ITO, Pune V. Shri Ganesh Sahakari Bank Ltd., Pune

ITA 1667/PUN/2012

• Counselvise Citation: 166724514 RSA 2012
• Duration Of Justice: 1 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-03-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 09-08-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: S P WALIMBE
• Keywords: Capital asset; Depreciation; Business expenditure; Revenue expenditure
• Section: 45(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE: SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 1667 / P N/ 20 1 2 ASSESSMENT YEAR : 200 8 - 09 INCOME TAX OFFICER, WARD - 6(2), PMT BLDG., SWARGATE, PUNE VS. SHRI GANESH SAH. BANK LTD., KRANTI CHOWK, MAIN ROAD, SANGAVI, PUNE (APPELLANT) (RESPONDENT) PAN NO. AAAAG0632K APPELLANT BY: SHRI S.P. WALIMBE RESPONDENT BY: SHRI MAHAVIR JAIN DATE OF HEARING : 05 - 03 - 2014 DATE OF PRON OUNCEMENT : 21 - 03 - 2014 ORDER P ER R.S. PADVEKAR , JM : - THIS APPEAL IS FILED BY THE REVENUE CHALLENGING THE IMPUGNED ORDER OF THE LD. CIT(A) - III, PUNE DATED 31 - 01 - 2012 FOR THE A.Y. 200 8 - 09. THE REVENUE HAS TAKEN FOLLOWING GROUNDS IN THE APPEAL: 1. THE O RDER OF THE COMMISSIONER OF INCOME - TAX (APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED ON FACTS AND IN LAW IN NOT TAKING INTO ACCOUNT THE APPLICABILITY OF SECTION 45(2) OF THE INCOME - TAX ACT WHILE GIVING DIRECTIONS TO THE ASSESSING OFFICER. 3. FOR THIS AND OTHER SUCH GROUNDS AS MAY BE URGED AT THE TIME OF THE HEARING, THE ORDER OF THE COMMISSIONER OF INCOME - TAX (APPEALS) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORE D. 2. THE ISSUE INVOLVED IS IN RESPECT OF THE ADDITION MADE BY THE ASSESSING OFFICER OF RS.60,20,000/ - BY WAY OF DISALLOWANCE OF LOSS ON REVALUATION CLAIMED BY THE ASSESSEE IN RESPECT OF GOVT. SECURITIES HELD 2 ITA NO. 1667 /PN/201 2 , SHRI GANESH SAH. BANK LTD., PUNE UNDER HTM CATEGORY. THE FACTS WHICH ARE REVEA LED FROM THE RECORD AS UNDER. THE ASSESSEE IS A CO - OPERATIVE SOCIETY CARRYING ON THE BUSINESS OF B ANKING. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.60,20,000/ - TO THE P & L A/C. IN RESP ECT OF LOSS ON REVALUATION OF GOVERNMENT SECURITIES. BEFORE THE ASSESSING OFFICER, IT WAS CONTENDED BY THE ASSESSEE THAT IT HAD MADE INVESTMENTS IN SECURITIES PURSUANT TO THE GUIDELINES ISSUED BY THE RBI WHICH ARE CLASSIFIED UNDER THE HTM (HELD TO MATURITY ) AND AFS (AVAILABLE FOR SALE) . IT WAS STATED THAT THE AFS SECURITIES WERE TREATED AS STOCK - IN - TRADE AND THE SAME WAS VALUED AT COST OR MARKET RATE WHICHEVER IS LOWER AT THE END OF THE YEAR AND THE LOSS ON SUCH REVALUATION WAS AMORTIZED AND DEBITED TO PRO FIT & LOSS ACCOUNT. IT WAS CLAIMED THAT SUCH LOSS BEING IN THE NATURE OF REVENUE EXPENDITURE WAS WRITTEN OFF AND CLAIMED AS EXPENDITURE DURING THE YEAR UNDER APPEAL. HOWEVER, THE CONTENTION OF THE ASSESSEE WAS NOT FOUND FAVOR WITH THE ASSESSING OFFICER. IT IS POINTED OUT BY THE ASSESSING OFFICER THAT AS PER THE GUIDELINES ISSUED BY THE RESERVE BANK OF INDIA, ASSESSEE IS ALLOWED TO MAKE INVESTMENTS IN GOVT. SECURITIES IN THREE CATEGORIES VIZ. HELD TO MATURITY (HTM), AVAILABLE FOR SALE (AFS) AND HELD FOR TRAD ING (HFT). ACCORDING TO THE ASSESSING OFFICER, INVESTMENTS MADE IN AFS AND HFT ONLY ARE CONSIDERED AS STOCK - IN - TRADE AND IN HTM ARE IN THE NATURE OF CAPITAL ASSETS AND THEREFORE, THE SAME WAS REQUIRED TO BE VALUED AT COST PRICE RATHER THAN THE MARKET PRICE AS WAS DONE BY THE ASSESSEE. ACCORDING TO THE ASSESSING OFFICER, WHILE IT MAY BE PRUDENT FROM BANKING POINT OF VIEW TO AMORTIZE THE PREMIUM ON HTM, IT WAS NOT ALLOWABLE UNDER THE INCOME TAX ACT AS ALL CAPITAL ASSETS HAVE TO BE VALUED AT COST ONLY AND NO P ART OF IT CAN BE CLAIMED AS REVENUE EXPENDITURE. THUS, THE ASSESSING OFFICER WAS OF THE OPINION THAT THE LOSS WORKED OUT BY THE ASSESSEE BY TAKING INTO ACCOUNT THE MARKET VALUE OF THE SECURITIES , BEING CAPITAL IN NATURE, CANNOT BE CLAIMED AS REVENUE EXPEND ITURE. ACCORDINGLY, A DISALLOWANCE OF RS.60,20,000/ - WAS MADE BY THE 3 ITA NO. 1667 /PN/201 2 , SHRI GANESH SAH. BANK LTD., PUNE ASSESSING OFFICER HOLDING THE SAME TO BE LOSS CLAIMED ON ACCOUNT OF AMORTIZATION OF INVESTMENTS MADE BY THE ASSESSEE IN GOVT. SECURITIES UNDER THE CATEGORY 'HELD TO MATURITY' (HTM) , U/S.3 7(L) OF THE INCOME - TAX ACT AND ADDITION WAS MADE BY THE ASSESSING OFFICER TO THE TOTAL INCOME OF THE ASSESSEE. 3. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD. CIT(A) AND LD. CIT(A) HELD THAT THE ASSESSING OFFICER MIGHT HAVE WRONGLY PRESUMED THAT THE IM PUGNED LOSS CLAIMED BY THE ASSESSEE PERTAINS TO SECURITIES HELD UNDER HTM CATEGORY AND DISALLOWED THE SAME HOLDING THE SAME TO BE THE CAPITAL LOSS. THE LD. CIT(A) DIRECTED THE ASSESSING OFFICER TO VERIFY THE VERACITY AND CORRECTNESS OF THE VALUATION OF TH E SECURITIES ADOPTED BY THE ASSESSEE AS ON 31 - 03 - 2008. THE OPERATIVE PART OF THE FINDINGS OF THE LD. CIT(A) ARE AS UNDER: THUS, AS PER THE CIRCULARS ISSUED BY THE RBI FROM TIME TO TIME, THE INVESTMENTS OF BANKS ARE CLASSIFIED INTO TWO BROAD CATEGORIES AS PERMANENT INVESTMENTS AND CURRENT INVESTMENTS. BY ABOVE MASTER CIRCULAR, THE ENTIRE INVESTMENT PORTFOLIO OF THE BANKS (INCLUDING SLR SECURITIES AND NON - SLR SECURITIES) IS CLASSIFIED UNDER THREE CATEGORIES VIZ., 'HELD TO MATURITY', 'AVAILABLE FOR SALE' AND 'HELD FOR TRADING'. THE PERMANENT INVESTMENTS ARE REGARDED AS THOSE BEING 'HELD TO MATURITY' (HTM) AND THE CURRENT INVESTMENTS ARE THOSE WHICH CONSTITUTE THE STOCK - IN - TRADE I.E. AVAILABLE FOR SALE (AFS) AND HELD FOR TRADING (HFT). THE PERMANENT INVESTMENT S ACCORDING TO THE CLASSIFICATION PRESCRIBED BY THE RBI ARE SECURITIES THAT NEED TO BE KEPT BY THE BANKS TILL THE DATE OF MATURITY AND CURRENT INVESTMENTS MAY BE SOLD BY THE BANKS BEFORE THE DATE OF MATURITY. VARIOUS RATIOS HAVE BEEN PRESCRIBED BY THE RBI IN THEIR GUIDELINES WITH REGARD TO CURRENT AND PERMANENT INVESTMENTS FROM TIME TO TIME. THE BANKS ARE ALSO PERMITTED TO CHANGE INVESTMENTS FROM ONE CATEGORY TO THE OTHER, THE ONLY REQUIREMENT BEING THAT THE OVERALL RATIOS OF CURRENT TO PERMANENT INVESTMENT S SHOULD BE MAINTAINED AS PER THE RBI REQUIREMENT. THE GUIDELINES ISSUED BY RBI FOR VALUATION IN RESPECT OF CURRENT INVESTMENTS ARE AT COST OR MARKET VALUE WHICHEVER IS LESS AND AT COST IN RESPECT OF PERMANENT INVESTMENTS. 4 ITA NO. 1667 /PN/201 2 , SHRI GANESH SAH. BANK LTD., PUNE 5.2. IN THE CASE OF THE APPELLANT , PERUSAL OF THE RELEVANT DOCUMENTS CLEARLY SHOW THAT THE SECURITIES UNDER REFERENCE IN RESPECT OF WHICH LOSS OF RS.60,20,000/ - WAS CLAIMED WERE ORIGINALLY HELD UNDER THE HMT CATEGORY. UNDER RBI'S MASTER CIRCULAR REFERRED ABOVE, BANKS ARE PERMITTED TO SHIFT INVESTMENTS TO/FROM HTM CATEGORY WITH THE APPROVAL OF THE BOARD OF DIRECTORS ONCE A YEAR . DURING THE YEAR, THE APPELLANT SHIFTED ABOVE LISTED FOUR HTM CATEGORY SECURITIES TO HFT CA TEGORY WITH THE APPROVAL OF THE BOARD OF DIRECTORS OF THE APPELLANT BANK AS PER RESOLUTION NO. 5/11 DATED 10/04/2007. SUBSEQUENTLY, BY ANOTHER BOARD'S RESOLUTION PASSED ON 12/07/2007, THE HFT SECURITIES SO CONVERTED FROM HTM CATEGORY WERE SHIFTED TO AFS CATEGORY ON THE GROUND NO TRADING COULD BE MADE IN HF T SECURITIES BECAUSE OF MARKET CONDITIONS FOR 90 DAYS AND AS PER RBI CIRCULAR, THE SECURITIES AND BONDS SHOULD NOT BE KEPT IN THE CATEGORY OF HFT FOR MORE THAN 90 DAYS. THUS, AS ON 31.03.2008, THE SECURITIES AND BONDS IN QUESTION WERE HELD BY THE APPELLANT BANK AS AFS CATEGORY, WHICH IS IN THE NATURE OF STOCK IN TRADE AND CONSEQUENTLY THESE SECURITIES CAN BE MARKED TO MARKET FOR THE PURPOSE OF VALUATION AS ON 31.03.2008 I.E. CAN BE VALUED ON THE BASIS OF COST OR MARKET PRICE WHICHEVER IS LOWER. FURTHER, THI S IS NOT A CASE WHERE DIMINUTION IN VALUE OF HTM AS ON DATE OF THEIR CONVERSION TO HFT AND THEN TO AFS WAS CLAIMED AS BUSINESS EXPENDITURE. THE HTM SECURITIES WERE CONVERTED TO HFT AND THEN TO AFS IN THE BEGINNING OF THE YEAR IN APRIL/ JULY 2007 AND AFS SE CURITIES SO CONVERTED, BEING CURRENT INVESTMENTS IN CASE OF BANKS, WERE VALUED AT COST OR MARKET PRICE WHICHEVER LESS AT THE YEAREND I.E. AS ON 31.03.2008 BY THE BANK. IT IS ALSO TO BE NOTED THAT THE LEARNED ASSESSING OFFICER HAS ALSO NOT DISPUTED THE CATE GORY UNDER WHICH THE SECURITIES AND BONDS WERE HELD, BUT IT APPEARS THAT THE ASSESSING OFFICER MIGHT HAVE WRONGLY PRESUMED THAT THE IMPUGNED LOSS CLAIMED PERTAINED TO SECURITIES HELD UNDER THE 'HTM' CATEGORY AND DISALLOWED THE SAME HOLDING THE SAME TO BE C APITAL LOSS. 5.3. FOR THE FOREGOING REASONS I AM OF THE CONSIDERED OPINION THAT THE ASSESSING OFFICER IS NOT JUSTIFIED IN PRINCIPLE IN DISALLOWING THE LOSS CLAIMED BY THE APPELLANT ON ACCOUNT OF VALUATION OF AFS SECURITIES AT COST OR MARKET PRICE WHICHEVE R IS LESS AS ON 31.03.2008. HOWEVER, THE VALUATION OF AFS SECURITIES CLAIMED BY THE APPELLANT REQUIRES VERIFICATION WITH REFERENCE TO THE MARKET QUOTATIONS OF THE SECURITIES AS ON 31/03/2008. AS THESE DETAILS ARE 5 ITA NO. 1667 /PN/201 2 , SHRI GANESH SAH. BANK LTD., PUNE NOT BROUGHT ON RECORD BY THE APPELLANT, I A M OF THE CONSIDERED VIEW THAT IT IS A FIT CASE FOR ISSUE OF DIRECTION TO THE ASSESSING OFFICER. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO VERIFY THE VERACITY AND CORRECTNESS OF THE VALUATION OF THE SECURITIES ADOPTED BY THE APPELLANT AS ON 31/03/20 08. IF ON VERIFICATION IT IS FOUND THAT THE VALUATION AS ADOPTED BY THE APPELLANT IS THE LOWEST OF T HE COST OR MARKET VALUE AS ON 31/O3/2008, THE LOSS CLAIMED BY THE APPELLANT SHALL BE ALLOWED BY THE ASSESSING OFFICER AND THE ADDITION MADE WILL STAND DELET ED. IN CASE THE MARKET VALUE OF THE SECURITIES IN QUESTION IS FOUND TO BE MORE THAN THE VALUE ADOPTED BY THE APPELLANT, THE LOSS CLAIMED BY THE APPELLANT SHALL BE REVISED AS PER THE CORRECT MARKET VALUE AS ON 31/03/2008. WITH THIS DIRECTION, THE GROUND RAI SED BY THE APPELLANT IS PARTLY ALLOWED. NOW THE REVENUE IS IN APPEAL BEFORE US. 4. WE HAVE HEARD THE PARTIES. NOW WITH THE DIFFERENT PLETHORA OF JUDICIAL PRONOUNCEMENT THE LAW IS WELL SETTLED THAT ALL THE SECURITIES HELD BY THE BANK ARE IN THE NATURE O F STOCK - IN - TRADE. THIS IS A REPETITIVE ISSUE FOR ADJUDICATION BEFORE THE ITAT, PUNE AND THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THIS BENCH IN THE CASE OF LATUR URBAN CO - OPERATIVE BANK LTD. VS. DCIT, CIRCLE - 3, ITA NOS. 7 78 & 792/PN/2011 DATED 31 - 08 - 2012 . IN THE SAID DECISION THE OPERATIVE PART OF THE TRIBUNAL DECISION IS AS UNDER: 14. WE HAVE HEARD THE PARTIES. THE LD . COUNSEL PLACED HIS HEAVY RELIANCE ON THE DECISION OF THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF C IT VS. BANK OF BARODA AND IN THE CASE OF UCO BANK VS. CIT, 240 ITR 355 (SC). IN THE CASE OF BANK OF BARODA (SUPRA), THE ISSUE BEFORE THEIR LORDSHIP WAS WHETHER THE ASSESSEE WAS ENTITLED FOR DEDUCTION ON ACCOUNT OF DEPRECIATION IN THE VALUE OF INVESTMENTS. THE METHOD OF VALUATION FOLLOWED BY THE ASSESSEE BANK WAS TO VALUE INVESTMENTS AT COST OR MARKET VALUE WHICHEVER WAS LOWER. THE ASSESSEE HAD CLAIMED THE DEPRECIATION TO THE TUNE OF RS. 11,82,35,007/ - AND THE SAID DEPRECIATION WAS CLAIMED AS A DEDUCTION WHICH WAS DISALLOWED BY THE A.O, BUT THE ASSESSEE BANK SUCCEEDED BEFORE THE CIT(A). THE TRIBUNAL CONFIRMED THE ORDER OF THE CIT(A). THE REVENUE CARRIED THE ISSUE BEFORE THE HONBLE HIGH COURT. THE CORE ISSUE WAS THE METHOD OF VALUATION ADOPTED BY THE AS SESSEE BANK FOR VALUING THE STOCK OF THE SECURITIES. THE HONBLE HIGH COURT FOLLOWED THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF UNITED COMMERCIAL BANK (SUPRA). 6 ITA NO. 1667 /PN/201 2 , SHRI GANESH SAH. BANK LTD., PUNE 15. IN THE CASE OF UNITED COMMERCIAL BANK (SUPRA), EVEN THE ISSUE OF VALUATION OF TH E STOCK IN TRADE OF THE INVESTMENT WAS BEFORE THE HONBLE SUPREME COURT. IN THE CASE OF THE ASSESSEE, THE ISSUE IS REGARDING ALLOWABILITY OF THE LOSS ON THE SALE OF THE SECURITIES. MERELY BECAUSE THE SECURITIES ARE KEPT UNDER THE HEAD TILL THE MATURITY, THE SAID SECURITY CANNOT BE TREATED AS A PURELY INVESTMENT. LAW IS WELL SETTLED THAT THE SECURITIES HELD BY THE BANK ARE IN THE NATURE OF STOCK - IN - TRADE. WE MAY LIKE TO QUOTE HERE THE DECISION OF THE HONBLE HIGH COURT OF KERALA IN THE CASE OF CIT VS. N EDUNGADI BANK LTD., 264 ITR 545. IN THE SAID CASE, THE HONBLE HIGH COURT HAS HELD THAT THE SECURITIES HELD BY THE BANK ARE IN THE NATURE OF STOCK - IN - TRADE. BOTH THE AUTHORITIES BELOW HAS MERELY GONE ON THE NOMENCLATURE OF THE HEAD UNDER WHICH THE SECURI TIES ARE HELD. IN OUR CONSIDERED VIEW, NOMENCLATURE CANNOT BE DECISIVE FOR THE ASSESSEE BANK. WE, THEREFORE, HOLD THAT THE LOSS ON THE SALE OF THE SECURITIES IS REVENUE IN NATURE AND SAME IS ALLOWABLE. ACCORDINGLY, GROUND NO. 2 IS ALLOWED. 5. WE , TH EREFORE, CONFIRM THE ORDER OF THE LD. CIT(A) BY FOLLOWING THE PRINCIPLES LAID DOWN IN THE CASE OF LATUR URBAN CO - OPERATIVE BANK LTD. (SUPRA). A CCORDINGLY, GROUNDS TAKEN BY THE REVENUE ARE DISMISSED. 6. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 21 - 03 - 2014 SD/ - SD/ - ( R.K. PANDA ) ( R.S. PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER RK /PS PUNE , DATED : 21 ST MARCH, 2014 COPY TO 1 DEPARTMENT 2 ASSESSEE 3 THE CI T(A) - III, PUNE 4 THE CIT - III, PUNE 5 THE DR, ITAT, B BENCH, PUNE . 6 GUARD FILE. //TRUE COPY// BY ORDER PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE