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TMI Blog2014 (1) TMI 754X X X X Extracts X X X X X X X X Extracts X X X X ..... 005-06 the assessee had shifted the securities held in the category "available for sale" (hereinafter referred to as 'AFS') to the category "held to maturity" (hereinafter referred to as 'HTM'). This amount was amortized over a period of five years @ 20% in every year under the head "provisions". Similarly, an amount of Rs.95,09,922/- was amortized during the year being the premium paid on purchase of Government securities. The Assessing Officer was of the opinion that these amounts cannot be allowed as business expenses and hence the same should be disallowed. He, therefore, confronted the same to the assessee. 3. The assessee in its reply submitted that they are a Schedule Cooperative Bank whose activities are covered by the Banking Regulation Act, 1949 (As applicable to Co-operative Banks). The Reserve Bank of India issues directives and circulars from time to time in respect of various banking activities and internal management including the manner in which business should be done. These circulars and directives applied to interest rates, loans and advances, investment of funds, regulations regarding recognition of non-performing assets, regulations regarding maintenance of li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and CIT V/s Nedungudi Bank Ltd. (2003) 130 Taxman 93. The assessee also relied on the decision given by the CIT(Appeal), Thane in the case of Thane Janata Sahakari Bank Ltd. In appeal No. THN/ACIT C-3/Thn/493/09-10 dated 31/08/10. 5. However, the AO was not convinced with the explanation given by the assessee. He considered the master circular on prudential norms for classification, valuation and operation of investment portfolio by banks dated 17/07/2004 to conclude that while AFS and HFT securities are in the nature of stock-in-trade, HTM securities are in the nature of capital asset. Hence while the AFS and HFT securities have to be valued according to "stock or maturity value whichever is less" principle, the HTM securities have to be valued at cost only. It was held that while it may be prudent to amortize the premium on securities held in HTM, the same is not an allowable expense under the Income-tax Act. Similarly, the Income-tax Act does not recognize conversion of stock-in-trade into asset as a transfer. Since this is re categorization of securities midway in the year, the loss does not represent an actual year end fall in market value but it is a simple notional loss wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and they have to be compulsorily followed by the banks. They are of a binding nature. Accordingly, the Reserve Bank of India has issued a master circular on investment by primary (urban) co-operative banks vide letter No.(UBD.DPD.(PCB)) MC No. 4/16.20.00/2003-04 dated 23/12/2003. This was revised by PCB. Cir.16/16.20.00/2004-05 in RBI No.2004-05/158 dated 02/09/2004. The final Master Circular on Investment by Primary (Urban) Co-operative Banks was issued on 07/01/2011 in UBD.BPD(PCB).MC No. 12/16-20-00/2011-12. These circulars provided the guideline for classification and categorization of investments and a review thereof to bring the classification and valuation of investment portfolio of urban co-operative banks in alignment with international practices and the current state of risk management practices in India. They have taken into account the requirement of maintenance of statutory reserves in the form of specified government securities equivalent to 25% of NDTL under section 24 of the Banking Regulation Act, 1949 (As applicable to cooperative banks). The Master Circulars on Investment by the Urban Co-operative Banks are revised from time to time. According to the master cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir investments in bonds of PSUs and shares (as permitted by RBI) should be classified under 'Held to Maturity' category but these will not be counted for the purpose of specified ceiling under this category. 15.2.4 Profit on sale of investments in this category should be first taken to the P&L Account and thereafter be appropriated to the Investment Fluctuation Reserve. Loss on sale will be recognized in the P&L A/c. 15.3 Held for Trading 15.3.1 Securities acquired by the banks with the intention to trade by taking advantage of the short term price/interest rate movements will be classified under 'Held for Trading' category. 15.3.2 If banks are not able to sell the security within 90 days due to exceptional circumstances such as tight liquidity conditions, or extreme volatility, or market becoming unidirectional, the security should be shifted to the 'Available for Sale' category, subject to conditions stipulated in paragraphs 15.5.3 and 15.5.4 below. 15.4 Available for Sale &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; (iii) Shares (iv) Bonds of PSUs (v) Others 16 VALUATION OF INVESTMENTS 16.1 Valuation Standards 16.1.1 Investments classified under 'Held to Maturity' category need not be marked to market and will be carried at acquisition cost unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. 16.1.2 The individual scrip in the 'Available for Sale' category will be marked to market at the year-end or at more frequent intervals. The book value of the individual securities would not undergo any change after the revaluation. 16.1.3 The individual scrip in the "Held for Trading" category will be marked to market at monthly or at more frequent intervals. The book value of individual securities in this category would not undergo any change after marking to market. Note: Securities under AFS and HFT categories shall be valued scr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shifting of securities from HFT/AFS categories to the HTM category consequent to the issue of our guidelines dated 02/09/2004 and amortize the same over a maximum period of five years commencing from the current accounting year ending 31/03/2005, with a minimum of 20% of such amount each year. II. Non Scheduled UCBs: . . . . . . . . . . . . . (a). . . . . . . . . . . (b). . . . . . . . . . . (c). . . . . . . . . . . (d). . . . . . . . . . . (e). . . . . . . . . . . & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n', 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) . . . . . . . . . &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to above. This Circular clearly states that investments classified under HTM category will be carried out at acquisition cost unless it is more than the face value in which case the premium i.e. the difference between the cost and the face value should be amortized over the period remaining to maturity. I find that the appellant had made a 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mium should be amortized over the period remaining to maturity. The Ld. CIT(A) has considered the instruction No. 17 and Reserve Bank of India Guidelines while allowing the appeal. 3) On the facts and circumstances of the case and in law and in view of cross objections of Sr. No. 1 and 2 above the appeal of the Revenue raising the grounds of appeal contrary to Instruction No. 17 and RBI Guidelines is not maintainable. It be held accordingly. 4) The appellant craves/leave to add, amend or alter 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate Co-op Bank Ltd.(2011) 336 ITR 516. It has been held that the cash reserve or reserve fund required to be maintained by a scheduled or Co-op. Bank under provisions of RBI Act or B.R. Act, are all activities of Banking. 10. Bank of Rajasthan Ltd. Vs. IAC(1999) 63 TTJ (TP) 226. It was held that Investment in Government and other securities by a banking company cannot be held as stock in trade and profit or loss on such investment arise only when they are finally transferred, sold or discarded and not at the end of each accounting period. It was also held that principles of resjudicata are not applied to tax matters. 11. Southern Technologies Ltd. JCIT (2010) 32. It has been held that RBI 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find an identical issue had come up before the Tribunal in the case of Nahsik Merchant Cooperative Bank Ltd. (Supra). We find the Tribunal has discussed the issue and dismissed the grounds raised by the Revenue by holding as under : "4. After going through rival submissions and material on record we find that with the advent of section 80P(4) w.e.f. A.Y, 2007-08 has closed the doors for cooperative banks for claiming the benefit of deduction u/s.80P(2)(a)(i) from this total income. However, the cooperative society should now be entitled to be assessed as normal banking company. The clause (4) inserted in section 80P has taken away the benefit of the erstwhile deduction available to cooperative society in carrying on business of banking or providing credit facility to its members. The new clause (4) inserted by the Finance Act, 2006 w.e.f. 01-04-2007 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arterly or at more frequent intervals. These investments are considered to form stock-in-trade of a bank and therefore are to be valued at cost or NRV, whichever is less. Fall in value below cost, therefore, is to be provided immediately, however any net appreciation in value is ignored and not recognized as income on the basis of conservatism. 3. HFT The individual scrips in the Held for Trading category will be marked to market at monthly or at more frequent intervals and provided for as in the case of those in the Available for Sale category. 7. In para (vii) of the CBDT Instruction No.17 of 2008 dated 26.11.2008, on 'Assessment of Bank - check list for deduction, states as under: "As per RBI guidelines dated i6th 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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