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TMI Blog2013 (6) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... the securities held by the assessee were Government Security and as per RBI introduction they had to be held for a period of more than 10-15 years as permanent assets which would assume the character of a capital asset over which the question of allowing law an account of revaluation of capital assets did not arise? (3) Whether, the Tribunal was correct in holding that the Assessing Officer had correctly granted relief in respect of bad debts claim of a sum of Rs. 1,96,71,030/- and the balance claim of Rs. 5,24,74,740/- had been correctly disallowed as the requirement of Section 36(1)(vii) and 36(1)(vii-a) had not been complied with by the assessee. (4) Whether the Tribunal was correct in holding that the Assessing Officer had correctly disallowed the claim made by the assessee regarding entertainment expenditure of Rs. 16,21,016/- on the basis that 50% should be treated as expenditure relating to staff and cannot be brought under the rigour of section 37(2) of the Act as there was no evidence produced to support such a claim nor was a claim in this regard was made in the return of income. (5) Whether, the Tribunal was correct in holding that the judgment of Can Bank Financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee on examination of the nature of holdings which were undisputedly in the form of investments in securities. The assessee itself having described some part of these investments in securities (70%) as permanent investment and balance 30% as current investments and in the wake of legal position as prevailed in the clarification issued by the Board Circular No.665/ 1992-93 and having found the assets in the nature of investments, any securities held by the assessee cannot be termed as stock-in-trade as it was an investment to fulfil the RBI Instructions and Guidelines and therefore held it as investments and not as part of the business asset of the assessee, valued for trading. Nevertheless, the claim of the assessee had been allowed to an extent of 30% based on the RBI Circular relating to the investments in securities, allowing a bank to treat 30% of the investments as current investment whereas 70% of the investment should be in the nature of permanent investments. Such disallowing became contentious issue against which the assessee carried the matter to the CIT (Appeals), but without much success on this aspect, as the view of the assessing authority was affirmed by the CIT (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has nevertheless carried this issue before the Appellate Tribunal. The Tribunal being of the opinion that the assessee was entitled for deduction of the claim in respect of the amount eligible under Section 36(1)(vii) holding that the provisions of Section 36(1)(vii) and 36(1)(vii-A) operates in different fields and by reversing the view of the Assessing Officer and CIT (Appeals) allowing the claim in full in favour of the assessee as one, to which the assessee was entitled to under Section 36(1)(vii). Therefore, on this aspect, the Revenue is in appeal before us raising the 3rd question for examination. 10. Yet another claim which became contentious before the Assessing Officer was relating to the amount that can be claimed as a part of its business expenditure which was in the nature of expenditure incurred or spent in respect of the employees who had accompanied the guests and visitors of the assessee-Organization for whom the assessee had incurred expenditure in the nature of entertainment expenditure which is defined in Explanation (i) of sub-Section (2) of Section 37 of the Act. The question became contentious as in terms of the provisions of Section 37(2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Circulars that guided the assessee on this aspect and has submitted that the assessee admittedly had held the securities as part of its investments in terms of the RBI instructions that the Banking Institution was required to make investments up to an amount equal to stipulated percentage of its deposits that such investments were mandatory and statutory requirements on any banking institution and RBI had issued guidelines and clarification on this aspect. But even the assessee had in the return, of income indicated the investments as permanent investments and submits that any asset held which is in the nature of an investment can never be termed as stock-in-trade as a stock-in-trade is held as part of trading asset and not one which is retained as investments and therefore, submits that on the very admission of the assessee the investments in securities can never partake the character of stock-in-trade and therefore the question of valuing such stocks at the end of the accounting period for the purpose of making profit and loss account and determining the profit or loss does not arise that exercise is in futility and therefore the stand of the assessee on this aspect is not tenabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [1991]187 ITR 541/57 Taxman 152, had withdrawn the earlier Board Circular No 599 dated 24-4.-1991, but later on the overwhelming representation from the Indian Banks Association and many other Banking Companies realizing that not only the judgment of the Hon'ble Supreme Court in the case of Vijaya Bank Ltd's case (supra) did not govern the question in issue but also that the earlier Board Circular No.599/1991 was not either on proper lines or one that could be generalized in respect of all investments by Banking Companies/institutions for fulfilling the RBI regulations and as an investment which is to be held as part of the trading asset which is characterized as stock-in-trade, had very clearly clarified under the circular of the year 1993 that as to whether the Banking Company is holding an investment in any security as part of its investments to fulfil the requirements of the Banking Regulation Act and the Rules framed thereunder or as to whether the investment has to be held as stock-in-trade is a question of fact to be decided by the Assessing Authority in each case and therefore having left the matter to the Assessing Authority and the Assessing Authority having sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether, in a case where the assessee purchases 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 the 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 from part of stock-in-trade or capital assets. 4. The question whether a particular item of investment in securities constituted 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 circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in the wake of the statutory provisions of the Board Circulars on these aspects. 22. So far as applicability of the provisions of RBI Act and the directions issued by the RBI in the matter of computation of tax liability and taxable income under the provisions of Income-tax Act is concerned, our attention is drawn to paragraph 32 of the judgment of the Hon'ble Supreme Court in the case of Southern Technologies Ltd. v Jt. CIT [2010] 320 ITR 577/187 Taxman 346, which reads as under: 32. RBI Directions 1998 have been issued under s. 45JA of RBI Act. Under that section, power is given to RBI to enact a 'regulatory framework involving prescription of prudential norms for NBFCs which are deposit taking to ensure that NBFCs function on sound and healthy lines. The primary object of the said 1998 Directions is prudence, transparency and disclosure. Sec. 45JA comes under Chapter IIIB which deals with provisions relating to financial institutions, and to non-banking institutions receiving deposits from the public. The said 1998 Directions touch various aspects such as income recognition; asset classification; ' provisioning, etc. As stated above, basis of the 1998 Directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the learned counsel for the assessee, the assessee has already been allowed the deduction to the extent of 30% of the loss and the claim is only in respect of the balance 70% and the issue is being carried further. 25. While 30% of the amount claimed as loss is allowed by the assessing authority itself and this amount is not in issue before us and therefore we have not opined anything on the same. The issue raised is on the rejection of the claim for deductions as a business loss in respect, of balance 70% and on the above examination, we find that the amount insofar as 70% of the investment is concerned, even as per the assessee it is held as permanent investment and may be because it is required to be held so by the assessee- Bank in terms of the instructions and guidelines issued by the RBI and to fulfil the statutory requirement under the RBI Act read with Banking Regulation Act. 26. In fact, we are of the view that the Assessing Officer has not merely recorded the finding of fact on this aspect, but also very correctly, as in our considered opinion, no assessee can claim an investment of lasting nature, to be part of its trading asset or as an asset held by way of sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee does not necessarily become stock-in-trade, it is only such merchandize of. a businessman which is ready for sale, and is held for sale, that acquires the characteristic of stock-in-trade. 30. A merchandize or goods or in the present situation, security does not get the character of stock-in-trade merely because it is so designated, but a security can acquire the character of stock-in-trade if it is so held as part of trading stock arid the assessee acts as such. In respect of securities which are held by way of permanent investment in securities by the assessee-bank as part of the requirement of the law, then such securities is not and cannot be either be construed or accepted as an investment in the form of security ready for sale. Stipulation on the bank is that it should be held as an investment and as an investment in some government securities or other securities. It is, therefore, held that all holdings of a banking institution in the form of investment in securities does not automatically acquire the characteristic of stock-in-trade. As to whether a particular investment in any security is in the nature of stock-in-trade or otherwise is a question which has to be e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Supreme Court to the facts of the assessee's case. Re: Questions 4 32. This question relates to deduction claimed by the assessee by way of expenditure incurred on its employees who had accompanied the guests and delegates of the assessee-bank and as to whether it is to be allowed in full or the provision of Section 37(2) of the Act operates on it. Having examined the submissions made at the Bar and in particular having regard to the definition of the term 'entertainment' as indicated in explanation-1 to sub-section (2) of Section 37 of the Act, reading as under: Explanation 1 - For the purposes of this sub-section, "entertainment expenditure" includes - (i) the amount of any allowance in the nature of entertainment allowance paid by the assessee to any employee or other person after the 29th day of February, 1968; (ii) the amount of any expenditure in the nature of entertainment expenditure [not being expenditure incurred out of an allowance of the nature referred to in clause (i)] incurred after the 29th day of February, 1968, for the purposes of the business or profession of the assessee by any employee or other person. read with clause-3 reading as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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