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2015 (12) TMI 295 - ITAT AHMEDABAD

2015 (12) TMI 295 - ITAT AHMEDABAD - TMI - Addition on account of business loss of security including premium written off treating it as a long term capital loss - CIT(A) deleted the addition - Held that:- Assessee has sold government securities and met net loss of ₹ 3,28,78,600/- after adjustment of profit of ₹ 5,35,800/- and premium on purchase of securities of ₹ 11,01,000/- total amounting to ₹ 3,39,79,600/-. As per RBI guidelines securities purchased by the primary ur .....

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of the assets in the specified mode at certain percentage which are inter alia known as CLR and SLR and the profit/loss on sale of such securities (AFS) cannot be treated as capital gain/loss.

As decided in Yes Bank Ltd. vs. Dy.CIT [2015 (1) TMI 1012 - ITAT MUMBAI ] Decision of the Hon'ble Bombay High Court in the case of CIT v. HDFC Bank (2014 (7) TMI 724 - BOMBAY HIGH COURT) and that of the Bangalore bench of the Tribunal in the case of State Bank of Mysore (2009 (5) TMI 610 - ITAT .....

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ndhinagar, Ahmedabad dated 1/8/2011. The assessment order was passed by DCIT, Mehsana Circle, Mehsana, under section 143(3) of the I.T. Act, 1961 (herein after referred to as the Act) for A.Y. 2008-09. Following effective ground has been raised in this appeal by the Revenue:- 1. The ld. CIT(A) has erred in law and on facts in deleting the addition of ₹ 3,38,79,600/- made on account of business loss of security including premium written off treating it as a long term capital loss. 2. On the .....

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assessment under section 143(3) of the Act. The AO completed the assessment by making addition including addition by way of disallowing claim of assessee of loss on sale of securities by treating it as long term capital loss instead of business loss at ₹ 3,39,79,600. 3. During the course of assessment proceedings on verification of profit and loss account it was observed by the AO that assessee has debited ₹ 3,39,79,600/- under the head loss in government securities . On being asked .....

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& provision of Banking Regulation Act as applicable to co-operative bank are applicable to our bank also. 2. On verification of detailed furnished of government securities particularly loss on sales of securities, your goodself has show caused to disallow of ₹ 33979600 being capital loss & not business loss debited in profit & loss a/c please. 3. In this respect we submit the summary of details of ₹ 3,39,79,600/- as follow & the details are attached herewith & st .....

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the basis of RBI guideline to show fair profit of the bank. 4. According to the provisions of section 6 rws 5(b) & (c) of the Banking Regulation Act held that the transaction of securities forms part of the banking business & bank can purchase and sell securities without affection the statutory SLR. Section 24 of the Banking Regulation Act provides that every cooperative bank shall maintain in cash or unencumbered approved securities an amount which shall not, at the close of business on .....

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escribed form in the column of property & assets, item no.4 provides for mentioning the investment.. Preparation of the balance sheet in accordance with the statutory provision would not disentitle the assessee in submitting the consistently & regularly. 5. Further, it is necessary to refer to the relevant portion of Circular No.599 dated 24.4.1991 issued by the CBDT in this respect which reads as under (A copy of circular is enclosed -Annexure -A) 1. Clarification on the following issue .....

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Board & it has been decided that the securities must be regarded as stock in trade by bank. Therefore, the claim of loss, if debited in the books of a/c would be given the same treatment as is normally given to the stock in trade. 4. However, the AO rejected the claim of assessee mainly on the basis of his examination and application of certain tests which were analysed in the case of Pari Mangaldas Girdhardas vs. CIT (1997) CTR 647 (Guj) - as under - Test Facts of the case (a) Whether the a .....

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sessee-itself has returned the income from the activities ? In the past, the entire income of the bank was treated exempt u/s 80P(2)(a)(i) of IT Act. However, the assessee has shown the Govt. Securities under the head ínvestment (e) Whether the memorandum of association authorizes such an activity ? Memorandum of Association authorizes the bank to transact in Govt. securities. (f) Whether frequency, continuity and regularity of transactions of purchase and sale maintained? The assessee do .....

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fact was capital loss. Therefore the claim of the assessee treating the loss on sale of Govt. securities as business loss is hereby rejected and the loss of ₹ 3,39,79,600/- is held as long term capital loss which is allowed to be carry forward. It is also pertinent to mention that in the case of Mehsana District Central Co-op. Bank, Mehsana has disallowed by capital loss on long term for AY 2008- 09. 5. Aggrieved, assessee went in appeal before CIT(A) who deleted the addition made by the A .....

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ad with section 5(b) and (c) Banking Regulation Act and as per the guideline issued by the Reserve Bank of India, Investment activities is the normal banking activity and should be treated as banking stock in trade. The format of the balance sheet has been prescribed by the legislature and bank has to report their financial result in that format only. As per this format the investment in Non-SLR Securities though treated as banking assets (stock in trade) has to be shown in the balance sheet as .....

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fficer should determine on the facts and circumstances of such case as to whether any particular security constitutes stock in trade as investment taking into account the guidelines issued by the Reserve Bank of India in this regard from time to time. CBDT has further issued instruction for the assessment of banks vide its instruction no.17/2008 dated 26.11.2008 (F.No.228/3/2008 -ITAIII). Point no.VII of the said instruction - As per RBI guidelines dated 16th October, 2000, the investment portfo .....

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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 . In such circumstances, where the same method of accounting is followed and allowed from year to year, such claim has been held to be allowable by the different courts. The Hon ble Mumbai High Court in the case of CIT vs. Bank of Baroda (2003) 262 ITR 334 has held that Depreciation in value of investment held b .....

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loss on the basis of market value; is in effect the application of well known and well accepted principle of valuation of closing stock at cost or market price whichever is lower . This method in fact allows for notional loss. Now, this allowance of depreciation held allowable by the board circular and the different decisions of the High Courts, have been made and could have been made only on the basis of these securities being treated, as stock in trade. The assessee has been following consiste .....

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of the nature of their business, it would not change the nature of the asset. Further as held by Hon ble Mumbai High Court in the case of CIT vs. Bank of Baroda (2003) 262 ITR 334 the mere fact that the banks are required as per RBI s guidelines to show these in the balance sheet as investment would not affect the nature of the asset. The banks by the very nature of the business may have to park surplus trading funds in securities and although intended to be trading assets may have to keep them .....

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eant to be held for very long periods and therefore were in nature of capital investments. This has to be seen in contradiction and contrast with securities of HTM category which are purchased and held for the purpose of investment only. The circular and instruction of the CBDT being squarely applicable, leaves no doubt on the allowability of the assessee s claim. The ground of appeal is allowed to the extent that the loss is to be taken as business loss. 6. Aggrieved, the Revenue is now in appe .....

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r bank. As per RBI guideline and circulars bank hs to maintain liquid assets which at close of the business on any day should not be less than 25% of its demand & time liabilities in addition to cash reserve called SLP. The said investment to be shown under the following heads under the main head Stock in Trade 1. Held to maturity (HTM) 2. Available for sales (AFS) 3. Held for trading (HFT) Above classification can be rectify as per RBI guideline also. During the year under consideration we .....

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e assessee bank being trading assets & not investment loss on sales thereof is a revenue loss. The above decision given by Madras High Court on the basis of decision given in the case of United Commercial Bank vs. CIT reported in 240 ITR 355 (SC) In our case the AFS securities have been shown as stock in trade & valued at cost price at consistent basis & as such we have declared real loss of sales of securities. ii…..Loss must have direct & proximate nexus to business oper .....

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ies & securities shown as stock in trade. The loss incurred on sales of such securities business loss & claimed as such please. 3. The method of accounting cannot be rejected on the ground that the assessee should have followed another method. (i) There shall be some good reason for rejecting the system of accounting followed by the assessee. The accounts cannot be rejected at the whims of the department. In investment Ltd. vs. CIT (1970) 77 ITR 533 (SC) it was held that a method of acco .....

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an (2004) 188 CTR 145 (Mad) 5. Asst. CIT vs. Shree Krishna Salk Industries (1998) 60 TTJ (Ahm Trib) 164 Further submissions to our facts dated 11.12.2010 Our is a schedule co-op bank, governed, controller & administered by RBI & Gujarat State Co-op. Societies Act. During the business of banking under license issued by RBI since last 25 years. During the year under consideration we have sold the government securities etc. & made net loss of ₹ 3,28,78,600/- after adjustment of pr .....

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of such section are mentioned in our previous submission. We publish our accounts as per form set out by RBI. As per section 24 of Bank Regulation Act, 1949 every primary urban co-op. bank shall maintain liquid assets which at the close of business on any day should not be less than 25% of its demand & time liability in India in addition to minimum cash reserve requirement called SLR. Liquid assets includes cash gold approved securities as per RBI norms & accordingly we have purchased v .....

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led working loss on sales of various securities are attached herewith for your kind consideration with copy of master circular of investment of RBI please. The major limb of the RBI guidelines to keep apart, some of the assets in specified mode at certain percentage which are commonly known as CRR & SLR. A general under standing of the operation of the bank would reveal that bank keep adjusting there specified assets on day to day basis depending on the situation on their hand vis-à-v .....

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91 of CBDT (copy attached) which is applicable to us, as there has been no change in the functioning of the bank since then. 1. According to Malabar Co-op. Central Bank Ltd. vs. CIT (1975) 101 ITR 87 (Ker) securities held by bank in view of statutory requirement are stock in trade & hence income from such securities is business income. 2. Rajasthan Financial Corporation vs. CIT (1967) 65 ITR 112 (Raj) the assessee financial corporation was established for financing industrial concern & i .....

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s would be assessable as business income. - United commercial Bank vs. CIT (1999) 106 taxman 601(SC) - ITO vs. J & K Bank Ltd. (2005) 611 ITCL 206 (Ars. Tribunal) - As buying & selling of securities was part of banking business, loss suffered by bank in sales of security to meet the liabilities of creditors would be a business loss vide CIT vs. Simala Banking & Industrial Co. Ltd. (1961) 41 ITR 332 (Punj) The Apex court in Patnaik & Co. Ltd. vs. CIT (1986) 161 ITR 365 (SC), the a .....

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R 93 (Mad) - In all most in all the co-op. bank interest income from securities under SLR & Non-SLR are banking business income treating as trading assets. Under the above stated fact & of this submission & previous submission we request your good self to delete the addition of ₹ 3,39,79,600/- & oblige us. 8. We have heard the rival contentions and gone through the facts of the case. Assessee has sold government securities and met net loss of ₹ 3,28,78,600/- after adj .....

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e (AFS) iii) Held for Trading (HFT) The loss incurred by the assessee of ₹ 3,39,79,600/- is from sale of securities held for Available for Sale (AFS) and the detailed working of the same has been provided by the ld. AR of the assessee in the Paper Book. These securities which are available for sale which are held by the assessee as per the RBI guidelines to keep apart some of the assets in the specified mode at certain percentage which are inter alia known as CLR and SLR and the profit/los .....

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assessee at the time of purchase. Merely because some items so purchased happen to be held till maturity cannot convert what is acquired as stock in trade into a capital asset at a later point of time. Intention at the time of purchase is relevant and not a subsequent event of holding the security for a longer period. Instruction No.17/2008 dated 26.11.2008 issued by the CBDT wherein, at para vi. It has been clearly stated that in the case of HFT and AFS Securities of the Bank, the depreciation .....

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