2008 (12) TMI 745 - AT - Income Tax

Disallowance of expenses - investment Portfolio - enhancing the assessment being depreciation in valuation of investment portfolio. HELD THAT - We are of the considered view that the decision of the Hon ble Supreme Court in the case of United Commercial Bank vs. CIT 1999 (9) TMI 4 - SUPREME COURT held that preparation of the Balance sheet in accordance with the statutory provisions 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. For the purpose of Income Tax what is to be taxed is real income which is to be deducted on the basis of accounting system regularly maintained by the assessee. Further the method by which the assessee Bank is valuing securities is in accordance with the accounting principles by treating such securities as stock-in-trade. Moreover the revenue itself is treating the profit on maturity of such security as business income and therefore such securities cannot be treated as capital assets. Therefore following the decision of the Hon ble Supreme Court it is held that the assessee Bank is entitled to value all the investment at cost prices or market value whichever is lower by treating such investment as stock-in-trade. We therefore delete the disallowance made by the Ld. CIT(A). In the result appeal of the assessee Bank is allowed.

Summary

Issues involved:
1. Disallowance of investment portfolio amounting to Rs. 5,05,73,414/- as stock-in-trade.
2. Enhancement of assessment by Rs. 16,23,122/- for depreciation in valuation of investment portfolio.

Analysis:

*Issue 1 - Disallowance of investment portfolio as stock-in-trade:*
The assessee, a bank, claimed a deduction of Rs. 5.05 Crores towards loss on valuation of its investment portfolio treated as stock-in-trade. The Assessing Officer (AO) sought details and compliance with CBDT and RBI guidelines. The bank argued for following RBI guidelines for bookkeeping but AO insisted on revised RBI guidelines for valuation. The AO disallowed the claimed depreciation, stressing the need to follow RBI guidelines. The bank's long-standing method was rejected, resulting in disallowance of Rs. 5,05,73,414/-. The CIT (A) upheld this disallowance, citing RBI circulars and judicial precedents.

*Issue 2 - Enhancement of assessment for depreciation:*
The AO allowed depreciation of Rs. 16,23,122/- per RBI guidelines but disallowed the rest. The bank's contentions, supported by various High Court and Supreme Court decisions, were presented before the ITAT. The ITAT analyzed RBI circulars permitting valuation methods for different investment categories. Referring to the Supreme Court decision in United Commercial Bank vs. CIT, the ITAT held that the bank could value investments as stock-in-trade, deleting the disallowance. This decision was also supported by a previous ITAT judgment.

In conclusion, the ITAT allowed the bank's appeal, emphasizing the right to value investments as stock-in-trade based on consistent accounting practices and in line with RBI guidelines. The decision aligned with judicial precedents and statutory provisions, ensuring the bank's entitlement to determine real taxable income.