TMI Blog2015 (3) TMI 449X X X X Extracts X X X X X X X X Extracts X X X X ..... ect the AO to allow the depreciation (loss) to the extent of 1/5th of the total depreciation - Decided partly in favour of assessee. Non-allowance of premium amortized on HTM securities - Held that:- The facts relating to the issue are that as per the guidelines of RBI, the banks are entitled to keep its investments under three categories i.e. Held To Maturity (HTM), Available For Sale (AFS) and Held For Trading (HFT). The HTM securities are in the nature of premium investment and are to be kept by the banks still the date of maturity. However, the AFS and HFT securities are in the nature of current investments and can be sold by the banks before the date of maturity. As per the guidelines of RBI with regard to current and permanent investments issued from time to time, the banks are permitted to change investments from one category to the other, subject to the condition that overall ratios of current to permanent investments are maintained as per the RBI requirements. The guidelines also prescribe that the investments classified as HTM securities are to be carried at acquisition cost. In the facts of the present case, the assessee had parked funds in HTM securities and during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty' securities claimed by the assessee bank disallowed - Held that:- The issue raised before us is identical to the issue before the Tribunal in ACIT Vs. Bank of Maharashtra (supra) and following the same parity of reasoning, we hold that the change in method of accounting adopted by the assessee for valuing its HTM securities at lower of cost or market price is a bonafide change and the assessee is entitled to the claim of depreciation on value of HTM securities. The loss arising on account of AFS and HFT securities have already been accepted by the Assessing Officer. Consequently, we direct the Assessing Officer to allow the claim arising on account of depreciation on value of HTM securities. However, the change in method of valuation in HTM securities and its effect on the computation of income would be verified by the Assessing Officer. Accordingly, we direct the Assessing Officer to consider the plea of the assessee and re-work the income - Decided in favour of assessee for statistical purposes. Revision u/s 263 - 1/5th of the amortized amount of loss incurred of ₹ 29,29,15,335/- in assessment year 2005- 06 on account of conversion of securities from AFS to HTM sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against order passed under section 143(3) of the Act. Further, the assessee is in appeal against the order of CIT(A)-I, Pune, dated 30.08.2013 relating to assessment year 2010-11 against order passed under section 143(3) of the Act. 2. All the appeals relating to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. First we shall take the cross appeals filed by the assessee and the Revenue relating to assessment year 2005-06. 4. The assessee has raised the following grounds of appeal in ITA No.21/PN/2014:- 1] The learned CIT(A) erred in not allowing the entire loss of ₹ 29,29,15,335/- incurred by the assessee bank on account of conversion of AFS securities to HTM securities. 2] The learned CIT(A) erred in allowing 1/5th of the total loss of ₹ 29,29,15,335/- without appreciating that the entire loss incurred by the assessee bank was allowable as a deduction while computing the income of the assessee bank. 3] The learned CIT(A) erred in not allowing the amount of ₹ 1,44,31,124/- being the amount of premium amortized on HTM securities without appreciating that the said amount was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, original assessment was completed vide assessment order passed under section 143(3) of the Act on a net loss of ₹ 25,73,01,810/- vide order dated 26.12.2007. The CIT on perusal of the assessment records noted that certain issues were not considered by the Assessing Officer in the original assessment proceedings and the order of the Assessing Officer was found to be erroneous and prejudicial to the interest of Revenue on (i) depreciation loss on investment amortized at ₹ 29,29,15,335/- was allowed, (ii) sum of ₹ 1,44,31,124/- debited on account of premium on investment amortized, and (iii) sum of ₹ 5,15,25,300/- was debited on account of depreciation on investments - others, being loss on sale of securities. As per the CIT, the said loss was wrongly allowed as business loss as HTM securities were in the nature of capital assets and loss incurred on sale of those securities was a capital loss. Consequent thereto, the CIT-I, Pune passed order under section 263 of the Act, dated 31.03.2010 and the issues were set-aside to the file of Assessing Officer for examination. The Assessing Officer in the second round of assessment proceedings in relation to the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment amortized should be allowed in entirely in assessment year 2005-06. With regard to the other issue of disallowance of amortized premium on HTM investment amounting to ₹ 1,44,31,124/, it was pointed out by the learned Authorized Representative for the assessee that the Tribunal had disallowed the claim of the assessee in its entirety. However, the claim was made to allow the said expenditure in entirety. The CIT(A) in line with the order of the Tribunal in ITA No.819/PN/2010 relating to assessment year 2005-06 vide order dated 31.05.2013 directed the Assessing Officer to allow 1/5th of the total depreciation loss of ₹ 29.29 crores for the year under consideration. In other words, depreciation of ₹ 5,85,83,066/- was directed to be allowed in the hands of the assessee. On the other issue of amortization of premium on HTM securities, the CIT(A) referred to the ratio laid down by the Hon ble Apex Court in Southern Technologies Ltd. Vs. JCIT (2010) 320 ITR 577 (SC) and pointed out that the RBI guidelines or the prudential norms issued by the RBI were not intended to regulate the Income-tax laws. Consequently, the disallowance of amortization of premium on in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion (loss) claimed by the assessee on conversion at the time of changing category of the securities from AFS to HTM is not as per law but the assessee at the most can claim depreciation (loss) to the extent of 1/5th each year for the period of Jive years. We accordingly direct the AO to allow the depreciation (loss) to the extent of 1/5th of the total depreciation (loss) of ₹ 29,29,15,335/- and to the extent we hold that the assessment order is erroneous. 16. In line with the directions of the Tribunal which have not been disturbed by any of the higher forums, we hold that the assessee is only entitled to the claim to the extent of 1/5th of the depreciation (loss) arising on transfer of securities from AFS to HTM. The CIT(A) having followed the directions of the Tribunal, cannot be faulted with. Accordingly, we uphold the order of CIT(A) in this regard and dismiss the grounds of appeal Nos.1 and 2 raised by the assessee and grounds of appeal Nos.1 to 3 raised by the Revenue. 17. The issue in ground of appeal No.3 raised by the assessee before us is with regard to non-allowance of premium amortized on HTM securities amounting to ₹ 1,44,31,124/-. The said issue al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion that overall ratios of current to permanent investments are maintained as per the RBI requirements. The guidelines also prescribe that the investments classified as HTM securities are to be carried at acquisition cost. In the facts of the present case, the assessee had parked funds in HTM securities and during the year, the assessee had not shifted the securities to any other category. The premium paid on government securities were amortized in the books of account and the plea of the assessee was that the said premium was to be separated from the face value of the securities and booked as expenditure. The Tribunal in the case of the assessee had held that even where the assessee had paid premium as cost of acquisition of the securities, the same should remain as composite cost for acquiring the securities, subject to valuation at the end of each year as prescribed by the RBI and no separate treatment could be given to the premium paid by the assessee. Admittedly, the assessee was following the method of valuing its HTM securities at face value or cost. In view thereof, we find no merit in the ground of appeal No.3 raised by the assessee in this regard. The CIT(A) had dismisse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,806/-. The Assessing Officer noted that the said premium on investment amortized was disallowed in assessment year 2005-06 and the same has been added by the assessee while computing the total income for assessment year 2007-08 and 2008- 09. Consequent thereto, the Assessing Officer passed an order under section 154 of the Act and added back premium on investment amortized at ₹ 3,90,09,806/- to the total income of the assessee. 22. In appeal, the CIT(A) held that the issue relating to the admissibility of amortization of premium as deduction under Income Tax Act was highly debatable and contentious in nature. Reference was made to the ratio laid down by the Pune Bench of the Tribunal in assessee s own case in ITA No.819/PN/2010 relating to assessment year 2005-06, wherein vide order dated 31.05.2013, the Assessing Officer was directed to allow the expenditure to the extent of 1/5th of the total depreciation loss. However, the Tribunal in the case of another assessee in subsequent order dated 05.08.2013 in the case of Kallappanna Awade Ichalkaranji Janata Sahakari Bank Ltd. in ITA No.449/PN/2012, relating to assessment year 2008- 09, had taken a contrary view and the addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore invoking the provisions of section 154 of the Act is that there is a mistake apparent from the record which can be rectified by the income tax authority who had passed the said order under the provisions of the Act. It has been held by the courts time and again that the debatable issues are not open to rectification under section 154 of the Act. The Hon ble Supreme Court in Volkart Brothers Vs. ITO (supra) had held as under:- A mistake apparent from the record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions. A decision on a debatable point of law is not a mistake apparent from the record. The power of the officers mentioned in s. 154 of the IT. Act, 1961 to correct any mistake apparent from the record is undoubtedly not more than that of the High Court to entertain a writ petition on the basis of an error apparent on the face of the record . 27. The mistake apparent from the record must be obvious and patent mistake. Further, the decision on a debatable point of law is not a mistake apparent from record. In the facts of the present case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.05.2013 had directed the Assessing Officer to allow 1/5th of the said expenditure. Further, the Tribunal in another decision dated 05.08.2013 had allowed the said expenditure in totality. The assessee is also in appeal against the order passed by the Tribunal in order passed under section 263 of the Act and the matter is pending before the Hon ble High Court and hence, the issue became debatable. Further, in any case, the Assessing Officer had exercised the powers under section 154 of the Act prior to the passing of order of the Tribunal dated 31.05.2013. Such exercise of the power by the Assessing Officer under section 154 of the Act is invalid. Even otherwise, in order to give effect to the finding of Tribunal in a year different from the year under consideration, the Hon ble Supreme Court in Mepco Industries Ltd. Vs. CIT (supra) had held that the right to rectify mistakes under section 154 of the Act could not be invoked in a case of mere change of opinion. In the facts of the case before the Hon ble Supreme Court, the said power was exercised under section 154 of the Act subsequent to the decision of Hon ble Supreme Court on the issue of subsidiary received after commencemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. 4. The learned CIT(A) failed to appreciate that the HTM securities held by the assessee bank were in the nature of stock in trade and not capital assets and hence, for Income Tax purposes, the same were to be valued at cost or market value, whichever is lower. 5. The learned CIT(A) ought to have appreciated that - a. All the securities purchased by a bank are to be considered as part of the stock in trade for Income Tax purposes. b. The entries in the books of accounts were not determinative of the correct nature of the securities purchased by the bank and hence, the classification of the securities made by the assessee in the books was not relevant. c. The activity of purchase and sale of securities was in the course of the normal banking business of the assessee bank and hence, the said securities were in the nature of stock in trade. d. Even though the securities were classified in HTM category, the bank was permitted to sell them before the maturity date and hence, it was not correct to hold that HTM securities were capital assets of the assessee bank. e. The issue involved was covered in favour of the assessee bank by various decisions and the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered the fact that the said judgment related to non-banking financial company, but there was no reason as to why the same rationale would not apply to the banking companies. The CIT(A) further deliberating upon the issue observed that where the investment in question comprised of stock in trade of the assessee, the assessee was entitled to value the same at cost or market value, whichever was lower and such valuation could be made irrespective of the necessary entries being made in the books of account. However, where the investments were not stock in trade, but were held as an investment by the assessee, then the same had to be valued at cost and the depreciation in the value of investment in question was not allowable as a deduction in computing business income of the assessee. 35. The assessee is in appeal against the order of CIT(A). 36. It was pointed out by the learned Authorized Representative for the assessee that assessment year 2007-08 was the first year of change in the method of accounting and the HTM securities were valued at cost or market value, whichever was lower. The learned Authorized Representative for the assessee further pointed out that as per the RBI g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to hold its investments in three categories i.e. HTM, AFS and HFT. The assessee upto assessment year 2006-07 was valuing the HTM securities at face value or cost, whichever was less as per the RBI guidelines. However, AFS and HFT investments were being valued at cost or market value, whichever was less. There is no dispute with regard to the valuation of AFS and HFT securities or the loss arising on the amortization of the respective premiums. During the year under consideration, after adopting the change in method of accounting for valuing its HFT securities at cost or market value, the assessee had claimed depreciation on value of securities amounting to ₹ 37,11,50,795/- in assessment year 2007-08 and ₹ 5,19,40,000/- in assessment year 2009-10. This change was adopted by the assessee in return of income filed for the year under consideration as is evident from the computation of income filed at pages 1 to 3 of the Paper Book. The assessee had booked the deduction on account of investment at cost price or market price, whichever was less on account of all securities i.e. HTM, AFS and HFT at ₹ 55,40,28,096/- in assessment year 2007-08. Admittedly, the Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the HTM securities are in the nature of long term permanent investments since they are Held upto Maturity. The learned CIT-DR has defended the aforesaid stand of the Revenue by pointing out that due to its nature, the HTM securities are to be understood as permanent investments and the same should be valued at cost, which is the basis adopted by the assessee in its books of account. In the books of account, as we have noted earlier, assessee bank continues to value the HTM investments at cost, following the RBI guidelines. As per the learned CIT-DR, the HTM securities cannot be considered as stock-in-trade since they are to be held till maturity and are not available for sale or trading thereof. The learned CIT-DR asserted that in the account books, following the RBI guidelines, the HTM Securities are treated differently than the AFS / HFT securities. It is explained that wherever the cost of acquisition of HTM securities is higher than its face value, the premium is amortized over the remaining period of maturity and where the cost prize is less than the face value, the difference is ignored as per the RBI guidelines. However, securities in AFS Category are marked to market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are valued at cost and in respect of AFS and HFT investments, the valuation is carried out basket-wise and within the prescribed basket any appreciation in security is adjusted against the depreciation of other any security. Up to the assessment year 2004-05, the method of valuation of closing stock of securities adopted in the books of account following the RBI guidelines, was also adopted by the assessee for the purposes of income-tax. It is in the instant assessment year of 2005-06 and in subsequent years, that assessee has changed the method of valuation for the purposes of its income-tax computation whereby assessee has valued the closing stock of securities / investments at lower of cost or market value. The resultant effect of such change in the assessment year 2005-06 amounting to ₹ 359,24,58,508/- is not accepted by the Revenue, and hence the impugned addition of ₹ 359,24,58,508/-. 18. Factually speaking, the change in the method of valuation has been partly accepted by the Revenue and we say so for the reason that qua the investments classified as AFS and HFT there is no dispute and, the valuation of such closing stock at lower of cost or market value, has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, we direct the Assessing Officer to consider the plea of the assessee and re-work the income in line with the observations of Tribunal in the case of ACIT Vs. Bank of Maharashtra (supra) vide para 24, which reads as under:- 24. In-principle, we have already upheld the stand of the assessee to value the stock of its investments / securities at lower of cost or market value. By application of such method of valuation of its stock of securities / investments in assessment year 2005-06 assessee claimed deduction for a loss of ₹ 359,24,58,508/-. The effect of the change in method of valuation on the computation of income for the purposes of income tax is a matter of factual appreciation, which is liable to be verified by the Assessing Officer appropriately. For the aforesaid purpose, we therefore direct the Assessing Officer to consider the stand of the assessee stated aforesaid and thereafter re-work the income of the assessee accordingly. Needless to mention, the assessee shall provide necessary workings to the Assessing Officer, including the Investment Trading Account and / or such other workings which would enable the Assessing Officer to re-work the income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s raised the following grounds of appeal:- 1. The learned CIT(A) erred in upholding the action of the learned A.O. in disallowing the depreciation of ₹ 37,11,50,795/- in the value of 'Held to Maturity' securities claimed by the assessee bank. 2. The learned CIT(A) erred in holding that the 'HTM' securities were in the nature of capital assets of the bank and hence, the same were to be valued at cost of acquisition and not at cost or market value, whichever is lower. 3. The learned CIT(A) erred in holding that the 'HTM' securities were in the nature of investments and not stock in trade by stating the following reasons - a. The 'HTM' securities held by the assessee bank were in the nature of investments having regard to the principles laid down by CBDT Circular No. 4 of 2007 dated 15.06.2007. b. There were only a few occasions where the assessee bank had sold the HTM securities before maturity in the earlier years and holding of the same till maturity had resulted in handsome profits for the assessee bank and hence, the intention of the assessee bank was to hold the HTM securities till maturity. c. In view of the decision of Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claim of the assessee after verifying the stand of the assessee in line with the directions hereinabove. 48. The issue raised in the ground of appeal No.6 is against the addition of ₹ 7,40,292/-. The said addition was made in the hands of the assessee on account of non reconciliation of transactions reflected in international transactions of the assessee with the entries in the books of account. The CIT(A) had directed the Assessing Officer to examine the claim of the assessee and delete the addition after verification. We find no merit in the ground of appeal No.6 in this regard as the CIT(A) had directed the Assessing Officer to carry out the verification exercise and after reconciliation, the Assessing Officer may decide the issue. We uphold the directions of CIT(A) in this regard and direct the Assessing Officer to carry out the reconciliation exercise and after verification decide the issue. 49. In the result, appeal of the assessee in ITA No.21/PN/2014 and appeal of the Revenue in ITA No.235/PN/2014 relating to assessment year 2005-06 are dismissed, appeal of Revenue in ITA No.236/PN/2014 relating to assessment year 2006-07 is dismissed, appeals of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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