2014 (1) TMI 754 - AT - Income Tax

Amortization of premium paid on Government Securities Held that - As per RBI guidelines dated 16th October, 2000, the investment portfolio of the banks is required to be classified under three categories viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortised over the period remaining to maturity. In the case of HFT and AFS securities forming stock in trade of the bank, the depreciation/ appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts. The Reserve Bank of India norms in respect of Schedule Urban Co-operative Banks had, on 02/09/2004 allowed the shifting of SLR securities to not more than 25% of NDTL provided that the depreciation on such shifting should be fully provided - In view of the difficulties being faced by the urban co-operative banks in meeting the provisioning requirement, the Reserve Bank of India, vide No.UBD(PCB).Cir.41/16.20.200/2004-05 dated 28/03/2005 allowed the amortization of cost over a maximum period of five years commencing from the year 2005 - The claim made by the appellant is in accordance with the extant Reserve Bank of India guidelines providing for provisioning requirement between the book value and the face value. As per the Circular No. 599 (F.No.201/29/87/ITA.II), dated 24th April, 1991 issued by CBDT - Securities held by banks must be regarded as their stock-in-trade and the claim of loss, if debited in the books of account, should be given the same treatment as is normally given to the stock-in-trade. It was also clarified that the interest paid for broken-period on the purchase of securities must be regarded as revenue payment and allowed accordingly. Following ACIT vs. The Bank of Rajasthan Ltd 2010 (12) TMI 894 - ITAT, Mumbai - In case of banks, the premium paid in excess of face value of investments classified under HTM category which has been amortised over the period till maturity is allowable as revenue expenditure since the claim is as per RBI Guidelines and CBDT also has directed to allow such premium - Decided against Revenue.

Issues Involved:

1. Depreciation on investment in Government Securities.
2. Amortization of premium paid on Government Securities.
3. Classification of securities as stock-in-trade or capital investment.
4. Applicability of RBI guidelines and CBDT instructions.
5. Binding nature of RBI directives on banks.

Detailed Analysis:

1. Depreciation on Investment in Government Securities:
The primary issue revolves around the assessee, a Co-operative Bank, claiming depreciation on securities shifted from "available for sale" (AFS) to "held to maturity" (HTM) categories. The Assessing Officer (AO) disallowed the depreciation of Rs.1,00,37,000/-, reasoning that HTM securities are capital assets and not stock-in-trade. The AO contended that while AFS and HFT securities are valued at the lower of cost or market value, HTM securities must be valued at cost, and any depreciation is not an allowable business expense under the Income-tax Act.

2. Amortization of Premium Paid on Government Securities:
The second issue relates to the amortization of Rs.95,09,922/- as premium paid on Government securities held in the HTM category. The AO disallowed this amount, asserting that the amortization of premium on capital assets is not a permissible deduction under the Income-tax Act. The AO further argued that the RBI circulars, which permitted such amortization, are not binding on the Income-tax Department.

3. Classification of Securities as Stock-in-Trade or Capital Investment:
The assessee argued that according to the RBI guidelines and various judicial precedents, securities held by banks should be treated as stock-in-trade. The CIT(A) supported this view, emphasizing that the banking industry is highly regulated, and the RBI's directives, which mandate the classification and valuation of securities, are binding on the banks.

4. Applicability of RBI Guidelines and CBDT Instructions:
The CIT(A) highlighted the binding nature of RBI guidelines on banks, citing various circulars and instructions, including the CBDT's Instruction No. 17 dated 26/11/2008. This instruction explicitly states that the latest RBI guidelines should be referred to for allowing claims related to the valuation and amortization of securities. The CIT(A) concluded that the assessee's claims for depreciation and amortization were in accordance with these guidelines and therefore allowable.

5. Binding Nature of RBI Directives on Banks:
The CIT(A) underscored that the RBI's directives are mandatory for banks and must be followed. The RBI's master circulars on investment by urban co-operative banks provide detailed guidelines on the classification, valuation, and shifting of securities. The CIT(A) noted that the RBI allowed the amortization of the premium on HTM securities over a period of five years, which the assessee had complied with.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order. The Tribunal cited a similar case (DCIT Vs. Nashik Merchant Cooperative Bank Ltd.) where the amortization of premium on HTM securities was allowed as per RBI guidelines. The Tribunal dismissed the Revenue's appeal and the assessee's cross-objections, affirming that the claims for depreciation and amortization were in line with the RBI's binding guidelines.

Conclusion:
The Tribunal's judgment reinforces the principle that RBI guidelines are binding on banks and must be adhered to for the classification and valuation of securities. The claims for depreciation on shifting securities and amortization of premium on HTM securities were deemed allowable, provided they comply with the RBI's directives. The Revenue's appeal was dismissed, and the CIT(A)'s order was upheld, emphasizing the necessity for banks to follow regulatory guidelines in their financial reporting and tax assessments.

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