2019 (1) TMI 409 - HC - Income Tax

Valuation of securities - valuation carried out by the Bank at the cost price - appreciation of trading assets and the manner in which the value has to be credited to the profit and loss account - assessee-Bank admittedly engages inter alia in making investments by way of purchasing securities also treated as trading assets of the Bank - the value to be taken when the securities appreciate in their market value Held that - The issue has been considered by this Court in CIT v. Nedungadi Bank Ltd. 2002 (11) TMI 29 - KERALA HIGH COURT and CIT v. Lord Krishna Bank Ltd. 2010 (10) TMI 860 - KERALA HIGH COURT with respect to the valuation of securities when there is a claim raised of depreciation or loss this Court had approved the measure adopted by the assessee-Banks following the stipulations made by the Reserve Bank of India. RBI had directed the security to be valued at market price or cost price, whichever is lower. The stipulation was brought in force, to ensure that the Banks do not claim escalated book profits. Though in the present case a contrary situation has arisen, where there is an appreciation of the value of the security, the dictum squarely applies. Even when there is an appreciation of the value, it does not enure to the Bank as income and, hence, the valuation has to be made as stipulated by the RBI; at the market price or cost price, whichever is lower. Hence, the valuation carried out by the Bank at the cost price has to be accepted. The question of law is answered in favour of the assessee-Bank

Summary

Issues:
Appreciation of trading assets and valuation for profit and loss account.

Analysis:
The High Court judgment addressed the issue of appreciating trading assets and determining the valuation for the profit and loss account. The case involved an assessee-Bank that engaged in making investments by purchasing securities, which were considered as trading assets. The key question was the valuation to be adopted when the securities appreciated in market value.

The Court referred to previous cases such as CIT v. Nedungadi Bank Ltd. and CIT v. Lord Krishna Bank Ltd., where the valuation of securities was discussed concerning claims of depreciation or loss. It was noted that the Reserve Bank of India (RBI) had directed that securities should be valued at the market price or cost price, whichever is lower, to prevent Banks from claiming escalated book profits. In the current scenario of appreciation in security value, the Court held that the same principle applied. Even with an increase in value, it was clarified that it does not constitute income for the Bank, and therefore, the valuation must align with the RBI stipulation, i.e., at the market price or cost price, whichever is lower.

Consequently, the Court ruled in favor of the assessee-Bank, upholding the valuation carried out by the Bank at the cost price. The judgment concluded by dismissing the appeal and directing the parties to bear their respective costs.