HDFC BANK LTD, MUMBAI V. ACIT 2(3), MUMBAI

ITA 3284/MUM/2009

• Counselvise Citation: 328419914 RSA 2009
• Duration Of Justice: 2 year(s) 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 04-07-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 18-05-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GOLI SRINIWAS RAO
• Assessee Lawyers: MRUDUL D INAMDAR
• Keywords: Business income; Depreciation; Business expenditure; Cost of acquisition; Date of conversion; Set aside
• Section: 143(3); 263

Judgement Text

1 ITA NO. 3284/MUM/2009 ASSTT. YEAR : 2005-05. IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER & SHRI R.S. PADVEKAR, JUDICIAL MEMBER. I.T.A. NO. 3284/MUM/2009. ASSESS MENT YEAR : 2005-06. HDFC BANK LTD., ASSTT. COMMISSIONER OF INCOME-TAX, HDFC HOUSE, VS. 2(3), MUMBAI. SENAPATI BAPAT MARG, LOWER PAREL, MUMBAI 400 013. PAN AAACH2702H. APPELLANT. RESPONDENT. APPELLANT BY : SHRI MRUDUL D. INAMDAR. RESPONDEN T BY : SHRI GOLI SRINIWAS RAO. O R D E R. PER P.M. JAGTAP, A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF LEARNED C.I.T.2, MUMBAI DATED 23 RD MARCH, 2009 PASSED U/S 263 WHEREBY HE DIRECTED THE AO TO MODIFY THE ASSESSMENT ORDER DATED 28-02-2007 BY DISALLOWING A SUM OF RS.87.11 LAKHS ALLOWED THEREIN AS A LOSS ARISING ON THE TRANSFER OF SECURITIES FROM AVAILABLE FOR SALE CATEGORY TO HELD TO MATURITY CATEGORY. 2. THE ASSESSEE IN THE PRESENT CASE IS A BANKING CO MPANY. VIDE AN ASSESSMENT COMPLETED U/S 143(3) BY AN ORDER DATED 28-02-2007, ITS INCOME FOR THE YEAR UNDER CONSIDERATION WAS COMPUTED BY THE AO AT RS.1227,85, 00,000/-. THE RECORDS OF THE 2 ITA NO. 3284/MUM/2009 ASSTT. YEAR : 2005-05. SAID ASSESSMENT CAME TO BE EXAMINED BY THE LEARNED CIT AND ON SUCH EXAMINATION, HE FOUND THE ASSESSMENT ORDER PASSED BY THE AO TO B E ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTERESTS OF THE REVENUE FOR THE FOLLOWING REASONS : A SUM OF RS.87.11 LAKHS DEBITED BY THE ASSESSEE T O THE P & L A/C. AS LOSS ON ACCOUNT OF TRANSFER OF SECURITIES HELD UNDER THE CATEGORY AVAILABLE FOR SALE TO HELD TO MATURITY HAS BEEN ALLOWED. THE A LLOWANCE OF SUCH NOTIONAL LOSS IS INCORRECT IN VIEW OF THE ORISSA HI GH COURT JUDGEMENT IN THE CASE OF TRIPTI DRINKS PVT. LTD., 112 ITR 721 AND T HAT OF MADRAS HIGH COURT IN THE CASE OF INDIAN OVERSEAS BANK, 151 ITR 446. ACCORDINGLY A NOTICE U/S 263 WAS ISSUED BY THE LEAR NED CIT TO THE ASSESSEE COMMUNICATING THE ABOVE REASONS AND SEEKING ITS OBJ ECTION, IF ANY, TO THE PROPOSED REVISION OF THE ASSESSMENT MADE BY THE AO IN ORDER TO RECTIFY THE MISTAKE POINTED OUT THEREIN. IN REPLY, IT WAS SUBMITTED ON BEHALF O F THE ASSESSEE THAT THE LOSS OF RS.87.11 LAKHS WAS COMPUTED AS PER THE CIRCULAR ISS UED BY THE RESERVE BANK OF INDIA ALLOWING SHIFTING OF SECURITIES TO/FROM HELD TO MATURITY CATEGORY WITH THE APPROVAL OF BOARD OF DIRECTORS ONCE IN A YEAR. IT W AS POINTED OUT THAT AS PER THE SAID CIRCULAR OF RBI, SUCH APPROVAL/SHIFTING OF SEC URITIES WAS REQUIRED TO BE DONE AT THE ACQUISITION COST/BOOK VALUE/MARKET VALUE ON THE DATE OF TRANSFER WHICHEVER IS LESS AND THE RESULTANT DEPRECIATION, IF ANY, IN THE VALUE OF SECURITIES ON SUCH TRANSFER WAS REQUIRED TO BE FULLY PROVIDED FOR. IT WAS CONTE NDED THAT THE CIRCULAR ISSUED BY THE RESERVE BANK OF INDIA IS BINDING ON THE ASSESSE E BEING A BANKING COMPANY AND THE DEPRECIATION IN VALUE OF SECURITIES CLAIMED AS LOSS AS PER RBI CIRCULAR WAS ALLOWABLE IN ITS CASE. IT WAS FURTHER SUBMITTED THA T FULL DETAILS RELATING TO THE SAID CLAIM WERE FURNISHED BY THE ASSESSEE ALONG WITH ITS RETURN OF INCOME AND THE AO HAVING ALLOWED THE SAID CLAIM OF THE ASSESSEE AFTER APPLYING HIS MIND TO THE SAID DETAILS, THERE WAS NO ERROR IN THE ASSESSMENT ORDER PASSED BY HIM CALLING FOR ANY REVISION U/S 263. 3 ITA NO. 3284/MUM/2009 ASSTT. YEAR : 2005-05. 3. THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE B EFORE HIM WERE NOT FOUND ACCEPTABLE BY THE LEARNED CIT. ACCORDING TO HIM, IN ORDER TO MAKE A LOSS DEDUCTIBLE, THE SAME MUST HAVE ACTUALLY ARISEN AND AS HELD IN THE VARIOUS JUDICIAL PRONOUNCEMENTS, NOTIONAL LOSS WAS NOT DEDUCTIBLE. H E HELD THAT THE LOSS OF RS.87.11 LAKHS CLAIMED BY THE ASSESSEE WAS ONLY A N OTIONAL LOSS AS THE SAME HAD ARISEN ON THE SHIFTING OF CERTAIN SECURITIES HELD U NDER AVAILABLE FOR SALE TO HELD TO MATURITY CATEGORY DURING THE YEAR UNDER CONSIDE RATION. HE HELD THAT THERE WAS NO TRANSFER OF THE SAID SECURITIES TO ANY THIRD PER SON AND IT WAS ONLY A CASE OF RECLASSIFICATION OF SECURITIES. HE ALSO HELD THAT S ECURITIES HELD UNDER HELD TO MATURITY CATEGORY WERE IN THE NATURE OF INVESTMENT AND THE SAME WERE REQUIRED TO BE VALUED AT COST AS THE PRINCIPLE OF VALUATION AT COST OR MARKET VALUE WHICHEVER IS LESS WOULD BE APPLICABLE ONLY TO THE SECURITIES HEL D BY THE ASSESSEE AS STOCK IN TRADE. HE HELD THAT THE ASSESSMENT MADE BY THE AO A LLOWING THE CLAIM OF THE ASSESSEE FOR A LOSS OF 87.11 LAKHS, WHICH WAS ONLY A NOTIONAL LOSS, WAS ERRONEOUS AS WELL AS PREJUDICIAL TO THE INTERESTS OF THE REVENUE . ACCORDINGLY HE DIRECTED THE AO TO REVISE THE ASSESSMENT ORDER DATED 28-02-2007 BY DISALLOWING A LOSS OF RS.87.11 LAKHS ALLOWED THEREIN. AGGRIEVED BY THE ORDER OF TH E LEARNED CIT PASSED U/S 263, THE ASSESSEE HAS PREFERRED THIS APPEAL BEFORE THE T RIBUNAL. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. ALTHOUGH THE ASSESSEE HAS ALSO CHALLENGED THE VALIDITY OF THE IMPUGNED ORDER PASSED BY THE LEARNED CIT U/S 263 ON THE GROUND THAT THE JURISDICTIONAL CONDITIONS NECESSARY TO INVOKE THE P ROVISIONS OF SECTION 263 ARE NOT SATISFIED IN THE PRESENT CASE, IT IS OBSERVED THAT THE OTHER ISSUE RAISED BY THE ASSESSEE IN THIS APPEAL CHALLENGING THE DECISION OF THE LEARNED CIT TO DISALLOW THE CLAIM OF THE ASSESSEE FOR LOSS OF RS.87.11 LAKHS IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE ON MERITS BY THE DECISION OF COORDINATE BE NCH OF THIS TRIBUNAL AT 4 ITA NO. 3284/MUM/2009 ASSTT. YEAR : 2005-05. BANGALORE IN THE CASE OF STATE BANK OF MYSORE VS. DCIT REPORTED IN 33SOT 7 (BANG). IN THE SAID CASE, THE ASSESSEE BANK HAD CON VERTED ITS SECURITIES FROM AVAILABLE FOR SALE CATEGORY TO HELD TO MATURITY CATEGORY IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2005-06. BEFORE CONVERS ION, THE SAID SECURITIES WERE VALUED AT MARKET RATE. AS A RESULT OF THE SAID VALU ATION, VALUE OF THE SAID SECURITIES GOT DIMINISHED AND SUCH DIMINTATION IN THE VALUE OF SECURITIES ON THE DATE OF CONVERSION WAS CLAIMED BY THE ASSESSEE AS ALLOWABLE BUSINESS EXPENDITURE. THIS CLAIM OF THE ASSESSEE WAS ALLOWED BY THE TRIBUNAL R ELYING MAINLY ON ITS EARLIER DECISION IN THE CASE OF ACIT VS. VIJAYA BANK RENDER ED VIDE ITS ORDER DATED 24-01- 2008 IN ITA NO. 253/BANG/2007 WHEREIN A SIMILAR ISS UE HAD ARISEN BEFORE THE TRIBUNAL AND AFTER CONSIDERING THE RELEVANT RBI GUI DELINES AS WELL AS THE VARIOUS JUDICIAL PRONOUNCEMENTS, THE TRIBUNAL HELD AS UNDER : 15. FROM THE ABOVE, IT IS CLEAR THAT THE ASSESSEE IS TREATING THE SECURITIES HELD UNDER THE CATEGORY HELD FOR MATURITY AS STOC K-IN-TRADE. IF THERE IS APPRECIATION IN THE MARKET VALUE AS COMPARED TO THE MARKET VALUE AT THE OPENING OF THE YEAR AND SUCH APPRECIATION IS ALSO A CCOUNTED FOR. IT IS NOT CLAIMING DEPRECIATION ONLY FOR THE YEARS, WHEN THE VALUE HAS GONE DOWN. IF THAT HAD BEEN THE CASE, THE ASSESSEE WOULD NOT HAVE ACCOUNTED FOR ANY APPRECIATION IN 3 RD , 4 TH AND 5 TH YEAR. THE METHOD BY WHICH THE ASSESSEE BANK IS VALUING SECURITIES IS IN ACCORDANCE WITH THE ACC OUNTING PRINCIPLES BY TREATING SUCH SECURITIES AS STOCK-IN-TRADE. MOREOVE R, THE REVENUE ITSELF IS TREATING THE PROFIT ON MATURITY OF SUCH SECURITIES AS BUSINESS INCOME AND, THEREFORE, SUCH SECURITIES CANNOT BE TREATED AS CAP ITAL ASSETS. 16. SPECIAL BENCH, DELHI IN THE CASE OF NEW INDIA I NSURANCE V. ACIT [2007] 18 SOT 51 = (2007-TIOL-389-ITAT-DEL-SB) HAD AN OCCA SION TO CONSIDER THE BINDING NATURE OF RBI GUIDELINES. THE SPECIAL B ENCH HELD THAT RBI GUIDELINES IN RESPECT OF PROVISION FOR NPA ARE NOT BINDING IN THE COMPUTATION OF INCOME UNDER THE INCOME-TAX ACT. INC OME IS TO BE ASSESSED AS PER THE PROVISION OF THE INCOME-TAX ACT. THE MAD RAS HIGH COURT IN THE CASE OF TAMILNADU POWER & INFRASTRUCTURE DEVELOPMEN T CORPORATION LTD. V. CIT 286 ITR 491 (206-TOIL-112-HC-MAD-IT) HELD THA T PROVISION FOR NON-PERFORMING THE ASSETS DEBITED TO P & L ACCOUNT IS NOT ALLOWABLE, AS 5 ITA NO. 3284/MUM/2009 ASSTT. YEAR : 2005-05. DIRECTIVE OF RESERVE BANK OF INDIA MAY NOT OVERRIDE STATUTORY PROVISION. ONCE THE REVENUE IS ACCEPTING THAT PROFIT ARISING O N THE MATURITY OF INVESTMENT IS BUSINESS INCOME, THEN IT CANNOT TAKE THE STAND THAT IT IS NOT STOCK-IN-TRADE. DURING THE COURSE OF PROCEEDINGS BE FORE US, THE LEARNED AR HAS FILED THE ASSESSMENT ORDER IN THE CASE OF THE A SSESSEE FOR THE ASSTT. YEARS 2000-01 TO 2002-03. THE DEPRECIATION CLAIMED IN ALL THESE ASST. YEARS HAS NOT BEEN DISALLOWED. THUS, THE REVENUE IS CONSISTENTLY ACCEPTING THAT DEPRECIATION IS ALLOWABLE. THIS BENCH IN THE FOLLOW ING CASES HAS ALLOWED SUCH DEPRECIATION ON THE VALUATION OF THE SECURITIE S HELD BY THE BANK: (1) KARNATAKA BANK LTD. V. JT. CIT ITA NO. 50/BANG/ 97 DATED 27 TH JULY, 2003. (2) ING VYSYA BANK LTD. V. DY. CIT [2006] 6 SOT 6 06 (BANG.) 17. CONSIDERING THE ABOVE DISCUSSION, IT IS HELD TH AT THE ASSESSEE IS ENTITLED TO VALUE ALL THE INVESTMENT AT COST PRICES OR MARKET V ALUE WHICHEVER IS LOWER BY TREATING SUCH INVESTMENT AS STOCK-IN-TRADE 5. AS THE ISSUE INVOLVED IN THE PRESENT CASE AS WEL L AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THE CASES OF STATE BANK OF MYSORE AND VIJAYA BANK (SUPRA), WE RESPECTFULLY FOLLOW THE DECISION OF THE TRIBUNAL IN THE SAID CASES AND HOLD THAT THE CLAIM OF THE ASSESSEE FOR A LOSS OF R S.87.11 LAKHS ON THE TRANSFER OF SECURITIES FROM AVAILABLE FOR SALE CATEGORY TO H ELD TO MATURITY CATEGORY IS AN ALLOWABLE CLAIM. THE IMPUGNED ORDER OF THE LEARNED CIT PASSED U/S 263 ON THIS ISSUE IS ACCORDINGLY SET ASIDE AND THAT OF THE AO I S RESTORED. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED AS INDICATED ABOVE. . ORDER PRONOUNCED ON THIS 15 TH DAY OF JULY, 2011. SD/- SD/- (R.S. PADVEKAR) (P.M. JAGTAP) JUDICIAL MEMBER A CCOUNTANT MEMBER MUMBAI, DATED: 15 TH JULY, 2011. WAKODE 6 ITA NO. 3284/MUM/2009 ASSTT. YEAR : 2005-05. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, H-BENCH. (TRUE COPY ) BY ORD ER ASSTT. R EGISTRAR, ITAT, MUMBAI BEN CHES, MUMBA I.