1982 (7) TMI 137 - AT - Income Tax

Summary

Issues Involved:

1. Whether the securities held by the bank constituted its stock-in-trade or were held as investments on capital account.
2. Whether the loss arising from the valuation of securities is admissible as a business loss.
3. Whether the provision for gratuity claimed by the bank is allowable under section 36(1)(v) of the Income-tax Act, 1961.

Detailed Analysis:

1. Whether the securities held by the bank constituted its stock-in-trade or were held as investments on capital account:

The bank argued that the securities were held as stock-in-trade and thus should be valued at cost or market price, whichever is lower. The Income Tax Officer (ITO) and the Commissioner (Appeals) disagreed, considering the securities as investments. The Tribunal examined the nature of the securities in the context of the Banking Regulation Act, 1949, which mandates banks to maintain a specified percentage of assets in liquid form. The Tribunal noted that the bank's investment in government and trustee securities was an essential part of its business operations. The Tribunal referenced multiple legal precedents, including the Supreme Court's ruling in United Commercial Bank Ltd. v. CIT, which established that income from securities held as part of a bank's trading assets should be treated as business income. The Tribunal concluded that the securities were indeed part of the bank's stock-in-trade.

2. Whether the loss arising from the valuation of securities is admissible as a business loss:

The bank claimed a deduction for the loss arising from the valuation of securities at the end of the accounting period. The ITO rejected this claim, arguing that the loss could only be considered if the securities were held as stock-in-trade. The Tribunal examined the bank's consistent practice of valuing securities at market price or cost, whichever was lower, starting from the assessment year 1975-76. The Tribunal cited legal precedents, including the Kerala High Court's judgment in Bank of Cochin Ltd. v. CIT, which supported the bank's method of valuation. The Tribunal concluded that the bank's method of valuing securities was permissible under commercial principles of accountancy and that the loss arising from such valuation should be treated as a business loss.

3. Whether the provision for gratuity claimed by the bank is allowable under section 36(1)(v) of the Income-tax Act, 1961:

The bank claimed a deduction for a gratuity provision amounting to Rs. 70.92 lakhs, out of which Rs. 61.29 lakhs pertained to earlier years (1971-1974). The ITO allowed only Rs. 9.63 lakhs, relating to the current assessment year, and disallowed the rest. The Commissioner (Appeals) allowed the entire claim, but the revenue contested this decision, arguing that the Commissioner (Appeals) did not provide a reasoned order. The Tribunal noted that section 40A(7) of the Income-tax Act, inserted by the Finance Act, 1975, with retrospective effect from 1-4-1973, superseded the general principles regarding gratuity liability. The Tribunal found that the Commissioner (Appeals) had not adequately considered the legal and factual aspects of the claim. Consequently, the Tribunal set aside the Commissioner (Appeals)'s order on this issue and directed a de novo consideration, requiring a reasoned order after affording both parties a reasonable opportunity to be heard.

Conclusion:

The Tribunal allowed the bank's appeals regarding the treatment of securities as stock-in-trade and the admissibility of the loss arising from their valuation as a business loss. The Tribunal set aside the Commissioner (Appeals)'s order on the provision for gratuity and directed a fresh consideration of the issue. The revenue's appeal was allowed for statistical purposes.