2020 (7) TMI 523 - AT - Income Tax

Disallowance of deduction claimed on account of diminution in the market value of Government securities classified under the category Held to Maturity - HELD THAT - The essence of the matter is to examine as to whether a particular expenditure/loss is deductible and not whether the same is recorded in the books of account. If a particular amount is deductible as per law, the same has to be allowed as deduction irrespective of the fact that it was not recorded in the books of account. It is further noticed that the assessee did not record such diminution of value of securities to the extent of ₹ 2.65 crores in its books of account so as to satisfy the RBI norms, which provide for valuing the securities as such without any diminution in their value at the year end. RBI guidelines mandate reflection of certain transactions in a certain way and do not supersede the taxing principles. Treatment of the securities as investment or stock-in-trade - AR has relied on the judgment in Pr.CIT Vs. Bank of Maharashtra 2018 (3) TMI 316 - BOMBAY HIGH COURT in which, in identical circumstances held that the securities held by the assessee bank as Held till Maturity will not be treated as investment. No contrary point of view has been brought to our notice by the ld. DR. Respectfully following the precedent, we overturn the impugned order on this score and hold that such securities should be taken as stock-in-trade and not investments. Computation of amount of diminution value on securities - as premium on year to year basis and secondly, difference between the market value and the face value of the securities - We find that the amount of premium on investment has been separately claimed as deduction by the assessee. Such premium has been offloaded from the purchase cost to bring such securities at face value and all the subsequent calculations for valuing at the market price at the end of the year and calculation of profit at the time of sale of in a later year, have been done with reference to the face value without premium. Thus, it is clear that the amount of premium on investment has not been taken into consideration at the time of computing diminution of the value of the securities. AO has not made any separate disallowance towards write off of premium on these securities. We, therefore, order to delete the addition of ₹ 2.65 crores and odd. Thus, these three grounds are allowed. Disallowance u/s 36(1)(viia) - Amount of provision which was not made in the books of account - HELD THAT - As decided in BANK OF MAHARASHTRA 2014 (10) TMI 210 - ITAT PUNE Tribunal did not allow deduction u/s 36(1)(viia) of the Act in respect of the amount of provision which was not made in the books of account. Also see STATE BANK OF PATIALA VERSUS COMMISSIONER OF INCOME-TAX AND ANOTHER. 2004 (5) TMI 12 - PUNJAB AND HARYANA HIGH COURT - Decided against assessee.

Summary

Issues involved:
1. Disallowance of deduction claimed on account of diminution in the market value of Government securities classified under 'Held to Maturity'.
2. Treatment of securities as investment or stock-in-trade.
3. Computation of amount of diminution value on securities.
4. Disallowance under section 36(1)(viia) of the Act.

Detailed Analysis:

1. The first issue pertains to the disallowance of a deduction claimed by the assessee on account of diminution in the market value of Government securities classified under 'Held to Maturity'. The Assessing Officer disallowed the deduction as the securities were considered investments and the amount was not debited to the Profit and Loss Account. The Tribunal held that the deductibility of an amount is based on legal principles, not solely on whether it is recorded in the books of account. It was noted that the RBI guidelines do not override taxing principles. The Tribunal allowed the deduction, emphasizing that the securities should be treated as stock-in-trade, not investments.

2. The second issue revolves around the treatment of the securities as investment or stock-in-trade. The Assessing Officer considered the securities as investments due to being 'Held till Maturity', while the assessee argued they should be treated as stock-in-trade. Relying on a precedent, the Tribunal held that the securities should be considered stock-in-trade, leading to a favorable decision for the assessee.

3. The next issue concerns the computation of the diminution value on securities. The Tribunal analyzed the valuation of securities and the profit computation upon sale. It was established that the market value was considered in the sale profit calculation, and the premium on investments was separately accounted for. The Tribunal ordered the deletion of the disallowance, highlighting that the premium on investments was not factored into the diminution value calculation.

4. The final issue involves the disallowance under section 36(1)(viia) of the Act. The assessee claimed a deduction based on a provision for bad and doubtful debts, which was partially disallowed by the Assessing Officer. The Tribunal upheld the disallowance, citing precedents and emphasizing the importance of provisions being made in the books of account for deductions under the relevant section.

In conclusion, the Tribunal partly allowed the appeal, addressing the various issues raised and providing detailed reasoning for each decision, ultimately resulting in a favorable outcome for the assessee on certain grounds while upholding the disallowance under section 36(1)(viia) of the Act.