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2012 (6) TMI 295 - AT - Income TaxCapital Loss vs Business loss - loss on sale of Government securities treated as business loss - assessee, Co-operative bank registered under Gujarat Co-operative Societies Act and RBI, engaged in banking business had however considered the investments made in the securities as Investments and not as stock in trade - Held that - It is undisputed that assessee has been treating for all intents and purposes the securities as its investments right from the date of its acquisition and it continues to treat it as investments. The C.B.D.T. Circular No.599 dt. 24.4.1991 has clarified that the securities held by Bank must be regarded as stock in trade meaning thereby regarded by whom i.e. by the Bank itself. Undisputedly in the present case the Bank in question has not regarded the investment as stock in trade but as investment. , therefore loss on sale of investments has to be taken as capital loss and not business loss - Decided in favor of Revenue.
Issues Involved:
1. Deletion of addition made on account of disallowance of loss incurred on the sale of government securities. 2. Consideration of the decision rendered by the Hon'ble Gujarat High Court in the case of Pari Mangaldas Girdhardas v. CIT(A). 3. Whether the order of the Assessing Officer (A.O.) should be upheld. Detailed Analysis: 1. Deletion of Addition Made on Account of Disallowance of Loss Incurred on Sale of Government Securities: The assessee, a Co-operative bank, claimed a loss of Rs. 30 lakhs on the sale of government securities as a business loss. The A.O. disallowed this claim, treating the loss as a capital loss instead. The A.O. argued that the assessee had consistently treated these securities as "investments" rather than "stock in trade" in its books and balance sheet. The magnitude and frequency of transactions did not indicate a regular business activity but rather an investment activity aimed at deriving income through dividends or capital gains. The A.O. relied on the decision of Pari Mangaldas Girdhardas v. CIT to conclude that the loss was a long-term capital loss. 2. Consideration of the Decision Rendered by Hon'ble Gujarat High Court in the Case of Pari Mangaldas Girdhardas v. CIT(A): The CIT(A) allowed the appeal of the assessee, stating that the transactions of government securities by banks are directly related to their day-to-day business due to the guidelines laid down by the Reserve Bank of India (RBI). The CIT(A) referred to the decisions of the Kerala High Court in Nedungadi Bank Ltd. and the Madras High Court in Karur Vysya Bank Ltd., which supported the treatment of such losses as business losses. The CIT(A) also considered CBDT Circular No. 599, which treats securities held by banks as stock in trade, thereby allowing the loss as a business loss. 3. Whether the Order of the Assessing Officer (A.O.) Should Be Upheld: The Revenue appealed against the CIT(A)'s decision, arguing that the assessee did not treat the investments as stock in trade in its balance sheet or income tax returns. The Revenue emphasized that for the CBDT circular to apply, the investments must be treated as stock in trade, which was not the case here. The Revenue also distinguished the cases relied upon by the assessee, stating that those cases involved securities treated as trading assets, unlike the assessee's case where securities were treated as investments. Judgment: The Tribunal upheld the A.O.'s order and allowed the Revenue's appeal. It concluded that the assessee had consistently treated the securities as investments and not as stock in trade. The Tribunal noted that the classification of securities as investments in the balance sheet and income tax returns was a method of accounting adopted by the assessee consistently and regularly, which could not be overlooked by the Departmental authorities. The Tribunal also pointed out that the CBDT circular applies only if the securities are treated as stock in trade by the bank itself, which was not the case here. Therefore, the Tribunal ruled that the loss incurred on the sale of government securities should be treated as a capital loss and not a business loss.
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