2002 (11) TMI 29 - HC - Income Tax

Ruling affirms government securities held by banks are stock-in-trade, allow year-end revaluation and loss deduction; section 147 reassessments upheld

HC upheld that government securities held by the assessee-banks constitute stock-in-trade, permitting year-end revaluation and allowing deduction for ... Validity of the assessments made under section 147 - entitlement for deduction of the interest paid for the broken period - Whether the Government securities held by the appellants as required under the provisions of the Banking Regulation Act, 1949, are stock-in-trade of the assessee-banks and, consequently, the assessee-banks are entitled to revalue the said securities at the close of the assessment year and claim depreciation in respect of the notional loss suffered by the assessee-banks in respect of the said securities in the assessment under the Act. - HELD THAT:- Tribunal has rightly held that the securities held by the assessee-bank in all these cases are the stock-in-trade of the business of the assessee-banks and the notional loss suffered on account of the revaluation of the said securities at the close of the year is an allowable deduction in the computation of the profits of the appellant - Further, the reopening of the assessment by issuing notice under section 147 of the Act beyond a period of four years is legal and valid Issues Involved:1. Whether the Government securities held by the appellants are stock-in-trade of the assessee-banks.2. Whether the assessee-banks are entitled to revalue the said securities at the close of the assessment year and claim depreciation in respect of the notional loss.3. Validity of the assessments made under section 147 of the Income-tax Act, 1961.4. Entitlement for deduction of the interest paid for the broken period claimed by the assessee.Issue-wise Detailed Analysis:1. Whether the Government securities held by the appellants are stock-in-trade of the assessee-banks:The court examined the relevant provisions of the Banking Regulation Act, 1949, particularly Section 6 which allows banking companies to deal in securities as part of their business. The court also referenced Section 24 which mandates banks to maintain a certain percentage of their assets in the form of Government securities. The court relied on the precedent set by the Kerala High Court in Malabar Co-operative Central Bank Ltd. v. CIT [1975] 101 ITR 87, which held that securities held by banks are part of their stock-in-trade. The court also referred to the Supreme Court's decision in United Commercial Bank v. CIT [1999] 240 ITR 355, which supported the view that securities held by banks for statutory liquidity ratio (SLR) purposes are stock-in-trade. Consequently, the court upheld that the securities held by the assessee-banks are indeed stock-in-trade.2. Whether the assessee-banks are entitled to revalue the said securities at the close of the assessment year and claim depreciation in respect of the notional loss:The court noted that it is an established rule of commercial practice and accountancy that closing stock can be valued at cost or market price, whichever is lower. This principle was supported by the Supreme Court in Chainrup Sampatram v. CIT [1953] 24 ITR 481. The court also referenced the Central Board of Direct Taxes Circular No. 599 dated April 24, 1991, which clarified that securities held by banks should be regarded as stock-in-trade and any loss on their valuation should be allowed as a deduction. The court concluded that the assessee-banks are entitled to revalue the securities at the close of the year based on the market value and claim depreciation on the notional loss.3. Validity of the assessments made under section 147 of the Income-tax Act, 1961:The court examined the proviso to Section 147, which bars reassessment beyond four years unless there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. In this case, the court found that the reassessment was initiated based on the Supreme Court's decision in Vijaya Bank Ltd. v. Addl. CIT [1991] 187 ITR 541, and not due to any failure by the assessee to disclose material facts. Therefore, the reassessment notices issued beyond the four-year period were held to be barred by limitation.4. Entitlement for deduction of the interest paid for the broken period claimed by the assessee:The court referred to its previous decision in CIT v. South Indian Bank Ltd. [2000] 241 ITR 374, which held that interest paid for the broken period is an allowable deduction in the computation of the total income of the bank. The court upheld this view and allowed the deduction of the interest paid for the broken period.Conclusion:The court dismissed all the appeals filed by the Revenue, upholding the decisions of the Income-tax Appellate Tribunal. It concluded that the securities held by the assessee-banks are stock-in-trade, the banks are entitled to revalue these securities and claim depreciation on the notional loss, the reassessment notices issued beyond the four-year period are barred by limitation, and the interest paid for the broken period is an allowable deduction.