The ACIT, Mehsan Circle, Mehsana V. The Mehsana Urban Co. Op. Bank Ltd., Mehsana

ITA 2703/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 94537 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 18-08-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 02-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D C MISHRA
• Assessee Lawyers: S N SOPARKAR
• Keywords: Capital asset; Business income; Depreciation; Cost of acquisition
• Section: 143(3); 6; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE S/SHRI RAJPAL YADAV, JM, & MANISH BORAD, AM. ITA NO.2703/AHD/2011 ASST. YEAR: 2008-09 ASSTT. CIT, MEHSANA CIRCLE, MEHSANA. VS THE MEHSANA URBAN CO-OP. BANK LTD., MALGODOWN ROAD, NR. BHARAT NAGAR, MEHSANA. (APPELLANT) (RESPONDENT) PA NO. AAAT 2500R APPELLANT BY SHRI D. C. MISHRA, SR. DR RESPONDENT BY SHRI S. N. SOPARKAR, AR DATE OF HEARING: 26/8/2015 DATE OF PRONOUNCEMENT: 14/10/2015 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER. THIS APPEAL OF THE REVENUE IS FILED AGAINST THE OR DER OF CIT(A), GANDHINAGAR, AHMEDABAD DATED 1/8/2011. THE ASSESSME NT ORDER WAS PASSED BY DCIT, MEHSANA CIRCLE, MEHSANA, UNDER SECTION 143(3) OF THE I.T. ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT) FOR A.Y. 2008-09. FOLLOWING EFFECTIVE GROUND HAS BEEN R AISED IN THIS APPEAL BY THE REVENUE:- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.3,38,79,600/- MADE ON ACCOUNT OF BU SINESS LOSS OF SECURITY INCLUDING PREMIUM WRITTEN OFF TREATING IT AS A LONG TERM CAPITAL LOSS. ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 2 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE L D. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 3. IT IS THEREFORE PRAYED THAT THE ORDER OF THE LEA RNED CIT(A) MAY BE SET ASIDE AND THAT OF THE AO BE RESTORED TO THE ABOVE EXTENT. 2. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E RETURN OF INCOME FOR AY 2008-09 WAS FILED ON 29.9.2009 DECLARING TOT AL INCOME AT RS.11,39,98,430/-. THE CASE WAS SELECTED FOR SCRUTI NY ON CASS AND ASSESSMENT PROCEEDINGS WAS INITIATED SO AS TO COMPL ETE ASSESSMENT UNDER SECTION 143(3) OF THE ACT. THE AO COMPLETED T HE ASSESSMENT BY MAKING ADDITION INCLUDING ADDITION BY WAY OF DIS ALLOWING CLAIM OF ASSESSEE OF LOSS ON SALE OF SECURITIES BY TREATING IT AS LONG TERM CAPITAL LOSS INSTEAD OF BUSINESS LOSS AT RS.3,39,79 ,600. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON V ERIFICATION OF PROFIT AND LOSS ACCOUNT IT WAS OBSERVED BY THE AO T HAT ASSESSEE HAS DEBITED RS.3,39,79,600/- UNDER THE HEAD LOSS IN GO VERNMENT SECURITIES. ON BEING ASKED BY AO TO THE ASSESSEE, AS TO WHY THE LOSS IN GOVERNMENT SECURITIES DEBITED TO THE PROFIT AN D LOSS ACCOUNT MAY NOT BE DISALLOWED TREATING THE SAME AS LOSS AS CAPI TAL GAIN/LOSS, IN RESPONSE ASSESSEE FURNISHED DETAILS AND PROOFS REGA RDING PURCHASE COST AND SALE PRICE OF VARIOUS GOVERNMENT SECURITIE S/BONDS AND SUBMITTED MERELY AS UNDER :- 1. OUR IS A CO-OPERATIVE BANK, DOING THE BUSINESS OF BANKING, REGISTERED UNDER GUJARAT CO-OP. SOCIETY ACT & CONTR OLLED & GOVERNED BY RESERVE BANK OF INDIA & PROVISION OF BANKING REG ULATION ACT AS APPLICABLE TO CO-OPERATIVE BANK ARE APPLICABLE TO O UR BANK ALSO. ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 3 2. ON VERIFICATION OF DETAILED FURNISHED OF GOVERNM ENT SECURITIES PARTICULARLY LOSS ON SALES OF SECURITIES, YOUR GOOD SELF HAS SHOW CAUSED TO DISALLOW OF RS.33979600 BEING CAPITAL LOS S & NOT BUSINESS LOSS DEBITED IN PROFIT & LOSS A/C PLEASE. 3. IN THIS RESPECT WE SUBMIT THE SUMMARY OF DETAILS OF RS.3,39,79,600/- AS FOLLOW & THE DETAILS ARE ATTACH ED HEREWITH & STATE YOU THAT THE SAID LOSS IS BANKING BUSINESS LOSS INC URRED DURING THE COURSE OF BANKING BUSINESS CARRIED ON BY US & CLAIM ED AS PER INCOME TAX ACT 1961 PLEASE. PURCHASE PRICE OF SECURITIES 26,25,35,800 LESS SALES PRICE 22,91,21,400 LOSS (-) 3,34,14,400 LESS PROFIT ON SALES OF SECURITIES (+) 5,35,800 LOSS (-) 3,28,78,600 ADD PURCHASED PREMIUM WRITTEN OFF 11,01,000 3,39,79,600 RS.32878600/- HAS BEEN WRITTEN OFF AS LOSS MADE ON SALES & RS.1101000/- THE PURCHASE PREMIUM WRITTEN OFF ON TH E BASIS OF RBI GUIDELINE TO SHOW FAIR PROFIT OF THE BANK. 4. ACCORDING TO THE PROVISIONS OF SECTION 6 RWS 5(B ) & (C) OF THE BANKING REGULATION ACT HELD THAT THE TRANSACTION OF SECURITIES FORMS PART OF THE BANKING BUSINESS & BANK CAN PURCHASE AN D SELL SECURITIES WITHOUT AFFECTION THE STATUTORY SLR. ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 4 SECTION 24 OF THE BANKING REGULATION ACT PROVIDES T HAT EVERY CO- OPERATIVE BANK SHALL MAINTAIN IN CASH OR UNENCUMBER ED APPROVED SECURITIES AN AMOUNT WHICH SHALL NOT, AT THE CLOSE OF BUSINESS ON ANY DAY, BE LESS THAN 25% OR SUCH OTHER PERCENTAGE NOT EXCEEDING 40% OF THE TOTAL OF ITS DEMAND & TIME LIABILITIES IN IN DIA OR AS THE RESERVE BANK MAY SPECIFY FROM TIME TO TIME. SECTION 29 OF THE BANKING REGULATION ACT, 1949 PROV IDES THAT AT THE EXPIRATION OF EACH YEAR EVERY BANKING COMPANY INCOR PORATED IN INDIA SHALL PREPARE A BALANCE SHEET & PROFIT & LOSS A/C W ITH REFERENCE TO THAT YEAR IN THE FORMS SET OUT IN THE THIRD SCHEDULE OR AS NEAR THERETO AS CIRCUMSTANCES ADMIT. IN THE PRESCRIBED FORM IN THE COLUMN OF PROPERTY & ASSETS, ITEM NO.4 PROVIDES FOR MENTIONING THE INV ESTMENT.. PREPARATION OF THE BALANCE SHEET IN ACCORDANCE WITH THE STATUTORY PROVISION WOULD NOT DISENTITLE THE ASSESSEE IN SUBM ITTING THE CONSISTENTLY & REGULARLY. 5. FURTHER, IT IS NECESSARY TO REFER TO THE RELEVAN T PORTION OF CIRCULAR NO.599 DATED 24.4.1991 ISSUED BY THE CBDT IN THIS RESPECT WHICH READS AS UNDER (A COPY OF CIRCULAR IS ENCLOSE D ANNEXURE A) 1. CLARIFICATION ON THE FOLLOWING ISSUE HAVE BEEN S OUGHT BY BANKS FROM THE CBDT (I) WHETHER THE SECURITIES HELD BY THE BANKS CONSTI TUTE THEIR STOCK IN TRADE OR INVESTMENT & CONSEQUENTLY WHETHER THE L OSS CLAIMED BY THE BANKS ON THE VALUATION OF THEIR SECURITIES SHOU LD BE ALLOWED AS A DEDUCTION IN COMPUTING THEIR TAXABLE PROFITS. ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 5 (II) WHETHER DEDUCTION CLAIMED IN RESPECT OF INTERE ST PAID FOR BROKER PERIOD ON THE PURCHASE OF SECURITIES SHOULD BE ALLO WED AS DEDUCTION FROM THE TAXABLE PROFITS. 1. THE MATTER HAS BEEN CONSIDERED BY THE BOARD & IT HAS BEEN DECIDED THAT THE SECURITIES MUST BE REGARDED AS STO CK IN TRADE BY BANK. THEREFORE, THE CLAIM OF LOSS, IF DEBITED IN T HE BOOKS OF A/C WOULD BE GIVEN THE SAME TREATMENT AS IS NORMALLY GIVEN TO THE STOCK IN TRADE. 4. HOWEVER, THE AO REJECTED THE CLAIM OF ASSESSEE M AINLY ON THE BASIS OF HIS EXAMINATION AND APPLICATION OF CERTAIN TESTS WHICH WERE ANALYSED IN THE CASE OF PARI MANGALDAS GIRDHARDAS V S. CIT (1997) CTR 647 (GUJ) AS UNDER - TEST FACTS OF THE CASE (A) WHETHER THE ACQUISITION WAS WITH THE INTENTION OF DEALING OR WITH A VIEW TO FINDING AN INVESTMENT ? THE INTENTION OF ACQUISITION WAS NOT TO DEAL WITH THEM BUT TO KEEP AS INVESTMENT. (B) WHY, HOW AND FOR WHAT PURPOSE THE SALE WAS EFFECTED SUBSEQUENTLY ? SALE WAS EFFECTED SUBSEQUENTLY NOT TO EARN BUSINESS PROFIT FROM FLUCTUATION IN PRICE (C) HOW THE ASSESSEE DEALT WITH DURING THE TIME THE ASSET WAS WITH THE ASSESSEE ? IN THE BOOKS OF ACCOUNTS IN BALANCE SHEET THERE ARE SHOWN AS NVESTMENT (D) HOW THE ASSESSEE-ITSELF HAS RETURNED THE INCOME FROM THE ACTIVITIES ? IN THE PAST, THE ENTIRE INCOME OF THE BANK WAS TREATED EXEMPT U/S 80P(2)(A)(I) OF IT ACT. HOWEVER, THE ASSESSEE HAS SHOWN THE GOVT. SECURITIES UNDER THE HEAD NVESTMENT (E) WHETHER THE MEMORANDUM OF ASSOCIATION AUTHORIZES SUCH AN ACTIVITY ? MEMORANDUM OF ASSOCIATION AUTHORIZES THE BANK TO TRANSACT IN GOVT. SECURITIES. ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 6 (F) WHETHER FREQUENCY, CONTINUITY AND REGULARITY OF TRANSACTIONS OF PURCHASE AND SALE MAINTAINED? THE ASSESSEE DOES NOT ENAGE REGULARLY, FREQUENTLY AND CONTINUOUSLY IN PURCHASE/SALE OF GOVT. SECURITIES. THE VOLUME/MAGNITUDE OF TRANSACTION IS ALSO NOT SUCH TO QUALIFY IT TO BE A REGULAR BUSINESS ACTIVITY IN THE NATURE OF BUSINESS. 4. ON APPLICATION OF THE AFORESAID TESTS TO THE FAC TS OF THE CASE AO CONCLUDED THAT IT IS NOW APPARENT THAT ONLY POSSIBL E INFERENCE WHICH CAN BE DRAWN IS THAT THE LOSS SUSTAINED BY THE ASSE SSEE FROM SALE OF GOVT. SECURITIES DOES NOT QUALIFY TO BE CONSIDERED AS BUSINESS LOSS BUT IN FACT WAS CAPITAL LOSS. THEREFORE THE CLAIM OF THE ASSESSEE TREATING THE LOSS ON SALE OF GOVT. SECURITIES AS B USINESS LOSS IS HEREBY REJECTED AND THE LOSS OF RS.3,39,79,600/- IS HELD AS LONG TERM CAPITAL LOSS WHICH IS ALLOWED TO BE CARRY FORWARD. IT IS ALSO PERTINENT TO MENTION THAT IN THE CASE OF MEHSANA DISTRICT CEN TRAL CO-OP. BANK, MEHSANA HAS DISALLOWED BY CAPITAL LOSS ON LONG TERM FOR AY 2008- 09. 5. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE CIT(A) WHO DELETED THE ADDITION MADE BY THE AO ON THE BASIS OF GUIDELI NES ISSUED BY RBI AS WELL AS CIRCULAR NO.665 OF THE CBDT DATED 5.10.1 993 AND ACCORDINGLY GAVE FOLLOWING FINDING :- 3.4 AFTER CONSIDERING THE ABOVE FACTS, I HAVE CARE FULLY CONSIDERED THE REASONING OF THE AO JUSTIFYING THE DISALLOWANCE MADE BY HIM AND THE SUBMISSIONS MADE BY THE APPELLANT IN THIS REGAR D AND THE FACTS OF THE CASE INCLUDING THE ACCOUNTING IN EARLIER YEAR A ND SUBSEQUENT YEARS. THE FOLLOWING MATERIAL OBSERVATIONS ARE MADE ON THE ISSUE :- ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 7 1) AS PER SECTION 6 READ WITH SECTION 5(B) AND (C) BANKING REGULATION ACT AND AS PER THE GUIDELINE ISSUED BY T HE RESERVE BANK OF INDIA, INVESTMENT ACTIVITIES IS THE NORMAL BANKING ACTIVITY AND SHOULD BE TREATED AS BANKING STOCK IN TRADE. THE FORMAT OF THE BALANCE SHEET HAS BEEN PRESCRIBED BY THE LEGISLATURE AND BANK HAS TO REPORT THEIR FINANCIAL RESULT IN THAT FORMAT ONLY. AS PER THIS FORMAT THE INVESTMENT IN NON-SLR SECURITIES THOUGH TREATED AS BANKING ASSETS (STOCK IN TRADE) HAS TO BE SHOWN IN THE BALANCE SHEET AS INVESTMENT. 2) THE ABOVE POSITION HAS ALSO BEEN CLARIFIED BY CI RCULAR NO.665 OF THE CBDT DATED 5.10.1993. THE QUESTION WHETHER A PARTICULAR ITEM OF INVESTME NT IN SECURITIES CONSTITUTES STOCK IN TRADE OR A CAPITAL ASSET IS A QUESTION OF FACT. IN FACT, THE BANKS ARE GENERALLY GOVERNED BY THE INSTRUCTIONS OF THE RESERVE BANK OF INDIA FROM TIME TO TIME WITH RESPECT TO THE CLASSIFICATION OF ASSETS AND AL SO THE ACCOUNTING STANDARDS FOR INVESTMENTS. THE BOARD HAS THEREFORE, DECIDED THAT THE ASSESSING OFFICER SHOULD DETERMINE ON THE FACTS AND CIRCUMSTANCES OF SUCH CASE AS TO WHETHER ANY PARTICULAR SECURITY CONSTITUTES STOCK IN TRADE AS I NVESTMENT TAKING INTO ACCOUNT THE GUIDELINES ISSUED BY THE RE SERVE BANK OF INDIA IN THIS REGARD FROM TIME TO TIME. CBDT HAS FURTHER ISSUED INSTRUCTION FOR THE ASSESSM ENT OF BANKS VIDE ITS INSTRUCTION NO.17/2008 DATED 26.11.2008 (F.NO.2 28/3/2008 ITA- III). POINT NO.VII OF THE SAID INSTRUCTION - AS PER RBI GUIDELINES DATED 16 TH OCTOBER, 2000, THE INVESTMENT PORTFOLIO OF THE BANKS IS REQUIRED TO BE CLASSIFIED UNDER THREE CATEGORIES VIZ., HELD TO MATURITY (HTM) , HELD FOR TRADING) (HFT) AND AVAILABLE FOR SALE (AFS). INVEST MENTS CLASSIFIED UNDER HTM CATEGORY NEED NOT BE MARKED TO MARKET AND ARE CARRIED AT ACQUISITION COST UNLESS THESE AR E MORE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTIZED OVER THE PERIOD REMAINING TO MATURITY. IN THE CASE OF HFT AND ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 8 AFS SECURITIES FORMING STOCK IN TRADE OF THE BANK, THE DEPRECIATION/APPRECIATION IS TO BE AGGREGATED SCRIP WISE AND ONLY NET DEPRECIATION, IF ANY, IS REQUIRED TO BE PR OVIDED FOR IN THE ACCOUNTS. THE LATEST GUIDELINES OF THE RBI MAY BE R EFERRED TO FOR ALLOWING ANY SUCH CLAIMS. IN SUCH CIRCUMSTANCES, WHERE THE SAME METHOD OF AC COUNTING IS FOLLOWED AND ALLOWED FROM YEAR TO YEAR, SUCH CLA IM HAS BEEN HELD TO BE ALLOWABLE BY THE DIFFERENT COURTS. THE HONBL E MUMBAI HIGH COURT IN THE CASE OF CIT VS. BANK OF BARODA (2003) 262 ITR 334 HAS HELD THAT DEPRECIATION IN VALUE OF INVESTMENT HELD BY BANK W AS ALLOWABLE AS DEDUCTION MORE SO WHEN THE LOSS WAS DE BITED TO P & L A/C WHICH WAS REFLECTED AS PROVISION FOR LIABILITY IN THE BALANCE SHEET AND THE SHARE AND SECURITIES WERE VALUED AT COST ON THE ASSET SIDE. SAME PROPOSITION HAS BEEN UPHELD BY KERALA HIGH CO URT IN CASE OF CIT VS. NADUNGADI BANK LTD. (2003) 130 TAXM AN 93 (KER). THEREFORE, EVEN THE DEPRECIATION IN VALUE IF HAD B EEN CLAIMED FROM YEAR TO YEAR, WAS ALLOWABLE. NOW THIS ALLOWANC E OF DEPRECIATION, WHICH IS A PROVISION FOR LOSS ON THE BASIS OF MARKE T VALUE; IS IN EFFECT THE APPLICATION OF WELL KNOWN AND WELL ACCEPTED PRI NCIPLE OF VALUATION OF CLOSING STOCK AT COST OR MARKET PRICE WHICHEVER IS LOWER. THIS METHOD IN FACT ALLOWS FOR NOTIONAL LOSS. NOW, THIS ALLOWANCE OF DEPRECIATION HELD ALLOWABLE BY THE BOARD CIRCULAR A ND THE DIFFERENT DECISIONS OF THE HIGH COURTS, HAVE BEEN MADE AND CO ULD HAVE BEEN MADE ONLY ON THE BASIS OF THESE SECURITIES BEING TR EATED, AS STOCK IN TRADE. THE ASSESSEE HAS BEEN FOLLOWING CONSISTENT M ETHOD OF IN ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 9 EFFECT CLAIMING NO DEPRECIATION (WRITING BACK ANY P ROVISION OF DEPRECIATION IN P & L ACCOUNT (IDR) FOR COMPUTATION OF TOTAL INCOME) AND THUS VALUING CLOSING STOCK AT COST ONLY FOR SHO WING THE INCOME IN ITS RETURNS. IN NUT SHELL, AS DISCUSSED ABOVE, THE BANK HAS CLAIMED LOSS IN RESPECT OF SECURITIES WHICH IT HAD ALWAYS M EANT TO HOLD AS TRADING ASSETS AND SHOWN AS AFS AS PER RBIS GUIDEL INES AND CLASSIFICATIONS. JUST BECAUSE THE BANKS HAVE TO KEE P THEM FOR LONGER TIMES BECAUSE OF THE NATURE OF THEIR BUSINESS, IT W OULD NOT CHANGE THE NATURE OF THE ASSET. FURTHER AS HELD BY HONBLE MUM BAI HIGH COURT IN THE CASE OF CIT VS. BANK OF BARODA (2003) 262 ITR 3 34 THE MERE FACT THAT THE BANKS ARE REQUIRED AS PER RBIS GUIDELINE S TO SHOW THESE IN THE BALANCE SHEET AS INVESTMENT WOULD NOT AFFECT TH E NATURE OF THE ASSET. THE BANKS BY THE VERY NATURE OF THE BUSINESS MAY HAVE TO PARK SURPLUS TRADING FUNDS IN SECURITIES AND ALTHOUGH IN TENDED TO BE TRADING ASSETS MAY HAVE TO KEEP THEM FOR LONGER PERIODS IF FUNDS ARE NOT REQUIRED. IN FACT THE ASSESSEE HAS PURCHASED AND SO LD SOME SECURITIES OF AFS CATEGORY IN RELATIVELY SHORTER PE RIODS ALSO. IN FACT DURING THE YEAR THE ASSESSEE HAS EARNED PROFIT OF R S.8,77,000/- ON GOI SECURITIES PURCHASED IN SEPTEMBER, 2007 DURING THE YEAR AND SOLD WITHIN VERY SHORT PERIOD OF FEW MONTHS. THE LO SS ALSO CONSISTS OF SOME SECURITIES PURCHASED IN JANUARY, 2007 AND SOLD IN MAY, 2007 ITSELF. SO THE AO IS NOT CORRECT TO SAY THAT SECURI TIES WERE MEANT TO BE HELD FOR VERY LONG PERIODS AND THEREFORE WERE IN NA TURE OF CAPITAL INVESTMENTS. THIS HAS TO BE SEEN IN CONTRADICTION A ND CONTRAST WITH SECURITIES OF HTM CATEGORY WHICH ARE PURCHASED AND HELD FOR THE PURPOSE OF INVESTMENT ONLY. THE CIRCULAR AND INSTRU CTION OF THE CBDT BEING SQUARELY APPLICABLE, LEAVES NO DOUBT ON THE A LLOWABILITY OF THE ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 10 ASSESSEES CLAIM. THE GROUND OF APPEAL IS ALLOWED T O THE EXTENT THAT THE LOSS IS TO BE TAKEN AS BUSINESS LOSS. 6. AGGRIEVED, THE REVENUE IS NOW IN APPEAL BEFORE T HE TRIBUNAL. THE LD. DR RELIED ON THE ORDER OF AO. 7. ON THE OTHER HAND, THE LD. AR RELIED ON THE ORDE R OF CIT(A) AND ALSO REFERRED TO THE WRITTEN SUBMISSIONS MADE BEFOR E THE CIT(A), THE RELEVANT PORTION OF WHICH IS REPRODUCED BELOW : THE PURCHASE AND SALES OF SECURITIES ARE BANKING B USINESS & DAY TO DAY ACTIVITIES OF THE BANK. IT IS NOT INVEST MENTS. THE MAIN PROVISION OF SECTION 6 R.W.S. 5(B) & SECTION 24 & S ECTION 29 & BANKING REGULATION ACT 1949 ARE APPLICABLE TO OUR B ANK. AS PER RBI GUIDELINE AND CIRCULARS BANK HS TO MAINT AIN LIQUID ASSETS WHICH AT CLOSE OF THE BUSINESS ON ANY DAY SH OULD NOT BE LESS THAN 25% OF ITS DEMAND & TIME LIABILITIES IN A DDITION TO CASH RESERVE CALLED SLP. THE SAID INVESTMENT TO BE SHOWN UNDER THE FOLLOWING HEADS UNDER THE MAIN HEAD STOCK IN TRADE 1. HELD TO MATURITY (HTM) 2. AVAILABLE FOR SALES (AFS) 3. HELD FOR TRADING (HFT) ABOVE CLASSIFICATION CAN BE RECTIFY AS PER RBI GUID ELINE ALSO. ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 11 DURING THE YEAR UNDER CONSIDERATION WE HAVE SOLD TH E SECURITIES HELD FOR AVAILABLE FOR SALES. REGARDING VALUATION OF SECURITIES U/S 145A WE STATE YOU THAT VALUATION OF STOCK BE VALUED AT 1. COST PRICE 2. SALES PRICE 3. COST OR MARKET WHICH EVER IS LOWER 21 WHILE IN CASE OF KARUR VISYA BANK REPORTED IN 27 3 ITR 510 HELD THAT - A TAX PAYER IS FREE TO EMPLOY FOR PURPOSE OF HIS T RADE, HIS OWN METHOD OF KEEPING ACCOUNTS & FOR THAT PURPOSE TO VA LUE STOCK IN TRADE AT COST OR MARKET PRICE & HELD THAT SECURITI ES IN QUESTION HELD BY THE ASSESSEE BANK BEING TRADING ASSETS & NO T INVESTMENT LOSS ON SALES THEREOF IS A REVENUE LOSS. THE ABOVE DECISION GIVEN BY MADRAS HIGH COURT ON TH E BASIS OF DECISION GIVEN IN THE CASE OF UNITED COMMERCIAL BAN K VS. CIT REPORTED IN 240 ITR 355 (SC) IN OUR CASE THE AFS SECURITIES HAVE BEEN SHOWN AS S TOCK IN TRADE & VALUED AT COST PRICE AT CONSISTENT BASIS & AS SUCH WE HAVE DECLARED REAL LOSS OF SALES OF SECURITIES. II..LOSS MUST HAVE DIRECT & PROXIMATE NEXUS TO BUS INESS OPERATION & IT SHOULD BE DURING THE COURSE OF BUSIN ESS. ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 12 IF THERE IS DIRECT & PROXIMATE NEXUS BETWEEN BUSINE SS OPERATION & IF LOSS OR IT IS INCIDENTAL TO IT THEN LOSS IS DE DUCTIBLE AS BUSINESS LOSS. A. RAMCHANDRA SHIVNARAYAN VS. CIT 1978 111 ITR 263 (SC) B. U/S 28(1) LOSS OF STOCK IN TRADE IS A ADMISSIBLE DEDUCTION IN COMPUTING PROFIT CIT VS. NAINITAL BANK LTD.(1965) 5 5 ITR 707 (SC). IN OUR CASE THE PURCHASE & SALES OF GOVERNMENT SECU RITIES, ARE OUR BANKING BUSINESS IN BANKING INDUSTRIES & SECUR ITIES SHOWN AS STOCK IN TRADE. THE LOSS INCURRED ON SALES OF SU CH SECURITIES BUSINESS LOSS & CLAIMED AS SUCH PLEASE. 3. THE METHOD OF ACCOUNTING CANNOT BE REJECTED ON T HE GROUND THAT THE ASSESSEE SHOULD HAVE FOLLOWED ANOTH ER METHOD. (I) THERE SHALL BE SOME GOOD REASON FOR REJECTING T HE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE. THE ACCOUNT S CANNOT BE REJECTED AT THE WHIMS OF THE DEPARTMENT. IN INVESTMENT LTD. VS. CIT (1970) 77 ITR 533 (SC) IT W AS HELD THAT A METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE CANNOT BE REJECTED BY THE DEPARTMENT ON TH E NOTION THAT IT WOULD HAVE BEEN BETTER HAD TO ASSESS EE FOLLOWED A DIFFERENT METHOD OF ACCOUNTING. (II) IN OUR CASE WE HAVE VALUED THE SECURITIES AT C OST PRICE & SAID IS CONSISTENTLY FOLLOWED AS HELD IN THE CASE. 1. INVESTMENT LTD. VS. CIT (1970) 77 ITR 533 (SC) 2. BALAPUR VIBHAG JANGAL KAMDAR MANDALI LTD. VS. CI T (1982) 135 ITR 91 (GUJ) ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 13 3. CIT VS. ADVANCE CONSTRUCTION CO. LTD. (2005) 275 ITR 30 (GUJ) 4. CIT VS. KAMALSAN (2004) 188 CTR 145 (MAD) 5. ASST. CIT VS. SHREE KRISHNA SALK INDUSTRIES (199 8) 60 TTJ (AHM TRIB) 164 FURTHER SUBMISSIONS TO OUR FACTS DATED 11.12.2010 OUR IS A SCHEDULE CO-OP BANK, GOVERNED, CONTROLLER & ADMINISTERED BY RBI & GUJARAT STATE CO-OP. SOCIETIE S ACT. DURING THE BUSINESS OF BANKING UNDER LICENSE ISSUED BY RBI SINCE LAST 25 YEARS. DURING THE YEAR UNDER CONSIDERATION WE HAVE SOLD TH E GOVERNMENT SECURITIES ETC. & MADE NET LOSS OF RS.3, 28,78,600/- AFTER ADJUSTMENT OF PROFIT OF RS.5,35,800/- & PREMI UM ON PURCHASE OF SECURITIES OF RS.11,01,000/-, TOTAL AMO UNTING RS.3,08,79,600/- CLAIMED IN PROFIT & LOSS A/C AS BU SINESS LOSS. THE PURCHASE & SALES OF SECURITIES IS BANKING BUSIN ESS & DAY TO DAY ACTIVITIES OF THE BANK. THE INVESTMENT MADE FRO M CIRCULATING FUND AS CURRENT BUSINESS ASSETS. THE MAIN PROVISION OF SECTION 6 R.W.S. 5(B) & 95), SECTION 24 & SECTION 29 OF BAN K REGULATION ACT 1949 ARE APPLICABLE TO OUR BANK. THE DETAILS OF SUCH SECTION ARE MENTIONED IN OUR PREVIOUS SUBMISSION. WE PUBLIS H OUR ACCOUNTS AS PER FORM SET OUT BY RBI. AS PER SECTION 24 OF BANK REGULATION ACT, 1949 EVER Y PRIMARY URBAN CO-OP. BANK SHALL MAINTAIN LIQUID ASSETS WHIC H AT THE ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 14 CLOSE OF BUSINESS ON ANY DAY SHOULD NOT BE LESS THA N 25% OF ITS DEMAND & TIME LIABILITY IN INDIA IN ADDITION TO MIN IMUM CASH RESERVE REQUIREMENT CALLED SLR. LIQUID ASSETS INCLUDES CASH GOLD APPROVED SECURITI ES AS PER RBI NORMS & ACCORDINGLY WE HAVE PURCHASED VARIOUS S ECURITIES. WE HAVE SUBMITTED THE DETAILED TO RBI IN FORM NO.B, FOR SLR PURPOSE. THE PHOTO COPY OF STATED FOR THE PERIOD EN DED 14.03.2008 ATTACHED FOR YOUR KIND CONSIDERATION. AS PER RBI GUIDELINE WE PURCHASE THE VARIOUS SECUR ITIES & CLASSIFY UNDER VARIOUS HEAD- 1. HELD TO MATURITY (HTM) 2. AVAILABLE FOR SALES (AFS) 3. HELD FOR TRADING (HFT) THE ABOVE CLASSIFICATION CAN BE RECLASSIFY FOR BANK AS PER GUIDELINES OF RBI. WE HAVE SAID THE SECURITIES HELD FOR AVAILABLE FOR SALE. THE DETAILED WORKING LOSS ON SALES OF VARIOUS SECURITIES ARE ATTACHED HEREWITH FOR YOUR K IND CONSIDERATION WITH COPY OF MASTER CIRCULAR OF INVES TMENT OF RBI PLEASE. THE MAJOR LIMB OF THE RBI GUIDELINES TO KEEP APART, SOME OF THE ASSETS IN SPECIFIED MODE AT CERTAIN PERCENTAGE WHIC H ARE COMMONLY KNOWN AS CRR & SLR. A GENERAL UNDER STANDI NG OF ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 15 THE OPERATION OF THE BANK WOULD REVEAL THAT BANK KE EP ADJUSTING THERE SPECIFIED ASSETS ON DAY TO DAY BASIS DEPENDIN G ON THE SITUATION ON THEIR HAND VIS--VIS THE CONDITION IMP OSED BY RBI WHICH IN TERM KEEP CHANGING REGULARLY & AS SUCH TRA NSACTION CANNOT BE CALLED TRANSACTION FOR CAPITAL GAIN OR FO R INVESTMENT & DIRECTLY RELATED TO DAY TO DAY BUSINESS OF THE BANK . WE MUCH MORE RELY ON THE FOLLOWING DECISIONS OF CO URT IN WHICH AUTHORITY STATED THAT LOSS ON SALES OF SECURITIES H ELD FOR IN SLR & NON SLR ARE TRADING BUSINESS THAT IS LOSS ON STOC K IN TRADE & ELIGIBLE FOR DEDUCTION AS BUSINESS REVENUE LOSS. TH E CIRCULAR NO.599 DT.24.04.1991 OF CBDT (COPY ATTACHED) WHICH IS APPLICABLE TO US, AS THERE HAS BEEN NO CHANGE IN TH E FUNCTIONING OF THE BANK SINCE THEN. 1. ACCORDING TO MALABAR CO-OP. CENTRAL BANK LTD. VS . CIT (1975) 101 ITR 87 (KER) SECURITIES HELD BY BANK IN VIEW OF STATUTORY REQUIREMENT ARE STOCK IN TRADE & HENCE IN COME FROM SUCH SECURITIES IS BUSINESS INCOME. 2. RAJASTHAN FINANCIAL CORPORATION VS. CIT (1967) 6 5 ITR 112 (RAJ) THE ASSESSEE FINANCIAL CORPORATION WAS ESTABL ISHED FOR FINANCING INDUSTRIAL CONCERN & IT INVESTED SURPLUS WITH IT IN GOVT. SECURITIES. IT WAS HELD THAT LOSS SUSTAINED OR SELLING THE SECU RITIES TO MEET THE FINANCIAL CONSISTENT WAS BUSINESS LOSS. IN STATE BANK OF HYDERABAD VS. CIT (1988) 171 ITR 2 32 (AP) & STATE BANK OF HYDERABAD VS. CIT (1985) 151 ITR 703 (AP) IT WAS HELD THAT THE INVESTMENT IN SECURITIES MADE BY THE ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 16 ASSESSEE BANK BEING A STATUTORY OBLIGATION, CAN BE TREATED AS A TRANSACTION IN THE COURSE OF CARRYING ON OF TRADE. THUS, ANY INCOME ARISING FROM ANY SUCH SECURITIES WOULD BE AS SESSABLE AS BUSINESS INCOME. - UNITED COMMERCIAL BANK VS. CIT (1999) 106 TAXMAN 601(SC) - ITO VS. J & K BANK LTD. (2005) 611 ITCL 206 (ARS. TRIBUNAL) - AS BUYING & SELLING OF SECURITIES WAS PART OF BAN KING BUSINESS, LOSS SUFFERED BY BANK IN SALES OF SECURIT Y TO MEET THE LIABILITIES OF CREDITORS WOULD BE A BUSINESS LO SS VIDE CIT VS. SIMALA BANKING & INDUSTRIAL CO. LTD. (1961) 41 ITR 332 (PUNJ) THE APEX COURT IN PATNAIK & CO. LTD. VS. CIT (1986 ) 161 ITR 365 (SC), THE ASSESSEE DEALER IN AUTOMOBILE SPARE P ARTS ACQUIRED ORISSA GOVERNMENT FLOATED LOAN, 1972 BECAU SE OF THE INSISTENCE OF THE TRANSPORT AUTHORITIES. THE SUPREM E COURT ALLOWED THE CLAIM OF THE ASSESSEE AS BUSINESS LOSS & IN THE PROCESS APPROVED THE DECISION IN THE CASE OF B.M.S. (P) LTD. (SUPRA) - VS. NEDUNGADI BANK LTD. (2003) 264 ITR 545 (KER) (2003) 182 CTR (KER) (403) - UNITED COMMERCIAL BANK VS. CIT 240 ITR 355 (SC) - KARUR VAISYA BANK 273 ITR 510 (MAD) - LAXMI VILAS BANK VS. CIT (2006) 284 ITR 93 (MAD) ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 17 - IN ALL MOST IN ALL THE CO-OP. BANK INTEREST INCOM E FROM SECURITIES UNDER SLR & NON-SLR ARE BANKING BUSINESS INCOME TREATING AS TRADING ASSETS. UNDER THE ABOVE STATED FACT & OF THIS SUBMISSION & PREVIOUS SUBMISSION WE REQUEST YOUR GOOD SELF TO DELETE THE ADDITION OF RS.3,39,79,600/- & OBLIGE US. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS OF THE CASE. ASSESSEE HAS SOLD GOVERNMENT SECURITIE S AND MET NET LOSS OF RS.3,28,78,600/- AFTER ADJUSTMENT OF PROFIT OF RS.5,35,800/- AND PREMIUM ON PURCHASE OF SECURITIES OF RS.11,01,0 00/- TOTAL AMOUNTING TO RS.3,39,79,600/-. GUIDELINES OF RBI AS WELL AS CBDT CIRCULAR NO.665 DATED 5.10.1993 HAVE BEEN ELABORATE LY DISCUSSED IN THE ORDER OF CIT(A) AND RELEVANT EXTRACT OF THE SAM E HAVE BEEN REPRODUCED ABOVE IN OUR ORDER. AS PER RBI GUIDELINE S SECURITIES PURCHASED BY THE PRIMARY URBAN CO-OP. BANKS CAN BE CLASSIFIED UNDER THREE HEADS I) HELD TO MATURITY (HTM) II) AVAILABLE FOR SALE (AFS) III) HELD FOR TRADING (HFT) THE LOSS INCURRED BY THE ASSESSEE OF RS.3,39,79,600 /- IS FROM SALE OF SECURITIES HELD FOR AVAILABLE FOR SALE (AFS) AND T HE DETAILED WORKING OF THE SAME HAS BEEN PROVIDED BY THE LD. AR OF THE ASSESSEE IN THE PAPER BOOK. THESE SECURITIES WHICH ARE AVAILABLE FO R SALE WHICH ARE HELD BY THE ASSESSEE AS PER THE RBI GUIDELINES TO K EEP APART SOME OF THE ASSETS IN THE SPECIFIED MODE AT CERTAIN PERCENT AGE WHICH ARE INTER ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 18 ALIA KNOWN AS CLR AND SLR AND THE PROFIT/LOSS ON SA LE OF SUCH SECURITIES (AFS) CANNOT BE TREATED AS CAPITAL GAIN/ LOSS. FURTHER THE LD. AR HAS REFERRED TO THE JUDICIAL PRONOUNCEMENT OF TH E ITAT, MUMBAI BENCH IN THE CASE OF YES BANK LTD. VS. DY.CIT IN IT A NOS.5833 & 5910 (MUM) OF 2012 & 2829 (MUM) OF 2013 FOR AYS 200 6-07 & 2007- 08 DATED JULY 21, 2015 WHEREIN IT WAS HELD - 12. IT IS PERTINENT TO MENTION THAT A SINGLE LARGE ST TEST TO DECIDE WHETHER THE SECURITY IS HELD AS CAPITAL ASSET OR IN STOCK-IN-TRADE IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE. MERELY BECAUSE SOME ITEMS SO PURCHASED HAPPEN TO BE HELD TILL MATU RITY CANNOT CONVERT WHAT IS ACQUIRED AS STOCK IN TRADE INTO A C APITAL ASSET AT A LATER POINT OF TIME. INTENTION AT THE TIME OF PURCH ASE IS RELEVANT AND NOT A SUBSEQUENT EVENT OF HOLDING THE SECURITY FOR A LONGER PERIOD. INSTRUCTION NO.17/2008 DATED 26.11.2008 ISSUED BY T HE CBDT WHEREIN, AT PARA VI. IT HAS BEEN CLEARLY STATED THA T IN THE CASE OF HFT AND AFS SECURITIES OF THE BANK, THE DEPRECIATION AN D APPRECIATION TO BE AGGREGATED SCRIPT WISE AND ONLY DEPRECIATION, IF ANY, IS REQUIRED TO BE PROVIDED IN THE ACCOUNTS. 13. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY MERIT IN THE ACTION OF LOWER AUTHORITIES FOR DISALLOWING LOSS AROSE ON THE YEAR END REVALUATION OF SECURITIES. OUR VIEW IS SUPPORTED BY DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. HDFC BANK LTD. (2014) 226 TAXMAN 132/49 TAXMANN.COM 335, UNITED COMMERCIA L BANK VS. CIT (1999) 240 ITR 355/106 TAXMAN 601 (SC), INVESTM ENT LTD. VS. CIT (1970) 77 ITR 533 (SC) AND CIT VS. BANK OF BARO DA (2003) 262 ITR 334/129 TAXMAN 716 (BOM). RESPECTFULLY FOLLOWI NG THE DECISION OF HONBLE SUPREME COURT AND HONBLE BOMBAY HIGH CO URT AND CONSIDERING THE CLASSIFICATION OF SECURITY SO MADE AND THE LOSS AROSE ON ACCOUNT OF REVALUATION OF SECURITIES ARE REQUIRE D TO BE ALLOWED. ACCORDINGLY, WE SET ASIDE THE ORDER OF BOTH THE LOW ER AUTHORITIES AND MATTER IS RESTORED BACK TO THE FILE OF AO FOR DECID ING AFRESH IN THE LIGHT OF OUR ABOVE OBSERVATION. WE DIRECT ACCORDINGLY. ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 19 WE, THEREFORE, ON THE BASIS OF OUR EXAMINATION OF F ACTS VIS--VIS RBI GUIDELINES AND ABOVE REFERRED CBDT CIRCULARS AS WEL L AS RELYING ON THE DECISION OF ITAT, MUMBAI BENCH, SEE NO REASON T O INTERFERE WITH THE ORDER OF CIT(A) AND THE SAME IS HEREBY UPHELD. THIS GROUND OF REVENUE IS DISMISSED. 11. THE OTHER GROUNDS ARE OF GENERAL NATURE WHICH, DO NOT REQUIRE ADJUDICATION. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 14/10/2015 SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 14/10/2015 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DY. REGISTRAR, ITAT, AHMEDABAD ITA NO.2703/AHD/2011 ASST. YEAR 2008-09 20 1.. DATE OF DICTATION: 10/9/2015 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 28/9/2015 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 14/10/2015 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: