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2013 (7) TMI 656 - HC - Income TaxDepreciation on securities - Computation of income of Bank - Revenue held Assessee violated RBI guidelines - Tribunal declined to grant depreciation - Held that - method of accounting adopted by the tax payer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation - RBI Act or Companies Act do not deal with the permissible deductions or exclusion under the IT Act - if the assessee has consistently treating the value of investment for more than two decades as investment as stock-in-trade and claim depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations - The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of accounts - Following decision of UNITED COMMERCIAL BANK v/s COMMISSIONER OF INCOME TAX 1999 (9) TMI 4 - SUPREME Court and SOUTHERN TECHNOLOGIES LIMITED v/s THE JOINT COMMISSIONER OF INCOME TAX 2010 (1) TMI 5 - SUPREME COURT OF INDIA - Decided in favour of assessee.
Issues Involved:
1. Whether the Tribunal was justified in denying the claim of depreciation on securities held by the assessee as stock-in-trade. 2. Whether RBI guidelines govern the treatment of securities as stock-in-trade for income tax purposes. Issue-wise Detailed Analysis: 1. Denial of Depreciation on Securities Held as Stock-in-Trade: The assessee, a banking institution, classified its securities into three categories as per the RBI Master Circular dated 01-09-2003: 'Available for Sale', 'Held to Maturity', and 'Held for Trading'. The assessee treated these securities as stock-in-trade and claimed depreciation based on the lower of cost or market value. The revenue authorities rejected this classification for income tax purposes, arguing that the securities did not qualify as stock-in-trade and thus, depreciation was not allowable. The Tribunal upheld this view, noting that the securities held to maturity were not in the nature of stock-in-trade and that the depreciation claimed in previous years was not adequately identified. Consequently, the Tribunal remitted the matter to the Assessing Officer for reconsideration. 2. Applicability of RBI Guidelines for Income Tax Purposes: The core issue was whether the RBI guidelines, which mandate certain classifications for accounting purposes, also dictate the treatment of these securities for income tax purposes. The Tribunal and lower authorities held that the RBI guidelines were not binding for income tax computations, leading to the disallowance of the depreciation claim. The assessee argued that it had consistently treated the securities as stock-in-trade for over two decades, a practice previously accepted by the revenue authorities. Judicial Precedents and Legal Principles: The judgment referenced several Supreme Court decisions to support the assessee's position: - CHAINRUP SAMPATRAM v/s CIT (1953) 24 ITR 481 (SC): This case established that closing stock should be valued at cost or market price, whichever is lower, and that unrealized profits are not taxed while losses due to a fall in price are allowed. - Investment Ltd. v/s CIT (1970) 77 ITR 533 (SC): This case emphasized that a taxpayer's consistent method of accounting cannot be discarded unless it fails to reflect true income. - UCO BANK v/s CIT (1999) 237 ITR 889 (SC): The Supreme Court upheld that income should be computed based on the method of accounting regularly employed by the assessee. - UNITED COMMERCIAL BANK v/s CIT (1999) 240 ITR 355 (SC): This case reiterated that the true picture of profits and gains must be disclosed for income tax purposes, irrespective of the entries in the balance sheet. - SOUTHERN TECHNOLOGIES LIMITED v/s THE JOINT COMMISSIONER OF INCOME TAX (2010) 320 ITR 577 (SC): The Court clarified that RBI guidelines are primarily for prudence, transparency, and disclosure and do not affect the computation of taxable income under the Income-tax Act. Conclusion: The High Court concluded that the method of accounting adopted by the assessee, which treated securities as stock-in-trade and claimed depreciation, was consistent and should not be discarded. The Court held that the RBI guidelines and the Income-tax Act operate in different fields, and the entries in the balance sheet are not decisive for income tax purposes. The authorities' approach was contrary to the well-settled legal position. Therefore, the High Court set aside the orders of the lower authorities, allowed the appeal, and remanded the matter to the Assessing Officer to reassess in accordance with the law declared by the Supreme Court. Both substantial questions of law were answered in favor of the assessee.
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