TMI Blog2002 (11) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... VARAJAN J.-All these appeals arise under the Income-tax Act, 1961 (for short, "the Act"). The main question involved in all these cases is as to whether the Government securities held by the appellants as required under the provisions of the Banking Regulation Act, 1949, are stock-in-trade of the assessee-banks and, consequently, the assessee-banks are entitled to revalue the said securities at the close of the assessment year and claim depreciation in respect of the notional loss suffered by the assessee-banks in respect of the said securities in the assessment under the Act. The other questions in some of the appeals are (1) regarding the validity of the assessments made under section 147 of the Act, and (2) regarding the entitlement for deduction of the interest paid for the broken period claimed by the assessee. All these appeals are filed by the Revenue challenging the orders of the Income-tax Appellate Tribunal, Cochin Bench. The Nedungadi Bank Ltd., Calicut, is the respondent assessee in I. T. A. Nos. 157 of 2001, 17 of 2002, 5 of 2002, 39 of 2002, 48 of 2002, 32 of 2002, 89 of 2002, 95 of 2002, 92 of 2002, and 4 of 2002. The Dhanalakshmi Bank Ltd. is the respondent assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the order of the first appellate authority. The Revenue contended before the Tribunal that as per section 24 of the Banking Regulation Act, every scheduled bank has to maintain a fixed SLR by depositing any gold or cash in any unencumbered approved Government securities and that approved securities are risk-free investments which give rise to definite income at definite intervals and redeem the interest on a definite interval. It was specifically contended that the purchase of the Government securities by the bank for the purpose of maintaining the SLR was only in the nature of a capital asset and the sale proceeds of the same after the maturity period can only be a capital receipt. It was also pointed out that the bank cannot dispose of these securities unless and until the value exceeded the SLR and that the securities forming part of the SLR are not stock-in-trade, and therefore, are not capital assets of the bank. Various other contentions are also urged before the Tribunal to the effect that the securities purchased by the assessee-bank for the purpose of complying with the requirement of maintaining the SLR cannot be treated as stock-in-trade of the assessee. It was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and legal situations are identical and the Tribunal has rendered the same findings in those cases also on the main issue involved in these appeals. Shri P. K. R. Menon, Senior Central Government Standing Counsel appearing for the appellants, has raised all the contentions which have been urged by the Departmental Representatives before the Tribunal and contained in the argument note annexure E. Learned senior counsel submitted that the assessee-bank is not at all engaged in the purchase and sale of securities and that the assessee-bank had invested money in Government securities only for the purpose of complying with the provisions of the Banking Regulation Act for maintaining the SLR, and that, senior counsel further submits, the assessee had never engaged in the, regular purchase and sale of securities during these years. Senior counsel further submits that even if the securities can be considered as stock-in-trade for the limited purpose, still they cannot be understood as unsold stock-in-trade remaining at the close of the assessment year for the purpose of revaluing the same based on the market value of the securities and for claiming depreciation on that basis. Senior coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel appearing for the respondent-assessee the Nedungadi Bank Limited, Calicut, submitted that the question as to whether the securities held by the banks for the purpose of complying with the requirements of the Banking Regulation Act to maintain the SLR are stock-in-trade of the bank has to be considered in the background of the provisions of the said Act and that section 19 of the said Act enables the assessee-bank to deal in shares and securities. Counsel on that basis submitted that the securities held by the assessee are stock-in-trade of its business and, therefore, it is entitled to the deduction of the loss, if any, suffered in respect of the said shares on the revaluation made at the close of the year based on the prevailing market value. In support of this contention, counsel relied on the decision the Kerala High Court in Malabar Co-operative Central Bank Ltd. v. CIT [1975] 101 ITR 87, the decision of this court in CIT v. South Indian Bank Ltd. [2000] 241 ITR 374, as affirmed by the Supreme Court in CIT v. South India Bank Ltd [2001] 249 ITR 304. (Of course, the Supreme Court left open the main issue in the said judgment) and also the decision of the Supreme Court in U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is entitled to claim depreciation on the basis of the notional loss suffered on account of the revaluation of the securities held by it at the close of the assessment year ? 3. The further question that arises for consideration is as to whether the reopening of the assessment by issuing notice under section 147 of the Act beyond a period of four years is legal and valid ? 4. The last question is as to whether the interest paid for the broken period in the purchase of securities is an allowable deduction ?" We will deal with the main question regarding the allowability of the claim of depreciation of the notional loss in respect of the securities held by the assessee at the close of the year. Let us first examine the relevant provisions of the Banking Regulation Act, 1949. Section 6 of the Banking Regulation Act, 1949, specifies the forms of business in which banking companies may engage. It provides that in addition to the business of banking, a banking company may engage in anyone or more of the following businesses, namely: "6. (a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, namely, valuation with reference to cost price, market price, book value or face value, as may be specified by the Reserve Bank from time to time, an amount which shall not, at the close of business on any day, be less than twenty-five per cent. or such other percentage not exceeding forty per cent. as the Reserve Bank may, from time to time, by notification in the Official Gazette, specify, of the total of its demand and time liabilities in India, as on the last Friday of the second preceding fortnight ;" The assessee-company is also governed by the provisions of the Reserve Bank of India Act, 1934. At this stage, it is also necessary to refer to the Circular No. 599 dated April 24, 1991, issued by the Central Board of Direct Taxes which reads thus: "Clarifications on the following issues have been sought by banks from the Central Board of Direct Taxes: (i) Whether the securities held by the banks constitute their stock-in-trade or investment, and consequently whether the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing their taxable profits? (ii) Whether deduction claimed in respect of interest paid for b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities even without legislative compulsion. If it did, holding of securities cannot be presumed to be not a part of its business, nor can it be said that the securities held are not part of its stock-in-trade. The fact that law now insists that the business must be run in a prudent manner by holding a specified part of its readily realisable resources in securities does not detract from the provision that in so holding securities the bank is carrying on its business and securities so held are stock-in-trade. Further, we do not think that the securities so held by a banking institution must be dealt with daily or often in order that those securities might become stock-in-trade. Supposing the institution kept a few lakhs of rupees either in its safe to meet emergent calls on the banks by the depositors or it maintained in the form of short-term deposits cash in other banking institutions, can it be said that it was not doing its business, that the cash was actually not in circulation, and, therefore, it did not form circulating capital and was, therefore, not part of its stock-in-trade? Certainly not; . . . . . 'It is a normal mode of carrying on banking business to invest moneys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d when money is required to meet any demand, the investment, i.e., the deposits as well as the securities, provide a source from which these requirements can easily be met. Thus, the credit of the bank remains unimpaired and its moneys continue to earn interest." The Division Bench has clearly noted that the question whether the securities held by the assessee co-operative bank are stock-in-trade or not, is an aspect of the question referred to the court and, therefore, they are not precluded from considering the said aspect. The Division Bench has ultimately held that the securities held by the co-operative society are the stock-in-trade of the business of the said society. On the said findings, the Division Bench held that the interest received on the said securities is business income and, therefore, it is entitled to exemption under the provisions of section 80P(2)(a)(i) of the Act. A Bench of this court in CIT v. South Indian Bank Ltd. [2000] 241 ITR 374 had occasion to consider this question, though in the context of challenge against the order of rectification of the assessment under section 154 of the Act. The said case was originally considered by a Division Bench con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich, inter alia, provides that at the expiration of each calendar year, every banking company incorporated in India shall prepare a balance-sheet and profit and loss account with reference to that year in the forms set out in the Third Schedule or as near thereto as circumstances admit. In the prescribed form in the column of property and assets, item No.4 provides for mentioning the investments. The court also noted the provisions of section 53 of the said Act under which the Central Government on the recommendation of the Reserve Bank of India had issued a notification. Note (f) appended to Form "A" in the Third Schedule to the said Act shall not apply to the bank in respect of its balance-sheet as on December 31, 1981. On the basis of the said notification, the assessee-bank did not mention the market value of the investments under the sub-heads "separately" within the brackets, in the balance-sheet. It was also the case of the assessee in that case that the requirement of disclosing the value of closing stock of shares and securities at cost and mentioning the market price is lower (now it is dispensed with by a circular dated June 28, 1992, issued by the Reserve Bank of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debarred from being allowed that deduction.' The court held that whether the assessee is entitled to the particular deduction or not will depend upon the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. In the present case, the question is slightly different. For reasons, the Central Government, in exercise of the powers conferred by section 53 of the Banking Regulation Act and on the recommendation of the Reserve Bank of India, permitted the assessee not to disclose the market value of its investment in the balance-sheet required to be maintained as per the statutory form. But as the assessee was maintaining its accounts on the mercantile system, he was entitled to show his real income by taking into account the market value of such investments in arriving at the real taxable income. On that basis, therefore, the Assessing Officer has taxed the assessee." It was further held as follows: "In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. v. Addl. CIT [1996] 218 ITR 438 (SC). There is no doubt, and it is not disputed, that the assessee co-operative bank is required to place a part of its funds with the State Bank or the Reserve Bank of India to enable it to carry on its banking business. This being so, any income derived from funds so placed arises from the business carried on by it and the assessee has not, by, reason of section 80P(2)(a)(i), to pay income-tax thereon. The placement of such funds being imperative for the purposes of carrying on the banking business, the income derived therefrom would be income from the assessee's business. We are unable to take the view that found favour with the Bench that decided the case of Madhya Pradesh Co-operative Bank Ltd. [1996] 218 ITR 438 (SC) that only income derived from circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital." This decision is followed by the same Bench of the Supreme Court in Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522. In the decision in CIT v. Corporation Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t can be set off as expenditure against income accruing on those securities. Here, it must be noted that the G Supreme Court has not at all considered the question with regard to the character of securities from which interest income is earned. No contention is seen taken by any of the parties that the securities involved in the said case represented stock-in-trade. Hence the decision rendered in the said case cannot be taken as an authority for the position that the securities held by the assessee in the present case in compliance with the provisions of the Banking Regulation Act is to be held as a capital investment. As we have already noted, this court and the Supreme Court have clearly taken the view that the Government securities acquired by the assessee-bank in compliance with the provisions of the Banking Regulation Act have to be treated as stock-in-trade of the business of the bank. In fact, the Central Board of Direct Taxes in the circular extracted above has taken the very same view which, according to us, is consistent with the view taken in the decisions of this court and of the Supreme Court discussed above. Here, it must be noted that till the decision of the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturn under section 139 or in response to a notice issued under sub-section (1) of section 142 or under section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. As already noted, the assessment years concerned are 1982-83, 1983-84 and 1984-85. The four years' period provided in the proviso expired on March 31, 1987, March 31, 1988 and March 31, 1989, respectively. In the instant case, admittedly, the notices under section 148 were issued beyond the period of four years. Therefore, the only question for consideration is as to whether the reassessment happened to be made on account of the fact that the assessee has failed to make a return under section 139 or in response to a notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. It must be noted that the assessing authority has no case that the assessee has not fully and truly disclosed all material facts necessary for his assessment for that assessment year. This is evident from the fact that the reason for reopening the assessment is the decision of the Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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