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TMI Blog2013 (7) TMI 656X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No.172/2009 - - - Dated:- 11-3-2013 - N Kumar and B Manohar, JJ For the Appellant : Shri P Dinesh for S Parthasarathi, Adv. For the Respondent : Shri K V Aravind, Adv. JUDGEMENT:- This appeal is by the assessee challenging the order passed by the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal') partly allowing the appeal filed by the assessee holding that the real income of the Bank has to be computed on the basis of the RBI guidelines when the claim of the assessee on erosion but investments available for sale is not allowable because it does not have the ingredient of stock in trade and hence no depreciation thereon can be allowed. 2. Assessee is the Banking institution; As per the Reserve Bank of India (RBI) Master Circular dated 01-09-2003, the assessee is required to classify the securities held into category of: (a) 'Available for Sale' (b) 'Held to Maturity' (c) 'Held for Trading'. The assessee tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the issue is restored to the file of the Assessing Officer for consideration in the light of the finding recorded above. Accordingly, the appeal was partly allowed and the matter was remitted to the Assessing Authority. Aggrieved by the said order, the present appeal is filed. 4. The following substantial question of law do arise for consideration in this appeal: (i) Whether the Tribunal was justified in passing the impugned order with a finding that securities held by the assessee were not in the nature of stock-in-trade and denied the claim of depreciation when the said benefit was extended to the assessee for the earlier years; and (ii) Whether the guideline of the RBI govern the treatment of securities as stock-in-trade for income tax purpose when the assessee has been consistently treating it as stock-in-trade which has been accepted by the revenue in the past.? 5. The said questions arose for consideration before the Apex Court in the case of CHAINRUP SAMPATRAM v/s CIT reported in (1953) 24 ITR 481 (SC), wherein the Apex Court held as under: " This is the theory underlying the rule that the closing stock is to be valued at cost or market price whiche ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (emphasis added). The Apex court in the case of UCO BANK c/s CIT reported in (1999) 237 ITR 839 observed as under: "Under section 145 of the Income-tax Act, 1961, income chargeable under the head 'Profit and gains of business or profession' or 'income from other sources' shall be computed in accordance with the method of accounting regularly employed by the assessee; provided that in a case where the accounts are correct and complete but the method employed is such that in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, the computation shall be made in such manner and on such basis as the Income-tax Officer may determine. In the present case, the method employed is entirely for a proper determination of income." Thereafter, the court further observed: "The very fact that the assessee, although generally using a mercantile system of accounting, keeps such interest amounts in a suspense account and does not bring these amounts to the profit and loss account, goes to show that the assessee is following a mixed system of accounting by which such interest is included in its income only when it is actually received. Looking to the met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s does not recognize the "income" under the mercantile system and it insists that NBFCs should follow the cash system in regard to such incomes. 31. Before concluding on this point, we need to emphasise that the 1998 directions has nothing to do with the accounting treatment or taxability of "income" under the Income-tax Act. The two, viz., the Income-tax Act and the 1998 Directions operate in different fields. As stated above, under the mercantile system of accounting, interest/hire charges income accrues with time. In such cases, interest is charges and debited to the account of the borrower as "income" is recognized under the accrual system. However, it is not so recognized under the 1998 Directions and, therefore, in the matter of its presentation under the said directions, there would be an add back but not under the Income-tax Act necessarily. It is important to note that collectability is different from accrual. Hence, in each case, the assesee has to prove, as has happened in this case with regard to the sum of Rs.20,34,605, that interest is not recognized, or taken into account due to uncertainty in collection of the income. It is for the Assessing Officer to accept t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The primary object of 1998 Directions is prudence, transparency and disclosure. Section 45-JA comes in Chapter III B which deals with the 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. Basis of the 1998 Directions is that anticipated losses must be taken into account but expected income need not be taken note of. Therefore, these Directions ensure cash liquidity for NBFCs which are now required to state true and correct profits, without projecting inflated profits. Therefore, the RBI Directions of 1998 deal only with the presentation of NPA provisions in the balance sheet of an NBFC. It has nothing to do with the computation or taxability of the provisions for NPA under the IT Act. Though RBI Directions 1998 deviate from accounting practice as provided in the Companies Act, they do not override the provisions of the IT Act. Some companies, for example, treat write offs or expenses or liabilities as contingent liabilities. For example, there are companies which do not recognize mark to market loss on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only had notified the 30% of the securities required to be held by a banking institution for complying with the RBI guidelines/ regulations can be in current investment, the fact that the bank had treated all its investments in securities as stock-in-trade and further fact that the RBI had accorded permission to the bank to value such investment should be taken as a relevant and clinching circumstance to accept the stand of the assessee that securities were stock-in-trade, we are unable to accept the submission, only for the reason that any and every asset held by an assessee 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." 7. It is submitted that against such demand assessee has preferred an appeal and is now pending before the Apex Court. As it is clear from the extraction of the judgment of the Hon'ble Supreme Court set up about, the reasoning adopted by this Court in ING VYSYA BANK's case runs counter to the law declared by the Apex Court. 8. From the aforesaid judgments of the Apex Court, new it is clear that a method of accounting ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otwithstanding that in the balance sheet, it is shown as investment, for the purpose of Income-tax Act, it is shown as stock-in-trade. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the Bank has to take into consideration the market value of the shares. If the market value is less than the cost price, in law, they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the balance sheet. 10. In that view of the matter, the order passed by the authorities holding that in view of the RBI guidelines, the assessee is estopped from treating the investment as stock-in-trade is not correct. That finding recorded by the authorities is hereby set aside. The appeal is allowed. The matter is remanded back to the Assessing Authority and he shall look into these entries in accordance with law and shall assess in terms of the law declared by the Apex Court and the assessee is entitled to the extension of the said benefit. Both the substantial questions of law are answered in favour of the assessee and against the Revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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