TMI Blog2012 (9) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... securities are transferred, the profit or loss arising therefrom would be computed after taking into account the cost of the acquisition. Since the issue about nature and character of securities is remanded to the AO and the outcome of this issue would depend upon the said determination, this issue also stands remanded back to the AO also. Disallowance of interest paid to sellers - expenditure was capitalized by the assessee itself - Held that:- According to assessee in fact Rs.15.61 crores was debited in PLL account and not Rs.13.52 crores and the matter can be examined by the AO in this behalf. As the respondent, during arguments, himself suggested that this can be verified by the AO for this reason, this issue is also remanded to the AO and the deduction shall be allowed subject to verification. - ITA 634/2009, ITA 660/2009 - - - Dated:- 12-9-2012 - MR. JUSTICE SURESH KAIT, J. For Appellant: Mr. Salil Kapoor, Advocate For Respondent: Mr. Abhishek Maratha, Advocate SURESH KAIT, J: The appellant is a statutory banking corporation, a wholly owned Government of India undertaking. It had filed its income tax return for the assessment year 1996-97 declaring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , shown as permanent investments, spread over the remaining period of securities, particularly when the income and interest from such securities is assessed as Business Income? In ITA 634/2009: Additional question (iii) Whether the Tribunal is correct in not allowing the deduction of Rs.2.09 Crores wrongly added by the A.O. when the amount debited to the Profit and Loss Account is Rs.13.52 Crores and not Rs.15.61 Crores? 3. We have heard Mr. Salil Kapoor, advocate for the assessee and Mr.Abhishek Maratha, advocate for the revenue. We have also gone through the records and the orders of the authorities below. We now proceed to decide these questions of law. Re Question No.1 4. In so far as this question is concerned, as already pointed out above, the assessee had claimed deduction for assessment years 1996-97 and 1997-98 on account of depreciation on investments‟. It was submitted by the assessee that being an authorized bank, the appellant is governed by the Banking Regulation Act and the balance sheet is required to be maintained in the statutory format. The current investments are shown in the balance sheet as investments‟, whereas these are in the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t‟ and not as stock in trade‟. According to him, the admitted fact was that income from sale of such securities on sale or on its maturity had been assessed as business income . It was also pointed out that the Tribunal while deciding the issue of broken period interest in para 9 has clearly held that income from the securities is to be assessed as business income‟. These admitted facts clinchly prove that the securities were stock in trade‟. Reliance was placed on the judgment of the Supreme Court in the case of United Commercial Bank v. CIT, 240 ITR 355 (SC) to support this submission. 7. Learned counsel additionally pointed out that in the earlier assessment years, the revenue had accepted these securities as stock in trade‟ and the loss, if any, on account of depreciation in the value of such security is allowable loss. For this purpose, he referred to the ITAT order for the assessment year 1975-76 and 1986-87. So much so, the Committee on Dispute (COD) did not even allow the revenue to challenge these very findings recorded in respect of Assessment Year 2005-06. 8. Learned counsel also relied upon the judgment of Commission of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the assessee to file the appeal thereby implying that the issue needs consideration. 12. In the instant case, we would like to convey that in so far as the books of account are concerned, namely, the balance sheet, the assessee was supposed to follow the mandate of the Reserve Bank of India and, therefore, that by itself would not be a ground to label the securities as investment‟. One will have to see the real nature of these securities. In Southern Technologies Ltd. (supra), the assessee which was a non banking financial corporation (NBFC) had claimed deduction of certain amount under Section 36(1)(vii) of the Act being provision for NPAs in terms of NBFC‟s Prudential Norms (Reserve Bank) Directions, 1998 on the ground that it had to debit the said amount to Profit and Loss Account in terms of para 9(4) of the said RBI directions reducing its profits, contending it to be write off. It was the contention of the assessee that it was bound to follow the method of accounting prescribed by the RBI and as per the method followed, provisions for NPAs actually represented depreciation in the value of assets and consequently, it was deductible under Section 37(1) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued by RBI. The investment held not as stock in trade cannot be valued at the year end for the purposes of income tax. When the investments are sold whatever may be capital or loss will be determined as per the provisions of Income Tax Act. Hon‟ble Madras High Court in the case of TN Power Financial Infrastructure Development Corporation Ltd. v. Joint CIT 280 ITR 491 held that RBI guidelines cannot over-ride statutory provisions of Income Tax Act, 1961. Therefore, contention of assessee that assessee‟s cases is covered by ITAT order for assessment year 1975-76 is no longer applicable. Moreover, in assessment year 1975-76 it was held that change in the method of valuation of stock and security to comply with the directive of the Reserve Bank of India could not be said that the change was not bonafide. The valuation of stocks and securities held as stock in trade has to be valued on market price or cost price which ever is lower. However, where stocks securities are held as investments, the valuation cannot be made for the purposes of income tax as per RBI guidelines. 15. The assessee has countered the aforesaid reasoning by relying upon the judgment of the Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance made by the AO originally on account of interest paid to sellers for the period from 1.4.1990 to 31.3.1994 was subsequently reduced to Rs.2.10 crores. The entry made by the assessee for Rs.15.61 crores as on 31.3.1996 in terms of RBI directives was reversed by debiting provisions in contingency and crediting investments. The CIT (Appeals) confirmed the disallowance of Rs.2.10 crores on the ground that the assessee had offered for taxation an amount of Rs.13.52 crores and accordingly the same was disallowed to the above extent. In absence of any arguments by the assessee, disallowance was confirmed. The order passed by the CIT (Appeals) was further upheld on the ground that interest paid to sellers on purchase of investment was a capital expenditure which was capitalized by the assessee itself. The argument of Mr. Kapoor, learned counsel for the assessee, was that the entire order proceeded on the fact which was factually incorrect. According to him, in fact Rs.15.61 crores was debited in PLL account and not Rs.13.52 crores and the matter can be examined by the AO in this behalf. Learned counsel for the respondent, during arguments, himself suggested that this can be verified ..... X X X X Extracts X X X X X X X X Extracts X X X X
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