF THE APPEAL. 5. THE L EARNED CIT (DR) CONTENDED THAT THE LD. CIT (A) OUGHT NOT TO HAVE ALLOWED DEPRECIATION ON INVESTMENTS AS DEDUCTION BY PLACING R ELIANCE ON THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. KARNATAKA BANK (356 ITR 549 ) ON THE OTHER HAND, THE LEARN ED AR OF THE ASSESSEE PLACE D R ELIANCE ON TH E DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF KARNATAKA BANK ( SUPRA ). 6. WE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. T HE ONLY ISSUE IN THE PRESENT APPEAL IS WHETHER THE FALL IN VALUE OF INVESTMENTS CAN BE ALLOWED AS DEDU CTION AS THE SAME WAS SHOWN AS INVESTMENTS IN THE BOOKS OF ACCOUNT IT IS THE CONDITION OF THE SOURCES THAT AS PER RBI GUIDELINES SECURITIES WERE CLASSIFIED AS INVESTMENTS BUT FOR INCOME TAX PURPOSES THE SAME WAS TREATED AS STOCK IN TRADE IN IDENTICAL ITA NO. 1387 /BA NG/2017 PAGE 3 OF 6 CIRCU MSTANCES THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF KARNATAKA BANK (S UPRA ) HELD THAT THE SAME IS ALLOWABLE AS DEDUCTION. EVEN TH E CO - ORDINATE BENCH OF TRIBUNAL IN THE CASE OF CANARA BANK REPORTED IN 68 TAXMAN.COM 128 , HELD AS FOLLOWS : 9.5 WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE SHORT ISSUE IN THIS GROUND OF APPEAL IS WHETHER FALL IN VALUE OF INVESTMENTS MADE PURSUANT TO SLR REQUIREMENTS OF RBI CAN BE ALLOWED AS A DEDUCTION WHILE COMPUTING BUSINESS INCOME OF A B ANKING COMPANY. NOTWITHSTANDING TREATMENT GIVEN IN THE BOOKS OF ACCOUNT, IT IS UNDISPUTED FACT THAT INVESTMENTS ARE MADE ONLY TO COMPLY WITH THE REGULATIONS OF RBI GOVERNING SLR REQUIREMENT. EVEN OTHERWISE, THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CA SE OF KARNATAKA BANK VS. CIT (356 ITR 539) HELD THAT CIRCULAR ISSUED BY THE RBI FOR TREATMENT IN THE BOOKS OF ACCOUNT IS NOT RELEVANT FOR CLASSIFYING THE INVESTMENTS WHETHER STOCK - IN - TRADE OR NOT. IN THE PRESENT CASE, UNDISPUTEDLY, ASSESSEE - BANK HAS CHANG ED ITS METHOD OF ACCOUNTING BY CLASSIFYING THE INVESTMENTS FROM INVESTMENTS TO STOCK - IN - TRADE. IN SUCH A SITUATION, PROVISIONS OF SEC.45(2) OF THE ACT ARE ATTRACTED. THE SAID PROVISIONS OF THE ACT READ AS UNDER: 45(2)NOTWITHSTANDING ANYTHING CONTAINE D IN SUB - SECTION (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO, OR ITS TREATMENT BY HIM AS STOCK - IN - TRADE OF A BUSINESS CARRIED ON BY HIM SHALL BE CHARGEABLE TO INCOME - TAX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK - IN - TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM AND, FOR THE PURPOSES OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION OR TREATMENT SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATIO N RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. BUT HERE THE QUESTION IS, IN THE EARLIER YEARS THOUGH INVESTMENTS ARE SHOWN AS INVESTMENTS IN THE BOOKS OF ACCOUNT, FOR INCOME - TAX PURPOSES, THE SAME WAS SHOWN AS STOCK - IN - TRADE. TH EREFORE, ASSESSEE - BANK CHANGED ITS METHOD OF ACCOUNTING DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION IS NOT A MATERIAL FACT IN DECIDING THE ISSUE IN THE PRESENT APPEAL. IN THE EARLIER YEARS, THE SAME WAS CLAIMED AS STOCK - IN - TRA DE AND THE RESULTANT LOSS OR GAIN ON ACCOUNT OF FOLLOWING THE PRINCIPLE COST OR MARKET PRICE WHICHEVER IS LESS, IS RECOGNIZED FOR INCOME - TAX PURPOSE. IN THIS CONTEXT, IT IS APT TO REPRODUCE CIRCULAR NO.18/2015: CIRCULAR NO. 18 OF 2015, DATED NOVEMBER 02 , 2015. ITA NO. 1387 /BA NG/2017 PAGE 4 OF 6 SUBJECT : INTEREST FROM NON - SLR SECURITIES OF BANKS REG. IT HAS BEEN BROUGHT TO THE NOTICE OF THE BOARD THAT IN THE CASE OF BANKS, FIELD OFFICERS ARE TAKING A VIEW THAT, EXPENSES RELATABLE TO INVESTMENT IN NON - SLR SECURITIES NEED TO BE DISALLOWE D UNDER SECTION 57(I) OF THE ACT AS INTEREST ON NON - SLR SECURITIES IS INCOME FROM OTHER SOURCES . 2. CLAUSE (ID) OF SUB - SECTION (1) OF SECTION 56 OF THE ACT PROVIDES THAT INCOME BY WAY OF INTEREST ON SECURITIES SHALL BE CHARGEABLE TO INCOME - TAX UNDER THE H EAD INCOME FROM OTHER SOURCES , IF, THE INCOME IS NOT CHARGEABLE TO INCOME - TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AND PROFESSION . 3. THE MATTER HAS BEEN EXAMINED IN LIGHT OF THE JUDICIAL DECISIONS ON THIS ISSUE. IN THE CASE OF CIT V. NAWANSHAH AR CENTRAL CO - OPERATIVE BANK LTD. [2007] 160 TAXMAN 48 (SC), THE APEX COURT HELD THAT THE INVESTMENTS MADE BY A BANKING CONCERN ARE PART OF THE BUSINESS OF BANKING. THEREFORE, THE INCOME ARISING FROM SUCH INVESTMENTS IS ATTRIBUTABLE TO THE BUSINESS OF BANK ING FALLING UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AND PROFESSION . 3.2 EVEN THOUGH THE ABOVEMENTIONED DECISION WAS IN THE CONTEXT OF CO - OPERATIVE SOCIETIES/BANKS CLAIMING DEDUCTION UNDER SECTION 80P(2)(A)(I) OF THE ACT, THE PRINCIPLE IS EQUALLY APP LICABLE TO ALL BANKS/COMMERCIAL BANKS, TO WHICH BANKING REGULATION ACT, 1949 APPLIES. 4. IN THE LIGHT OF THE SUPREME COURT S DECISION IN THE MATTER, THE ISSUE IS WELL SETTLED. ACCORDINGLY, THE BOARD HAS DECIDED THAT NO APPEALS MAY HENCEFORTH BE FILED ON T HIS GROUND BY THE OFFICERS OF THE DEPARTMENT AND APPEALS ALREADY FILED, IF ANY, ON THIS GROUND BEFORE COURTS/TRIBUNALS MAY BE WITHDRAWN/NOT PRESSED UPON. THIS MAY BE BROUGHT TO THE NOTICE OF ALL CONCERNED. (SD.) . . . . . . . . . . . . . . . D. S. CHAUDHRY, CIT (A&J), CBDT, NEW DELHI. FROM THE READING OF THE ABOVE CIRCULAR, IT IS CLEAR THAT INVESTMENTS HELD BY THE BANKING CONCERN ARE TREATED AS A PART OF BUSINESS OF THE BANKING COMPANY AND THEREFORE, THE I NCOME ARISING FROM SUCH INVESTMENTS IS TREATED AS PART OF BUSINESS INCOME FALLING UNDER THE HEAD PROFITS AND GAINS OF BUSINESS . THOUGH THE CIRCULAR WAS ISSUED IN THE PROVISIONS OF SEC.80P OF THE ACT, THE SAID PRINCIPLE WAS EQUALLY MADE APPLICABLE TO OTH ER BANKS AND COMMERCIAL BANKS TO WHICH BANKING REGULATION ACT, 1949 APPLIES. THEREFORE, BY VIRTUE OF THE ABOVE SAID CIRCULAR, INVESTMENTS MADE BY THE BANKING COMPANY SHOULD BE TREATED AS A BUSINESS ASSET OF THE BANKING COMPANY OR STOCK - IN - TRADE. IT IS WEL L SETTLED IN LAW THAT CBDT CIRCULARS ARE BINDING UPON THE OFFICERS WHO ARE ENTRUSTED WITH THE RESPONSIBILITY OF EXECUTING THE PROVISIONS OF THE ACT. 9.6 THE JURISDICTIONAL HIGH COURT, IN THE CASE OF KARNATAKA BANK (SUPRA), AFTER REFERRING TO THE J UDGMENT OF THE APEX COURT ITA NO. 1387 /BA NG/2017 PAGE 5 OF 6 IN THE CASE OF SOUTHERN TECHNOLOGY (320 ITR 577) AND UCO BANK (237 ITR 889) HELD THAT THE DIRECTIONS OF THE RBI ARE ONLY DISCLOSED NORMS AND THEY HAVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME. THE JURISDICTIONAL HIGH COUR T FURTHER UPHELD THE CLAIM OF THE ASSESSEE - BANK FOLLOWING THE PRINCIPLE OF CONSISTENCY. EVEN THE HON BLE APEX COURT IN THE CASE OF UCO BANK (SUPRA) ONLY LAID DOWN PRINCIPLE THAT WHERE THE INVESTMENTS ARE FORMING PART OF STOCK - IN - TRADE, LOSS ARISING ON ACC OUNT OF FALL IN VALUE OF THE SECURITIES SHOULD BE RECOGNIZED AND ALLOWED AS A DEDUCTION. BUT THE ABOVE CASE CITED SUPRA DOES NOT COME TO THE RESCUE OF THE ASSESSEE - BANK FOR THE REASON THAT THE ASSESSEE - BANK, EVEN IN THE BOOKS OF ACCOUNT, HAS TREATED THE I NVESTMENTS AS STOCK - IN - TRADE FROM THE ASSESSMENT YEAR 2005 - 06 ONWARDS. THEREFORE, THE QUESTION BOILS DOWN TO THE ONE ISSUE WHETHER THE CHANGE OF METHOD OF ACCOUNTING IS BONA FIDE OR NOT. IT IS NOT THE CASE OF THE REVENUE THAT THE ASSESSEE - BANK CHANGED FO R A CASUAL PERIOD TO SUIT ITS OWN PURPOSE. THEREFORE, THE BONA FIDE OF THE ASSESSEE - BANK IN CHANGING THE METHOD OF ACCOUNTING CANNOT BE DOUBTED. NOW, IT IS WELL SETTLED THAT THE ASSESSEE IS ENTITLED TO CHANGE REGULAR METHOD OF ACCOUNTING IRRESPECTIVE OF THE FACT, IT RESULTS IN LOSS TO REVENUE. THEREFORE, HAVING REGARD TO THE SPIRIT OF THE CIRCULAR CITED SUPRA AND THE FACT THAT INVESTMENTS ARE SHOWN AS STOCK - IN - TRADE IN THE BOOKS OF ACCOUNT, LOSS/DEPRECIATION ON ACCOUNT OF FALL IN VALUE OF SECURITIES HELD BY THE ASSESSEE - BANK SHOULD BE ALLOWED AS DEDUCTION. THEREFORE, INCOME ARISING THERE - FROM SHOULD ALSO BE TREATED AS BUSINESS INCOME. THE PROVISIONS OF SECTION 45(2) CANNOT BE APPLIED TO THE FACTS OF THE PRESENT CASE, AS IN THE EARLIER YEARS, FOR THE PURP OSE OF INCOME - TAX PROCEEDINGS, THE INVESTMENTS WERE TREATED AS STOCK - IN - TRADE.... I N THE LIGHT OF ABOVE LEGAL POSITION , WE DO NOT FIND ANY FALLACY IN THE ORDER OF THE LD.CIT(A). T HE GROUNDS OF APPEAL FILED BY THE REVENUE A RE DISMISSED . 7. I N THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MAY, 2018 SD/ - SD/ - (SUNIL KUMAR YADAV) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : BENGALURU. D A T E D : 31/05/2018 SRINIVASULU, SPS ITA NO. 1387 /BA NG/2017 PAGE 6 OF 6 COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME - TAX APPELLATE TRIBUNAL BANGALORE