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The ACIT, Circle-3, Thane Versus M/s. The Kalyan Janata Sahakari Bank Ltd.

2015 (11) TMI 581 - ITAT MUMBAI

Deduction claimed by the assessee on account of amortization of premium paid on purchase of securities, classified under the category ‘Held to Maturity’ - Held that:- Pertinently, assessee’s claim for amortization of premium paid on the purchase of Government securities classified as HTM is consistent with the prudential norms issued by the RBI. It is also undeniable that the acquisition of the Government securities under the HTM categories has been undertaken by the assessee in the course of ca .....

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ssee is entitled for deduction on account of the amortization of premium paid on purchase of securities classified under HTM category. - Decided against revenue.

Loss suffered by the assessee on compulsory redemption of Sardar Sarovar Narmada Nigam Ltd.(SSNNL) Bonds - Held that:- The bank is obliged to pay interest to its depositors, which it generates by way of interest receipts from loans advanced and earnings from investments made in various securities and other incomes received du .....

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fered therefrom is a revenue loss. In our considered opinion, the business of banking includes in its fold making of investments for the purpose of generating incomes which would service bank’s requirement of paying interest to its depositors. The assessee has consistently explained the rationale for making the impugned investment, and the same has been merely brushed aside by the lower authorities. The characterization of such investments as an activity carried out in the course of the banking .....

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td. For The Assessee : Shri Ravi K. Mulchandani ORDER PER G.S. PANNU,AM: The captioned are three appeals by the Revenue relating to assessment years 2007-08, 2008-09 and 2009-10. Since the appeals relate to the same assessee and involve certain common issues, they have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. 2. First, we may take up the appeal of the Revenue for assessment year 2009-2010, which is directed against order pa .....

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which is inter-alia, engaged in the business of banking as defined under section-5 of the Banking Regulation Act, 1949. The Assessing Officer noticed that assessee had debited an amount of ₹ 6,37,20,000/- in its Profit & Loss Account under the head amortization of premium on investment . On being asked to explain the aforesaid, the assessee explained that the impugned sum represented the amortized premium paid on purchase of Government securities, which have been classified under the .....

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marked to market but are required to be carried at acquisition cost, and in case the same is more than the face value, the premium paid over and above the face value of the securities shall be amortized over the period remaining to maturity. Accordingly, it was sought to be pointed out that the impugned amount of amortization of premium for the investment held under the category Held to Maturity was akin to diminution in the value of investment and was thus, an allowable deduction. The stand of .....

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d not accept the plea of the assessee primarily on the ground that the securities classified as HTM were in the nature of a capital asset in distinction to the securities held under the categories AFS and HFT . As per the Assessing Officer, so far as the securities held under the categories AFS and HFT are concerned, they were to be valued as at the year end on the principle of cost or market value, whichever is less. However, securities classified as HTM are held till the maturity and, therefor .....

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n case in assessment years 2007-08 and 2008-09, wherein his predecessor CIT(A) had upheld assessee s claim for deduction on account of amortization of premium paid on acquisition of HTM securities. The CIT(A) has concluded that the securities purchased by the assessee Co-operative bank even under the category HTM formed a part of its stock-in-trade because the same are purchased with a predominant motive of maintaining Statutory Liquidity Ratio (SLR) as prescribed from time to time by RBI, and t .....

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or the assessee pointed out that the CIT(A) made no mistake in allowing the claim of the assessee and submitted that subsequent to the impugned order, the issue now stands covered by the decision of the Hon ble Kerala High Court in the case of CIT vs. Nedungadi Bank Ltd. 264 ITR 545(Ker), wherein it has been held that the securities held by Bank constituted their stock-in-trade. Apart therefrom, a reference has also been invited to the decision of the Pune Bench of the Tribunal in the case of Th .....

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). Pertinently, assessee s claim for amortization of premium paid on the purchase of Government securities classified as HTM is consistent with the prudential norms issued by the RBI. It is also undeniable that the acquisition of the Government securities under the HTM categories has been undertaken by the assessee in the course of carrying on the banking business under the mandate of RBI. Ostensibly, the predominant motive to purchase securities is to maintain the statutory liquidity ratio pres .....

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ecurities held by a Co-operative society engaged in the business of banking would constitute the stock-in-trade of the business of the said society. Therefore, in the context of the present assessee, which is also a Co-operative society engaged in the business of banking, the impugned Government securities are liable to be considered as the stock-in-trade of its business of banking. Thus, considering the aforesaid fact-situation and also the mandate of the RBI, the amortization of premium paid o .....

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nd of the mandate by RBI guidelines. In our considered opinion, the aforesaid judgment of the Hon ble Bombay High Court clearly supports the inference reached by the CIT(A), which we hereby affirm. 7.1 Before parting, we may refer to the judgment of the Hon ble Madras High Court in the case of T.N Finance & Infrastructure Development Corporation Ltd.,280 ITR 491(Mad), which has been relied upon by the Assessing Officer in support of his stand that the RBI guidelines do not over-ride the stat .....

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from RBI, which is quite distinct from an entity enjoying status of NBFC. Moreover, in the case before Hon ble Madras High Court, the claim of the assessee was in relation to section 36(1)(vii) of the Act on account of Provision for bad and doubtful debts; section 36(1)(vii) of the Act clearly prohibits allowability of a mere Provision for bad and doubtful debts. It is in this context the Hon ble High Court noted that the precise conditions contained in section 36(1)(vii) of the Act would govern .....

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Hon ble Bombay High Court in the case of HDFC Bank (supra). Thus, the decision of Hon ble Madras High Court in T.N Finance & Infrastructure Development Corporation Ltd. (supra) does not help the case of the Revenue in the present case. 7.2 Hence, we hereby affirm the order of CIT(A) and hold that the assessee is entitled for deduction on account of the amortization of premium paid on purchase of securities classified under HTM category. Thus, on this aspect the Revenue fails. 8. The second i .....

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debit in its P&L Account, which has since been disallowed by the Assessing Officer on the ground that it was a capital loss. As per the Assessing Officer, the investment in Deep discount Bonds of SSNNL was different from a normal investment and that since the purchase of Bonds on 27/9/2005, assessee did not trade even once in such bonds. Therefore, as per the Assessing Officer the intention of the assessee was to treat such investment as a capital investment and, therefore, any loss resulti .....

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ment also constituted its stock-in-trade . The CIT(A) has considered the submissions put-forth by the assessee and held that the investment in the bonds of SSNNL was in the nature of stock-in-trade and, hence, any loss on sale thereof was allowable as a revenue loss. Against aforesaid decision of CIT(A), the Revenue is in appeal before us. 8.2 Before us, Ld. Departmental Representative contended that the CIT(A) erred in deleting the addition of ₹ 68.00 lacs in as much as it was a loss suff .....

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s was a part and parcel of the activity of banking being carried out by the assessee. Accordingly, the conclusion drawn by CIT(A) was sought to be defended. 8.4 We have carefully considered the rival submissions. The factual matrix in the present dispute lies in a narrow compass. During the year under consideration, the assessee has suffered a loss of ₹ 68.00 lacs on compulsory redemption of bonds of SSNNL, which were purchased by it from the secondary market in the past on 29/9/2005 for & .....

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g or investment, of deposit of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. ..... . It is quite well understood that banks deal in Money and for that matter, Money for the banks constitute stock-in-trade which is taken and accepted by them from depositors and then deployed in the form of either giving loans to various types of borrowers or it is invested in different types of securities. The bank is obliged to pay interest to its de .....

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anges and that they were available as a source of liquidity, if required. It was, therefore, contended that such investment was a stock-in-trade and any loss suffered therefrom is a revenue loss. In our considered opinion, the business of banking includes in its fold making of investments for the purpose of generating incomes which would service bank s requirement of paying interest to its depositors. The assessee has consistently explained the rationale for making the impugned investment, and t .....

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do so. Thus, on this aspect also Revenue fails. 8.5 In the result, Revenue s appeal for Assessment Year 2009-10 is dismissed. 9. In so far as the appeal for Assessment Year 2008-09 is concerned, the only issue involved is the amortization of premium paid on purchase of securities under HTM category. This aspect has already been dealt with by us in the appeal for Assessment Year 2009-10 and our decision therein shall apply mutatis mutandis in Assessment Year 2008-09 also. Accordingly, for assess .....

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from the action of the CIT(A) in holding that assessment proceedings finalized by the Assessing Officer were invalid. 11.1 On this aspect, the relevant facts are that the assessee bank filed its return of income for Assessment Year 2007-08 originally on 31/10/2007 declaring a total income of ₹ 8,73,01,589/-. The said return was processed under section 143(1) of the Act on 6/11/2008. Subsequently, the Assessing Officer issued a notice under section 148 of the Act to the assessee on 17/11/2 .....

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