ITO, Wd 1(3), Ichalkaranji, Ichalkaranji V. Kallapanna Awade Ichalkarnji Jata Sahakari Bank Ltd, Ichalkaranji

ITA 449/PUN/2012

• Counselvise Citation: 44924514 RSA 2012
• Duration Of Justice: 1 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2008-2009
• Appeal Filed On: 02-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANN KAPTHUAMA
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Question of law; Cost of acquisition; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER , AND SHRI R.K. PANDA, ACCOUNTANT MEMBER. ITA.NO.449/PN/2012 (ASSESSMENT YEAR 2008-09) DEPUTY COMMISSIONER OF INCOME TAX, ICHALKARANJI CIRCLE, ICHALKARANJI, DIST. KOLHAPUR. .. APPELLANT VS. KALLAPPANNA AWADE ICHALKARANJI JANATA SAHAKARI BANK LTD., WARD NO.12, H.NO.169B, JANATA BANK BHAVAN MAIN ROAD, ICHALRAKANJI, DIST. KOLHAPUR. .. RESPONDENT PAN NO.AAAAI 0111M CO.NO.130/PN/2013 (ARISING OUT OF ITA NO.449/PN/2012) (ASSESSMENT YEAR 2008-09) KALLAPPANNA AWADE ICHALKARANJI JANATA SAHAKARI BANK LTD., WARD NO.12, H.NO.169B, JANATA BANK BHAVAN MAIN ROAD, ICHALRAKANJI, DIST. KOLHAPUR. .. APPELLANT PAN NO.AAAAI 0111M VS. DEPUTY COMMISSIONER OF INCOME TAX, ICHALKARANJI CIRCLE, ICHALKARANJI, DIST. KOLHAPUR. .. RESPONDENT ASSESSEE BY : SHRI M.K. KULKARNI REVENUE BY : MS. ANN KAPTHUAMA DATE OF HEARING : 11-06-2013 DATE OF PRONOUNCEMENT : 05-08-2013 ORDER PER R.K. PANDA, AM : THE APPEAL FILED BY THE REVENUE AND CO FILED BY TH E ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 07-12-2011 OF THE CIT(A), KOLHAPUR RELATING TO ASSESSMENT YEAR 2008-09. 2 ITA NO.449/PN/2012 (A.Y. 2008-09) : 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A CO-OPERATIVE BANK BASED AT ICHALKARANJI, KOLHAPUR. DURING THE R ELEVANT PREVIOUS YEAR, IT HAS BECOME A MULTI STATE CO-OPERATIVE BANK. IT HAD E-FILED ITS RETURN OF INCOME ON 26-09-2008 DECLARING TOTAL INCOME OF RS.2 ,25,40,880/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD MADE A PROVISION OF RS.1,00,37,000/- B EING THE AMOUNT OF DEPRECIATION PROVIDED FOR SHIFTING OF INVESTMENTS. IT WAS NOTICED BY THE ASSESSING OFFICER THAT DURING THE PREVIOUS YEAR REL EVANT TO THE ASSESSMENT YEAR 2005-06 THE ASSESSEE HAD SHIFTED THE SECURITIE S HELD IN THE CATEGORY AVAILABLE FOR SALE (HEREINAFTER REFERRED TO AS 'A FS') TO THE CATEGORY HELD TO MATURITY (HEREINAFTER REFERRED TO AS 'HTM'). TH IS AMOUNT WAS AMORTIZED OVER A PERIOD OF FIVE YEARS @ 20% IN EVERY YEAR UND ER THE HEAD 'PROVISIONS'. SIMILARLY, AN AMOUNT OF RS.95,09,922/ - WAS AMORTIZED DURING THE YEAR BEING THE PREMIUM PAID ON PURCHASE OF GOVE RNMENT SECURITIES. THE ASSESSING OFFICER WAS OF THE OPINION THAT THESE AMO UNTS CANNOT BE ALLOWED AS BUSINESS EXPENSES AND HENCE THE SAME SHOULD BE D ISALLOWED. HE, THEREFORE, CONFRONTED THE SAME TO THE ASSESSEE. 3. THE ASSESSEE IN ITS REPLY SUBMITTED THAT THEY A RE A SCHEDULE CO- OPERATIVE BANK WHOSE ACTIVITIES ARE COVERED BY THE BANKING REGULATION ACT, 1949 (AS APPLICABLE TO CO-OPERATIVE BANKS). TH E RESERVE BANK OF INDIA ISSUES DIRECTIVES AND CIRCULARS FROM TIME TO TIME IN RESPECT OF VARIOUS BANKING ACTIVITIES AND INTERNAL MANAGEMENT INCLUDIN G THE MANNER IN WHICH BUSINESS SHOULD BE DONE. THESE CIRCULARS AND DIRECT IVES APPLIED TO INTEREST RATES, LOANS AND ADVANCES, INVESTMENT OF FUNDS, REG ULATIONS REGARDING 3 RECOGNITION OF NON-PERFORMING ASSETS, REGULATIONS R EGARDING MAINTENANCE OF LIQUID FUNDS I.E. THE STATUTORY LIQUIDITY RATIO (SL R) AND THE CASH RESERVE RATIO (CRR). THE CIRCULARS AND DIRECTIVES ISSUED BY THE RESERVE BANK OF INDIA ARE OF BINDING NATURE AND HAVE TO BE COMPULSO RILY FOLLOWED BY THE BANKS. THE ASSESSEE EXPLAINED THAT ACCORDING TO SEC TION 24 OF THE BANKING REGULATION ACT, 1949, EVERY SCHEDULE CO-OPERATIVE B ANK HAS TO KEEP 25% OF THE NET TIME AND DEMAND LIABILITY (NTDL) IN LIQU ID ASSETS WHICH IN TURN HAS TO BE INVESTED IN SPECIFIED SECURITIES. TH E SECURITIES ARE CLASSIFIED BY THE RESERVE BANK OF INDIA AS AVAILABLE FOR SALE (AFS), HELD FOR TRADE (HEREINAFTER REFERRED TO AS 'HFT') AND HELD TO MATU RITY (HTM). DURING THE PREVIOUS YEAR 2004-05, THE RESERVE BANK OF INDIA IS SUED CIRCULAR NOS.PCB/CIR.16/16.20.00/2004.05 DATED 2 ND SEPT. 2004 AND UBD(PCB).BPD.CIR.41/16.20.000/2005-06 DATED 29/03/2 006 WHICH ALLOWED THE BANKS TO SHIFT THEIR SECURITIES FROM AF S CATEGORY TO HTM CATEGORY. THE CIRCULAR ALSO DIRECTED THAT PROVISION SHOULD BE MADE IN RESPECT OF THE LOSSES INCURRED IN THE VALUATION OF GOVERNME NT SECURITIES. SUBSEQUENTLY, THE RESERVE BANK OF INDIA VIDE CIRCUL AR NO. 41/16-20- 00/2004-05 RELAXED THE NORMS FOR PROVISIONING AND A LLOWED ITS AMORTIZATION @ 20% OVER A PERIOD OF FIVE YEARS. IT IS THIS LOSS WHICH IS CLAIMED BY THE ASSESSEE AS AN EXPENDITURE. IN SUPPORT OF ITS CONTE NTION, THE ASSESSEE RELIED ON VARIOUS DECISIONS WHICH ARE AS UNDER: I) ACIT V/S RAJASTHAN BANK LTD., MUMBAI TRIBUNAL NO. 2011 TIOL - 35 ITAT MUMBAI II) PUNJAB WOOL COMBERS LTD. V/S ACIT 2, SOT 622 (CHANDI) III) MADRAS INDUSTRIAL CORPORATION LTD. V/S CIT, 225 ITR 802 4. ON THE ISSUE OF AMORTIZATION OF PREMIUM OF INVE STMENT IN GOVERNMENT SECURITIES, THE ASSESSEE STATED THAT PRE MIUM ON INVESTMENTS IN 4 GOVERNMENT SECURITIES HELD IN HTM CATEGORY AMOUNTIN G TO RS.95,09,922/- IS NOTHING BUT THE AMOUNT AMORTIZED DURING THE RELE VANT PREVIOUS YEAR IN ACCORDANCE WITH THE RESERVE BANK OF INDIA MASTER CI RCULAR NO.UBD/BPD/PCB/MC/NO.2/16.20.000/2007.08 DATED 02/0 7/2007 AND PRUDENTIAL NORMS. IT WAS CLAIMED THAT THE RBI CIRCU LARS ARE BINDING ON EVERY BANK AND HENCE THESE ARE AN ALLOWABLE EXPENDITURE I N THE HANDS OF THE BANKS BECAUSE THESE INVESTMENTS ARE IN THE NATURE O F STOCK-IN-TRADE OF THE BANK. THE ASSESSEE RELIED ON THE DECISIONS IN THE C ASES OF CIT V/S NAINITAL BANK LTD. 309 ITR 335 (UTTARANCHAL) AND CIT V/S NED UNGUDI BANK LTD. (2003) 130 TAXMAN 93. THE ASSESSEE ALSO RELIED ON T HE DECISION GIVEN BY THE CIT(APPEAL), THANE IN THE CASE OF THANE JANATA SAHAKARI BANK LTD. IN APPEAL NO. THN/ACIT C-3/THN/493/09-10 DATED 31/08/1 0. 5. HOWEVER, THE AO WAS NOT CONVINCED WITH THE EXPLA NATION GIVEN BY THE ASSESSEE. HE CONSIDERED THE MASTER CIRCULAR ON PRUDENTIAL NORMS FOR CLASSIFICATION, VALUATION AND OPERATION OF INVESTME NT PORTFOLIO BY BANKS DATED 17/07/2004 TO CONCLUDE THAT WHILE AFS AND HFT SECURITIES ARE IN THE NATURE OF STOCK-IN-TRADE, HTM SECURITIES ARE IN THE NATURE OF CAPITAL ASSET. HENCE WHILE THE AFS AND HFT SECURITIES HAVE TO BE V ALUED ACCORDING TO 'STOCK OR MATURITY VALUE WHICHEVER IS LESS' PRINCIP LE, THE HTM SECURITIES HAVE TO BE VALUED AT COST ONLY. IT WAS HELD THAT WH ILE IT MAY BE PRUDENT TO AMORTIZE THE PREMIUM ON SECURITIES HELD IN HTM, THE SAME IS NOT AN ALLOWABLE EXPENSE UNDER THE INCOME-TAX ACT. SIMILAR LY, THE INCOME-TAX ACT DOES NOT RECOGNIZE CONVERSION OF STOCK-IN-TRADE INT O ASSET AS A TRANSFER. SINCE THIS IS RE-CATEGORIZATION OF SECURITIES MIDWA Y IN THE YEAR, THE LOSS DOES NOT REPRESENT AN ACTUAL YEAR END FALL IN MARKET VAL UE BUT IT IS A SIMPLE 5 NOTIONAL LOSS WHICH CANNOT BE ALLOWED AS AN EXPENSE . THE ASSESSING OFFICER WAS ALSO OF THE OPINION THAT WHEN SUCH SECURITIES A RE SOLD ULTIMATELY, THE COMPUTATION MECHANISM OF CAPITAL GAIN AS PER THE IN COME-TAX ACT WOULD FAIL BECAUSE AFTER SUCH A REDUCTION, THE RESULTANT VALUE WILL NOT REPRESENT THE COST OF ACQUISITION OR CONSIDERATION PAID FOR ACQUI SITION OF SECURITY. IT WAS HELD THAT THE RESERVE BANK OF INDIA CIRCULAR AUTHOR ISING SHIFTING OF SECURITIES BETWEEN THE VARIOUS CATEGORIES IS NOT MA NDATORY AND IS OPTIONAL, TO BE FOLLOWED AS PER THE WILL OF THE BANK. SIMILAR LY, SINCE THE INSTRUCTIONS ISSUED BY THE RESERVE BANK OF INDIA DO NOT SUPERSED E THE PROVISIONS OF THE INCOME-TAX ACT, THEY ARE AS SUCH, NOT BINDING ON TH E DEPARTMENT. FURTHER, THE DEPARTMENT HAS TAKEN A CONSISTENT STAND THAT DE PRECIATION IN VALUE OF SECURITIES IS ONLY ALLOWABLE IN CASES WHERE SECURIT IES ARE HELD AS STOCK-IN- TRADE AND NOT AS CAPITAL INVESTMENT IN THE FORM OF HTM. THE AO ACCORDINGLY MADE ADDITION OF RS.1,00,37,000/- ON AC COUNT OF DEPRECIATION ON INVESTMENT AND RS.95,09,922/- ON ACCOUNT OF AMOR TIZATION OF PREMIUM ON GOVERNMENT SECURITIES. 6. BEFORE THE CIT(A) THE ASSESSEE REITERATED THE SA ME SUBMISSIONS AS MADE BEFORE THE AO. BASED ON THE ARGUMENTS ADVANCE D BY THE ASSESSEE THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE TOWARD S PROVISION OF DEPRECIATION ON FRESH INVESTMENTS OVER THE LIFE OF THE SECURITY PURCHASED AND AMORTIZED AND THE PREMIUM IN RESPECT OF SECURIT IES SHIFTED TO HTM CATEGORY AS DEDUCTIBLE EXPENSE BY HOLDING AS UNDER : 10. I HAVE GIVEN CAREFUL CONSIDERATION TO THE SUB MISSIONS OF THE APPELLANT AS ALSO THE FACTS OF THE CASE. IN THE INS TANT CASE, TWO ISSUES ARE INVOLVED - THE FIRST RELATES TO CLAIM OF DEPREC IATION IN VALUE TO THE TUNE OF RS.1,00,37,000/- ON ACCOUNT OF SHIFTING OF SECURITIES FROM AFS AND HFT CATEGORY OF INVESTMENT TO HTM CATEGORY OF I NVESTMENTS AND THE SECOND ISSUE PERTAINS TO CLAIM OF AMORTIZATION OF PREMIUM PAID 6 ON PURCHASE OF GOVERNMENT SECURITIES TO THE TUNE OF RS.95,09,922/- AND KEPT IN HTM CATEGORY. 11. IT IS WELL KNOWN THAT BANKING INDUSTRY IS ONE OF THE MOST REGULATED SECTORS OF INDIAN ECONOMY AND THE DAY TO DAY FUNCTIONING AND BUSINESS OF A BANK ARE STRICTLY CONTROLLED BY T HE RESERVE BANK OF INDIA. FOR THIS PURPOSE THE RESERVE BANK OF INDIA I SSUES VARIOUS DIRECTIVES AND CIRCULARS WHICH ARE MANDATORY IN NAT URE AND THEY HAVE TO BE COMPULSORILY FOLLOWED BY THE BANKS. THEY ARE OF A BINDING NATURE. ACCORDINGLY, THE RESERVE BANK OF INDIA HAS ISSUED A MASTER CIRCULAR ON INVESTMENT BY PRIMARY (URBAN) CO-OPERAT IVE BANKS VIDE LETTER NO.(UBD.DPD.(PCB)) MC NO. 4/16.20.00/2003-04 DATED 23/12/2003. THIS WAS REVISED BY PCB. CIR.16/16.20.0 0/2004-05 IN RBI NO.2004-05/158 DATED 02/09/2004. THE FINAL MAST ER CIRCULAR ON INVESTMENT BY PRIMARY (URBAN) CO-OPERATIVE BANKS WA S ISSUED ON 07/01/2011 IN UBD.BPD(PCB).MC NO. 12/16-20-00/2011- 12. THESE CIRCULARS PROVIDED THE GUIDELINE FOR CLASSIFICATION AND CATEGORISATION OF INVESTMENTS AND A REVIEW THEREOF TO BRING THE CL ASSIFICATION AND VALUATION OF INVESTMENT PORTFOLIO OF URBAN CO-OPERA TIVE BANKS IN ALIGNMENT WITH INTERNATIONAL PRACTICES AND THE CURR ENT STATE OF RISK MANAGEMENT PRACTICES IN INDIA. THEY HAVE TAKEN INTO ACCOUNT THE REQUIREMENT OF MAINTENANCE OF STATUTORY RESERVES IN THE FORM OF SPECIFIED GOVERNMENT SECURITIES EQUIVALENT TO 25% O F NDTL UNDER SECTION 24 OF THE BANKING REGULATION ACT, 1949 (AS APPLICABLE TO CO- OPERATIVE BANKS). THE MASTER CIRCULARS ON INVESTMEN T BY THE URBAN CO-OPERATIVE BANKS ARE REVISED FROM TIME TO TIME. A CCORDING TO THE MASTER CIRCULARS ISSUED, THE URBAN CO-OPERATIVE BAN KS ARE REQUIRED TO MAINTAIN ITS PORTFOLIO IN GOVERNMENT SECURITIES, OTHER APPROVED SECURITIES, SHARES BONDS OF PSUS AND OTHER FORMS AC CORDING TO THE INSTRUCTIONS LAID DOWN ON THAT BEHALF FROM TIME TO TIME. IN TERMS OF PROVISIONS OF SECTION 24 OF THE BANKING REGULATION ACT, 1949 (AS APPLICABLE TO CO-OPERATIVE SOCIETIES) EVERY URBAN C O-OPERATIVE BANK IS REQUIRED TO MAINTAIN LIQUID ASSETS AT THE END OF EVERY BUSINESS DAY EQUIVALENT TO 25% OF THE NDTL. THESE LIQUID ASSETS ARE IN THE FORM OF CASH, GOLD OR UNENCUMBERED APPROVED SECURITIES. THE APPROVED SECURITIES ARE NORMALLY THE GOVERNMENT OF INDIA BON DS OR ANY OTHER SECURITIES WHICH MAY BE RATIFIED BY THE RESERVE BAN K OF INDIA. 12. IN RESPECT OF VALUATION AND CATEGORIZATION OF INVESTMENTS, NORMS PRESCRIBED BY THE RESERVE BANK OF INDIA ARE A S UNDER: 15 CATEGORISATION OF INVESTMENTS 15.1 PRIMARY (URBAN) CO-OPERATIVE BANKS ARE REQ UIRED TO CLASSIFY THEIR ENTIRE INVESTMENT PORTFOLIO (INCLUDING SLR AN D NON-SLR SECURITIES) UNDER THREE CATEGORIES VIZ (I) HELD TO MATURITY (II) (HTM) AVAILABLE FOR SALE (AFS) (III) HELD FOR TRADING (HFT) 7 BANKS SHOULD DECIDE THE CATEGORY OF THE INVESTMENT AT THE TIME OF ACQUISITION AND THE DECISION SHOULD BE RECORDED ON THE INVESTMENT PROPOSALS. 15.2 HELD TO MATURITY 15.2.1 SECURITIES ACQUIRED BY THE BANKS WITH THE IN TENTION TO HOLD THEM UP TO MATURITY WILL BE CLASSIFIED UNDER 'HELD TO MATURITY' CATEGORY. 15.2.2 THE INVESTMENTS INCLUDED UNDER 'HELD TO MATU RITY' CATEGORY SHOULD NOT EXCEED 25 PER CENT OF THE BANK'S TOTAL I NVESTMENTS. HOWEVER, BANKS ARE PERMITTED TO EXCEED THE LIMIT OF 25 PER CENT OF THEIR TOTAL INVESTMENTS UNDER HTM CATEGORY PROVIDED , A) THE EXCESS COMPRISES ONLY OF SLR SECURITIES B) THE TOTAL SLR SECURITIES HELD IN THE HTM CATEGO RY IS NOT MORE THAN 25 PER CENT OF THEIR NDTL AS ON THE LAST FRIDA Y OF THE SECOND PRECEDING FORTNIGHT. 15.2.3 PRIMARY (URBAN) CO-OPERATIVE BANKS ARE NOT P ERMITTED TO INVEST IN BONDS AND DEBENTURES OF PRIVATE SECTOR CO MPANIES. THEIR INVESTMENTS IN BONDS OF PSUS AND SHARES (AS PERMITT ED BY RBI) SHOULD BE CLASSIFIED UNDER 'HELD TO MATURITY' CATEG ORY BUT THESE WILL NOT BE COUNTED FOR THE PURPOSE OF SPECIFIED CEILING UNDER THIS CATEGORY. 15.2.4 PROFIT ON SALE OF INVESTMENTS IN THIS CATEGO RY SHOULD BE FIRST TAKEN TO THE P&L ACCOUNT AND THEREAFTER BE APPROPRI ATED TO THE INVESTMENT FLUCTUATION RESERVE. LOSS ON SALE WILL B E RECOGNIZED IN THE P&L A/C. 15.3 HELD FOR TRADING 15.3.1 SECURITIES ACQUIRED BY THE BANKS WITH THE IN TENTION TO TRADE BY TAKING ADVANTAGE OF THE SHORT-TERM PRICE/INTEREST R ATE MOVEMENTS WILL BE CLASSIFIED UNDER 'HELD FOR TRADING' CATEGORY. 15.3.2 IF BANKS ARE NOT ABLE TO SELL THE SECURITY W ITHIN 90 DAYS DUE TO EXCEPTIONAL CIRCUMSTANCES SUCH AS TIGHT LIQUIDITY C ONDITIONS, OR EXTREME VOLATILITY, OR MARKET BECOMING UNIDIRECTION AL, THE SECURITY SHOULD BE SHIFTED TO THE 'AVAILABLE FOR SALE' CATEG ORY, SUBJECT TO CONDITIONS STIPULATED IN PARAGRAPHS 15.5.3 AND 15.5 .4 BELOW. 15.4 AVAILABLE FOR SALE 15.4.1 SECURITIES WHICH DO NOT FALL WITHIN THE ABOV E TWO CATEGORIES WILL BE CLASSIFIED UNDER 'AVAILABLE FOR SALE' CATEG ORY. 15.4.2 BANKS HAVE THE FREEDOM TO DECIDE ON THE EXTE NT OF HOLDINGS UNDER 'AVAILABLE FOR SALE' CATEGORY. THIS MAY BE DE CIDED BY THEM CONSIDERING VARIOUS ASPECTS SUCH AS BASIS OF INTENT , TRADING STRATEGIES, RISK MANAGEMENT CAPABILITIES, TAX PLANNING, MANPOWE R SKILLS, CAPITAL POSITION, ETC. 8 (PROFIT OR LOSS ON SALE OF INVESTMENTS IN HFT & AFS CATEGORIES SHOULD BE TAKEN TO P&L ACCOUNT). 15.5 SHIFTING OF INVESTMENTS 15.5.1 BANKS MAY SHIFT INVESTMENTS TO/FROM 'HELD TO MATURITY' CATEGORY WITH THE APPROVAL OF THE BOARD OF DIRECTOR S ONCE IN A YEAR. SUCH SHIFTING WILL NORMALLY BE ALLOWED AT THE BEGIN NING OF THE ACCOUNTING YEAR. NO FURTHER SHIFTING TO/FROM THIS C ATEGORY WILL BE ALLOWED DURING THE REMAINING PART OF THAT ACCOUNTIN G YEAR. 15.5.2 BANKS MAY SHIFT INVESTMENTS FROM 'AVAILABLE FOR SALE' CATEGORY TO 'HELD FOR TRADING' CATEGORY WITH THE APPROVAL OF THEIR BOARD OF DIRECTORS. IN CASE OF EXIGENCIES, SUCH SHIFTING MAY BE DONE WITH THE APPROVAL OF THE CHIEF EXECUTIVE OF THE BANK, BUT SH OULD BE RATIFIED BY THE BOARD OF DIRECTORS. 15.5.3 SHIFTING OF INVESTMENTS FROM 'HELD FOR TRADI NG' CATEGORY TO 'AVAILABLE FOR SALE' CATEGORY IS GENERALLY NOT ALLO WED. HOWEVER, IT WILL BE PERMITTED ONLY UNDER EXCEPTIONAL CIRCUMSTAN CES SUCH AS MENTIONED IN PARAGRAPH 15.3.2 ABOVE, SUBJECT TO DEP RECIATION, IF ANY, APPLICABLE ON THE DATE OF TRANSFER, WITH THE APPROV AL OF THE BOARD OF DIRECTORS/INVESTMENT COMMITTEE. 15.5.4 TRANSFER OF SCRIPS FROM ONE CATEGORY TO ANOT HER, UNDER ALL CIRCUMSTANCES, SHOULD BE DONE AT THE ACQUISITION CO ST/BOOK VALUE/MARKET VALUE ON THE DATE OF TRANSFER, WHICHEV ER IS THE LEAST, AND THE DEPRECIATION, IF ANY, ON SUCH TRANSFER SHOULD B E FULLY PROVIDED FOR. 15.6 CLASSIFICATION OF INVESTMENTS IN THE BALANCE SHEET FOR THE PURPOSE OF BALANCE SHEET, THE INVESTMENTS SHOULD CONTINUE TO BE CLASSIFIED IN THE FOLLOWING CATEGORI ES. (I) GOVERNMENT (II) OTHER APPROVED SECURI TIES (III) SHARES (IV) BONDS OF PSUS (V) OTHERS 16 VALUATION OF INVESTMENTS 16.1 VALUATION STANDARDS 16.1.1 INVESTMENTS CLASSIFIED UNDER 'HELD TO MATURI TY' CATEGORY NEED NOT BE MARKED TO MARKET AND WILL BE CARRIED AT ACQU ISITION COST UNLESS IT IS MORE THAN THE FACE VALUE, IN WHICH CAS E THE PREMIUM SHOULD BE AMORTISED OVER THE PERIOD REMAINING TO MA TURITY. 16.1.2 THE INDIVIDUAL SCRIP IN THE 'AVAILABLE FOR S ALE' CATEGORY WILL BE MARKED TO MARKET AT THE YEAR-END OR AT MORE FREQUEN T INTERVALS. THE BOOK VALUE OF THE INDIVIDUAL SECURITIES WOULD NOT U NDERGO ANY CHANGE AFTER THE REVALUATION. 9 16.1.3 THE INDIVIDUAL SCRIP IN THE 'HELD FOR TRADING' CATEGORY WILL BE MARKED TO MARKET AT MONTHLY OR AT MORE FREQUENT INTERVALS. THE BOOK VALUE OF INDIVIDUAL SECURITIES IN THIS CATEGORY WOULD NOT UNDERGO ANY CHANGE AFTER MARKING TO MARKE T. NOTE: SECURITIES UNDER AFS AND HFT CATEGORIES SHALL BE VALUED SCRIP-WISE AND DEPRECIATION/ APPRECIATION SH ALL BE AGGREGATED FOR EACH CLASSIFICATION AS INDICATED AT PARA 15.6 ABOVE SEPARATELY FOR AFS AND HFT. NET DEPRECIATION, IF ANY, SHALL BE PROVIDED FOR. NET APPRECIATION, IF ANY, SH OULD BE IGNORED. NET DEPRECIATION REQUIRED TO BE PROVIDED F OR IN ANY ONE CLASSIFICATION SHOULD NOT BE REDUCED ON ACCOUNT OF NET APPRECIATION IN ANY OTHER CLASSIFICATION. SIMILARLY NET DEPRECIATION FOR ANY CLASSIFICATION IN ONE CATEGORY SHOULD NOT BE REDUCED FROM APPRECIATION IN SIMILAR CLASSIFICA TION IN ANOTHER CATEGORY. 13. THE SEPTEMBER 2 ND 2004 CIRCULAR LAID DOWN THE FOLLOWING GUIDELINES IN RESPECT OF INVESTMENT PO RTFOLIO OF URBAN CO-OPERATIVE BANKS : (I) BANKS MAY EXCEED THE PRESENT LIMIT OF 25 PER CE NT OF A BANKS TOTAL INVESTMENTS UNDER HTM CATEGORY PROVIDE D. A. THE EXCESS COMPRISES ONLY OF SLR SECURITIES, AND B. THE TOTAL SLR SECURITIES HELD IN THE HRM CATEGO RY IS NOT MORE THAN 25 PER CENT OF THEIR NDTL AS ON TH E LAST FRIDAY OF THE SECOND PROCEEDING FORTNIGHT (II) TO ENABLE THE ABOVE, AS A ONE-TIME MEASURE, B ANKS MAY SHIFT SLR SECURITIES TO THE HRM CATEGORY ANY TIME, ONCE MORE, DURING THE CURRENT ACCOUNTING YEAR. SUCH SHIFTING SHOULD BE DONE AT THE ACQUISITION COST/BOOK VALUE/MARKET VALU E ON THE DATE OF TRANSFER, WHICHEVER IS THE LEAST, AND THE D EPRECIATION, IF ANY, ON SUCH TRANSFER SHOULD BE FULLY PROVIDED FOR. (III) THE NON SLR INVESTMENTS IN BONDS OF PSUS AND SHARES (AS PERMITTED BY RBI) CLASSIFIED UNDER HTM CATEGORY MAY REMAIN IN THAT CATEGORY. NO FRESH NON-SLR SECURITI ES ARE PERMITTED TO BE INCLUDED IN THE HTM CATEGORY. 14. SUBSEQUENT TO THE CIRCULAR DATED 02/09/20 04 THE RESERVE BANK OF INDIA ISSUED THE CIRCULAR NO.RBI/2004 5/403UBD(PCB).CIR.41/16.20.00/2004-05 DATED 28/03/2 005. IN THIS CIRCULAR, THE PROVISIONING REQUIREMENT ON ACCOUNT O F SHIFTING OF SECURITIES WAS RELAXED IN THE FOLLOWING MANNER: 2 . IN VIEW OF THE REPRESENTATIONS RECEIVE FROM THE FEDERATIONS OF UCBS ON ACCOUNT OF THE DIFFICULTIES FACED BY THE UCBS IN MEETING THE PROVISIONING REQUIREMENTS, THE MATTER HAS BEEN REVIEWED AND IT HAS BEEN DECIDED AS A SPEC IAL CASE, TO CONSIDER RELAXING THE ABOVE PROVISIONING REQUIRE MENTS, AS UNDER: 10 I. SCHEDULED UCBS : SCHEDULED UCBS MAY CRYSTALLIZE THE PROVISIONING REQ UIREMENT ARISING ON ACCOUNT OF SHIFTING OF SECURITIES FROM H FT/AFS CATEGORIES TO THE HTM CATEGORY CONSEQUENT TO THE IS SUE OF OUR GUIDELINES DATED 02/09/2004 AND AMORTIZE THE SAME O VER A MAXIMUM PERIOD OF FIVE YEARS COMMENCING FROM THE CU RRENT ACCOUNTING YEAR ENDING 31/03/2005, WITH A MINIMUM O F 20% OF SUCH AMOUNT EACH YEAR. II. NON SCHEDULED UCBS: . . . . . . . . . . . . . (A). . . . . . . . . . . (B). . . . . . . . . . . (C). . . . . . . . . . . (D). . . . . . . . . . . (E). . . . . . . . . . . 3. IT IS FURTHER ADVISED THAT THE ABOVE RELAXATION IS A ONE TIME MEASURE FOR THE CURRENT ACCOUNTING YEAR AND FO R ALL FUTURE FRESH INVESTMENTS MADE ON OR AFTER 01.04.2005, EXIS TING GUIDELINES MAY CONTINUE TO BE FOLLOWED. ALSO, THE B ANKS ARE NOT ALLOWED TO WRITE BACK PROVISIONS ALREADY MADE ON IN VESTMENTS AS ON 31.03.2004. 15. IN THIS RESPECT, THE FOLLOWING CIRCULARS OF THE CBDT ARE RELEVANT: I) CIRCULAR NO. 665 DATED 05/10/1993 ON TREATMENT O F SECURITIES - STOCK IN TRADE OR INVESTMENT, THE RELEVANT PORTIO N OF WHICH IS REPRODUCED AS UNDER: BY CIRCULAR NO. 599 (F.NO.201/29/87/ITA.II), DATED 24 TH APRIL, 1991 IT WAS CLARIFIED THAT SECURITIES HELD BY BANKS MUST BE REGARDED AS THEIR STOCK-IN-TRADE AND THE CLAIM OF L OSS, IF DEBITED IN THE BOOKS OF ACCOUNT, SHOULD BE GIVEN TH E SAME TREATMENT AS IS NORMALLY GIVEN TO THE STOCK-IN-TRAD E. IT WAS ALSO CLARIFIED THAT THE INTEREST PAID FOR BROKEN-PERIOD ON THE PURCHASE OF SECURITIES MUST BE REGARDED AS REVENUE PAYMENT AND ALLOWED ACCORDINGLY. 2. . . . . . . . . . . . 3.. . . . . . . . . . . 4. THE QUESTION WHETHER A PARTICULAR ITEM OF INVEST MENT 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 FR OM TIME TO TIME WITH REGARD TO THE CLASSIFICATION OF ASSETS AND ALSO THE ACCOUNTING STANDARDS FOR INVESTMENTS. THE BOARD HAS, THEREFORE, DECIDED THAT THE ASSESSING OFFICERS SHOU LD 11 DETERMINE ON THE FACTS AND CIRCUMSTANCES OF EACH CA SE AS TO WHETHER ANY PARTICULAR SECURITY CONSTITUTES STOC K-IN- TRADE OR INVESTMENT TAKING INTO ACCOUNT THE GUIDELI NES ISSUED BY THE RESERVE BANK OF INDIA IN THIS REGARD FROM TIME TO TIME. II) INSTRUCTION NO. 17 DATED 26/ 11/2008. 2. IN A RECENT REVIEW OF ASSESSMENT OF BANKS CARRIE D OUT BY C&AG, IT HAS BEEN OBSERVED THAT WHILE COMPUTING THE INCOME OF BANKS UNDER THE HEAD 'PROFIT AND GAINS OF BUSINE SS & PROFESSION', DEDUCTIONS OF LARGE AMOUNTS UNDER DIFF ERENT SECTIONS ARE BEING ALLOWED BY THE ASSESSING OFFICER S WITHOUT PROPER VERIFICATION, LEADING TO SUBSTANTIAL LOSS OF REVENUE. IT IS, THEREFORE, NECESSARY THAT ASSESSMENTS IN THE CASES OF BANKS ARE COMPLETED WITH DUE CARE AND AFTER PROPER VERIFICATI ON. IN PARTICULAR, DEDUCTIONS UNDER THE PROVISIONS REFERRE D TO BELOW SHOULD BE ALLOWED ONLY AFTER A THOROUGH EXAMINATION OF THE CLAIM ON FACTS AND ON LAW AS PER THE PROVISIONS OF THE INCOME- TAX ACT, 1961. (I) . . . . . . . . (II) . . . . . . . . (III) . . . . . . . . (IV) . . . . . . . . . (V) . . . . . . . . . (VI) . . . . . . . . . (VII) AS PER RBI GUIDELINES DATED 16 OCTOBER, 2000 , THE INVESTMENT PORTFOLIO OF THE BANKS IS REQUIRED TO BE CLASSIFIED UNDER THREE CATEGORIES VIZ. HELD TO MATU RITY (HTM), HELD FOR TRADING (HFT) AND AVAILABLE FOR SAL E (AFS). INVESTMENTS CLASSIFIED UNDER HTM CATEGORY NE ED NOT BE MARKED TO MARKET AND ARE CARRIED AT ACQUISIT ION COST UNLESS THESE ARE MORE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTISED OVER THE PERIO D REMAINING TO MATURITY. IN THE CASE OF HFT AND AFS SECURITIES FORMING STOCK IN TRADE OF THE BANK, THE DEPRECIATION /APPRECIATION IS TO BE AGGREGATED SCRI P WISE AND ONLY NET DEPRECIATION, IF ANY, IS REQUIRED TO BE PROVIDED FOR IN THE ACCOUNTS. THE LATEST GUIDELINES OF THE RBI MAY BE REFERRED TO FOR ALLOWING ANY SUCH CLAIMS . 16. INSTRUCTION NO. 17 PARAGRAPH 7 IS VERY CLEAR. IT CLEARLY LAYS DOWN THAT THE LATEST GUIDELINES OF THE RESER VE BANK OF INDIA SHOULD BE REFERRED TO FOR ALLOWING ANY SUCH CLAIMS . THE FIRST CLAIM RELEVANT TO DEPRECIATION IN VALUE OF SECURITIES TO THE TUNE OF RS.1,00,37,000/- ON ACCOUNT OF SHIFTING OF SECURITI ES IS FROM AFS AND HFT CATEGORY TO HTM CATEGORY OF INVESTMENTS. THE MA STER CIRCULAR ON INVESTMENT ISSUED BY THE RESERVE BANK OF INDIA O N 02/07/2006 CLEARLY LAYS DOWN THAT AS A SPECIAL CASE, THE CO-OP ERATIVE BANK MAY SHIFT SECURITIES FROM AND TO HTM CATEGORY. THE RESE RVE BANK OF INDIA 12 NORMS IN RESPECT OF SCHEDULE URBAN CO-OPERATIVE BAN KS HAD, ON 02/09/2004 ALLOWED THE SHIFTING OF SLR SECURITIES T O NOT MORE THAN 25% OF NDTL PROVIDED THAT THE DEPRECIATION ON SUCH SHIFTING SHOULD BE FULLY PROVIDED. HOWEVER, IN VIEW OF THE DIFFICUL TIES BEING FACED BY THE URBAN CO-OPERATIVE BANKS IN MEETING THE PROVISI ONING REQUIREMENT, THE RESERVE BANK OF INDIA, VIDE NO.UBD(PCB).CIR.41/16.20.200/2004-05 DATED 28/03/20 0.5 ALLOWED THE AMORTIZATION OF COST OVER A MAXIMUM PERIOD OF F IVE YEARS COMMENCING FROM THE YEAR 2005. HENCE, THE CLAIM MAD E BY THE APPELLANT IS IN ACCORDANCE WITH THE EXTANT RESERVE BANK OF INDIA GUIDELINES PROVIDING FOR PROVISIONING REQUIREMENT B ETWEEN THE BOOK VALUE AND THE FACE VALUE. HENCE, THIS DEDUCTION IS ALLOWABLE TO THE APPELLANT. 17. FURTHER, IN RESPECT OF AMORTIZATION OF PREMIUM PAID ON PURCHASE OF GOVERNMENT SECURITIES TO BE HELD IN HTM CATEGORY TO THE TUNE OF RS.95,09,922/-, THE SAME IS IN ACCORDANCE W ITH THE MASTER CIRCULAR REFERRED TO ABOVE. THIS CIRCULAR CLEARLY S TATES THAT INVESTMENTS CLASSIFIED UNDER HTM CATEGORY WILL BE C ARRIED OUT AT ACQUISITION COST UNLESS IT IS MORE THAN THE FACE VA LUE IN WHICH CASE THE PREMIUM I.E. THE DIFFERENCE BETWEEN THE COST AN D THE FACE VALUE SHOULD BE AMORTIZED OVER THE PERIOD REMAINING TO MA TURITY. I FIND THAT THE APPELLANT HAD MADE A CLAIM OFRS.95,09,922/- DUR ING THE RELEVANT PREVIOUS YEAR, WHICH WAS THE VALUE REQUIRED TO BE A MORTIZED DURING THE RELEVANT PREVIOUS YEAR IN RESPECT OF SECURITIES PURCHASED FOR HOLDING IN HTM CATEGORY. AS PER THE RBI NORMS, THE PREMIUM IS REQUIRED TO BE AMORTIZED OVER THE PERIOD REMAINING TO MATURITY. HENCE, THERE IS NO INFIRMITY IN THIS CLAIM ALSO WHI CH IS MADE BY THE APPELLANT BANK. 18. IN VIEW OF THE CLEAR-CUT GUIDELINES OF THE RESE RVE BANK OF INDIA, THE CLAIM OF THE APPELLANT TOWARDS PROVISION S OF DEPRECIATION ON FRESH INVESTMENTS OVER THE LIFE OF THE SECURITY PURCHASED AND AMORTIZED AND THE PREMIUM IN RESPECT OF SECURITIES SHIFTED TO HTM CATEGORY IS ALLOWABLE AS DEDUCTIBLE EXPENSE. GROUN D NOS. 1 AND 2 IN APPEAL ARE ALLOWED. 7. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVE NUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS. THE ASSESSEE HAS ALSO FILED CO BY TAKING THE FOLLOWING GROUNDS : 13 GROUNDS BY REVENUE : 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE CIT(A) ERRED IN ALLOWING DEPRECIATION ON INVESTMENT IN GOVERNMEN T SECURITIES OF RS.1,00,37,000/-. 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE CIT(A) ERRED IN ALLOWING AMORTIZATION OF PREMIUM PAID ON GOVERNM ENT SECURITIES PURCHASED BY THE ASSESSEE OF RS.95,09,922/- 3) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE CIT(A) ERRED IN ALLOWING DEPRECIATION. THE DEPRECIATION CAN BE C LAIMED ONLY ON BUSINESS ASSETS AND NOT ON INVESTMENT. THE DEPARTME NT HAS TAKEN A CONSISTENT STAND THAT DEPRECIATION IN VALUE OF SECU RITIES IS ALLOWABLE IN CASES WHERE SECURITIES ARE HELD AS STOCK IN TRAD E AND NOT AS CAPITAL INVESTMENT IN THE FORM OF HTM. 4) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE CIT(A) ERRED IN ALLOWING AMORTIZATION OF PREMIUM PAID ON GOVERNM ENT SECURITIES PURCHASED BY THE ASSESSEE. ALL CAPITAL ASSETS ARE T O BE VALUED AT COST ONLY AND NO PART THEREOF CAN BE CLAIMED AS REVENUE EXPENDITURE IN COMPUTING TOTAL INCOME. THIS PRINCIPLE HAS BEEN UPH ELD BY THE HON. SUPREME COURT IN THE CASE OF VIJAYA BANK LTD V/S .A DDL. CIT (187 ITR 541). 5) THE ADDITIONS MADE BY THE AO BE RETAINED A ND THE DECISION OF THE CIT (A) BE REVERSED. 6). THE APPELLANT CRAVES RIGHT TO ADD, ALTER, AMEND ANY OR ALL GROUNDS DURING HEARING OF APPEAL. CROSS OBJECTIONS BY ASSESSEE : 1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE APPELLANT- REVENUE IN APPEAL NO. ITA/449/PN/2012 AMONGST OTHER S HAS RAISED GROUND NO. 3 THAT THE DEPTT. HAS CONSISTENTLY TAKEN A STAND THAT DEPRECIATION IN VALUE OF SECURITIES IS ALLOWABLE NO T IN CASE OF CAPITAL INVESTMENT. THIS CONSISTENT STAND HAS NOT BEEN APPR OVED BY CBDT INSTRUCTION NO. 17 DT. 26-11-2008 WHICH SAYS THE LA TEST GUIDELINES OF RBI MAY BE REFERRED TO ALLOWING ANY SUCH CLAIMS. 2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE SAID INSTRUCTION NO. 17 DT. 26-11-2008 INSTRUCTS THAT IN VESTMENTS CLASSIFIED UNDER HIM CATEGORY NEED NOT BE MARKED TO MARKET AND ARE CARRIED AT ACQUISITION COST UNLESS THESE ARE MO RE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTIZE D OVER THE PERIOD REMAINING TO MATURITY. THE LD. CIT(A) HAS CO NSIDERED THE 14 INSTRUCTION NO. 17 AND RESERVE BANK OF INDIA GUIDEL INES WHILE ALLOWING THE APPEAL. 3) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW AND IN VIEW OF CROSS OBJECTIONS OF SR. NO. 1 AND 2 ABOVE THE APPEA L OF THE REVENUE RAISING THE GROUNDS OF APPEAL CONTRARY TO INSTRUCTI ON NO. 17 AND RBI GUIDELINES IS NOT MAINTAINABLE. IT BE HELD ACCO RDINGLY. 4) THE APPELLANT CRAVES/LEAVE TO ADD, AMEND OR ALT ER ANY OF THE ABOVE GROUNDS OF APPEAL. 8. THE LEARNED COUNSEL FOR THE ASSESSEE WHILE SUPPO RTING THE ORDER OF LD.CIT(A) ALSO RELIED ON VARIOUS DECISIONS PLACED I N THE PAPER BOOK WITH SYNOPSIS, THE DETAILS OF WHICH ARE AS UNDER : 1. MOHAMMED USMAN T.P. & ORS. VS. REGISTRAR OF CO-O P SOCIETIES AIR 2003 KER. 299. IN THE SAID DECISION IT WAS HELD THAT RESERVE BANK OF INDIA HAS POWER TO PRESCRIBE NORMS FOR TRANSACTION BANKING BUSINESS UNDER KERALA CO-OPERATIVE SOCIETIE S ACT. 2. JANATA SAHAKARI BANK LTD. STATE OF MAHARASTRA AI R 1993 (BOM.)252. IT WAS HELD THAT BANKING REGULATION ACT , 1949 POWER OF RESERVE BANK OF INDIA TO GIVE DIRECTION ARE VALID. 3. CIT VS. KARUR VYSYA BANK LTD. 33 DTR (MAD.) 244. IT WAS HELD THAT THE ASSESSEE IS ENTITLED TO CHANGE THE ME THOD OF VALUATION OF GOVT. SECURITIES TO MARKET VALUE FROM COST AND CLAI M DEPRECIATION ON THE DIFFERENCE IN THE DIMINUTION OF VALUE. 4. UNITS COMMERCIAL BANK VS. CIT (1999) 240 ITR 355 (SC). IT WAS HELD THAT WHERE THE ASSESSEE BANK HAD BEEN VALU ING ITS STOCK (INVESTMENTS) AT COST IN THE BALANCE SHEET BUT IT HAD BEEN VALUING THE SAME INVESTMENT AT COST OR MARKET VALUE, WHICH EVER IS LOWER, FOR INCOME-TAX PURPOSES FOR OVER 30 YEARS, THE SAME COULD NOT BE DISCARDED BY THE REVENUE ON THE GROUND THAT ASSESSE E WAS MAINTAINING BALANCE SHEET IN THE STATUTORY FORM ON THE BASIS OF THE COST OF THE INVESTMENTS. FOR VALUING THE CLOSING S TOCK, IT IS OPEN TO THE ASSESSEE TO VALUE IT AT COST OR MARKET VALUE WH ICHEVER IS LOWER, A METHOD OF ACCOUNTING ADOPTED BY THE TAX PAYER CONSI STENTLY AND REGULARLY CANNOT BE DISREGARDED BY THE DEPARTMENTAL AUTHORITIES ON THE VIEW THAT IT SHOULD HAVE ADOPTED A DIFFERENT ME THOD OF ACCOUNTING VALUATION. 5. CIT VS. CITY UNION BANK LTD. (2007) 291 ITR 144 (MAD). IT WAS HELD THAT REDUCTION CLAIMED BY THE ASSESSEE BANK AS DIMINUTION IN THE VALUE OF INSTALMENTS (SECURITIES) IS ALLOWABLE. 15 6. LAXMI VILAS BANK LTD. VS. CIT(2006) 284 ITR 93 ( MAD). IT WAS HELD THAT ASSESSEE BANK HAVING ALL ALONG TREATE D THE GOVERNMENT SECURITIES AS ITS STOCK IN TRADE AND THE REVENUE HA VING ACCEPTED THIS POSITION IN THE EARLIER YEARS, FALL IN MARKET VALUE OF THE SECURITIES WAS ALLOWABLE AS DEDUCTION. 7. CIT VS. LORD KRISHNA BANK LTD. (2011) 339 ITR 60 6. IT HAS BEEN HELD THAT VALUATION OF UNQUOTED GOVT. SECURITI ES BASED ON RBI GUIDELINES WAS SUSTAINABLE. 8. CATHOLIC SYRIAN BANK LTD. VS. CIT (2012) 343 ITR 270 (SC). IT WAS HELD THAT MERELY BECAUSE THE ORDER OF THE SPECI AL BENCH OF THE TRIBUNAL RELATING TO EARLIER ASSESSMENT YEARS WAS N OT ASSAILED IN APPEAL BY THE DEPARTMENT ITSELF, IT CANNOT TAKE AWA Y THE RIGHT OF THE REVENUE TO QUESTION THE CORRECTNESS OF THE ASSESSME NT ORDER ON THE SAME ISSUE IN THE RELEVANT ASSESSMENT YEAR, PARTICU LARLY WHEN A QUESTION OF LAW IS INVOLVED WHICH GOES TO THE VERY ROOT OF THE MATTER. 9. CIT VS. ANDHRA PRADESH STATE CO-OP BANK LTD.(201 1) 336 ITR 516. IT HAS BEEN HELD THAT THE CASH RESERVE OR RES ERVE FUND REQUIRED TO BE MAINTAINED BY A SCHEDULED OR CO-OP. BANK UNDE R PROVISIONS OF RBI ACT OR B.R. ACT, ARE ALL ACTIVITIES OF BANKING. 10. BANK OF RAJASTHAN LTD. VS. IAC(1999) 63 TTJ (TP ) 226. IT WAS HELD THAT INVESTMENT IN GOVERNMENT AND OTHER SECURI TIES BY A BANKING COMPANY CANNOT BE HELD AS STOCK IN TRADE AND PROFIT OR LOSS ON SUCH INVESTMENT ARISE ONLY WHEN THEY ARE FINALLY TRANSFE RRED, SOLD OR DISCARDED AND NOT AT THE END OF EACH ACCOUNTING PER IOD. IT WAS ALSO HELD THAT PRINCIPLES OF RESJUDICATA ARE NOT APPLIED TO TAX MATTERS. 11. SOUTHERN TECHNOLOGIES LTD. JCIT (2010) 32. IT H AS BEEN HELD THAT RBI DIRECTIONS, 1998 IN CASE OF NBFCS BAD DEB T NPA PROVISIONS FOR NPA THE RBI GUIDELINES ARE NOT BIN DING ON THEM BECAUSE THEY ARE NOT BANKS BUT ONE NON-BANKING FINA NCIAL CORPORATION. 12. PEERLESS GENERAL FINANCE & INVESTMENT CO. LTD. VS. RBI AIR 1992 (SC) 1033. IT HAS BEEN HELD THAT RESIDUARY NO N-BANKING COMPANIES, RESERVE BANK DIRECTIONS OF 1987 PROVIDIN G FOR MANNER IN WHICH DEPOSITS RECEIVED ARE TO BE INVESTED BY TH EM AND MANNER OF THE DISCOURSE IN THEIR BOOKS OF ACCOUNT. DIRECTION ARE FULLY COVERED U/S.45(K-3). 13. DCIT VS. BANQUE INDOSUEZ (2012) 19 ITR (TRIB) ( MUM). IT HAS BEEN HELD THAT PURCHASE OF SECURITIES BROKEN PE RIOD INTEREST PAID ON PURCHASE INCLUDED IN COST OF SECURITY BROKEN PER IOD INTEREST PAID ON PUBLIC SECTOR UNDERTAKING BONDS TO BE ALLOWED AS DEDUCTION AGAINST INTEREST RECEIVED IN RESPECT OF BROKEN PERI OD. 14. AMERICAN EXPRESS INTERNATIONAL BANKING CORP. CI T (2002) 258 ITR 601 (BOM.). IT HAS BEEN HELD THAT ONCE THE BROKEN PERIOD INTEREST RECEIVED BY ASSESSEE-BANK ON GOVERNMENT SE CURITIES WAS 16 CHARGES TO TAX AS BUSINESS INCOME U/S.28 DEDUCTION FOR PAYMENT MADE FOR BROKEN PERIOD INTEREST AT THE TIME OF PURCHASE OF THESE SECURITIES COULD NOT BE DENIED WHEN THE ASSESSEES METHOD OF A CCOUNTING DOES NOT RESULT IN LOSS OF TAX/REVENUE FOR THE DEPARTMEN T. 15. CIT VS. NEDUNGADI BANK LTD. (2003) 264 ITR 545 (KER) IT HAS BEEN HELD THAT THE SECURITIES HELD BY THE BANKS CONSTITUTE THEIR STOCK IN TRADE; AND CONSEQUENTLY THE LOSS CLAIMED B Y THE BANKS ON VALUATION OF SUCH SECURITIES AT THE CLOSE OF THE YE AR IS ALLOWABLE AS DEDUCTION IN COMPUTING THE TAXABLE PROFITS. 16. CIT VS. NAINITAL BANK LTD. (2009) 309 ITR 335 ( UTTARANCHAL). IT WAS HELD THAT ASSESSEE BEING A BANKING COMPANY, RBI GUIDELINES WERE BINDING ON IT AND, THEREFORE, VALUATION OF INV ESTMENTS ON THE BASIS OF RBI GUIDELINES WAS JUSTIFIED. 17. VIJAYA BANK LTD. VS. ACIT (1991) 187 ITR 541 (S C). IT HAS BEEN HELD THAT AMOUNT SPENT ON PURCHASE OF SECURITI ES BEING CAPITAL OUTLAY CANNOT BE SET-OFF AGAINST INTEREST INCOME FR OM THE SECURITIES. 8.1 REFERRING TO THE DECISION PUNE BENCH OF THE TRI BUNAL IN THE CASE OF DCIT VS. NASHIK MERCHANT COOPERATIVE BANK LTD VIDE ITA NO.1254/PN/2011 AND CO NO.96/PN/2011 ORDER DT. 29.0 4.2013 FOR A.Y. 2007-08 HE SUBMITTED THAT IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND REVENUE APPEAL HAS BEEN DISMISSED. 9. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE AO. 10. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND AN IDENTICAL IS SUE HAD COME UP BEFORE THE TRIBUNAL IN THE CASE OF NAHSIK MERCHANT COOPERA TIVE BANK LTD. (SUPRA). WE FIND THE TRIBUNAL HAS DISCUSSED THE ISSUE AND DI SMISSED THE GROUNDS RAISED BY THE REVENUE BY HOLDING AS UNDER : 17 4. AFTER GOING THROUGH RIVAL SUBMISSIONS AND MATE RIAL ON RECORD WE FIND THAT WITH THE ADVENT OF SECTION 80P(4) W.E.F. A.Y, 2007- 08 HAS CLOSED THE DOORS FOR COOPERATIVE BANKS FOR CLAIMING THE BENEFIT OF DEDUC TION U/S.80P(2)(A)(I) FROM THIS TOTAL INCOME. HOWEVER, THE COOPERATIVE SOCIETY SHOU LD NOW BE ENTITLED TO BE ASSESSED AS NORMAL BANKING COMPANY. THE CLAUSE (4) INSERTED IN SECTION 80P HAS TAKEN AWAY THE BENEFIT OF THE ERSTWHILE DEDUCTION A VAILABLE TO COOPERATIVE SOCIETY IN CARRYING ON BUSINESS OF BANKING OR PROVI DING CREDIT FACILITY TO ITS MEMBERS. THE NEW CLAUSE (4) INSERTED BY THE FINANCE ACT, 2006 W.E.F. 01-04-2007 READS AS UNDER : ' THE PROVISION OF THE SECTION WAS NOT IN RELATION TO ANY COOPERATIVE BANK OTHER THAN AGRICULTURAL CREDIT SOCIETY OR PRIMARY C OOPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK'. 5. THE INTENTION OF THE PROVISION MAY BE DERIVED M ORE PRECISELY FROM RELEVANT PARA 166 OF THE BUDGET SPEECH WHICH STATED THAT : 'CO-OPERATIVE BANKS, LIKE ANY OTHER BANK, ARE LENDING INSTITUTIONS AND S HOULD PAY TAX ON THEIR PROFITS, PRIMARY AGRICULTURAL CREDIT SOCIETIES (PACS) AND PR IMARY COOPERATIVE AGRICULTURAL AND RURAL DEVELOPMENT BANK (PCARDB) STAND ON A SPEC IAL FOOTING AND WILL CONTINUE TO BE EXEMPT UNDER SECTION 80P OF THE INCO ME TAX ACT. HOWEVER, I PROPOSE TO EXCLUDE ALL OTHER CO-OPERATIVE BANKS FRO M THE SCOPE OF THAT SECTION'. ACCORDINGLY, SECTION 80P IS TO BE AMENDED TO GIVE E FFECT TO THE ABOVE PROPOSAL. IT IS ALSO PROPOSED TO AMEND SECTION 2(24) TO PROVIDE THA T PROFITS AND GAINS OF BUSINESS OF BANKING (INCLUDING PROVIDING CREDIT FAC ILITIES) CARRIED ON BY A CO- OPERATIVE SOCIETY WITH ITS MEMBERS SHALL BE INCLUDE D IN THE DEFINITION OF 'INCOME' (WITH EFFECT FROM 1ST APRIL, 2007)'. 6. COOPERATIVE BANK UNLIKE OTHER COMMERCIAL BANKS ARE SUBJECTED TO DUAL CONTROL FROM BOTH RBI AS WELL AS FROM STATE COOPERA TIVE DEPARTMENT. THE ACCOUNTING TREATMENT FOR A COOPERATIVE BANK IS THER EFORE A RESULT OF GUIDELINES FROM BOTH THE CONTROLLING AUTHORITIES. ORDINARILY A DEDUCTION IS NOT AVAILABLE TO AN ASSESSEE UNLESS SPECIFICALLY PROVIDED UNDER THE ACT. THIS IS IRRESPECTIVE OF ACCOUNTING TREATMENT PROVIDED BY THE ASSESSEE IN IT S BOOKS OF ACCOUNTS. BUT AT THE SAME TIME IT WAS WELL SETTLED THAT DEDUCTION EX PRESSLY MENTIONED UNDER THE ACT ARE NOT EXHAUSTIVE AND PROFIT IS TO BE DERI VED ACCORDING TO ORDINARY COMMERCIAL PRINCIPLES. AS PER THE EXTANT RBI GUIDEL INES DATED 01-07-2009 THE INVESTMENT PORTFOLIO OF THE BANKS IS REQUIRED TO BE CLASSIFIED UNDER 3 CATEGORIES VIZ., HELD THE MATURITY HTM), HELD FOR TRADING (HFT ) AND AVAILABLE FOR SALE (AFS). THE VALUE OF EACH KIND OF INVESTMENT IS TO BE DONE IN THE FOLLOWING MANNER: SR.NO. CLASSIFICATION VALUATION NORMS OF INVESTMENT . 1. HTM THESE ARE CARRIED AT ACQUISITION COST UNLES S THE COST IS MORE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTISED OVER THE PERIOD REMAINING TO MATURITY. THE PREMIUM IS REQUIRED TO B E AMORTISED OVER THE PERIOD REMAINING TO MATURITY. THIS APART, ANY PERMANENT DI MINUTION IN VALUE SHALL FV SHALL GO ON TO REDUCE COST OF THE INVESTMENT. 18 2. AFS THE INDIVIDUAL SCRIPS IN THE AVAILABLE FOR SALE CATEGORY WILL BE MARKED TO MARKET AT QUARTERLY OR AT MORE FREQUENT I NTERVALS. THESE INVESTMENTS ARE CONSIDERED TO FORM STOCK-IN-TRADE O F A BANK AND THEREFORE ARE TO BE VALUED AT COST OR NRV, WHICHEVER IS LESS. FAL L IN VALUE BELOW COST, THEREFORE, IS TO BE PROVIDED IMMEDIATELY, HOWEVER A NY NET APPRECIATION IN VALUE IS IGNORED AND NOT RECOGNIZED AS INCOME ON THE BASIS O F CONSERVATISM. 3. HFT THE INDIVIDUAL SCRIPS IN THE HELD FOR TRAD ING CATEGORY WILL BE MARKED TO MARKET AT MONTHLY OR AT MORE FREQUENT INTERVALS AND PROVID ED FOR AS IN THE CASE OF THOSE IN THE AVAILABLE FOR SALE CATEGORY. 7. IN PARA (VII) OF THE CBDT INSTRUCTION NO.17 OF 2008 DATED 26.11.2008, ON 'ASSESSMENT OF BANK - CHECK LIST FOR DEDUCTION, STA TES AS UNDER: 'AS PER RBI GUIDELINES DATED I6TH OCTOBER, 2000, TH E 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). INVESTMENTS CLASSIFIED UNDER HTM CATEGO RY NEED NOT BE MARKED TO MARKET AND ARE CARRIED AT ACQUISITION COS T UNLESS THESE ARE MORE THAN THE FACE VALUE, IN WHICH CASE THE PREMIUM SHOULD BE AMORTISED OVER THE PERIOD REMAINING TO MATURITY. IN THE CASE OF HFT AND AFS SECURITIES FORMING STOCK IN TRADE OF THE BA NK, THE DEPRECIATION/ APPRECIATION IS TO BE AGGREGATED SCRIP WISE AND ONL Y NET DEPRECIATION, IF ANY, IS REQUIRED TO BE PROVIDED FOR IN THE ACCOUNTS . THE LATEST GUIDELINES OF THE RBI MAY BE REFERRED TO FOR ALLOWING ANY SUCH CLAIMS.' 8. THE ITAT, MUMBAI BENCH, IN THE CASE OF ACIT VS. THE BANK OF RAJASTHAN LTD. (2011) TIOL-35-ITAT-MUMBAI, HAS HELD THAT IN CASE OF BANKS , THE PREMIUM PAID IN EXCESS OF FACE VALUE OF INVESTMENTS CLASSIFIED UNDER HTM CATEGORY WHICH HAS BEEN AMORTISED OVER THE PERIOD TILL MATURITY IS ALLOWABLE AS REVENUE EX PENDITURE SINCE THE CLAIM IS AS PER RBI GUIDELINES AND CBDT ALSO HAS DIRECTED TO ALLOW SUCH PREMIUM. IT HAS ALSO BEEN HELD IN THE CASE OF CATHOLIC SYRIAN BANK LTD. VS. A CIT THAT AMORTIZATION ON PURCHASE OF GOVERNMENT SECURITIES WAS MADE AS PER PRUDENTIAL NO RMS OF THE RBI AND SAME WAS ALLOWABLE DEDUCTION. IN VIEW OF ABOVE, ASSESSEE WA S JUSTIFIED IN CONTENDING FOR AMORTIZATION OF PREMIUM PAID IN EXCESS OF FACE VALU E OF SECURITIES HELD TO MATURITY (HTM) CATEGORY OR PERIOD REMAINING TILL MATURITY WA S FOUND REASONABLE BY THE CIT(A). ACCORDINGLY ADDITION OF RS.17,91,659/- MADE BY THE ASSESSING OFFICER BY DISALLOWING AMOUNT TOWARDS AMORTIZATION OF GOVERNMENT SECURITIE S (HMT) WAS DELETED. THIS REASONED FACTUAL AND LEGAL FINDING OF THE CIT(A) NE EDS NO INTERFERENCE FROM OUR SIDE. WE UPHOLD THE SAME. 9. AS A RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 10.1 RESPECTFULLY FOLLOWING THE DECISION OF THE COO RDINATE BENCH OF THE TRIBUNAL AND IN ABSENCE OF ANY CONTRARY MATERIAL BR OUGHT TO OUR NOTICE 19 AGAINST THE ABOVE CITED DECISION WE FIND NO INFIRMI TY IN THE ORDER OF THE LD.CIT(A) DELETING THE ADDITION. ACCORDINGLY, THE ORDER OF THE LD.CIT(A) IS UPHELD AND THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. CO.NO.130/PN/2013 (A.Y. 2008-09) : 11. AFTER HEARING BOTH SIDES WE FIND THE GROUNDS RA ISED BY THE ASSESSEE IN THE CO ARE IN SUPPORT OF THE ORDER OF THE LD.CIT(A) . SINCE THE GROUND IN APPEAL FILED BY THE REVENUE ARE DISMISSED, THE GROU NDS IN THE CO OF THE ASSESSEE BECOME INFRUCTUOUS AND ARE ACCORDINGLY DIS MISSED. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE AS WELL AS THE CO FILED BY THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 5 TH OF AUGUST, 2013. SD/- SD/- (SHAILENDRA KUMAR YADAV ) ( R.K. PANDA ) JUDICIAL MEMBER ACCOUNTANT MEMBER SATISH PUNE, DATED : 5 TH AUGUST, 2013. COPY OF THE ORDER IS FORWARDED TO: 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-KOLHAPUR 4. THE CIT, KOLHAPUR 5. THE DR A BENCH, PUNE. 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY, INCOME TAX APPELLATE T RIBUNAL, PUNE.