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TMI Blog2012 (6) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... aside and that of the A.O. be restored to the above extent." 2. The brief facts of the case are that the assessee is a Co-operative bank engaged in banking business. It is also deriving interest income by investment in other banks, commercial income etc. The assessee filed its return of income for the assessment year under consideration on 29-10-2007 declaring total income at Rs. 75,82,610/-. Thereafter the case was selected for scrutiny and assessment was completed u/s. 143(3). During the course of assessment proceedings, the A.O. observed that in the Profit and loss account, the assessee had debited Rs. 30 lakhs under the head "loss in Government securities" and claimed it as business loss. The details of the transactions on which the assessee claimed the loss are as under:- Sr No. Name of securities Purchase Date Purchase Amount. (Rs) Sale date Sale Amount (Rs) Loss (Rs) 1. 6.25% GOI 2018 5-3-2004 1,00,00,000 21-3-2007 80,00,000 15,00,000 2. 6.25% GOI 2018 9-6-2004 52,49,000 21-3-2007 42,50,000 9,999,000 3. 9.39% GOI 2011 12-1-2006 1,12,21,000 9-1-2007 1,07,20,000 5,01,000 TOTAL 2,64,70,000 2,29,70,000 30,00,000 3. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment securities has applied the ratios laid down for a normal entity operating in shares/securities market. However, it cannot be ignored that the banks work under specified guidelines laid down by RBI. A major limb of these guidelines is to keep apart some of the assets in specified modes at certain percentages, which are commonly known as CRR and SLR. A general understanding of the operation of banks reveal that the banks keep adjusting these specified assets on day-to-day basis depending on the situation on their hands vis-à-vis the conditions imposed by the Reserve Bank of India, which in turn keep changing regularly. In view of this frame work, obviously, the Banks indulging in transaction of Government securities cannot be called as transaction for capital gains or for investment. On the other hand, they are very directly related to the day-to-day business of the banks. 2.4 Looking from the judicial point of view, in my view, the decision of Kerala High Court in the case of Nedungadi Bank Ltd. (supra) and the decision of the Madras High Court in the case of Karur Vysya Bank Ltd. 273 ITR 510 are applicable to the facts of the case. 2.5 Also in my view, the Circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has treated securities as investments and not as stock in trade, the assessee has been valuing the stock at cost and has not been valuing the stock at the year end at cost or market value whichever is lower and therefore the assessee is not entitled to the benefit of clarification issued by CBDT. 11. On the reliance placed by the Assessee on the case of United Commercial Bank v. CIT [1999] 240 ITR 355/106 Taxman 601 (SC), ld. D.R. pointed out that the facts of the case before the Hon'ble are different than that of the assessee. In the case before Hon'ble Supreme Court, the Assessee was for over 30 years valuing the stock in trade (investments) "at cost" in the balance sheet but it has been valuing the same investments "at cost or market value whichever is lower" for income tax purposes. In these circumstances it was held by Hon'ble Apex Court that this practice was accepted by the Revenue and there was no justifiable reason for not accepting the same. According to the Ld. D.R. the case of the Assessee in the present appeal is different because the assessee has been considering its investments in securities as "investments" in the balance sheet and also in its income tax returns. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the Banking Regulation Act as applicable to Co-operative Banks are also applicable to it. During the year the assessee incurred loss of Rs. 30 lakhs on sale of Government securities and the same was debited to the Profit and loss account. It is a fact that the assessee had sold 3 types of securities during the assessment year under review. The securities namely 6.5% GOI 2018 which the assessee had sold, was held by him for more than 2 years and 9.39% GOI 2011 was held by the assessee for almost 1 year. No evidence has been produced before us to show that the assessee has done any other transaction in it after its acquisition. It is an undisputed fact that the assessee has been consistent in treating the transactions pertaining to Govt. securities as "investment" and not as "stock in trade" in its books of accounts. Since the assessee was treating the investment in its books of accounts as "investments", its valuation was done "at cost" on the balance sheet dates. It is a fact that even while filing its Income tax return, the assessee valued the investments "at cost". Thus the assessee has been consistently treating its investments as "investments" and not as "stock in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "investments". The assessee was entitled to claim of diminution in the value of securities which were held for the purpose of business. 21. The question before CBDT on which the clarification was given by CBDT in Circular No. 599 dated April 29, 1991 was as under: "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". On this the clarification of CBDT is reproduced as under: "2. The matter 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 to stock in trade...". 22. CBDT vide circular No 665 [F. No. 201/3/92-ITA-II, reported in (1993) 114 CTR (St) 61 : (1993) 204 ITR (St) 39] reads as under. "Treatment of securities-Stock-in-trade or investment Business Income, Income, Interest On Securities By Circular No. 599 (F. No. 201/29/87/ITA.II), dt. 24th April, 1991, it was clarified that securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment' and this is method of accounting adopted by the taxpayer consistently and regularly which cannot be regarded or overlooked by the Departmental authorities. 25. 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 regard to the classification of assets and also the accounting standards for investments. The Board has, therefore, decided that the Assessing Officers should determine on the facts and circumstances of each case as to whether any particular security constitutes "stock-in-trade" or "investment" taking into account the guidelines issued by the Reserve Bank of India in this regard from time to time. 26. In the case of Bank of Rajasthan v. Inspecting Assistant Commissioner [1999] 68 ITD 69 (JP) the co-ordinate Bench held as under: Head Notes: Business income-Business loss-Loss on account of revaluation of Government and other securities due to fluctuations in market-Investment in Government securities by a banking company cannot be held as stock-in-trade-Assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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