TMI Blog2014 (1) TMI 754X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting the provisioning requirement, the Reserve Bank of India, vide No.UBD(PCB).Cir.41/16.20.200/2004-05 dated 28/03/2005 allowed the amortization of cost over a maximum period of five years commencing from the year 2005 - The claim made by the appellant is in accordance with the extant Reserve Bank of India guidelines providing for provisioning requirement between the book value and the face value. As per the Circular No. 599 (F.No.201/29/87/ITA.II), dated 24th April, 1991 issued by CBDT - Securities held by banks must be regarded as their stock-in-trade and the claim of loss, if debited in the books of account, should be given the same treatment as is normally given to the stock-in-trade. It was also clarified that the interest paid for broken-period on the purchase of securities must be regarded as revenue payment and allowed accordingly. Following ACIT vs. The Bank of Rajasthan Ltd [2010 (12) TMI 894 - ITAT, Mumbai] - In case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctives issued by the Reserve Bank of India are of binding nature and have to be compulsorily followed by the banks. The assessee explained that according to section 24 of the Banking Regulation Act, 1949, every Schedule Co-operative Bank has to keep 25% of the Net Time and Demand Liability (NTDL) in liquid assets which in turn has to be invested in specified securities. The securities are classified by the Reserve Bank of India as available for sale (AFS), held for trade (hereinafter referred to as 'HFT') and held to maturity (HTM). During the previous year 2004-05, the Reserve Bank of India issued circular Nos.PCB/CIR.16/16.20.00/2004.05 dated 2nd Sept. 2004 and UBD(PCB).BPD.Cir.41/16.20.000/2005-06 dated 29/03/2006 which allowed the banks to shift their securities from AFS category to HTM category. The circular also directed that provision should be made in respect of the losses incurred in the valuation of Government securities. Subsequently, the Reserve Bank of India vide Circular No. 41/16-20- 00/2004-05 relaxed the norms for provisioning and allowed its amortization @ 20% over a period of five years. It is this loss which is claimed by the assessee as an expenditure. In suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal gain as per the Income-tax Act would fail because after such a reduction, the resultant value will not represent the cost of acquisition or consideration paid for acquisition of security. It was held that the Reserve Bank of India circular authorising shifting of securities between the various categories is not mandatory and is optional, to be followed as per the will of the bank. Similarly, since the instructions issued by the Reserve Bank of India do not supersede the provisions of the Income-tax Act, they are as such, not binding on the department. Further, the department has taken a consistent stand that depreciation in value of securities is only allowable in cases where securities are held as stock-intrade and not as capital investment in the form of HTM. The AO accordingly made addition of Rs.1,00,37,000/- on account of depreciation on investment and Rs.95,09,922/- on account of amortization of premium on government securities. 6. Before the CIT(A) the assessee reiterated the same submissions as made before the AO. Based on the arguments advanced by the assessee the Ld. CIT(A) allowed the claim of the assessee towards provision of depreciation on fresh investments over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns laid down on that behalf from time to time. In terms of provisions of section 24 of the Banking Regulation Act, 1949 (as applicable to co-operative societies) every urban co-operative bank is required to maintain liquid assets at the end of every business day equivalent to 25% of the NDTL. These liquid assets are in the form of cash, gold or unencumbered approved securities. The approved securities are normally the Government of India bonds or any other securities which may be ratified by the Reserve Bank of India. 12. In respect of valuation and categorization of investments, norms prescribed by the Reserve Bank of India are as under: 15 CATEGORISATION OF INVESTMENTS 15.1 Primary (urban) co-operative banks are required to classify their entire investment portfolio (including SLR and non-SLR securities) under three categories viz (i) Held to Maturity (ii) (HTM) Available for Sale (AFS) (iii) Held for Trading (HFT) Banks should decide the category of the investment at the time of acquisition and the decision should be recorded on the investment proposals. 15.2 Held to Maturity 15.2.1 Securities acquired by the banks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the approval of the Board of Directors once in a year. Such shifting will normally be allowed at the beginning of the accounting year. No further shifting to/from this category will be allowed during the remaining part of that accounting year. 15.5.2 Banks may shift investments from 'Available for Sale' category to 'Held for Trading' category with the approval of their Board of Directors. In case of exigencies, such shifting may be done with the approval of the Chief Executive of the Bank, but should be ratified by the Board of Directors. 15.5.3 Shifting of investments from 'Held for Trading' category to 'Available for Sale' category is generally not allowed. However, it will be permitted only under exceptional circumstances such as mentioned in paragraph 15.3.2 above, subject to depreciation, if any, applicable on the date of transfer, with the approval of the Board of Directors/Investment Committee. 15.5.4 Transfer of scrips from one category to another, under all circumstances, should be done at the acquisition cost/book value/market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , once more, during the current accounting year. Such shifting should be done at the acquisition cost/book value/market value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for. (iii) The non SLR investments in bonds of PSUs and shares (as permitted by RBI) classified under HTM category may remain in that category. No fresh non-SLR securities are permitted to be included in the HTM category. 14. Subsequent to the circular dated 02/09/2004 the Reserve Bank of India issued the circular No.RBI/2004 5/403UBD(PCB).Cir.41/16.20.00/2004-05 dated 28/03/2005. In this circular, the provisioning requirement on account of shifting of securities was relaxed in the following manner: 2. In view of the representations receive from the Federations of UCBs on account of the difficulties faced by the UCBs in meeting the provisioning requirements, the matter has been reviewed and it has been decided as a special case, to consider relaxing the above provisioning requirements, as under: I. Scheduled UCBs : Scheduled UCBs may crystallize the provisioning requirement arising on account of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t review of assessment of banks carried out by C AG, it has been observed that while computing the income of banks under the head 'Profit and gains of business profession', deductions of large amounts under different sections are being allowed by the Assessing Officers without proper verification, leading to substantial loss of revenue. It is, therefore, necessary that assessments in the cases of banks are completed with due care and after proper verification. In particular, deductions under the provisions referred to below should be allowed only after a thorough examination of the claim on facts and on law as per the provisions of the Incometax Act, 1961. (i) . . . . . . . . (ii) . . . . . . . . (iii) . . . . . . . . (iv) . . . . . . . . . (v) . . . . . . . . . (vi) . . . . . . . . . (vii) As per RBI guidelines dated 16 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 marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim ofRs.95,09,922/- during the relevant previous year, which was the value required to be amortized during the relevant previous year in respect of securities purchased for holding in HTM category. As per the RBI norms, the premium is required to be amortized over the period remaining to maturity. Hence, there is no infirmity in this claim also which is made by the appellant bank. 18. In view of the clear-cut guidelines of the Reserve Bank of India, the claim of the appellant towards provisions of depreciation on fresh investments over the life of the security purchased and amortized and the premium in respect of securities shifted to HTM category is allowable as deductible expense. Ground Nos. 1 and 2 in appeal are allowed. 7. Aggrieved with such order of the CIT(A) the revenue is in appeal before us with the following grounds. The assessee has also filed CO by taking the following grounds : Grounds by Revenue : 1) On the facts and in the circumstances of the case the CIT(A) erred in allowing depreciation on investment in Government Securities of Rs.1,00,37,000/-. 2) On the facts and in the circumstances of the case the CIT(A) erred in allowing amortiz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any of the above grounds of appeal. 8. The learned counsel for the assessee while supporting the order of Ld.CIT(A) also relied on various decisions placed in the Paper Book with synopsis, the details of which are as under : 1. Mohammed Usman T.P. Ors. Vs. Registrar of Co-op Societies AIR 2003 Ker. 299. In the said decision it was held that Reserve Bank of India has power to prescribe Norms for transaction banking business under Kerala Co-operative Societies Act. 2. Janata Sahakari Bank Ltd. State of Maharastra AIR 1993 (Bom.)252. It was held that Banking Regulation Act, 1949 power of Reserve Bank of India to give direction are valid. 3. CIT Vs. Karur Vysya Bank Ltd. 33 DTR (Mad.) 244. It was held that the assessee is entitled to change the method of valuation of Govt. securities to market value from cost and claim depreciation on the difference in the diminution of value. 4. Units Commercial Bank Vs. CIT (1999) 240 ITR 355 (SC). It was held that where the assessee bank had been valuing its stock (investments) at cost in the balance sheet but it had been valuing the same investment at cost or market value, whichever is lower , for income-tax purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Directions, 1998 In case of NBFC S bad debt NPA provisions for NPA the RBI guidelines are not binding on them because they are not banks but one Non-banking Financial Corporation. 12. Peerless General Finance Investment Co. Ltd. Vs. RBI AIR 1992 (SC) 1033. It has been held that Residuary Non-Banking Companies, Reserve Bank Directions of 1987 providing for manner in which deposits received are to be invested by them and manner of the discourse in their books of account. Direction are fully covered u/s.45(k-3). 13. DCIT Vs. Banque Indosuez (2012) 19 ITR (Trib) (Mum). It has been held that Purchase of securities Broken period interest paid on purchase included in cost of security broken period interest paid on public sector undertaking bonds to be allowed as deduction against interest received in respect of broken period. 14. American Express International Banking Corp. CIT (2002) 258 ITR 601 (Bom.). It has been held that once the broken period interest received by assessee-bank on Government securities was charges to tax as business income u/s.28 deduction for payment made for broken period interest at the time of purchase of these securities could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -04-2007 reads as under : " The provision of the section was not in relation to any cooperative bank other than agricultural credit society or primary cooperative agricultural and rural development bank". 5. The intention of the provision may be derived more precisely from relevant Para 166 of the budget speech which stated that : "Co-operative banks, like any other bank, are lending institutions and should pay tax on their profits, Primary Agricultural Credit Societies (PACS) and Primary Cooperative Agricultural and Rural Development Bank (PCARDB) stand on a special footing and will continue to be exempt under section 80P of the Income Tax Act. However, I propose to exclude all other co-operative banks from the scope of that section". Accordingly, section 80P is to be amended to give effect to the above proposal. It is also proposed to amend section 2(24) to provide that profits and gains of business of banking (Including providing credit facilities) carried on by a cooperative society with its members shall be included in the definition of 'income' (with effect from 1st April, 2007)". 6. Cooperative bank unlike other commercial banks are subjected to dual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortised over the period remaining to maturity. In the case of HFT and 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." 8. The ITAT, Mumbai Bench, in the case of ACIT vs. The Bank of Rajasthan Ltd. (2011) TIOL-35-ITAT-Mumbai, has held that in case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium. It has also been held in the case of Catholic Syrian Bank Ltd. Vs. ACIT that amortization on purchase of Government securities was made as per prudential norms of the RBI and same was allowable deduction. In view of above, assessee was justified in contending for amortization of premium paid in excess of face value of secu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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