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2016 (2) TMI 606 - HC - Income TaxLoss on revaluation of investments - valuation of stock in trade - ITAT allowed the claim - Held that - We find that the issue as raised before us is no more res integra. This Court had an occasion to deal with identical question in the case of Commissioner of Income Tax Vs. HDFC Bank, reported in 2014 (8) TMI 119 - BOMBAY HIGH COURT and held 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. Therefore, 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. Therefore, 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. If the market value is less than the cost price, in law, they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the balance-sheet. Thus, the view that the securities of the Banks are investment and have to be valued at costs or market price, whichever is less. - for the purposes of income tax, what has to be taxed is a real income and not necessarily the income on the basis of the manner in which the accounts are prepared. Thus, the issue is settled issue. - Decided against the revenue.
Issues Involved:
1. Admissibility of the depreciation claim on revaluation of investments. 2. Consistency in accounting methods for tax purposes. 3. Application of RBI guidelines versus Income Tax Act provisions. 4. Precedent cases and their applicability. Issue-wise Detailed Analysis: 1. Admissibility of the depreciation claim on revaluation of investments: The respondent assessee claimed a loss of Rs. 476 crores on revaluation of investments, i.e., depreciation in the value of securities for the Assessment Year 2007-08. The Assessing Officer disallowed this depreciation on the grounds that the respondent had claimed deductions differently in its books of accounts than for income tax purposes. Specifically, the respondent netted off depreciation against appreciation in its books but claimed gross depreciation for tax purposes. The Assessing Officer relied on CBDT Circular No.665 dated 5th October 1993, which mandates that the classification of securities as stock-in-trade or investment should be determined based on RBI guidelines. Consequently, Rs. 359 crores claimed as a loss was disallowed and added to the income of the respondent assessee. 2. Consistency in accounting methods for tax purposes: The Commissioner of Income Tax (Appeals) reversed the Assessing Officer's order, citing the Apex Court's decision in United Commercial Bank v/s. CIT (240 ITR 355), the Bombay High Court's decision in CIT Vs. Bank of Baroda (262 ITR 334), and the Tribunal's order in the respondent assessee's own case for earlier years. The CIT (Appeals) emphasized that the computation of income under the Act should not necessarily follow RBI guidelines in the absence of specific provisions in the Income Tax Act. This decision was supported by Sections 43(D) and 36(1)(viia) of the Act, which mandate computation in accordance with RBI guidelines only when explicitly stated. 3. Application of RBI guidelines versus Income Tax Act provisions: The Tribunal upheld the CIT (Appeals) decision, stating that the issue was covered by earlier Tribunal decisions for the respondent assessee for Assessment Years 2005-06 and 2006-07, where revaluation on account of depreciation in the value of securities was allowed. The Tribunal also relied on the Apex Court's decision in UCO Bank and the Bombay High Court's decision in Bank of Baroda, which supported the respondent assessee's method of accounting. The Tribunal noted that the Revenue's appeals for Assessment Years 2005-06 and 2006-07 did not entertain this question, further solidifying the precedent. 4. Precedent cases and their applicability: The High Court referenced its own decision in Commissioner of Income Tax Vs. HDFC Bank (366 ITR 505), which refused to entertain a similar question, relying on the Karnataka High Court's decision in Karnataka Bank Ltd. Vs. ACIT (356 ITR 549). The Karnataka High Court ruled that a taxpayer's consistent and regular accounting method cannot be discarded by the Departmental authorities. It emphasized that the RBI Act, Companies Act, and Income Tax Act operate in different fields, and the method of accounting for income tax purposes should reflect true profits and gains, regardless of how entries are made in the books of accounts. The High Court further cited the Apex Court's decision in UCO Bank, which held that for income tax purposes, what should be taxed is the real income, not necessarily the income based on the manner in which accounts are prepared. The Court noted that the respondent assessee had consistently valued securities at market price or cost, whichever is less, for over 30 years, and this method was accepted by the Department. Conclusion: The High Court concluded that question no.6 did not raise any substantial question of law as it was already settled by the decision in HDFC Bank Ltd., which the Revenue had accepted without filing a Special Leave Petition (SLP). Therefore, question no.6 was not entertained, and the appeal will proceed for final hearing on the previously admitted questions (4, 5, and 7).
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