2015 (8) TMI 272 - HC - Income Tax

Disallowance u/s 36(1)(vii) - ITAT allowed claim - Held that - Although as rightly contended by the learned Standing Counsel appearing for the appellant, it is true that the assessee had failed to adduce evidence as directed by the Tribunal in the first round of the litigation, the main reason which prevailed upon the Assessing Officer to disallow the deduction when the impugned order was passed after the matter was remanded to him, is his conclusion that the R.B.I guidelines to value the unsecured shares on the basis of yield to maturity method are inapplicable and cannot be adopted. This view taken by the Assessing Officer is contrary to the principles laid down by this Court in the judgments in the cases of Nedungadi Bank Ltd. (2002 (11) TMI 29 - KERALA High Court) and Lord Krishna Bank Ltd. (2010 (10) TMI 860 - Kerala High Court ). It was therefore that the Tribunal reversed the view taken by the Assessing Officer and directed that the notional loss claimed on revaluation of the securities as deduction, be allowed. In our view, since as held by this Court, the R.B.I guidelines are applicable to the cases in question, the view taken by the Tribunal cannot be said to be illegal. Therefore, answering the questions of law framed against the Revenue

Issues:
1. Disallowance of deduction claimed under Sec.36(1)(vii) by the Assessing Officer.
2. Nature of investments made by the assessee in private companies.
3. Tribunal's direction to consider loss on devaluation of shares.
4. Applicability of RBI guidelines for valuation of unsecured shares.
5. Legality of the Tribunal's decision to allow notional loss as deduction.

Analysis:

1. The appeals filed by the Revenue were related to the disallowance of deduction claimed by the Respondent, a scheduled Bank, under Sec.36(1)(vii) for the assessment years 2000-2001 to 2004-2005. The Respondent had made investments in shares of private companies, claiming them to be defunct with nil market value. The Assessing Officer disallowed the deduction, which was affirmed by the Appellate Commissioner.

2. The Appellate Commissioner dismissed the appeals filed by the assessee, who claimed that the shares were stock-in-trade and the loss was due to the devaluation of shares. The Tribunal affirmed the disallowance but directed the Assessing Officer to reconsider the matter regarding the loss on devaluation of shares, as the investments were considered stock-in-trade.

3. The Tribunal, following judgments in similar cases, directed the Assessing Authority to allow the notional loss claimed by the assessee on revaluation of the shares as a deduction while computing the total income. The Revenue filed further appeals questioning the Tribunal's decision based on lack of evidence provided by the assessee to support the claim of devaluation of bonds.

4. The High Court held that the Assessing Officer's conclusion that RBI guidelines for valuing unsecured shares were inapplicable was contrary to established principles laid down in previous judgments. The Court emphasized that the RBI guidelines were applicable to the cases in question, and therefore, the Tribunal's decision to allow the notional loss claimed by the assessee was legal.

5. Consequently, the High Court dismissed the appeals filed by the Revenue, ruling in favor of the assessee based on the applicability of RBI guidelines and the Tribunal's direction to allow the notional loss claimed on revaluation of securities as a deduction. The Court found the view taken by the Tribunal to be in accordance with legal principles and upheld the decision in favor of the assessee.

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