2014 (7) TMI 223 - HC - Income Tax

Nature of Government Securities Capital asset or Business asset valuation of securities consistent method of accounting - claiming depreciation due to market fluctuations - Held that - Following Commissioner of Income Tax vs. ING Vysya Bank Ltd. 2013 (6) TMI 43 - KARNATAKA HIGH COURT - the method of accounting adopted by the tax payer consistently and 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 institutions like Bank, are expected to maintain accounts in terms of the RBI Act and its regulations - the assessee has maintained the accounts in terms of the RBI Regulations and he has shown it as investment - But consistently for more than two decades it has been shown as stock-in- trade and depreciation is claimed and allowed. Notwithstanding that in the balance sheet, it is shown as investment, for the purpose of Income-Tax Act, it is shown as stock-in-trade - 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 Decided in favour of Assessee.

Summary

Issues:
Assessment of depreciation on securities held for maturity, Valuation of securities, Interpretation of RBI guidelines and Income Tax Act

Assessment of Depreciation on Securities Held for Maturity:
The appellant challenged the order dismissing their appeals regarding the assessment years 2005-2006 and 2006-2007. The main issue revolved around whether the appellant's treatment of government securities as part of business assets for claiming depreciation, in line with RBI guidelines, was valid. The Revenue contended that depreciation could only be claimed if securities were held for trading, not for maturity. The Tribunal sided with the Revenue, stating that RBI guidelines cannot dictate income computation practices. However, a Division Bench judgment was cited, emphasizing that the taxpayer's consistent accounting method should be respected. It was concluded that the appellant's practice, approved by the Supreme Court, was valid, leading to the Tribunal's decision being overturned.

Valuation of Securities:
The dispute also involved the valuation of securities, particularly the treatment of securities held for maturity. The appellant's approach of assessing these securities at year-end based on market fluctuations was challenged by the Revenue. The Tribunal rejected the appellant's method, citing Income Tax Act provisions and disregarding RBI guidelines as the basis for income computation. However, the Division Bench decision highlighted that the appellant's historical practice of treating securities as stock-in-trade for over two decades, despite being classified as investments in the balance sheet, was acceptable for claiming depreciation based on market values. This approach was deemed valid for determining real income under the Income Tax Act.

Interpretation of RBI Guidelines and Income Tax Act:
The case delved into the interplay between RBI guidelines, the Income Tax Act, and accounting practices. While the Revenue argued that RBI guidelines should not override income tax regulations, the Division Bench emphasized that a taxpayer's consistent accounting method, aligned with RBI regulations, should be respected. The judgment clarified that the method adopted by the assessee for maintaining accounts should reflect the true income, regardless of how entries are made in the books. It underscored that authorities should not disallow deductions based on discrepancies between accounting treatments and statutory requirements. Ultimately, the Tribunal's decision was overturned in favor of the appellant, affirming the validity of their accounting practices in line with the Income Tax Act and RBI regulations.