2012 (9) TMI 446 - HC - Income Tax

Disallowance of depreciation on investments - investments were held as stock in trade - Held that - As decided in United Commercial Bank Versus Commissioner of Income-Tax 1999 (9) TMI 4 - SUPREME COURT that for valuing the stock, it is open to the assessee can value it at the cost or market value, whichever is lower & in the balance sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn a taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose, to value stock-in-trade either at cost or market price Method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. - in favour of assessee by way of remand. Disallowance of amortization premium paid on purchase of securities - Held that - This amortization expenses was disallowed on the ground that the securities are held as investment and, therefore, whenever such securities are transferred, the profit or loss arising therefrom would be computed after taking into account the cost of the acquisition. Since the issue about nature and character of securities is remanded to the AO and the outcome of this issue would depend upon the said determination, this issue also stands remanded back to the AO also. Disallowance of interest paid to sellers - expenditure was capitalized by the assessee itself - Held that - According to assessee in fact Rs.15.61 crores was debited in PLL account and not Rs.13.52 crores and the matter can be examined by the AO in this behalf. As the respondent, during arguments, himself suggested that this can be verified by the AO for this reason, this issue is also remanded to the AO and the deduction shall be allowed subject to verification.

Summary

Issues Involved:
1. Deduction on account of depreciation of investments valued at the close of the year and held as stock in trade.
2. Deduction on account of amortization of premium paid towards the purchase of securities shown as permanent investments.
3. Deduction of Rs.2.09 Crores wrongly added by the AO when the amount debited to the Profit and Loss Account is Rs.13.52 Crores and not Rs.15.61 Crores.

Issue-wise Detailed Analysis:

Re Question No.1:
The primary issue here is whether the securities held by the assessee bank should be classified as "investments" or "stock in trade." The assessee argued that these securities, though shown as investments in the balance sheet due to the statutory format prescribed by the Reserve Bank of India (RBI), are essentially stock in trade. The Assessing Officer (AO) disallowed the depreciation claim on these securities, treating it as a notional loss. The ITAT upheld this view, treating the securities as investments based on previous years' decisions and the statutory format.

The court noted that the AO did not dispute that the securities were stock in trade but disallowed the depreciation on the grounds of it being a notional loss. The court referenced the Supreme Court's judgment in United Commercial Bank v. CIT, which allowed for the valuation of stock at cost or market value, whichever is lower, and emphasized that the method of accounting consistently adopted by the taxpayer should not be discarded. The court concluded that the true nature of these securities needs to be examined, and the matter was remanded back to the AO for a detailed determination based on the material produced.

Re Question No.2:
The second issue pertains to the amortization of the premium paid on the purchase of securities. The AO disallowed this claim, treating the securities as investments and stating that any profit or loss would be computed upon transfer. Given that the determination of whether the securities are investments or stock in trade was remanded to the AO, this issue was also remanded for reconsideration based on the outcome of the first issue.

Re Question No.3:
The third issue involved the disallowance of Rs.2.09 Crores on account of interest paid to sellers of securities. The AO originally disallowed Rs.15.61 Crores, which was later reduced to Rs.2.10 Crores. The CIT (Appeals) and ITAT upheld this disallowance, treating the interest paid as a capital expenditure. The assessee argued that the amount debited was Rs.15.61 Crores, not Rs.13.52 Crores, and suggested this could be verified by the AO. The court agreed that this factual discrepancy warranted verification and remanded the issue back to the AO for verification and appropriate deduction.

Conclusion:
The court remanded all three issues back to the AO for a detailed examination and verification, emphasizing the need to ascertain the true nature of the securities and the correct amounts involved. The appeals were disposed of with no order as to costs.