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Dy. Commissioner of Income Tax, Circle – 3 (1) , Dhule Versus The Hasti Co-operative Bank Ltd.

2016 (7) TMI 276 - ITAT PUNE

Addition on account of difference in valuation of securities - change in valuation method of stock - Held that:- In the present case, the Revenue has not pointed out any infirmity in the method adopted by the assessee for valuation of stock. The appeal pertains to the assessment year 2010-11, the ld. AR has stated at the Bar that the assessee is following the changed method of valuation of stock even today. The ld. DR has not controverted the statement made by the ld. AR. Since, the method of va .....

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e that the method of valuation of stock adopted by assessee is inconsistent with the accounting principles. - Decided in favour of assessee - Disallowance of claim of bonus - Held that:- As per final accounts, bonus a/c and Profit and Loss a/c, find there was a liability of Bonus payable only which was paid by appellant before the due date for furnishing the return of income on the previous year. The Auditors have given the necessary comments in this regard in the Audit Report. Under the cir .....

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ik dated 08-01-2014 for the assessment year 2010-11. 2. The brief facts of the case as emanating from records are: The assessee is a Co-operative Society engaged in the banking business. The assessee filed its return of income for the assessment year 2010-11 on 22-09-2011 declaring Nil income. The case of the assessee was selected for scrutiny under CASS and accordingly notice u/s. 143(2) was issued to the assessee on 24-08-2011. During the course of scrutiny assessment proceedings the Assessing .....

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Revenue is in appeal assailing the order of Commissioner of Income Tax (Appeals). 3. Shri K.K. Mishra representing the Department submitted that the Govt. Securities were held by the assessee under Held to Maturity for several years. The assessee changed the method of valuation of securities from cost to cost or market price , whichever is less in financial year 2009-10. The Commissioner of Income Tax (Appeals) has erred in presuming that the assessee will follow the changed method continuously .....

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7; 65,00,000/-, TDS of ₹ 3,32,801/- and claimed refund of ₹ 78,32,800/-. This indicates that the deduction claimed in computation of income is after thought. The assessee has already identified its permanent investment category HTM. Therefore, the change in method of valuation is not bonafide. 3.1 On the issue of bonus of ₹ 12,76,657/-, the ld. DR submitted that the assessee had claimed deduction of ₹ 28,72,823/- in respect of bonus. The bonus was paid to the extent of &# .....

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issioner of Income Tax (Appeals) and restoring the order of Assessing Officer on both the issues. 4. Au contraire Shri Sunil Ganoo appearing on behalf of the assessee vehemently supported the findings of Commissioner of Income Tax (Appeals) in deleting the additions. The ld. AR submitted that the main objection raised by the assessee against change of method in valuation of stock is the refund of advance tax claimed by the assessee. The apprehension of the Assessing Officer was without any basis .....

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ad). In respect of disallowance of cliam of bonus, the ld. AR placed reliance on the findings of the Commissioner of Income Tax (Appeals). 5. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decision on which the ld. AR of the assessee has placed reliance in support of his contentions. The Commissioner of Income Tax (Appeals) has deleted the addition of ₹ 8,39,17,500/- on account of di .....

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ecurities was diminishing day by day, true and fair picture of financial statement was not reflected in its books of account. In order to reflect the true and correct pictures 'and real statement of affairs of the financial position of the Bank, they had adopted correct method showing the correct value of Government securities to overcome and avoid imaginary notional income in their hands. Therefore, appellant bank was compelled to change .the present method of valuation of stock, from at &# .....

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by the appellant that "Assessee is at liberty to change his regular method of accounting but it must be employed regularly thereafter and not for a casual period, as held by the Jurisdictional Bombay High Court in the case of Sarupchand vs CIT (1936) 4 ITR 420 (BOM)". It is further observed that "Bonafide change in the basis of valuation stock of securities is permissible where new method is followed thereafter regularly. It cannot be rejected on the ground that it is detrimental .....

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the appellant that the method of valuation .adopted in respect of Government securities is bonfide and it is followed thereafter regularly. 5.4 As regards, "Whether RBI's guidelines can override the provision of I T Act", I have carefully considered the submission of the appellant. I observe from the ratios laid down in the decisions relied upon by the appellant that RBI's guidelines cannot override the provision of I T Act and appellant has to follow the provision of Income t .....

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at) 448 dt. 11th March 2013. In view of the principle laid down in the decisions cited supra, am of the considered view that guideline issued by the RBI cannot override the provision of the I T Act and appellant has to follow the provision of Income-tax Act, while computing income for the purposes of Income tax Act. Therefore, A.O's view is not tenable. 5.5 As regards, classification of Government securities into 3 different categories i.e. Held to Maturity (HTM), Available for Sale (AFS) an .....

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anking business carried out by it. Appellant bank has not claimed arty amortization i.e. difference between the cost paid with a premium price on Government securities, and actual face value cost of Government securities." The appellant bank has furnished details of amortization amount which is debited to P & L A/c of the respective year, but added back while computing the income under the LT. Act. These details are furnished upto A.Y. 20l3-14. Till A.Y. 2009-10, bank consistently follo .....

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uation is adopted by the assessee the same must be followed on constant basis in the near future though in the year of change the valuation will have impact upon the valuation of closing stock but the same shall be ironed out in the subsequent years due to valuation of opening and closing stock on the same basis. The above findings were observed by the Hon'ble Court in the case of CIT Vs. Corporation Bank 174 ITR 616 (Karnataka). In this case the bank was valuing the securities held as stock .....

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9;ble Court that in the year of change there shall be some impact upon profit of the company but the same shall be ironed out in the subsequent years due to adoption of new method of valuation on permanent basis thereafter. The Hon'ble court relied upon the following rulings of various courts while delivering above judgement. i) Chainrup Sampat Ram Vs. CIT 1953 24 ITR 481 sc. II) Indo Commercial Bank Vs. CIT 1962 44 ITR 22 MAD. Ill) Bank of Cochin Ltd. Vs. CIT 1974 ITR 93. iv) CIT Vs. Carbor .....

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stent in following the changed method of valuation after A.Y. 2010-11. 5.6 The appellant vide letter dated 02/01/2014 has stated that Government securities held by the appellant bank are entirely its stock in trade. Appellant bank has valued Government securities at "Cost" up to 31/03/2009. However, during the year under consideration, appellant bank has changed its method of valuation of Government securities for the purpose of Income-tax from "Cost" price to "Cost or M .....

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nk is a stock-in-trade and has to be valued at cost or market price whichever less", in the following case: Latur Co-op Bank Ltd vs Dy CIT Circle -2, Nanded [ITA Nos.778&792 /PN/2011- AY.2007-08 dt.31/08/2012] Sangli Bank Ltd. Rajwada Chowk, Sangli vs. ACIT, Circle-Z. Sangli in ITA NO.846/PN/2006 dt.30-05-2013. Recently, the Hon. ITAT Hyderabad in the case of Dy.CIT Circle-l(I) Hyderabad vs Andhara Bank Ltd ( ITA No 630jHydj2012-A.Y.2007- 8) dt.4-10-2013-]2013-TIOL-IOSI-ITAT-HYD] has he .....

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d be allowed as a revenue deduction. However, the RBI has issued Circular wherein they have classified the investment made to comply with SIR requirement as 'Held to maturity' (HTM), 'Available for sale' (AFS) and 'Held for Trade' (HFT). Based on the RBI Circular lower authorities came to the conclusion that investment in Government Securities which are classified under the head HTM cannot be considered as stock in trade and therefore depreciation in value of such securit .....

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n allowable deduction. 51. Respectfully following the decisions cited by the learned counsel for the assessee, we uphold the claim of the assessee and direct the AO to allow depreciation / fall in value of investment in Government Securities including those classified under HTM category. No doubt (he value in opening stock in the next year would correspondingly be adjusted. This issue is decided in favour of the assessee." 6. Since the issue under consideration is identical to that of AY 20 .....

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stments to/from HTM category with 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. Banks may shift investments from AFS category to HFT 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 .....

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ket value on the date of transfer, whichever is the least, and the depreciation, if any, on such transfer should be fully provided for. The appellant has furnished a copy of the Board of Directors resolution No.11(6) passed in the meeting held on 30/05/2010 in regard to revaluation of the Government Security which is as follows :- Resolution No.11(6) On reviewing of the Balance Sheet, Protit .and Loss Account and Investment details of Government Securities of the Financial Year 2009-10. It seems .....

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F.Y. 2009-2010, the valuation of all Government Securities are to be adopted at Cost Price or Market Price, whichever is lower. According to the above, Valuation of the all our investment in Government Securities from the date of 31/03/2010 is valued as per above resolution for the Income Tax Act and to be considered in Income Tax Returns. Henceforth, for the Income Tax Returns in future also should be submitted as per the cost or market value whichever is lower. Resolution Passed Unanimously. T .....

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r Trading (HFT). According to the instruction of RBI, Bank has right to change the classification at beginning of every financial year, according to that, any internal changes can be done in classification of Government Securities. The President or the Managing Director has authorized to change the classification subject to RBI's guidelines, and maintain SIR Ratio. The appellant vide submission dated 30/12/2103 has however, stated that till date it has not shifted HTM govt, securities into A .....

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of the bank and there is no justification to decline the claim of depreciation/loss on the valuation of the said securities. The Hon'ble High Court of Kamataka 94 DTR (Kar.) 448 in the case of Kamataka Bank Ltd. Vs. ACIT has held as under:- "A method of accounting adopted by the taxpayer consistently and the regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping- the accounts or on valuation. Financial institu .....

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ow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations. The RBI Regulations, the Companies Act and IT Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of accounts. It is not decisive or conclusive in the matter. For the purpose of LT. Act whiche .....

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But consistently for more than two decades it has been shown as stock-in-trade and depreciation is. claimed and allowed. Therefore, notwithstanding that in the balance sheet, it is shown as investment, for the purpose of L T. Act it is shown as stock-in-trade. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the bank has to take into consideration the market value of the shares. If the marke .....

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o the assessinq authority and he shall look into these entries in accordance with law. - Chainrup Sampatram Vs. CIT (1953) 24 ITR 481 (SC), UCO Bank Vs CIT(1999) 154 CTR (SC) 88 ; (1999) 237 ITR 889 (SC), United Commercial Bank Vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC) and Southern Technologies Ltd. Vs. It. CIT (2010) 228 CTR (SC) 440 : (2010) 34 DTR (SC) 11 : (2010) 320 ITR 577 (SC) applied; at vs. ING Vyasya Bank Ltd. (2013) 94 DTR (Kar.) 425 not followed. Conclusion: Assessee .....

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9,17,500/- on account of disallowance of diminution in the valuation of Government Securities. The addition of ₹ 8,39,17,5001- is therefore, deleted. 6. The issue relating to change in method of valuation of stock has come up before the Hon'ble Bombay High Court in the case of Commissioner of Income Tax Vs. Modern Terry Towels Ltd. (supra). In the said case the assessee was regularly following the method of valuing closing stock on the basis of net realizable value. During the period r .....

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al the Commissioner of Income Tax (Appeals) accepted the contentions of the assessee and deleted the addition. The Department carried the matter in appeal before the Tribunal. The Tribunal upheld the findings of Commissioner of Income Tax (Appeals). Thereafter, the matter travelled to the Hon'ble High Court. The Hon'ble High Court held as under: 19. This High Court in Melmould Corporation v. CIT [1993] 202 ITR 789 (Bom) relied upon the booklet titled Valuation of Stock and WorkinProgress .....

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not seek to revise the valuation of earlier years. It neither seeks to raise additional assessments, nor does it admit relief under the "error or mistake" provisions. 3. it is not possible to define with precision what amounts to a change of basis. It is a convenience, both to the taxpayer and to the Revenue, not to regard every change in the method of valuation as a change of basis. In particular, the Revenue encourages the view that change which involves no more than a greater degree .....

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uot;Whenever there is a change in the method of valuation, there is bound to be some distortion in calculating the profit in the year in which change takes place. But if change is brought about bona fide and is in accordance with the normally accepted accounting practice, there is no reason why such a change should not be permitted." 20. In the circumstances, the valuation of the closing stock on the basis of the cost or the net realizable value, which is lower, done by the respondent-asses .....

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iples of accountancy. 8. In the present case, the Revenue has not pointed out any infirmity in the method adopted by the assessee for valuation of stock. The appeal pertains to the assessment year 2010-11, the ld. AR has stated at the Bar that the assessee is following the changed method of valuation of stock even today. The ld. DR has not controverted the statement made by the ld. AR. Since, the method of valuation of stock has been regularly adopted by the assessee this shows the bonafide of a .....

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ounting principles. Therefore, we do not find any merit in the ground no. 2 raised by the Revenue, the same is accordingly dismissed. 9. In so far as the issue relating to disallowance of claim of bonus, the Commissioner of Income Tax (Appeals) has deleted the addition by observing as under: 6. The Second ground relates to disallowing the claim of bonus of ₹ 12,76,657/-. I find from the assessment order that A.O has inter alia discussed and stated in Para no.5.2 of the order that: "On .....

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e of appellate proceedings, counsels of the appellant has argued and explained entire facts and also filed written explanation cited supra. It is inter alia stated that: (i) Appellant submits that the learned A.O failed to appreciate correct position in this regard and made the addition. As regards Bonus payable, appellant bank submits as under: Bonus payable as per balance sheet as at 31/03/2010....................... ₹ 28,72,823/- Less: Entry reserved due to excess provision ₹ 12,5 .....

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