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TMI Blog2015 (12) TMI 295X X X X Extracts X X X X X X X X Extracts X X X X ..... e above extent. 2. Briefly stated the facts of the case are that the return of income for AY 2008-09 was filed on 29.9.2009 declaring total income at Rs. 11,39,98,430/-. The case was selected for scrutiny on CASS and assessment proceedings was initiated so as to complete assessment under section 143(3) of the Act. The AO completed the assessment by making addition including addition by way of disallowing claim of assessee of loss on sale of securities by treating it as long term capital loss instead of business loss at Rs. 3,39,79,600. 3. During the course of assessment proceedings on verification of profit and loss account it was observed by the AO that assessee has debited Rs. 3,39,79,600/- under the head 'loss in government securities'. On being asked by AO to the assessee, as to why the loss in 'government securities' debited to the profit and loss account may not be disallowed treating the same as loss as capital gain/loss, in response assessee furnished details and proofs regarding purchase cost and sale price of various government securities/bonds and submitted merely as under :- "1. Our is a co-operative bank, doing the business of banking, registered under Gujarat Co-op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the CBDT in this respect which reads as under (A copy of circular is enclosed -Annexure -A) 1. Clarification on the following issue have been sought by banks from the CBDT (i) Whether the securities held by the banks constitute their stock in trade or investment & consequently whether the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing their taxable profits. (ii) Whether deduction claimed in respect of interest paid for broker period on the purchase of securities should be allowed as deduction from the taxable profits. 1. The matter has been considered by the Board & it has been decided that the securities must be regarded as stock in trade by bank. Therefore, the claim of loss, if debited in the books of a/c would be given the same treatment as is normally given to the stock in trade." 4. However, the AO rejected the claim of assessee mainly on the basis of his examination and application of certain tests which were analysed in the case of Pari Mangaldas Girdhardas vs. CIT (1997) CTR 647 (Guj) - as under - Test Facts of the case (a) Whether the acquisition was with the intention of dealing or w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The following material observations are made on the issue :- 1) As per section 6 read with section 5(b) and (c) Banking Regulation Act and as per the guideline issued by the Reserve Bank of India, Investment activities is the normal banking activity and should be treated as banking stock in trade. The format of the balance sheet has been prescribed by the legislature and bank has to report their financial result in that format only. As per this format the investment in Non-SLR Securities though treated as banking assets (stock in trade) has to be shown in the balance sheet as investment. 2) The above position has also been clarified by Circular No.665 of the CBDT dated 5.10.1993. "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 respect to the classification of assets and also the accounting standards for investments. The Board has therefore, decided that the Assessing Officer should determine on the facts and circumstances of such case as to whether any particular security con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of in effect claiming no depreciation (writing back any provision of depreciation in P & L account (IDR) for computation of total income) and thus valuing closing stock at cost only for showing the income in its returns. In nut shell, as discussed above, the bank has claimed loss in respect of securities which it had always meant to hold as trading assets and shown as AFS as per RBI's guidelines and classifications. Just because the banks have to keep them for longer times because of the nature of their business, it would not change the nature of the asset. Further as held by Hon'ble Mumbai High Court in the case of CIT vs. Bank of Baroda (2003) 262 ITR 334 the mere fact that the banks are required as per RBI's guidelines to show these in the balance sheet as investment would not affect the nature of the asset. The banks by the very nature of the business may have to park surplus trading funds in securities and although intended to be trading assets may have to keep them for longer periods if funds are not required. In fact the assessee has purchased and sold some securities of AFS category in relatively shorter periods also. In fact during the year the assessee has earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n given by Madras High Court on the basis of decision given in the case of United Commercial Bank vs. CIT reported in 240 ITR 355 (SC) In our case the AFS securities have been shown as stock in trade & valued at cost price at consistent basis & as such we have declared real loss of sales of securities. ii.....Loss must have direct & proximate nexus to business operation & it should be during the course of business. If there is direct & proximate nexus between business operation & if loss or it is incidental to it then loss is deductible as business loss. A. Ramchandra Shivnarayan vs. CIT 1978 111 ITR 263 (SC) B. U/s 28(1) loss of stock in trade is a admissible deduction in computing profit CIT vs. Nainital Bank Ltd.(1965) 55 ITR 707 (SC). In our case the purchase & sales of Government securities, are our banking business in banking industries & "securities" shown as stock in trade. The loss incurred on sales of such securities business loss & claimed as such please. 3. The method of accounting cannot be rejected on the ground that the assessee should have followed another method. (i) There shall be some good reason for rejecting the system of accounting followed by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TM) 2. Available for sales (AFS) 3. Held for trading (HFT) The above classification can be reclassify for bank as per guidelines of RBI. We have said the securities held for "available for sale". The detailed working loss on sales of various securities are attached herewith for your kind consideration with copy of master circular of investment of RBI please. The major limb of the RBI guidelines to keep apart, some of the assets in specified mode at certain percentage which are commonly known as CRR & SLR. A general under standing of the operation of the bank would reveal that bank keep adjusting there specified assets on day to day basis depending on the situation on their hand vis-à-vis the condition imposed by RBI which in term keep changing regularly & as such transaction cannot be called transaction for capital gain or for investment & directly related to day to day business of the bank. We much more rely on the following decisions of court in which authority stated that loss on sales of securities held for in SLR & non SLR are trading business that is loss on stock in trade & eligible for deduction as business revenue loss. The circular no.599 dt.24.04.1991 of CBDT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and met net loss of Rs. 3,28,78,600/- after adjustment of profit of Rs. 5,35,800/- and premium on purchase of securities of Rs. 11,01,000/- total amounting to Rs. 3,39,79,600/-. Guidelines of RBI as well as CBDT Circular No.665 dated 5.10.1993 have been elaborately discussed in the order of CIT(A) and relevant extract of the same have been reproduced above in our order. As per RBI guidelines securities purchased by the primary urban co-op. banks can be classified under three heads - i) Held to Maturity (HTM) ii) Available for Sale (AFS) iii) Held for Trading (HFT) The loss incurred by the assessee of Rs. 3,39,79,600/- is from sale of securities held for "Available for Sale (AFS) and the detailed working of the same has been provided by the ld. AR of the assessee in the Paper Book. These securities which are available for sale which are held by the assessee as per the RBI guidelines to keep apart some of the assets in the specified mode at certain percentage which are inter alia known as CLR and SLR and the profit/loss on sale of such securities (AFS) cannot be treated as capital gain/loss. Further the ld. AR has referred to the judicial pronouncement of the ITAT, Mumbai Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X
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