Kerala High Court
Commissioner Of Income Tax vs The Nedungadi Bank Ltd. on 7 November, 2002
Equivalent citations: (2003)182CTR(KER)403, [2003]264ITR545(KER), 2003(2)KLT443
Author: G. Sivarajan
Bench: G. Sivarajan, K. Balakrishnan Nair
JUDGMENT G. Sivarajan, J.
1. All these Appeals arise under the Income Tax Act, 1961 (for short, the Act). The main question involved in all these cases is as to whether the Government securities held by the appellants as required under the provisions of the Banking Regulation Act, 1949 are stock-in-trade of the assessee Banks and consequently the assessee Banks are entitled to re-value the said securities at the close of the assessment year and claim depreciation in respect of the notional loss suffered by the assessee Banks in respect of the said securities in the assessment under the Act. The other questions in some of the Appeals are (1) regarding the validity of the assessments made under Section 147 of the Act and (2) regarding the entitlement for deduction of the interest paid for the broken period claimed by the assessee.
2. All these appeals are filed by the Revenue challenging the orders of the Income Tax Appellate Tribunal, Cochin Bench. The Nedungadi Bank Ltd., Calicut is the respondent assessee in I.T.A. Nos. 157/01, 17/02, 5/02, 39/02, 48/02, 32/02, 89/02, 95/02, 92/02 and 4/02. The Dhanalakshmi Bank Ltd. is the respondent assessee in I.T.A. Nos. 214/01, 62/02, 21/02, 33/02 and 14/02. The South Indian Bank Limited is the respondent assessee in I.T.A. Nos. 47/02, 13/02, 63/02, 51/02, 65/02, 38/02, 59/02 and 90/02. The Catholic Syrian Bank is the respondent/assessee in ITA No. 25/02. Various assessment years ranging from 1981-1982 upto 1992-93 are involved in these Appeals. It is not necessary to give all the details of the assessment years, for nothing turns on the relevant assessment years in deciding the issue involved.
3. Since the Income Tax Appellate Tribunal has passed a detailed order in the case of Nedungadi Bank Ltd. in I.T.A. Nos. 848, 841 and 842/94 for the assessment years 1982-83 and 1984-85, we are taking I.T.A. No. 157/01 arising from the said order as the leading case.
4. The assessment of the respondent Nedungadi Bank Limited, Calicut for the year 1982-83 was originally completed on 24.3.1985. Subsequently, the assessing authority issued a notice under Section148 of the Act on 22.3.1993 to assess escaped income in the light of the Supreme Court Judgment in Vijaya Bank Ltd. v. Commissioner of Income Tax (Addl.) (197 ITR 541). In the return filed by the assessee it claimed depreciation in the value of stock-in-trade computed as the difference between market value of the securities and their costs. The assessing authority has, however, taken the view that any depreciation in the value cannot be adjusted against the business income as an item of revenue expenditure as the securities purchased to meet the Statutory Liquidity Requirement (hereinafter referred to as SLR), was an investment by the Bank and not astock-in-trade intended for trading and disallowed the assessee's claim for depreciation. The assessee filed appeal against the said order before the Commissioner of Income Tax (Appeals) who relying on the provisions of Section 6 read with Section 5(b) and (c) of the Banking Regulation Act, held that the transaction of securities forms part of the banking business and Banks can purchase and sell securities without affecting the statutory SLR. The first appellate authority accordingly held that the securities purchased by the assessee constitute stock-in-trade of the Bank. The Department took up the matter in appeal before the tribunal and the tribunal dismissed the appeal confirming the order of the first appellate authority.
5. The Revenue contended before the tribunal that as per Section 24 of the Banking Regulation Act, every Scheduled Bank has to maintain a fixed SLR by depositing any gold or cash in any unencumbered approved Government securities, and that approved securities are risk-free investments which give rise to definite income at definite intervals and redeem the interest on a definite interval. It was specifically contended that the purchase of Government Securities by the Bank for the purpose of maintaining the SLR was only in the nature of a capital asset and the sale proceeds of the same after the maturity period can only be a capital receipt. It was also pointed out that the Bank cannot dispose of these securities unless and until the value exceeded the SLR and that the securities forming part of the SLR are not sock-in-trade, and therefore, are not capital asset of the Bank. Various other contentions are also urged before the tribunal to the effect that the securities purchased by the assessee bank for the purpose of complying with the requirement of maintaining the SLR cannot be treated as stock-in-trade of the assessee. It was also contended that the securities purchased for the purpose of fulfilment of the SLR and remain at the close of the year cannot be treated as unsold stock in trade for the purpose of revaluing the closing stock and for claiming depreciation on account of the notional loss. The appellant had also filed a very detailed argument note, Annexure E to substantiate the contention that the securities held by the assessee bank cannot be treated as the stock-in-trade of the business of the assessee, and that the same cannot be revalued and the difference between the cost price and the market price, if it is a loss, cannot be allowed as a deduction in the computation of the profits and gains of the business of the assessee. The assessee had also filed cross-objection challenging the orders of the assessing authority as confirmed by the first appellate authority regarding the validity of the reopening. It is contended before the tribunal that in view of the provisions of the proviso to Section 147 of the Act, since the assessee had disclosed all material facts necessary for completion of the assessment and since the assessing authority has reopened the assessment only on the basis of the decision in Vijaya Bank's case supra, the assessing authority is entitled to reopen the assessment and to make a re-assessment only within four years from the end of the assessment year concerned. The assessee accordingly contended that since the notice under Section 148 of the Act was issued for the assessment years 1982-83, 1983-84, 1984-85 beyond the four years specified in the proviso to Section 147 of the Act, the re-assessment for the three assessment years are barred by limitation. The tribunal had accepted the said contention and held that the re-assessments are barred by limitation. The contentions of the Department that the securities held by the assessee bank for complying with the requirements of maintaining the SLR as provided under the provisions of the Banking Regulation Act, 1949 cannot be treated as the stock-in-trade of the assessee, was rejected by the tribunal relying on the decisions of this Court and of the Supreme Court. The Revenue have filed appeal against the aforesaid findings of the tribunal. So far as the respondent assessees in the other cases namely South Indian Bank Ltd. and Dhanalakshmi Bank Ltd. are concerned, both the factual and legal situations are identical and the tribunal has rendered the same findings in those cases also on the main issue involved in these appeals.
6. Shri. P.K.R. Menon, Senior Central Government Standing Counsel appearing for the appellants has raised all the contentions which have been urged by the Departmental representatives before the Tribunal and contained in the Argument Note Annexure E. The learned senior counsel submitted that the assessee Bank is not at all engaged in the purchase and sale of securities and that the assessee Bank had invested money in Government securities only for the purpose of complying with the provisions of the Banking Regulation Act for maintaining the SLR, and that, the senior counsel further submits, the assessee had never engaged in the regular purchase and sale of securities during these years. The senior counsel further submits that even if the securities can be considered as stock-in-trade for the limited purpose, still it cannot be understood as unsold stock-in-trade remaining at the close of the assessment year for the purpose of revaluing the same based on the market value of the securities and for claiming depreciation on that basis. The senior counsel also took us to the various decisions of this Court and of the Supreme Court relied on by the assessee and accepted by the tribunal, and submitted that none of those cases related to the present situation of the assessee bank holding securities for the purpose of maintaining the SLR and also dealing in securities by way of purchase and sale frequently and, therefore, the tribunal was not justified in deciding the issue in favour of the assessee relying on those decisions.
7. On the question of reopening of the assessment and the limitation contained in the proviso to Section 147, the senior counsel submits that those limitations are applicable only in a case where the assessee had filed return as contemplated under the provisions of Section 139(1) of the Act. The contention of the senior counsel is that even in a case where the assessee had filed a return for the assessment year in question, unless the return is one under the Act which, according to him, a return filed in accordance with the provisions of the Act and the Rules, such a return cannot be treated as one under the Act and consequently the bar of limitation provided under the proviso to Section 147 is not applicable. The counsel drew inspiration for this submission from the decision of the Division Bench of this Court in the Judgment dated 17.11.1978 in I.T.R. No. 30/1977. Referring to the case of the assessee that since the assessee had furnished all the necessary details for the purpose of completion of the assessment and assessment was completed on the basis of the relevant facts, the re-assessment cannot be allowed to be made on a mere change of opinion, the senior counsel submitted that admittedly the assessing authority has not reopened the assessment on a mere change of opinion, but only on the basis of the decision of the Supreme Court in Vijaya Bank's case (mentioned supra) which will only mean that the assessments were reopened only on the basis of information. The senior counsel accordingly submitted that the reassessment made by the assessing authority is perfectly valid and legal. Regarding the entitlement for deduction of the interest paid for the broken period for the acquisition of the securities, the senior counsel submitted that the matter as it is covered by the decision of this Court in Commissioner of Income Tax v. South India Bank Ltd. (241 ITR 374) which the Department has not accepted.
8. Shri. P. Balachandran, learned counsel appearing for the respondent assessee - the Nedungadi Bank Limited, Calicut submitted that the question as to whether the securities held by the Banks for the purpose of complying with the requirements of the Banking Regulation Act to maintain the SLR is the stock-in-trade of the bank has to be considered in the background of the provisions of the said Act and that Section 19 of the said Act enables the assessee bank to deal in shares and securities. The counsel on the basis submitted that the securities held by the assessee are stock-in-trade of its business and, therefore, it is entitled to the deduction of the loss, if any, suffered in respect of the said shares on the revaluation made at the close of the year based on the prevailing market value. In support of this contention, the counsel relied on the decision of the Supreme Court in Malabar Co-operative Central Bank Ltd. v. Commissioner of Income Tax, Kerala ((101) ITR 87), the decision of this Court in Commissioner of Income Tax v. South Indian Bank Ltd. ((241) ITR 374), as affirmed by the Supreme Court in Commissioner of Income Tax v. South India Bank Ltd. ((249) ITR 304). (Of course, the Supreme Court left open the main issuein the said Judgment) and also the decision of the Supreme Court in UCO Bank's case (248) ITR 355). Counsel also relied on the decisions of the Karnataka High Court in ((174) ITR 616) and the decision of the Supreme Court in Commissioner of Income Tax v. Karnataka State Co-operative Apex Bank ((251) ITR 194) and Meshana District Central Co-operative Bank Ltd. v. Income Tax Officer ((251) ITR 522). The counsel relying on all these decisions, submits that the two appellate authorities have rightly held that the securities held by the assessee bank are the stock-in-trade of the assessee and, therefore, the assessee was perfectly justified in revaluing the closing stock and in claiming the loss suffered in such revaluation and claiming depreciation of such loss as computed. Learned counsel has also relied on the Circular issued by the Central Government which has also taken the view that the securities held by the assessee bank is stock-in-trade of the business of the bank. Regarding the validity of the re-assessments, learned counsel submits that the tribunal was perfectly justified in holding that in view of the proviso to Section 147 of the Act, the assessment is barred by limitation. Counsel also submitted that the claim regarding deduction of the interest paid for the broken period is covered by the decision of this Court in favour of the assessee.
9. Shri. P. Balakrishnan, learned counsel appearing for the respondent assessees, namely Dhanalakshmi Bank Ltd. and South Indian Bank Ltd. also supported the contention taken by Shr. P. Balachandran and also supplemented by making submissions based on the facts of the case in which he appears.
10. From the respective contentions taken by the Department and the assessees, the following questions arise for consideration:
"1) Whether the investments made by the assessee in the form of Government securities acquired for the purpose of complying with the requirements of the provisions of the Banking Regulation Act i.e. to maintain the SLR, can be treated as the trading asset/ stock-in-trade of the business of the assessee?
2) Whether the assessee is entitled to revalue the securities held by the Banks at the close of the year based on the market value of the securities prevailing, then and to claim depreciation on the basis of such notional loss in computing the profits and gains of the business of the assesses? In other words, the question is as to whether the assesste is entitled to claim depreciation on the basis of the notional loss suffered on account of the revaluation of the securities held by it at the close of the assessment year?
3) The further question that arises for consideration is as to whether the reopening of the assessment by issuing notice under Section 147 of the Act beyond a period of four years is legal and valid?
4) The last question is as to whether the interest paid for the broken period in the purchase of securities is an allowable deduction?
11. We will deal with the main question regarding the allowability of the claim of depreciation of the notional loss in respect of the securities held by the assessee at the close of the year. Let us first examine the relevant provisions of the Banking Regulation Act, 1949. Section 6 of the Banking Regulation Act, 1949 specifies the forms of business in which the Banking Companies may engage. It provides that in addition to the business of banking, a banking company may engage in any one or more of the following businesses, namely:
"6(a) : the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting; discounting, buying, selling;
collecting and dealing in bills of exchange, bundles, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds: the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiating of loans and advances; the receiving qf all kinds of bonds, scrips or valuables on deposits or for safe custody or otherwise; the providing of safe deposit vaults : the collecting and transmitting of money and securities;"
12. Section 24 of the said Act provides for maintenance of a percentage of assets. Sub-sections (1), (2A) and (4)(a) thereof without the explanation reads thus:
"24(1): After the expiry of two years from the commencement of this Act, every banking company shall maintain in India in case, gold or unencumbered approved securities, valued at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than 20 per cent of the total of its demand and time liabilities in India."
(2-A): (a): Notwithstanding anything contained in Sub-section (1), or in Sub-section (2), after the expiry of two years from the commencement of the Banking Companies (Amendment) Act, 1962 -
(i) a scheduled bank, in addition to the average daily balance which it is, or may be, required to maintain under Section 42 of the Reserve Bank of India Act, 1934, and
(ii) every other banking company, in addition to the cash reserve which it is required to maintain under Section 18, shall maintain in India,-
(A) in cash, or (B) in gold valued at a price not exceeding the current market price or in unencumbered approved securities valued at a price determined in accordance with such one or more of, or combination of, the following methods of valuation, namely, valuation with reference to cost price, market price, book value or face value, as may be specified by the Reserve Bank from time to time.
an amount which shall not, at the close of business on any day, be less than twenty-five per cent or such other percentage not exceeding forty per cent as the Reserve Bank may, from time to time, by notification in the Official Gazette, specify, of the total of its demand and time liabilities in India, as on the last Friday of the second preceding fortnight;"
13. The assessee company is also governed by the provisions of the Reserve Bank of India Act, 1934. At this stage, it is also necessary to refer to the Circular No. 599 dated 24.4.1991 issued by the Central Board of Direct Taxes (189 ITR (St) 126) which reads thus:
"Clarifications on the following issues have been sought by banks from the Central Board of Direct Taxes:
(i) Whether the securities held by the banks constitute their stock-in-trade or investment, and consequently whether the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing their taxable profits?
(ii) Whether deduction claimed in respect of interest paid for broken period on the purchase of securities should be allowed as a deduction from the taxable profits?
2. The matte: has been considered by the Board and it has been decided that the securities must be regarded as stock-in-trade by the banks. Therefore, the claim of loss, if debited in the books of account, would be given the same treatment as is normally given lo the stock-in-trade. As far as the second issue is concerned, both the interest payments and receipts must be regarded as revenue payments/receipts, and only the net interest on securities shall be brought to tax as business income,"
14. It is now settled by a series of decisions of this Court and of the Supreme Court that the securities held by the Banks constitute their stock-in-trade or investment and consequently the loss claimed by the Banks on the valuation of their securities should be allowed as a deduction in computing the taxable profits, This Court in Malabar Cooperative Central Bank Ltd, v. Commissioner of Income Tax, Kerala (101 ITR 87) was concerned with the question as to whether the assessee, a Co-operative Society engaged in banking business is entitled to exemption under Section 80P(2)(a)(i) of the Act in respect of the interest earned on securities held by it. In that context, this Court considered the question as to whether the securities held by the Co-operative Society can be treated as stock-in-trade of the business of the said Society. This Court noted that the assessee is a Co-operative Society carrying on banking business. It was further observed;
"A banking institution, as we understand it, as a part of its business activity will have to have ready resources to meet its liabilities the extent of which can never be foreseen. It must, therefore, have liquid resources which of course will normally be cash, and, secondly, easily realisable securities. This is in the interest of the banking institution and it is in the interest of the public that deal with the bank. Taking the latter aspect into consideration the legislature has stepped in and has made it obligatory that the banking institutions must maintain a certain percentage, one fifth of its assets, in the form of securities at any given day. This is one of the legislative restrictions, on the otherwise unlimited freedom of a banking institution to conduct its business in any manner it liked. Any prudent banking institution will so invest in securities even without legislative compulsion. If it did, holding of securities cannot be presumed to be not a part of its business, nor can it be said that the securities held are not part of its stock-in-trade. The fact that law now insists that the business must be run in a prudent manner by holding a specified part of its readily realisable resources in securities does not detract from the provision that in so holding securities the bank is carrying on its business and securities so held are stock-in-trade. Further, we do not think that the securities so held by a banking institution must be dealt with daily or often in order that those securities might become stock-in-trade. Supposing the institution kept a few lakhs of rupees either in its safe to meet emergent calls on the banks by the depositors or it maintained in the form of short-term deposits cash in other banking institutions, can it be said that it was not doing its business, that the cash was actually not in circulation, and, therefore, it did not form circulating capital and was, therefore, not part of its stock-in-trade? Certainly not;.................................................. It is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank. The moneys laid out, in the form of deposits as in the instant case, would not cease to be apart of the circulating capital of the appellant nor would they cease to form part of its banking business. The returns flowing from them would form part of its profits from its business. In a commercial sense the directors of the company owe it to the bank to make investments which earn them interest instead of letting moneys lie idle. It cannot be said that the funds of the bank which were not lent to borrowers but were laid out in the form of deposits in another bank to add to the profit instead of lying idle necessarily ceased to be a part of the stock-in-trade of the bank, or that the interest arising therefrom did not form part of its business profits.......... The question whether the securities held by the assessee's co-operative society-bank is stock-in-trade of not is an aspect of the question that has been referred to us and we do not think we are precluded from considering this aspect. What we have said is sufficient to come to the conclusion that this aspect has to be decided in favour of the assessee. If money held in short-term deposit for the same purpose as the securities held by the assessee is part of its normal banking business and the income earned from that money is income from business as has been held by the Supreme Court in Bihar State Cooperative Bank Ltd. v. Commissioner of Income Tax, we can have no hesitation whatever in saying that the income earned by the assessee from the securities held by the assessee in the form of interest is also income, from the business of the assessee-bank."
For holding so, the Division Bench relied on the decision of the Supreme Court in Bihar State Co-operative Bank Ltd. v. Commissioner of Income Tax ((1960) 39 ITR 114 at Page 122), the relevant portion of which is extracted below:
"....... Therefore, where out of moneys in deposit with a bank a portion is put away or laid out in securities or in deposits with another banker, two objects are served: (1) the moneys which are not immediately required do not remain idle but earn interest; and (2) if and when money is required to meet any demand, the investment, i.e. the deposits as well as the securities, provide a source from which these requirements can easily be met. Thus, the credit of the bank remains unimpaired and its moneys continue to earn interest."
15. The Division Bench has clearly noted that the question whether the securities held by the assessee Co-operative Bank is stock-in-trade or not, is an aspect of the question referred to the Court and, therefore, they are not precluded from considering the said aspect. The Division Bench has ultimately held that the securities held by the Co-operative Society is the stock-in-trade of the business of the said Society. On the said findings, the Division Bench held that the interest received on the said securities is the business income and, therefore, it is entitled to exemption under the provisions of Section 80P(2)(a)(i) of the Act.
16. A Bench of this Court in Commissioner of Income Tax v. South Indian Bank Ltd. ((249) ITR 304) had occasion to consider this question, though in the context of challenge against the order of rectification of the assessment under Section 154 of the Act. The said case was originally considered by a Division Bench consisting of Justice P.A. Mohammed and Justice P. Shanmugam. When the Bench differed on the opinion, the matter was referred to a third Judge (one of us Sivarajan, J.) who agreed with the view expressed by Justice P.A. Mohammed. Mohammed. J. in his Judgment has considered this question with reference to Circular No. 599 dated 24th April, 1991 arid on the basis of the decision in Malabar Co-operative Central Bank's case (mentioned supra) besides other decisions of the Supreme Court and ultimately held that the securities held by the assessee bank constitute the stock-in-trade of the business of the assessee. Si varajan, J. in the concurring Judgment has also considered this question with reference to the Circular issued by the Central Board of Direct Taxes as also the decision in Malabar Co-operative Central Bank Ltd. (mentioned above), Commissioner of Income Tax v. V. Cocanada Radhaswami Bank Ltd. ((1965) 57 ITR 306) and Brooke Bond & Co. Ltd. v. Commissioner of Income Tax, West Bengal ((1986) 162 ITR 373) and held that the Government securities held by the assessee Bank constitute the stock-in-trade of the assessee.
17. The Department has taken up the decision in South Indian Bank's case before the Supreme Court and the Supreme Court in Commissioner of Income Tax v. South Indian Bank Ltd. ((2001) (249 ITR 304) affirmed the judgment. However, it was made clear in the said Judgment that they are not making any opinion regarding the principal issue. That is the issue under consideration in this case. The very same question came up for consideration before the Supreme Court in United Commercial Bank v. Commissioner of Income Tax ((1999) 240 ITR 355) in the context of valuation of stock and the claim for depreciation of the loss suffered on account of the valuation. In that case, the assessee bank claimed that the notional loss in the investment to the extent of Rs. 7,45,35,029/- by working out a difference between the book value of shares as shown in the final accounts and their market price as on the last date of the accounts is an admissible deduction from the book profits of the assessee. The High Court held that the assessee is not entitled to the said deduction by holding that the stock valuation of the shares shown in the Bank's final accounts could not be permitted to be revalued at the market value for income tax purposes only. The Supreme Court in that case noted the provisions of Section 29 of the Banking Regulation Act, 1949 which, inter alia, provides that at the expiration of each calendar year, every Banking Company incorporated in India shall prepare a Balance Sheet and Profit & Loss Account with 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 and assets, item No. 4 provides for mentioning the investments. The Court also noted the provisions of Section 53 of the said Act under which the Central Government on the recommendation of the Reserve Bank of India had issued a notification. Note (f) appended to Form "A" in the Third Schedule to the said Act shall not apply to the Bank in respect of its Balance Sheet as on 31 st December, 1981. On the basis of the said Notification, the assessee Bank did not mention the market value of the investments under the sub-heads "Separately" within the brackets, in the Balance Sheet. It was also the case of the assessee in that case that the requirement of disclosing the value of closing stock of shares and securities at costs and mentioning the market price is lower (now it is dispensed with by a Circular dated 28.6.1992 issued by the Reserve Bank of India) and by the said Circular standard investments in securities other than approved securities are to be classified under current category or at costs whichever is less and its depreciation is to be provided for the short fall, if any. The Supreme Court then observed that the question would be when such a Bank has submitted its statutory return of income, whether it can disclose it on the basis of the market value of the securities and shares. The Supreme Court noted the following undisputed facts:
"(a) the appellant is a nationalised bank and, therefore, is governed by the Banking Regulation Act, 1949.
(b) the appellant follows the mercantile system of accounting both for book-keeping purpose as well as for tax purposes.
(c) the appellant consistently and for over 30 years prior to the assessment year in dispute (1982-83) has been valuing its stock-in-trade (investments) "at cost" in the balance-sheet whereas for the same period of time the appellant has been valuing the very same investment "at cost or market value whichever is lower" for income tax purposes."
Thereafter, the Court observed that in the background of the aforesaid facts it is an established rule of commercial practice and accountancy that closing stock can be valued at cost or market price, whichever is lower. In support of the said view, the Supreme Court also referred to the decision in Chainrup Sampatram v. CIT ((1953) 24 ITR 481) which contains the principles regarding the valuation of the closing stock. Ultimately, the Supreme Court held thus:
"Hence, for the purpose of income tax whichever method is adopted by the assessee a true picture of the profits and gains, that is to say, the real income is to be disclosed. For determining the real income, the entries in a balance-sheet require to be maintained in the statutory form, may not be decisive or conclusive. In such cases, it is open to the Income-tax Officer as well as the assessee to point out the true and proper income while submitting the income tax return. In Kedarnath Jute Mfg. Co. Ltd. v. CIT((1971) 82 ITR 363), this Court has negatived the contention that (page 367):
"........ if an assessee under some misapprehension or mistake fails to make an entry into the books of account and although, under the law, a deduction must be allowed by the Income Tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction."
The Court held that whether the assessee is entitled to the particular deduction or not will depend upon the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. In the present case, the question is slightly different. For reasons, the Central Government, in exercise of the powers conferred by Section 53 of the Banking Regulation Act and on the recommendation of the Reserve Bank of India, permitted the assessee not to disclose the market value of its investment in the balance-sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on the mercantile system, he was entitled to show his real income by taking into account the market value of such investments in arriving at the real taxable income. On that basis, therefore, the Assessing Officer has taxed the assessee.
It was further held as follows :
........ In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance-sheet, and for the income tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investment) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case."
18. Again, the question came up for consideration before the Supreme Court in Commissioner of Income Tax v. Karnataka State Co-operative Apex Bank ((2001) 251 ITR 194). There also, the question was as to whether interest arising from investment in compliance with the statutory provisions to enable a Co-operative Society to carry on banking business is exempted under Section 80P(2)(a)(i) of the Act. It was held that the placement of such funds being imperative for the purpose of carrying banking business, the income therefrom would be income from the assessee's business. The question came up before a Bench of three Judges since a doubt was arisen as to whether the decision of the Supreme Court in Bangalore District Co-operative Central Bank's case ((1998) 233 ITR 282) has laid down any principle or as to whether the said decision was rendered on its own facts. The Supreme Court held that the observations made by the Supreme Court on the decision in Madhya Pradesh Co-operative Bank's case ((1996) 218 ITR 438) was clearly a reasoned decision. This is what the Supreme Court has observed with reference to the decision rendered in the above decision:
"The question is whether we agree with the reasoning in Madhya Pradesh Co-operative Bank Ltd. ((1996) 218 ITR 438 (SC)). There is no doubt, and it is not disputed, that the assessee co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by reason of Section 80P(2)9a)(i), to pay income tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of Madhya Pradesh Co-operative Bank Ltd. ((1996) 218 ITR 438(SC)) that only income derived from circulating or working capital would fall within Section 80P(2)9a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital."
19. This decision is followed by the same Bench of the Supreme Court in Maharashtra District Central Co-operative Bank v. Income Tax Officer ((251) ITR 522). In the decision in Commissioner of Income Tax v. Corporation Bank Ltd. ((1998) 174 ITR 616) the Karnataka High Court had also considered this question as to whether the Appellate Tribunal was justified in approving the system of valuation of stock-in-trade adopted by the assessee for the purpose of assessment. Of course, it was noted in the said decision that the fact that the securities form part of stock-in-trade of the assessee bank, and that it was a trading loss, was not disputed at any point of time and, therefore, the only question that remains for consideration is whether the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, notwithstanding the fact that the assessee had failed to debit it in its books of accounts. The Karnataka High Court relying on the decision of the Supreme Court in Kedarnath Jute Mfg. Co. Ltd. v. CIT ((1971) 82 ITR 363 (SC)) and the decision of this Court in Bank of Cochin Ltd. v. CIT((1974) 94 ITR 93 (Ker.)) and other decisions held that the tribunal was justified in approving the method of valuation adopted by the assessee for the valuation of the relevant assessment year.
20. Here, it must be noted that the assessing authority had in fact reopened the assessment on the basis of the decision of the Supreme Court in Vijaya Bank Ltd. v, Commissioner of Income Tax (Addl.) ((1991) 187 ITR 541). In that case, the question which arose for consideration was as to whether a sum of Rs. 58,568/- representing interest accrued on securities taken by the assessee bank from the Jayalakshmi Bank Ltd. and another sum of Rs. 11,630/- representing interest accrued upto the date of purchase in the case of securities pruchased by the assessee-bank from the open market are admissible as deduction under the provisions of Sections 19, 20 and 37 of the Act. In that context, the Supreme Court relied on a decision of the Court of Appeal CIT v. Pitcher ((1949) 31 TC 314, 332 (CA)) where it was observed that outlay on purchase of an income bearing asset is in the nature of capital asset. The Supreme Court observed in Vijaya Bank's case that the price paid for the securities was determined with reference to their actual value as well as the interest which had accrued on them till date of purchase, that whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of a capital outlay and no part of it can be set off as expenditure against income accruing on those securities. Here, it must be noted that the Supreme Court has not at all considered the question with regard to the character of securities from which interest income is earned. No contention is seen taken by any of the parties that the securities involved in the said case represented stock-in-trade. Hence the decision rendered in the said case cannot be taken as an authority for the position that the securities held by the assessee in the present case in compliance with the provisions of the Banking Regulation Act is to be held as a capital investment. As we have already noted, this Court and the Supreme Court have clearly taken the view that the Government securities acquired by the assessee Bank in compliance with the provisions of the Banking Regulation Act has to be treated as stock-in-trade of the business of the Bank. In fact, the Central Board of Direct Taxes in the Circular extracted above has taken the very same view which, according to us, is consistent with the view taken in the decisions of the Court and of the Supreme Court discussed above. Here, it must be noted that till the decision of the Supreme Court in Vijaya Bank's case (187 ITR 541) the assessing authority has been taking the consistent view that the assessees are entitled to depreciation on account of the notional loss suffered by them on revaluation of the securities. In fact, in all the reassessment cases, the assessing authority had originally granted deduction by way of depreciation of the notional loss incurred by the assessee and the only reason for denying the said relief to the assessee, is the decision of the Supreme Court in Vijaya Bank's case. Vijaya Bank's case, as we have already noted, does not lay down any clear proposition that the securities held by a bank cannot be considered as stock-in-trade of the business of the Bank.
21. For all these reasons, we are of the view that the Income Tax Appellate Tribunal has rightly held that the securities held by the assessee bank in all these cases are the stock-in-trade of the business of the assessee banks and the notional loss suffered on account of the revaluation of the said securities at the close of the year is an allowable deduction in the computation of the profits of the appellant. This disposes of the first two questions mentioned in para 10 above.
22. The next question for consideration is as to whether the re-assessment made by the assessing authority beyond the period of four years is barred by limitation. Section 147 of the Act as it stood during the assessment years 1982-83, 1983-84 and 1984-85 provides that if the Assessing Officer has reason to believe that the assessment made for the assessment year was improper, he may subject to the provisions of Sections148 to 153 assess or re-assess such income and also any other income chargeable to tax which was estimated in the course of the assessment proceedings under the Section or re-compute the loss or any other relevant account as the case may be for the relevant year concerned. However, the proviso to the said Section states that where an assessment under Sub-section (3) of Section 143 or under this Section has been made for the relevant assessment year, no action shall be taken under this Section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped the assessment for such assessment year by reason of failure on the part of the assessee to make return under Section 139 or in response to a notice issued under Section 139 or in response to a notice under Sub-section (1) of Section 142 or under Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. As already noted, the assessment years concerned are 1982-83, 1983-84 and 1984-85. The four years' period provided in the proviso expired on 31.3.1987, 31.3.1988 and 31.3.1989 respectively. In the instant case, admittedly, the notice under Section 148 were issued beyond the period of four years. Therefore, the only question for consideration is as to whether the re-assessment happened to be made on account of the fact that the assessee has failed to make a return under Section 139 or in response to a notice issued under Sub-section (1) or Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. It must be noted that the assessing authority has no case that the assessee has not fully and truly disclosed all material facts necessary for his assessment for that assessment year. This is evident from the fact that the reason for reopening the assessment is the decision of the Supreme Court in Vijaya Bank's case which is clearly stated in the notice and extracted in paragraph 26 of the order of the tribunal. Therefore, it cannot be said that the re-assessment happened to be made due to the failure on the part of the assessee to disclose truly all the material facts for the assessment year. In the instant case, admittedly, the assessee had filed return for all the years concerned. The contention of the senior counsel appearing for the Revenue, as already noticed, is that the return filed by the assessee cannot be treated as one under the Act. The senior counsel has relied on a decision of a Division Bench of this Court in ITR No. 30 of 1977. The Division Bench observed that the first limb of Section 147(a) of the Act viz. the omission or failure on the part of the assessee to make a return under Section 139 of the Act, the mere filing of a return would not satisfy the requirement of the provision and that the same should be one required to be filed under Section 139 of the Act i.e. in the prescribed form, verified in the prescribed manner, and setting forth the prescribed particulars. It is not clear as to how this decision will help the Department in the present case.
23. We are unable to appreciate as to how the said decision has got any application to the facts of this case. As we have already noted, there is no case for the Department that the assessee has not filed any return or that the return filed is not in accordance with the provisions of the Act and the Rules. In fact the assessee had furnished all the required details in the return and had only claimed depreciation of the loss suffered on account of the re-valuation of the securities. This was a permissible deduction and was being allowed for all the years till the decision of the Supreme Court in Vijaya Bank's case. This Court as early as in October, 1973 has held that the securities held by a Banking Company is the stock-in-trade of the business of the assessee and, therefore, the income derived therefrom must be treated as business income. In such circumstances, we are unable to agree with the contention of the learned senior counsel that the return filed by the assessee for the years in question was not one under the Act. There is no merit in the said contention also.
24. The last question arising for consideration jn some of these appeals is as to whether the tribunal was justified in allowing the claim for deduction of the interest paid for the broken period for the acquisition of the securities till the date of such acquisition. In fact, the said question is squarely covered by the decision of this Court in South Indian Bank Ltd. 's case (241 ITR 374). This Court in the above decision held that the interest paid for the broken period would constitute allowable outgo in the hands of the assessee and is an admissible deduction in the computation of total income of the Bank under the head profits and gains of business or profession. In view of the said decision, we are in full agreement with the order of the tribunal allowing the said claim. Though we have dealt with the issues in relation to Nedungadi Bank's case, the facts of the other Appeals also being the same, the decision taken as above will apply to the other appeals also equally. No other question arises for consideration in these appeals. We accordingly dismiss all these appeals. In the circumstances, no order as to costs.