TMI Blog2005 (3) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory Liquidity Requirement (in short SLR). In order to meet such statutory requirements, Banks invest part of the deposits in the form of securities. The assessee bank also maintained certain percentage of deposits in the securities. Prior to assessment year 1982-83, the assessee used to value these securities at book/face value. However, for the assessment year under reference, the assessee changed the method of valuation of the closing stock of securities and started valuing the closing stock either at the cost or market price, whichever was less. As a result of change in the method of valuation of securities, the assessee claimed loss of Rs. 2,24,54,054 for the assessment year 1982-83. Similar loss was claimed in the subsequent assessment years. However, while completing the assessment for the assessment year 1982-83, the Assessing Officer observed that the investment in securities was not stock-in-trade as the same have been treated as capital investment in the earlier years. Therefore, he was of the view that loss arising on account of change in the method of valuation of the securities could not be allowed as trading loss. The assessee had relied on various judgments in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and was therefore, constituted stock-in-trade. 4.1 Proceeding further, the assessee had also argued that method of valuation of securities which was bona fide and based on sound accounting principles to value the closing stock either at cost price or market price whichever was less, was permitted, as the same method had been followed consistently and regularly in all the subsequent assessment years. Reliance was also placed on the judgment of Privy Council in the case of Punjab Co-operative Bank Ltd v. CIT [1940] 8 ITR 635 and other judgments in Indo Commercial Bank Ltd's case, Investment Ltd.'s case, Bank of Cochin Ltd.'s case, Josna Bank Ltd.'s case and National Grindlays Bank Ltd.'s case, where change in method of valuation of closing stock which was consistently followed in the subsequent year was accepted. The ld. CIT(A) considered these submissions and held that the findings of the Assessing Officer that investments in securities were held as capital investments in the earlier years were factually wrong. He observed that the securities were always held as stock-in-trade and resultant surplus from transactions of purchase of securities had been accounted for as profit. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the intention of the Banking Regulation Act of 1949. (d) In ITA No. 327 of 1978-79 and 124 of 1979 and 380 of 1978-79 in the case of State Bank of Patiala v. ITO, Company Circle, Patiala, the learned Tribunal, while deciding appeals for the assessment years 1975-76 and 1976-77 had a case which was even worse than the appellant's case because in that case the investment in securities was always considered by that assessee as capital investment but during the accounting period relevant to the assessment years under appeal, they considered the investment in securities as stock-in-trade and the learned Tribunal allowed the valuation of securities at cost or market price whichever was lower. In that case the profit on sale of Investment Securities in earlier years was considered as capital gains and not as a trading profit. As per the report of the IAC of Income-tax, Jammu Range, Jammu, dated 27th March, 1985, the Hon'ble Punjab Haryana High Court had not admitted the appeal of the department against the decision of the Tribunal in the case of State Bank of Patiala. Thus, the decision of the Chandigarh Bench. In the case of State Bank of Patiala has become final as far as the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain or capital loss and not as business loss. 6. The learned counsel for the assessee Sh. K.K. Mehra, on the other hand, heavily relied on the orders of CIT(A) and reiterated the submissions made before the authorities below. He submitted that the assessee was engaged in the business of banking. As per Banking Regulation Act and guidelines issued by the Reserve Bank of India, the assessee was under a statutory obligation to keep specified percentage of deposits in Government Approved Securities valued at price not exceeding current market price. He submitted that since securities were intrinsic part of assessee's business, profit therefrom was a business profit and not a capital gain or loss. He further submitted that findings recorded by the Assessing Officer that in the earlier years, securities held by the assessee were shown as investment was factually wrong. During the course of hearing of the appeal before the CIT(A), the assessee had produced annual reports of the last three years, where net profit on sale of investments in securities was shown as profit and not as capital gain. If it was not a stock-in-trade then the profit on sale of investments of securities would have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven our thoughtful consideration to the rival submissions with reference to the facts, evidence and material on record. It is not in dispute that the assessee is engaged in the business of banking. As per Banking Regulation Act and guidelines issued by the Reserve Bank of India, the Banks are under statutory obligation to keep specified percentage of their securities in the Government approved securities. Thus, it is statutory obligation on the part of banks to keep such amounts in the specified percentage of the securities and, therefore, forms integral part of banking business. Keeping these deposits in Government securities is not the option of the bank but a business compulsion if it has to carry on Banking business. Such measure is intended to provide stability and liquidity to the bank for carrying on banking operations. It is now settled position under law as held by a number of decisions of the various High Courts/Supreme Court that the securities held by the Banks constituted their stock-in-trade or investment and consequently the loss claimed by the banks on the valuation of their securities should be allowed as deduction in computing the taxable profit. The following jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of CIT v. Bangalore District Co-operative Central Bank Ltd. [1998] 233 ITR 282 has taken a view that the income from the investment of any reserves is an integral part of banking activity and, therefore, such income is very much attributable to the activity of banking and such income was eligible for deduction under section 80P(2)(a)(i) of the Act. Thus, the Supreme Court held that the interest from the investment made in compliance with the statutory provisions to enable it to carry on banking business was profit from banking business. Thereafter, in the case of Karnataka State Co-operative Apex Bank, a larger Bench consisting of three judges of the Supreme Court overruled the earlier judgment in the case of M.P. Co-operative Bank Ltd. and affirmed the view taken in the case of Bangalore District Co-operative Central Bank Ltd. In the case of Surat District Co-operative Bank Ltd v. ITO [2001] 251 ITR (AT) 1 (Spl. Bench) Ahmedabad has held that interest on investment made by Co-operative banks in Government securities attributable to utilization of its funds from Statutory reserves, income from hiring of safe deposits vaults, fixed deposits with banks, investments in Indira Vik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was as per accounting principles accepted by the department. It is also not in doubt that the same method of valuation of closing stock has been followed in all the subsequent assessment years. There is no allegation of the Department that change in method of valuation of the closing stock was not bona fide or was with an intention of evading the tax. Now only question that requires to be considered whether such bona fide change in the method of valuation of closing stock which has been consistently followed in the subsequent assessment years could be allowed and accepted. This issue was considered by the Delhi High Court in the case of Bharat Commerce Industries Ltd. where it was held that change in the method of valuation of stock is permissible if it is bona fide and the same method is regularly followed thereafter. Loss arising on account of revaluation of stock as per changed method was held to be allowable. The Hon'ble Kerala High Court also considered this issue in the case of Corporation Bank Ltd. In this case, the assessee used to value the securities at cost price in the earlier years. However, by changing the method, the assessee started valuing the securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue for the various assessment years. 8. The next common ground for the assessment years 1983-84 and 1984-85 relates to the facts that the learned CIT(A) was not justified in allowing deduction of Rs. 4,24,000 for the assessment year 1983-84 and Rs. 3,20,000 (out of Rs. 3,90,975) being loss on account of embezzlement. The facts of the case for the assessment year 1983-84 are that during the course of assessment proceedings for the assessment year 1983-84, the assessee claimed embezzlement loss of Rs. 40,000 in Branch at Anantnag which occurred on 4-6-1982 and was detected on the same day. This fell in the accounting year under reference. However, on complaint made to the police, the culprit was apprehended and the matter was pending before the Court. The Assessing Officer observed that the loss was pre-mature and, therefore, the same cannot be allowed as deduction. 8.1 As regards the loss of Rs. 2 lakhs at Residency Road, Srinagar, the Assessing Officer observed that such loss occurred on 1-7-1981 and was also detected on the same day. The Assessing Officer observed that the matter was now pending with the Sub-Judge, Srinagar. Therefore, the loss was pre-mature. He also ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce because it was detected in the earlier assessment year. He, therefore, sustained the disallowance of Rs. 70,796. The Revenue is aggrieved by the orders of the CIT(A). Hence, these appeals before us. 11. The learned DR, heavily relied on the orders of the Assessing Officer. 12. The ld. counsel for the assessee, on the other hand, relied on the orders of the CIT(A). He also relied on the judgment of Hon'ble Gujarat High Court in the case of Dinesh Mills Ltd. v. CIT [2002] 254 ITR 673 where it has been held that embezzlement loss should be allowed in the accounting year relevant to the assessment year when such loss was in fact discovered. 13. We have heard both the parties and carefully considered the rival submissions. We have also examined the facts, evidence and material placed on record and gone through the orders of the authorities below. The assessee is engaged in the Banking business and such business is being run from various branches. Thus embezzlement loss is incidental to assessee's business and is allowable in view of the judgment of Hon'ble Supreme Court in the case of Badridass Daga. However, it is the claim of the assessee that the embezzlement loss is being c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of appeal is partly allowed. 15. As regards, the assessment year 1984-85, the Assessing Officer has observed that in almost all the cases, such loss had occurred prior to the previous year. The learned CIT(A) held that only out of Rs. 3,90,975, embezzlement loss of Rs. 70,000 occurred and detected in the earlier year. This finding appears to be contrary to the finding recorded by the Assessing Officer. In any case, this is question of fact which can easily be verified, as relevant facts relating to this issue have not been placed before us. We accordingly set aside the order of the CIT(A) and restore the issue to the file of the Assessing Officer with the direction that the disallowance should be made only in respect of loss which occurred and was detected in the earlier/subsequent year. If the loss related to earlier year, what was detected in the assessment year under reference, the assessee would be entitled to claim deduction for the same. Needless to say that the assessee shall be allowed reasonable opportunity while deciding the matter. We order accordingly. This ground of appeal is partly allowed for statistical purposes. 16. In the result, the appeals for the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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