Bank securities as stock-in-trade, time-barred reassessment, and broken period interest deductions upheld for banking income

Government securities held by banks to satisfy statutory liquidity requirements may still form part of banking stock-in-trade, so year-end revaluation loss is deductible in computing business income. Reassessment initiated after four years is invalid where there is no recorded failure by the assessee to disclose fully and truly all material facts; a later judicial decision alone does not satisfy the proviso to section 147. Broken period interest on purchase of securities is also an allowable business deduction. On the stated principles, the appeals were unsuccessful and the assessee's treatment was upheld.

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Issues: (i) Whether Government securities held by banks to comply with statutory liquidity requirements are stock-in-trade of the banking business and whether loss on revaluation at year-end is deductible; (ii) whether reassessment initiated beyond four years under the proviso to section 147 is valid; and (iii) whether interest paid for the broken period on purchase of securities is allowable as deduction.

Issue (i): Whether Government securities held by banks to comply with statutory liquidity requirements are stock-in-trade of the banking business and whether loss on revaluation at year-end is deductible.

Analysis: The banking statutes permit banks to deal in securities, and the statutory requirement to maintain approved securities does not change the character of such holdings when they are part of the banking deployment of funds. Prior decisions had already treated such securities as part of the circulating capital and stock-in-trade of a bank. The Board's circular also recognised the same position. Once the securities are stock-in-trade, the bank is entitled to value closing stock at market value where lower and to claim the resulting notional loss in computing business income.

Conclusion: In favour of the assessee. The securities are stock-in-trade and the revaluation loss is an allowable deduction.

Issue (ii): Whether reassessment initiated beyond four years under the proviso to section 147 is valid.

Analysis: The reassessment notices were issued after expiry of the four-year period. There was no finding that the assessees had failed to disclose fully and truly all material facts necessary for assessment. The reopening was based only on a later judicial decision, which does not by itself satisfy the statutory exception in the proviso. The returns had been filed and the relevant particulars were already disclosed.

Conclusion: In favour of the assessee. The reassessments are barred by limitation and are invalid.

Issue (iii): Whether interest paid for the broken period on purchase of securities is allowable as deduction.

Analysis: The question was covered by the earlier binding decision recognising broken period interest as an allowable business outgo in computing bank income. No contrary distinction was accepted.

Conclusion: In favour of the assessee. The deduction is allowable.

Final Conclusion: The appeals fail in entirety because the securities were correctly treated as stock-in-trade, the reassessment was time-barred, and the broken period interest was deductible.

Ratio Decidendi: Securities held by a bank in compliance with statutory liquidity obligations may constitute stock-in-trade of the banking business, and where reassessment is initiated beyond the statutory time limit, it is invalid absent failure to disclose fully and truly all material facts.

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