2018 (3) TMI 316 - HC - Income Tax

Addition in allowing loss of valuation of Held to Maturity (HTM) securities, when HTM securities are capital in nature - Held that - The change sought in the method of valuation of its stock is not bonafide and that it is not regularly followed thereafter. Its only grievance is that these RBI guidelines classify the same as Investments and, therefore, for the purpose of the Act also HTM securities should be considered to be the Investments. It is well settled that merely because RBI guidelines direct a particular treatment to be given to particular asset, the same would not necessarily hold good for the purposes of income chargeable to tax under the Act. In the view of the clear finding of fact recorded by the impugned order of the Tribunal that the securities HTM are stock-in-trade and the income on sales have been offered to tax as business income, has not been shown to be perverse. Appeal entertained on substantial question of law No.(ii)- Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that provisions of Section 115JB are not applicable to a Banking Company ?

Summary

Issues:
1. Valuation of Held to Maturity (HTM) securities as stock-in-trade.
2. Applicability of Section 115JB of the Income Tax Act to a Banking Company.

Issue 1: Valuation of Held to Maturity (HTM) securities as stock-in-trade:
The dispute in the case revolved around the appropriate valuation of HTM securities for the Assessment Year 2005-06. The Respondent-Bank classified its investments into three categories: Held to Maturity (HTM), Available for Sale (AFS), and Held for Trading (HFT). The Assessing Officer and CIT (A) disallowed the claim of valuing HTM securities as stock-in-trade, maintaining that it should be valued at cost based on previous years' practices. However, the Tribunal, citing the Karnataka High Court's decision, allowed the change in valuation method to lower of cost or market value, provided it was bona fide and consistently followed. The Tribunal found that the HTM securities were indeed held as stock-in-trade by the Bank, supported by the balance-sheet evidence and treatment of receipts as business income. The Tribunal directed the Assessing Officer to accept the Respondent-Bank's plea after verifying the factual claim.

Issue 2: Applicability of Section 115JB of the Income Tax Act to a Banking Company:
The Revenue contended that HTM securities should be treated as investments per RBI guidelines, while the Respondent argued they should be considered stock-in-trade for valuation purposes. The Court noted that RBI guidelines do not dictate the treatment for tax purposes, as confirmed in the Southern Technologies Limited case. The Karnataka High Court also observed that the RBI guidelines do not prevent treating investments as stock-in-trade. The Tribunal's finding that HTM securities are stock-in-trade and the income from sales was taxed as business income was upheld as not perverse. Consequently, the proposed question of law regarding the applicability of Section 115JB was not entertained, while the appeal on the second substantial question of law was allowed.

In conclusion, the judgment clarified the valuation method for HTM securities, emphasizing the freedom to change valuation methods if done in good faith and consistently. It also highlighted the distinction between RBI guidelines and tax treatment, affirming that the former does not bind the latter.