2015 (11) TMI 581 - AT - Income Tax

Deduction claimed by the assessee on account of amortization of premium paid on purchase of securities, classified under the category Held to Maturity - Held that - Pertinently, assessee s claim for amortization of premium paid on the purchase of Government securities classified as HTM is consistent with the prudential norms issued by the RBI. It is also undeniable that the acquisition of the Government securities under the HTM categories has been undertaken by the assessee in the course of carrying on the banking business under the mandate of RBI. Ostensibly, the predominant motive to purchase securities is to maintain the statutory liquidity ratio prescribed by the RBI. The Central Board of Direct Taxes vide its circular No.665 dated 5/10/1995 also provides that the question as to whether any particular securities constitute stock-in-trade or investment in the case of a bank shall be determined, inter-alia, having regard to the guidelines issued by RBI from time to time. The assessee is entitled for deduction on account of the amortization of premium paid on purchase of securities classified under HTM category. - Decided against revenue. Loss suffered by the assessee on compulsory redemption of Sardar Sarovar Narmada Nigam Ltd.(SSNNL) Bonds - Held that - The bank is obliged to pay interest to its depositors, which it generates by way of interest receipts from loans advanced and earnings from investments made in various securities and other incomes received during the course of banking activities. In this context, assessee explained before the lower authorities that the investment in the bonds of SSNNL was with the predominant objective of earning interest so as to service the burden of interest payments to the depositors. The assessee also explained that the bonds were traded on stock exchanges and that they were available as a source of liquidity, if required. It was, therefore, contended that such investment was a stock-in-trade and any loss suffered therefrom is a revenue loss. In our considered opinion, the business of banking includes in its fold making of investments for the purpose of generating incomes which would service bank s requirement of paying interest to its depositors. The assessee has consistently explained the rationale for making the impugned investment, and the same has been merely brushed aside by the lower authorities. The characterization of such investments as an activity carried out in the course of the banking business cannot be doubted and, therefore, it would constitute assessee s stock-in-trade of the business of banking. As a consequence, any loss suffered on sale of such stock-in-trade would be an allowable deduction while computing the business income. - Decided against revenue.

Summary

Issues Involved:
1. Deduction on account of amortization of premium paid on purchase of securities classified under 'Held to Maturity' (HTM).
2. Loss on compulsory redemption of Sardar Sarovar Narmada Nigam Ltd. (SSNNL) Bonds.
3. Validity of assessment proceedings for the assessment year 2007-08 due to the alleged late issuance of notice under section 143(2).

Issue-wise Detailed Analysis:

1. Deduction on Account of Amortization of Premium Paid on Purchase of Securities Classified Under 'Held to Maturity' (HTM):

The first issue pertains to the deduction claimed by the assessee for the amortization of premium paid on the purchase of securities classified under HTM. The assessee, a Co-operative Society engaged in banking, argued that the amortized premium on Government securities classified as HTM should be deductible. The Assessing Officer disallowed this claim, considering HTM securities as capital assets rather than stock-in-trade. However, the CIT(A) allowed the deduction, noting that such securities, even under HTM, are part of the bank's stock-in-trade, primarily held to maintain the Statutory Liquidity Ratio (SLR) as mandated by RBI guidelines.

The Tribunal upheld CIT(A)'s decision, emphasizing that the acquisition of Government securities under HTM is part of the banking business and consistent with RBI's prudential norms. The Tribunal referenced the Kerala High Court's decision in CIT vs. Nedungadi Bank Ltd., which held that securities held by a bank constitute stock-in-trade. Additionally, the Tribunal cited the Bombay High Court's judgment in CIT vs. HDFC Bank Ltd., supporting the deduction for amortization of premium on HTM securities as per RBI guidelines.

2. Loss on Compulsory Redemption of Sardar Sarovar Narmada Nigam Ltd. (SSNNL) Bonds:

The second issue involves the loss of Rs. 68.00 lacs suffered by the assessee on the compulsory redemption of SSNNL Bonds. The Assessing Officer disallowed the loss, treating it as a capital loss since the bonds were not traded post-purchase and were considered a capital investment. The CIT(A) reversed this decision, recognizing the bonds as part of the bank's stock-in-trade, used in the course of its banking business.

The Tribunal affirmed CIT(A)'s decision, noting that the business of banking includes making investments to generate income for servicing depositors' interest payments. The Tribunal accepted the assessee's explanation that the bonds were part of its liquidity management and income generation activities, thus constituting stock-in-trade. Consequently, the loss on redemption was considered a revenue loss and allowable as a deduction.

3. Validity of Assessment Proceedings for the Assessment Year 2007-08 Due to Alleged Late Issuance of Notice Under Section 143(2):

The third issue concerns the validity of the assessment proceedings for the assessment year 2007-08. The CIT(A) found that the notice under section 143(2) was issued on 8/10/2009, beyond the prescribed period, making the assessment invalid. The Tribunal upheld this finding, noting that the Departmental Representative did not contest the factual findings of the CIT(A). Consequently, the assessment for the year 2007-08 was deemed invalid due to the belated issuance of the notice under section 143(2).

Conclusion:

The Tribunal dismissed the Revenue's appeals for all three assessment years (2007-08, 2008-09, and 2009-10). The decisions affirmed the CIT(A)'s rulings on the deductibility of amortization of premium on HTM securities, the allowance of loss on SSNNL Bonds as a revenue loss, and the invalidation of the assessment for 2007-08 due to procedural lapses. The judgments consistently emphasized adherence to RBI guidelines and the nature of banking activities in determining the tax treatment of securities and investments.