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TMI Blog2001 (3) TMI 254X X X X Extracts X X X X X X X X Extracts X X X X ..... R 44 and of the Calcutta High Court in the case of CIT v. UCO Bank [1993] 200 ITR 68. 3. In this case, the original assessments for the assessment years 1982-83, 1983-84 and 1984-85 were completed on 21-3-1985, 26-12-1985 and 29-9-1986 fixing the income at Rs. 13,76,160, Rs. 2,90,470 and loss of Rs. 28,11,413 respectively. Subsequently, assessment proceedings were reopened by issuance of notice under section 148 of the Income-tax Act, 1961. The reopening was done on the ground that income chargeable to tax has escaped assessment on account of allowing the claim made by the assessee with regard to depreciation and investment allowance and broken period interest. The basis for reopening was the decision of the Supreme Court in the case of Vijaya Bank Ltd v. Addl. CIT [1991] 187 ITR 541. In this case, the Hon'ble Supreme Court held that investment in Government securities is a capital outlay and, therefore, broken period interest paid was not revenue expenditure. In the light of the above decision, the Assessing Officer held the view that the investment in Government securities is a capital loss and the broken period interest constituted capital expenditure, hence the reopening. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was only investment and did not constitute stock-in-trade of the assessee. The assessee's transactions in Government securities are in the nature of capital outlay and hence the claim of loss, if any, on the revaluation of such investments, according to the Assessing Officer, can at best be a capital loss which is only notional at this stage and in any case cannot be allowed as a revenue loss. The Assessing Officer, therefore, held that interest paid for the broken period tan only be treated as part and parcel of the capital outlay and cannot be treated as a revenue item. Consistent with the stands taken by the assessee, the difference between the sale price and the depreciated book value has been offered by the assessee as profit on sale of investments. However the Assessing Officer held that since the investments in securities are to be held as capital outlay, the profit arising on the sale of such securities will have to be reckoned with reference to the purchase cost and should be assessed as capital gain as against business income as offered by the assessee. 6. Aggrieved by the order of the Assessing Officer, the assessee approached the first appellate authority. Apart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... old it cannot be considered to have become an investment or capital expenditure so long as the basic test of its being in the nature of stock-in-trade is satisfied. The selling or buying depends on the requirements and exigencies of the situation and this alone cannot be made a yardstick for determining the nature of investment. For the above proposition, the assessee relied on the following decisions: (1) CIT v. Cocanada Radhaswami Bank Ltd. [1965] 57 ITR 306 (SC); (2) United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC); and (3) CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 (SC). 7. The CIT (Appeals) mainly relying on the Circular of the Board No. 665, dated 5-10-1993, held that the Assessing Officer went wrong in not taking note of the above circular. The Assessing Officer was not justified in holding that the Government securities were purchased by the assessee-bank as capital investment and not as stock-in-trade. The CIT (Appeals) held that the assessee is a banking company and as per the guidelines issued by the Reserve Bank of India, the assessee is required to have a minimum percentage of investment in Government securities. However, since the securities can be p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputing the business income of the appellant because the depreciation refers not to a capital asset but to stock-in-trade. Reliance in this connection is also placed on the decision of the Karnataka High Court in the case of Corporation Bank Ltd (174 ITR 616) and of the Supreme Court in Brooke Bond India Ltd. v. CIT (162 ITR 373, 380)." Aggrieved by the above order, the Revenue is in appeal before the Tribunal. 8. The learned departmental representative vide his written arguments submits as follows: Banking companies are formed to carry on business of banking. Section 5(b) of the Banking Regulation Act, 1949, defines "banking". Banking means accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft or otherwise. The bank utilises the deposits for purpose of lending it to others to earn interest income for investment in approved securities, shares, bonds, debentures and other forms of investments to earn investment income. "Security" has not been defined in the Income-tax Act. It is only defined in section 2(h) of Securities Contracts (Regulation) Act, 1956, on the following lines: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts which give rise to definite income at definite intervals and redeem the invested amount on a definite date. The banks cannot dispose of these securities unless and until their value exceeds the SLR in view of section 24(2A) of the Banking Regulation Act. 8. The learned departmental representative submitted that every banking company is required as per section 29 of the Banking Regulation Act to prepare a balance-sheet as on the last working day of the year in Form A of the Third Schedule to the Banking Regulation Act and a profit and loss account in Form B of the said Schedule. In this Form 'A' the liabilities are shown under five heads and assets under six heads in a columnar form of the balance-sheet. The third item in the 'Assets' side is the 'Investment' whose break up is given in Schedule '8' of the balance-sheet. In this schedule 'investments' in India are categorised under six heads, the first being "Government securities" and the second one "Other Approved securities". Form 'B' shows income under two heads "interest earned" as per Schedule 13 and "other income" as per Schedule 14 of the profit and loss account. Schedule 13 shows the interest earned under three heads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrent liabilities and provisions, and the losses and expenditure not written off. The current assets are further classified into five items-consisting of inventories, sundry debtors, cash and bank balances, other current assets and loans and advances. The term "Inventory" includes "stock-in-trade". While companies other than banking companies can carry on any business and can show the relevant stock-in-trade under the head "Inventory" in the balance-sheet and in the profit and loss account, the banking companies do not have any stock-in-trade to show in these statements since they do not purchase any asset for selling at a profit but invest in them only to earn income from these assets. The investment in certain assets such as approved securities is also mandatory, assessee already, for the maintenance of SLR. From what has been stated above, it is clear that the approved securities are treated only as a investment by banking companies and are held by them for maintenance of SLR and simultaneously for earning income by way of interest. The learned departmental representative submitted that the question for consideration is whether the approved securities are treated as investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved securities should be bifurcated into permanent and current investments". Permanent investments are those which banks intended to hold till maturity and current investments are those which banks intend to deal in i.e., buy and sell on a day-to-day basis. It has been decided that to begin with, banks should keep not more than 70% of their investments in permanent category from the accounting year 1992-93. Permanent investments should be valued at cost. Any gain on sale of these has to be taken to the capital reserve account and any loss written off. The learned departmental representative submitted that banks are required to fully provide for the depreciation in the case of current investments, while the depreciation in the case of permanent investments should not be provided for. In fact, the RBI has already stated that the depreciation in respect of permanent investments is not likely to affect their realisable value. The learned departmental representative submitted that Circulars dated 20-6-1992, 3-4-1995, 19-3-1996 and 6-4-1996 speak of permanent investments/securities to be treated as capital in the light of the wordings of the Circulars. Whatever be the changes brought by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intervals. They are usually purchased by trusts and banks for investment as per legal requirements. They are not the type of financial assets like shares which are traded regularly on the stock exchange. The purchase was made only to comply with S.L.R. requirements and to get financial returns. There is no price fluctuation for securities as in the case of shares. There is no intention to resell at a profit. Hence the learned departmental representative contended that approved securities are only investments to be classified under capital assets and not the stock-in-trade of the banking business. 12. In respect of the second case referred to above also the learned departmental representative submitted that the intention of the assessee in that case is important. In the third case, cited above, the learned departmental representative submitted that while reversing the orders of the Tribunal and the High Court, the Hon'ble Supreme Court held that since the transactions of the assessee were not diversifying, nor gradual, according to opportunities offered by fluctuating market conditions but were in bulk and almost at a time, the transactions lacked business character and hence the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee-bank as its stock-in-trade. Therefore, the difference between the market value of the securities and their cost treated as depreciation in the value of stock-in-trade should be allowed as a deduction in computing the business income of the assessee. The learned representative of the assessee supported the order of the CIT (Appeals) placing reliance on the following decisions: (1) Corpn. Bank Ltd's case; (2) Brooke Bond Co. Ltd. v. CIT [1986] 162 ITR 373 (SC). The learned representative also relied on the following decisions in support of the order of the CIT (Appeals): (1) Bank of Cochin Ltd. v. CIT [1974] 94 ITR 93 (Ker.); (2) Malabar Co-operative Central Bank Ltd. [1975] 101 ITR 87 (Ker.); and (3) CIT v. South Indian Bank Ltd [2000] 241 ITR 374 2 (Ker.). In the case reported in Bank of Cochin Ltd, the assessee's learned representative submitted, it was held by the jurisdictional High Court that the loss on revaluation of the Government securities was deductible in determining the total income for income-tax assessment. Coming to the instant case of the assessee, it was contended that the Assessing Officer's version that the assessee had not sold any securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that CIT(A) was justified in deleting the disallowance of depreciation on investment made by the Assessing Officer and hence the order of the CIT(A) should be upheld. 15. Coming to the disallowance of the assessee's claim for broken period interest also the assessee's learned representative submitted relying on the decision of the Supreme Court in the case of United Commercial Bank that investments made in Government securities being stock-in-trade, broken period interest paid for the purchase of the securities should also be treated as revenue expenditure and allowed as a deduction. The assessee's learned representative also relied on the decision of the Kerala High Court in the case of South Indian Bank Ltd for the proposition that broken period interest paid is a revenue expenditure and allowable as a deduction. The assessee's representative also challenged the ground of the Revenue that because of the change in the method of accounting the income cannot be properly determined. The method changed by the assessee cannot be rejected simply because the income has been reduced by an amount of Rs. 13 lakhs or so. The assessee had to change the method of accounting for bonus from c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom tax under the CBR Notification No. 35, dated 20th October, 1934 and No. 33, dated 18th August, 1945?". The learned departmental representative submitted that "fixed deposits" are entirely different from investment in "approved securities". "Fixed deposits" are treated on par with cash which is clear from Schedule 6 of the Balance-sheet where "cash on hand" includes "Balance with the RBI in current account and other accounts". The fixed deposits are not mandatory form of investment under section 24(2A) of the Banking Regulation Act, which can be dealt with freely by banks. But the approved securities cannot be dealt with freely by banks due to the requirement of S.L.R. The learned departmental representative stressed the fact again that the assessee cannot sell the approved sccurities which are held in compliance with S.L.R. requirements. These securities are classified by the assessee as "investments" and not as "stock-in-trade", in its balance-sheet. Stock-in-trade is only kept for sale; whereas securities are held for S.L.R. compliance. There is no evidence that the approved securities were regularly dealt with by the assessee so as to call them "stock-in-trade". In some of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities. The bank was thus required to buy and sell Government securities to maintain certain ratios. During the assessment years 1979-80 and 1980-81, the assessee sold Government securities ex-interest and received sums of Rs. 5,70,740 and Rs. 4,75,294, respectively, for the two years concerned with respect to the broken period upto the date of sale. Similarly, during the said periods, the assessee purchased Government securities-cum-interest and paid interest for the broken period, of Rs. 6,36,411 and Rs. 5,15,659 respectively. In the computation of total income for the years in question, the assessee deducted the interest paid for the broken period and this was originally allowed by the assessing authority in the assessments. Later, the assessing authority withdrew the said deductions by resort to the provisions of section 154 of the Act, which was upheld by the Commissioner of Income-tax (Appeals). The Tribunal cancelled the orders of the authorities below. On a reference: it was held,-- (i) That the Government securities held by the assessee-bank were part of its trading assets. The purchase and sale of Government securities was incidental to the carrying on of the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance-sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and that there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with statutory provision would not disentitle the assessee in submitting the income tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income-tax, as stated earlier, what is to be fixed is the real income which is to be deduced on the basis of the accounting system regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, in the assessment year 1968-69, earned certain amount of income by way of interest on securities. The assessee claimed that the above sum earned by it should be exempted under section 80P(2)(a)(i) of the Income-tax Act, 1961, for the reason that the Banking Regulation Act, 1949, had been made applicable to the assessee and the provisions of the Regulation clearly indicated that the holding of securities, the realisation of those securities and the earning of interest from those securities all spelt carrying on of the business of banking and, therefore, the interest that accrued on the securities should be treated as business income. The Tribunal held that the assessee had not discharged the burden of showing that the securities represented stock-in-trade and, therefore, the Appellate Asstt. Commissioner was justified in rejecting the assessee's claim for exemption. On a reference, it was held by the jurisdictional High Court as under: "The Tribunal had erroneously held that the burden of proving that the securities were held as stock-in-trade would be discharged only if the bank established that, as a matter of practice, it had been buying and selling securities or dealing wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) G. Venkataswamy Naidu Co.'s case; (2) Ramnarayan Sons (P.) Ltd's case; and (3) Raja Bahadur Kamakhya Narain Singh's case are distinguishable on facts. In these cases none of the assessees were banks. In all these cases, the assessees made investments either in land or dealt in shares and securities at its own free will. The assessees in these cases were free either to sell or purchase. It was under these circumstances, the Hon'ble Supreme Court held that the intention of the assessee is the most important factor as it decides the character of the investment, whether it is stock-in-trade or capital. In all these cases, there was no dealing by any of the assessees; whereas in the instant case of the assessee the assessee is bound to maintain a minimum level of investment as per the direction of the R.B.I. in order to gain the confidence of the public and to meet any unforeseen circumstances. In the case of the assessee before us, the assessee is not prevented from buying and selling securities. In fact, it is the case of the assessee that it had purchased and sold securities and held securities as its stock-in-trade. But the assessee could not show these securities as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt. Coming to the instant case of the assessee, the decision of the Hon'ble Supreme Court in the case of United Commercial Bank is on identical facts. Hence the ground taken by the Revenue that the assessee had been regularly following the method of valuation of approved Government securities at cost price, that the revaluation of the same was a change in the method of accounting regularly followed by it and consequently the income chargeable to tax for the relevant assessment year was not properly deducible cannot be accepted. The assessee has not changed the method of accounting regularly followed by it to a system not recognised by any accounting standard. More so, if the change made by the assessee is also an accepted method. If that be so, the change cannot be faulted with merely because by that change there is loss of revenue. Such changed method of valuation was upheld by the Karnataka High Court in the case of Corpn. Bank Ltd though in that case the Revenue had not disputed that the securities formed part of the stock-in-trade. 23. In the case of Bihar State Co-operative Bank (supra), the Hon'ble Supreme Court held that the assessee who is carrying on the general busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently, notice under section 148 was issued on 22-3-1993 for all the three years under consideration on the ground that income assessable to tax has escaped assessment in the light of the decision of the Hon'ble Supreme Court in the case of Vijaya Bank Ltd. The relevant observations of the Assessing Officer recording the reasons for reopening the assessments under section 143(3) read with section 147 as appearing in para 2 of the assessment order (assessment year 1982-83) are as below: "Subsequently on the basis of the decision of the Supreme Court in the case of Vijaya Bank Ltd v. CIT [1991] 187 ITR 541 that investment in Government securities is capital in nature, the assessment was reopened under section 147 of the IT Act and notice under section 148 was issued to the assessee and served on 25-3-1993. The very purpose of the reassessment proceedings was primarily to disallow a sum of Rs. 7,72,500. Which is the amount claimed by the assessee as depreciation on investments, being the loss on revaluation of Government securities." It is the case of the assessee that even according to the Assessing Officer there was no failure on the part of the assessee to disclose fully and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to re-open the assessment if he has reason to believe that any income chargeable to tax has escaped assessment for the assessment year. The proviso to section 147 restricts the scope of the re-opening of the assessment. It reads as under: "S. 147. Income escaping assessment.--If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to r53 referred to as the relevant assessment year): Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escap ..... 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