2009 (7) TMI 1210 - HC - Income Tax

Disallowances on bad debts - claims of the assessee relating to non-rural branches - without appreciating the provisions of s. 36(1)(viia) in its proper perspective - Whether the Tribunal was right in holding that the diminution in the value of securities held by the bank should be allowed as deduction disregarding the method prescribed in the RBI circular as per which permanent investments had to be valued only at cost and only 'current' investments were to be valued at market price at the close of the accounting year ? HELD THAT - The very same issue came up for consideration before this Court in the decision reported in CIT vs. Karur Vysya Bank Ltd. 2004 (7) TMI 52 - MADRAS HIGH COURT which was rendered by relying upon the decision of the Supreme Court reported in United Commercial Bank vs. CIT 1999 (9) TMI 4 - SUPREME COURT . In that case, the Hon'ble Supreme Court categorically formulated the principles. Following the principles laid down by the Hon'ble Supreme Court, this Court has clearly held that the assessee is entitled to change the method of valuation of Government securities to market value from cost and claim depreciation on the difference in the diminution of value. The Tribunal also rightly pointed out the above ruling and held that the securities are trading assets of the bank and the loss arising on its sale is an allowable deduction. The loss on sale of securities is a revenue loss considering that the securities are trading assets and not investments. Hence, this question of law is answered in favour of the assessee and against the Revenue. Whether the Tribunal was right in law in holding that the interest paid on charge of investment is allowable as revenue expenditure disregarding the principle that the interest paid on charge of investments categorized as 'permanent' are to be treated as capital expenditure and not as revenue expenditure - HELD THAT - Whatever expenses incurred or interest paid therein on such shares was only revenue expenditure and not a capital expenditure in nature and the Tribunal by following the decision of this Court in 2004 (7) TMI 52 - MADRAS HIGH COURT and by following the Hon'ble Supreme Court decision 1999 (9) TMI 4 - SUPREME COURT has arrived at the conclusion that the interest paid will not be a capital expenditure and only a revenue expenditure. Hence, we hold that the Tribunal's finding is legal, valid and correct. Therefore, this question is also answered against the Revenue and in favour of the assessee following the above decisions of this Court and the Hon'ble Supreme Court. Whether the Tribunal was right in holding that the loss on sale of security incurred by the assessee bank was allowable as revenue loss ignoring the fact that loss on sale of securities categorised as 'permanent assets' 'cannot be treated as business loss - HELD THAT - Once the Government securities have already been held as stock-in-trade, any further subsequent sale by the bank to either third party and any loss on such transfer will also be treated only as a revenue expenditure and cannot be of a permanent nature treating the security as a capital expenditure. Since the main question has already been decided following the Hon'ble Supreme Court decision that such securities are stock-in-trade and loss of Government security transfer would only amount to revenue expenditure and the Tribunal was right in holding the same following the decision of this Court. Hence this question of law is also answered against the Revenue. Whether the Tribunal was right in law in holding that the payment of subscription fees paid to Securities and Exchange Board of India (SEBI) to carry on business of merchant banking by the assessee bank was allowable as revenue expenditure - HELD THAT - Following the decision rendered in Bikaner Gypsums Ltd. vs. CIT 1990 (10) TMI 2 - SUPREME COURT the Tribunal has rightly held that the bank which was carrying out its merchant banking business hitherto, having been required by the subsequent operation of law to pay authorisation fee to SEBI has paid the same and hence, the expenses have to be viewed only as having been incurred to facilitate the carrying on of an existing business and it is in the nature of revenue expenditure. The Hon'ble Supreme Court in the case Bikaner Gypsums Ltd. vs. CIT (supra) had categorically held that where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset. Hence, the finding of the Tribunal is correct in law. We do not find any other reason to interfere with the order passed by the Tribunal. Accordingly, the appeal is dismissed.

Issues Involved:
1. Diminution in the value of securities held by the bank disregarding RBI circular.
2. Treatment of interest paid on charge of investments as revenue expenditure.
3. Allowability of loss on sale of security as revenue loss.
4. Payment of subscription fees to SEBI as revenue expenditure.

Analysis:

Diminution in the value of securities:
The first issue pertains to whether the diminution in the value of securities held by the bank should be allowed as deduction, disregarding the method prescribed in the RBI circular. The Court referred to earlier decisions and principles laid down by the Supreme Court, emphasizing the freedom of the taxpayer to value stock-in-trade either at cost or market price. It was held that the assessee is entitled to change the method of valuation of Government securities to market value from cost and claim depreciation on the difference in value. The Tribunal correctly identified the securities as trading assets, allowing the deduction for the loss arising from their sale. The Court upheld the Tribunal's decision in favor of the assessee.

Interest paid on charge of investments:
The second issue concerns whether interest paid on charge of investments should be treated as revenue expenditure. The Court reiterated that Government securities held by banks are considered stock-in-trade, leading to the conclusion that any expenses incurred, including interest paid on such securities, are revenue expenditure and not capital expenditure. By following previous decisions, the Tribunal's finding that the interest paid is revenue expenditure was deemed legal and valid, resulting in a ruling against the Revenue and in favor of the assessee.

Loss on sale of security:
The third issue revolves around the treatment of the loss on the sale of security incurred by the bank. The Court clarified that since Government securities are held as stock-in-trade, any loss on their sale is considered revenue expenditure and not a capital loss. The Tribunal's decision to treat such losses as revenue expenditure was upheld based on previous rulings, leading to a ruling against the Revenue.

Payment of subscription fees to SEBI:
The final issue addresses whether the payment of subscription fees to SEBI by the bank for carrying on the business of merchant banking should be considered as revenue expenditure. Citing a Supreme Court decision, the Court affirmed that such expenses incurred to facilitate the carrying on of an existing business are in the nature of revenue expenditure. The Tribunal's decision to view the subscription fee as revenue expenditure was deemed correct in law, resulting in a ruling against the Revenue.

In conclusion, the Court dismissed the appeal, upholding the Tribunal's decisions on all issues raised by the Revenue. The judgments were based on established legal principles and previous decisions, leading to rulings in favor of the assessee and against the Revenue.

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