Treatment of securities--Stock-in-trade or investment--Regarding - Income Tax - 665/1993

Treatment of securities--Stock-in-trade or investment--Regarding Circular No. 665 Dated 5/10/1993 To All Chief Commissioners of Income-tax, All Directors-General of Income-tax. Sir, By Circular No. 599 (F. No. 201/29/87/ITA.II), dated 24th April, 1991 ([1991] 189 ITR (St.) 126), it was clarified that securities held by banks must be regarded as their stock-in-trade and the claim of loss, if debited in the books of account, should be given the same treatment as is normally given to the stock-in-trade. It was also clarified that the interest paid for broken-period on the purchase of securities must be regarded as revenue payment and allowed accordingly. 2. Consequent upon the judgment of the Supreme Court in the case of Vijaya Bank Ltd. v. CIT ([1991] 187 ITR 541), the above circular was withdrawn by the issue of Circular No. 610 (F.No. 225/106/91-ITA.II), dated 31st July, 1991 (see [1991] 191 ITR (St.) 2). There have been representations from the Indian Banks' Association to the effect that the Supreme Court in the case of Vijaya Bank Ltd. was concerned, only with the claim for broken-period interest and did not decide the issue whether the securities constituted stock-in-trade or investment. It has, therefore, been represented that the withdrawal of Circular No. 599, dated 24th April, 1991 ([1991] 189 ITR (St.) 126), in toto was not called for. 3. The Board has reconsidered the treatment to be accorded to securities held by banks. In the case of Vijaya Bank Ltd. (187 ITR 541), the Supreme Court considered the issue whether, in a case where the assessee purchase securities at a price determined with reference to their actual value as well as the interest accrued thereon till the date of purchase, the entire price paid for them would be in the nature of capital outlay or whether the interest portion could be claimed as a revenue expenditure. It was in this context that the Supreme Court held that whatever was the consideration which prompted the assessee to purchase securities, the price paid for them was in the nature of capital outlay and no part of it could be set off as expenditure against income accruing on those securities. The court was not directly concerned with the issue whether the securities form part of stock-in-trade or capital assets. 4. The question whether a particular item of investment in securities constitutes stock-in-trade or a capital asset is a question of fact. In fact, the banks are generally governed by the instructions of the Reserve Bank of India from time to time with regard to the classification of assets and also the accounting standards for investments. The Board has, therefore, decided that the Assessing Officers should determine on the facts and circumstances of each case as to whether any particular security constitutes stock-in-trade or investment taking into account the guidelines issued by the Reserve Bank of India in this regard from time to time. Yours faithfully, (Sd.) G. Muthuramakrishnan, Director, Central Board of Direct Taxes.