Income Tax Appellate Tribunal - Ahmedabad
Mehsana Urban Co. Op. Bank Ltd., Mehsana vs Department Of Income Tax on 14 October, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD ''C'' BENCH - AHMEDABAD
Before S/Shri Rajpal Yadav, JM, & Manish Borad, AM.
ITA No.2703/Ahd/2011
Asst. Year: 2008-09
Asstt. CIT, Mehsana Circle, Vs The Mehsana Urban Co-op.
Mehsana. Bank Ltd., Malgodown Road, Nr.
Bharat Nagar, Mehsana.
(Appellant) (Respondent)
PA No. AAAT 2500R
Appellant by Shri D. C. Mishra, Sr. DR
Respondent by Shri S. N. Soparkar, AR
Date of hearing: 26/8/2015
Date of pronouncement: 14/10/2015
ORDER
PER Manish Borad, Accountant Member.
This appeal of the Revenue is filed against the order of CIT(A), Gandhinagar, Ahmedabad dated 1/8/2011. The assessment order was passed by DCIT, Mehsana Circle, Mehsana, under section 143(3) of the I.T. Act, 1961 (herein after referred to as the Act) for A.Y. 2008-09. Following effective ground has been raised in this appeal by the Revenue:-
1. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.3,38,79,600/- made on account of business loss of security including premium written off treating it as a long term capital loss.ITA No.2703/Ahd/2011 2
Asst. Year 2008-09
2. On the facts and circumstances of the case the ld. CIT(A) ought to have upheld the order of the Assessing Officer.
3. It is therefore prayed that the order of the learned CIT(A) may be set aside and that of the AO be restored to the above extent.
2. Briefly stated the facts of the case are that the return of income for AY 2008-09 was filed on 29.9.2009 declaring total income at Rs.11,39,98,430/-. The case was selected for scrutiny on CASS and assessment proceedings was initiated so as to complete assessment under section 143(3) of the Act. The AO completed the assessment by making addition including addition by way of disallowing claim of assessee of loss on sale of securities by treating it as long term capital loss instead of business loss at Rs.3,39,79,600.
3. During the course of assessment proceedings on verification of profit and loss account it was observed by the AO that assessee has debited Rs.3,39,79,600/- under the head 'loss in government securities'. On being asked by AO to the assessee, as to why the loss in 'government securities' debited to the profit and loss account may not be disallowed treating the same as loss as capital gain/loss, in response assessee furnished details and proofs regarding purchase cost and sale price of various government securities/bonds and submitted merely as under :-
"1. Our is a co-operative bank, doing the business of banking, registered under Gujarat Co-op. Society Act & controlled & governed by Reserve Bank of India & provision of Banking Regulation Act as applicable to co-operative bank are applicable to our bank also.ITA No.2703/Ahd/2011 3
Asst. Year 2008-09
2. On verification of detailed furnished of government securities particularly loss on sales of securities, your goodself has show caused to disallow of Rs.33979600 being capital loss & not business loss debited in profit & loss a/c please.
3. In this respect we submit the summary of details of Rs.3,39,79,600/- as follow & the details are attached herewith & state you that the said loss is banking business loss incurred during the course of banking business carried on by us & claimed as per Income Tax Act 1961 please.
Purchase price of securities 26,25,35,800
Less sales price 22,91,21,400
Loss (-) 3,34,14,400
Less profit on sales of securities (+) 5,35,800
Loss (-) 3,28,78,600
Add purchased premium written off 11,01,000
3,39,79,600
Rs.32878600/- has been written off as loss made on sales &
Rs.1101000/- the purchase premium written off on the basis of RBI guideline to show fair profit of the bank.
4. According to the provisions of section 6 rws 5(b) & (c) of the Banking Regulation Act held that the transaction of securities forms part of the banking business & bank can purchase and sell securities without affection the statutory SLR.ITA No.2703/Ahd/2011 4
Asst. Year 2008-09 Section 24 of the Banking Regulation Act provides that every co- operative bank shall maintain in cash or unencumbered approved securities an amount which shall not, at the close of business on any day, be less than 25% or such other percentage not exceeding 40% of the total of its Demand & Time Liabilities in India or as the Reserve Bank may specify from time to time.
Section 29 of the Banking Regulation Act, 1949 provides that at the expiration of each year every banking company incorporated in India shall prepare a balance sheet & profit & loss a/c 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 & assets, item no.4 provides for mentioning the investment.. Preparation of the balance sheet in accordance with the statutory provision would not disentitle the assessee in submitting the consistently & regularly.
5. Further, it is necessary to refer to the relevant portion of Circular No.599 dated 24.4.1991 issued by the CBDT in this respect which reads as under (A copy of circular is enclosed -Annexure -A)
1. Clarification on the following issue have been sought by banks from the CBDT
(i) Whether the securities held by the banks constitute their stock in trade or investment & 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.ITA No.2703/Ahd/2011 5
Asst. Year 2008-09
(ii) Whether deduction claimed in respect of interest paid for broker period on the purchase of securities should be allowed as deduction from the taxable profits.
1. The matter has been considered by the Board & it has been decided that the securities must be regarded as stock in trade by bank. Therefore, the claim of loss, if debited in the books of a/c would be given the same treatment as is normally given to the stock in trade."
4. However, the AO rejected the claim of assessee mainly on the basis of his examination and application of certain tests which were analysed in the case of Pari Mangaldas Girdhardas vs. CIT (1997) CTR 647 (Guj) - as under -
Test Facts of the case (a) Whether the acquisition was The intention of acquisition was
with the intention of dealing not to deal with them but to keep or with a view to finding an as investment.
investment ?
(b) Why, how and for what Sale was effected subsequently purpose the sale was not to earn business profit from effected subsequently ? fluctuation in price
(c) How the assessee dealt with In the books of accounts in during the time the asset balance sheet there are shown was with the assessee ? as ínvestment'
(d) How the assessee-itself has In the past, the entire income of returned the income from the the bank was treated exempt u/s activities ? 80P(2)(a)(i) of IT Act. However, the assessee has shown the Govt. Securities under the head ínvestment'
(e) Whether the memorandum Memorandum of Association of association authorizes authorizes the bank to transact in such an activity ? Govt. securities.
ITA No.2703/Ahd/2011 6
Asst. Year 2008-09
(f) Whether frequency, The assessee does not enage
continuity and regularity of regularly, frequently and
transactions of purchase and continuously in purchase/sale of
sale maintained? Govt. securities. The
volume/magnitude of transaction
is also not such to qualify it to be
a regular business activity in the
nature of business.
4. On application of the aforesaid tests to the facts of the case AO concluded that it is now apparent that only possible inference which can be drawn is that the loss sustained by the assessee from sale of Govt. securities does not qualify to be considered as "business loss"
but in fact was "capital loss." Therefore the claim of the assessee treating the loss on sale of Govt. securities as "business loss" is hereby rejected and the loss of Rs.3,39,79,600/- is held as "long term capital loss" which is allowed to be carry forward. It is also pertinent to mention that in the case of Mehsana District Central Co-op. Bank, Mehsana has disallowed by capital loss on long term for AY 2008-
09."
5. Aggrieved, assessee went in appeal before CIT(A) who deleted the addition made by the AO on the basis of guidelines issued by RBI as well as Circular No.665 of the CBDT dated 5.10.1993 and accordingly gave following finding :-
"3.4 After considering the above facts, I have carefully considered the reasoning of the AO justifying the disallowance made by him and the submissions made by the appellant in this regard and the facts of the case including the accounting in earlier year and subsequent years. The following material observations are made on the issue :-ITA No.2703/Ahd/2011 7
Asst. Year 2008-09
1) As per section 6 read with section 5(b) and (c) Banking Regulation Act and as per the guideline issued by the Reserve Bank of India, Investment activities is the normal banking activity and should be treated as banking stock in trade. The format of the balance sheet has been prescribed by the legislature and bank has to report their financial result in that format only. As per this format the investment in Non-SLR Securities though treated as banking assets (stock in trade) has to be shown in the balance sheet as investment.
2) The above position has also been clarified by Circular No.665 of the CBDT dated 5.10.1993.
"The question whether a particular item of investment in securities constitutes stock in trade or a capital asset is a question of fact. In fact, the banks are generally governed by the instructions of the Reserve Bank of India from time to time with respect to the classification of assets and also the accounting standards for investments. The Board has therefore, decided that the Assessing Officer should determine on the facts and circumstances of such case as to whether any particular security constitutes stock in trade as investment taking into account the guidelines issued by the Reserve Bank of India in this regard from time to time."
CBDT has further issued instruction for the assessment of banks vide its instruction no.17/2008 dated 26.11.2008 (F.No.228/3/2008 -ITA- III). Point no.VII of the said instruction -
"As per RBI guidelines dated 16th October, 2000, the investment portfolio of the banks is required to be classified under three categories viz., Held to Maturity (HTM), Held for Trading) (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortized over the period remaining to maturity. In the case of HFT and ITA No.2703/Ahd/2011 8 Asst. Year 2008-09 AFS securities forming stock in trade of the bank, the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims".
In such circumstances, where the same method of accounting is followed and allowed from year to year, such claim has been held to be allowable by the different courts. The Hon'ble Mumbai High Court in the case of CIT vs. Bank of Baroda (2003) 262 ITR 334 has held that "Depreciation in value of investment held by bank was allowable as deduction more so when the loss was debited to P & L a/c which was reflected as provision for liability in the balance sheet and the share and securities were valued at cost on the asset side".
Same proposition has been upheld by Kerala High Court in case of CIT vs. Nadungadi Bank Ltd. (2003) 130 TAXMAN 93 (Ker).
Therefore, even the depreciation in value if had been claimed from year to year, was allowable. Now this allowance of depreciation, which is a provision for loss on the basis of market value; is in effect the application of well known and well accepted principle of valuation of closing stock at 'cost or market price whichever is lower'. This method in fact allows for notional loss. Now, this allowance of depreciation held allowable by the board circular and the different decisions of the High Courts, have been made and could have been made only on the basis of these securities being treated, as stock in trade. The assessee has been following consistent method of in ITA No.2703/Ahd/2011 9 Asst. Year 2008-09 effect claiming no depreciation (writing back any provision of depreciation in P & L account (IDR) for computation of total income) and thus valuing closing stock at cost only for showing the income in its returns. In nut shell, as discussed above, the bank has claimed loss in respect of securities which it had always meant to hold as trading assets and shown as AFS as per RBI's guidelines and classifications. Just because the banks have to keep them for longer times because of the nature of their business, it would not change the nature of the asset. Further as held by Hon'ble Mumbai High Court in the case of CIT vs. Bank of Baroda (2003) 262 ITR 334 the mere fact that the banks are required as per RBI's guidelines to show these in the balance sheet as investment would not affect the nature of the asset. The banks by the very nature of the business may have to park surplus trading funds in securities and although intended to be trading assets may have to keep them for longer periods if funds are not required. In fact the assessee has purchased and sold some securities of AFS category in relatively shorter periods also. In fact during the year the assessee has earned profit of Rs.8,77,000/- on GOI securities purchased in September, 2007 during the year and sold within very short period of few months. The loss also consists of some securities purchased in January, 2007 and sold in May, 2007 itself. So the AO is not correct to say that securities were meant to be held for very long periods and therefore were in nature of capital investments. This has to be seen in contradiction and contrast with securities of HTM category which are purchased and held for the purpose of investment only. The circular and instruction of the CBDT being squarely applicable, leaves no doubt on the allowability of the ITA No.2703/Ahd/2011 10 Asst. Year 2008-09 assessee's claim. The ground of appeal is allowed to the extent that the loss is to be taken as business loss."
6. Aggrieved, the Revenue is now in appeal before the Tribunal. The ld. DR relied on the order of AO.
7. On the other hand, the ld. AR relied on the order of CIT(A) and also referred to the written submissions made before the CIT(A), the relevant portion of which is reproduced below :
"The purchase and sales of securities are banking business & day to day activities of the bank. It is not investments. The main provision of section 6 r.w.s. 5(b) & section 24 & section 29 & banking regulation Act 1949 are applicable to our bank.
As per RBI guideline and circulars bank hs to maintain liquid assets which at close of the business on any day should not be less than 25% of its demand & time liabilities in addition to cash reserve called SLP.
The said investment to be shown under the following heads under the main head "Stock in Trade"
1. "Held to maturity (HTM)
2. Available for sales (AFS)
3. Held for trading (HFT) Above classification can be rectify as per RBI guideline also.
ITA No.2703/Ahd/2011 11Asst. Year 2008-09 During the year under consideration we have sold the securities held for "available for sales".
Regarding valuation of securities u/s 145A we state you that valuation of stock be valued at
1. Cost price
2. Sales price
3. Cost or market which ever is lower 21 While in case of Karur Visya Bank reported in 273 ITR 510 held that -
"A tax payer is free to employ for purpose of his trade, his own method of keeping accounts & for that purpose to value stock in trade at cost or market price & held that "securities in question held by the assessee bank being trading assets & not investment loss on sales thereof is a revenue loss. The above decision given by Madras High Court on the basis of decision given in the case of United Commercial Bank vs. CIT reported in 240 ITR 355 (SC) In our case the AFS securities have been shown as stock in trade & valued at cost price at consistent basis & as such we have declared real loss of sales of securities. ii.....Loss must have direct & proximate nexus to business operation & it should be during the course of business.ITA No.2703/Ahd/2011 12
Asst. Year 2008-09 If there is direct & proximate nexus between business operation & if loss or it is incidental to it then loss is deductible as business loss.
A. Ramchandra Shivnarayan vs. CIT 1978 111 ITR 263 (SC) B. U/s 28(1) loss of stock in trade is a admissible deduction in computing profit CIT vs. Nainital Bank Ltd.(1965) 55 ITR 707 (SC).
In our case the purchase & sales of Government securities, are our banking business in banking industries & "securities" shown as stock in trade. The loss incurred on sales of such securities business loss & claimed as such please.
3. The method of accounting cannot be rejected on the ground that the assessee should have followed another method.
(i) There shall be some good reason for rejecting the system of accounting followed by the assessee. The accounts cannot be rejected at the whims of the department. In investment Ltd. vs. CIT (1970) 77 ITR 533 (SC) it was held that a method of accounting followed by the assessee cannot be rejected by the department on the notion that it would have been better had to assessee followed a different method of accounting.
(ii) In our case we have valued the securities at cost price & said is consistently followed as held in the case.
1. Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC)
2. Balapur Vibhag Jangal Kamdar Mandali Ltd. vs. CIT (1982) 135 ITR 91 (Guj) ITA No.2703/Ahd/2011 13 Asst. Year 2008-09
3. CIT vs. Advance Construction Co. Ltd. (2005) 275 ITR 30 (Guj)
4. CIT vs. Kamalsan (2004) 188 CTR 145 (Mad)
5. Asst. CIT vs. Shree Krishna Salk Industries (1998) 60 TTJ (Ahm Trib) 164 Further submissions to our facts dated 11.12.2010 Our is a schedule co-op bank, governed, controller & administered by RBI & Gujarat State Co-op. Societies Act. During the business of banking under license issued by RBI since last 25 years.
During the year under consideration we have sold the government securities etc. & made net loss of Rs.3,28,78,600/- after adjustment of profit of Rs.5,35,800/- & premium on purchase of securities of Rs.11,01,000/-, total amounting Rs.3,08,79,600/- claimed in profit & loss a/c as business loss.
The purchase & sales of securities is banking business & day to day activities of the bank. The investment made from circulating fund as current business assets. The main provision of section 6 r.w.s. 5(b) & 95), section 24 & section 29 of Bank Regulation Act 1949 are applicable to our bank. The details of such section are mentioned in our previous submission. We publish our accounts as per form set out by RBI.
As per section 24 of Bank Regulation Act, 1949 every primary urban co-op. bank shall maintain liquid assets which at the ITA No.2703/Ahd/2011 14 Asst. Year 2008-09 close of business on any day should not be less than 25% of its demand & time liability in India in addition to minimum cash reserve requirement called SLR.
Liquid assets includes cash gold approved securities as per RBI norms & accordingly we have purchased various securities. We have submitted the detailed to RBI in form no.B, for SLR purpose. The photo copy of stated for the period ended 14.03.2008 attached for your kind consideration.
As per RBI guideline we purchase the various securities & classify under various head-
1. Held to maturity (HTM)
2. Available for sales (AFS)
3. Held for trading (HFT) The above classification can be reclassify for bank as per guidelines of RBI. We have said the securities held for "available for sale". The detailed working loss on sales of various securities are attached herewith for your kind consideration with copy of master circular of investment of RBI please.
The major limb of the RBI guidelines to keep apart, some of the assets in specified mode at certain percentage which are commonly known as CRR & SLR. A general under standing of ITA No.2703/Ahd/2011 15 Asst. Year 2008-09 the operation of the bank would reveal that bank keep adjusting there specified assets on day to day basis depending on the situation on their hand vis-à-vis the condition imposed by RBI which in term keep changing regularly & as such transaction cannot be called transaction for capital gain or for investment & directly related to day to day business of the bank.
We much more rely on the following decisions of court in which authority stated that loss on sales of securities held for in SLR & non SLR are trading business that is loss on stock in trade & eligible for deduction as business revenue loss. The circular no.599 dt.24.04.1991 of CBDT (copy attached) which is applicable to us, as there has been no change in the functioning of the bank since then.
1. According to Malabar Co-op. Central Bank Ltd. vs. CIT (1975) 101 ITR 87 (Ker) securities held by bank in view of statutory requirement are stock in trade & hence income from such securities is business income.
2. Rajasthan Financial Corporation vs. CIT (1967) 65 ITR 112 (Raj) the assessee financial corporation was established for financing industrial concern & it invested surplus with it in Govt. securities.
It was held that loss sustained or selling the securities to meet the financial consistent was business loss.
In State Bank of Hyderabad vs. CIT (1988) 171 ITR 232 (AP) & State Bank of Hyderabad vs. CIT (1985) 151 ITR 703 (AP) it was held that the investment in securities made by the ITA No.2703/Ahd/2011 16 Asst. Year 2008-09 assessee bank being a statutory obligation, can be treated as a transaction in the course of carrying on of trade. Thus, any income arising from any such securities would be assessable as business income.
- United commercial Bank vs. CIT (1999) 106 taxman 601(SC)
- ITO vs. J & K Bank Ltd. (2005) 611 ITCL 206 (Ars. Tribunal)
- As buying & selling of securities was part of banking business, loss suffered by bank in sales of security to meet the liabilities of creditors would be a business loss vide CIT vs. Simala Banking & Industrial Co. Ltd. (1961) 41 ITR 332 (Punj) The Apex court in Patnaik & Co. Ltd. vs. CIT (1986) 161 ITR 365 (SC), the assessee dealer in automobile spare parts acquired Orissa Government Floated loan, 1972 because of the insistence of the transport authorities. The Supreme Court allowed the claim of the assessee as business loss & in the process approved the decision in the case of B.M.S. (P) Ltd.
(supra)
- Vs. Nedungadi Bank Ltd. (2003) 264 ITR 545 (Ker)
(2003) 182 CTR (Ker) (403)
- United Commercial Bank vs. CIT 240 ITR 355 (SC)
- Karur Vaisya Bank 273 ITR 510 (Mad)
- Laxmi Vilas Bank vs. CIT (2006) 284 ITR 93 (Mad)
ITA No.2703/Ahd/2011 17
Asst. Year 2008-09
- In all most in all the co-op. bank interest income from
securities under SLR & Non-SLR are banking business income treating as trading assets.
Under the above stated fact & of this submission & previous submission we request your good self to delete the addition of Rs.3,39,79,600/- & oblige us.
8. We have heard the rival contentions and gone through the facts of the case. Assessee has sold government securities and met net loss of Rs.3,28,78,600/- after adjustment of profit of Rs.5,35,800/- and premium on purchase of securities of Rs.11,01,000/- total amounting to Rs.3,39,79,600/-. Guidelines of RBI as well as CBDT Circular No.665 dated 5.10.1993 have been elaborately discussed in the order of CIT(A) and relevant extract of the same have been reproduced above in our order. As per RBI guidelines securities purchased by the primary urban co-op. banks can be classified under three heads -
i) Held to Maturity (HTM)
ii) Available for Sale (AFS)
iii) Held for Trading (HFT) The loss incurred by the assessee of Rs.3,39,79,600/- is from sale of securities held for "Available for Sale (AFS) and the detailed working of the same has been provided by the ld. AR of the assessee in the Paper Book. These securities which are available for sale which are held by the assessee as per the RBI guidelines to keep apart some of the assets in the specified mode at certain percentage which are inter ITA No.2703/Ahd/2011 18 Asst. Year 2008-09 alia known as CLR and SLR and the profit/loss on sale of such securities (AFS) cannot be treated as capital gain/loss. Further the ld. AR has referred to the judicial pronouncement of the ITAT, Mumbai Bench in the case of Yes Bank Ltd. vs. Dy.CIT in ITA Nos.5833 & 5910 (Mum) of 2012 & 2829 (Mum) of 2013 for AYs 2006-07 & 2007- 08 dated July 21, 2015 wherein it was held -
"12. It is pertinent to mention that a single largest test to decide whether the security is held as capital asset or in stock-in-trade is the intention of the assessee at the time of purchase. Merely because some items so purchased happen to be held till maturity cannot convert what is acquired as stock in trade into a capital asset at a later point of time. Intention at the time of purchase is relevant and not a subsequent event of holding the security for a longer period. Instruction No.17/2008 dated 26.11.2008 issued by the CBDT wherein, at para vi. It has been clearly stated that in the case of HFT and AFS Securities of the Bank, the depreciation and appreciation to be aggregated script wise and only depreciation, if any, is required to be provided in the accounts.
13. In view of the above, we do not find any merit in the action of lower authorities for disallowing loss arose on the year end revaluation of securities. Our view is supported by decision of Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 226 Taxman 132/49 taxmann.com 335, United Commercial Bank vs. CIT (1999) 240 ITR 355/106 Taxman 601 (SC), Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC) and CIT vs. Bank of Baroda (2003) 262 ITR 334/129 Taxman 716 (Bom). Respectfully following the decision of Hon'ble Supreme Court and Hon'ble Bombay High Court and considering the classification of security so made and the loss arose on account of revaluation of securities are required to be allowed. Accordingly, we set aside the order of both the lower authorities and matter is restored back to the file of AO for deciding afresh in the light of our above observation. We direct accordingly."ITA No.2703/Ahd/2011 19
Asst. Year 2008-09 We, therefore, on the basis of our examination of facts vis-à-vis RBI guidelines and above referred CBDT Circulars as well as relying on the decision of ITAT, Mumbai Bench, see no reason to interfere with the order of CIT(A) and the same is hereby upheld. This ground of Revenue is dismissed.
11. The other grounds are of general nature which, do not require adjudication.
12. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open Court on 14/10/2015 Sd/- Sd/-
(Rajpal Yadav) (Manish Borad)
Judicial Member Accountant Member
Dated 14/10/2015
Mahata/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad
ITA No.2703/Ahd/2011 20
Asst. Year 2008-09
1.. Date of dictation: 10/9/2015
2. Date on which the typed draft is placed before the Dictating Member: 28/9/2015 other Member:
3. Date on which approved draft comes to the Sr. P. S./P.S.:
4. Date on which the fair order is placed before the Dictating Member for pronouncement: __________
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk: 14/10/2015
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the Assistant Registrar for signature on the order:
9. Date of Despatch of the Order: