Bank securities must be tested by commercial reality, not balance-sheet labels, for tax depreciation and premium amortisation claims.

For tax purposes, the character of a bank's securities must be determined from their substantive commercial reality, not merely from balance-sheet treatment or RBI classification. Depreciation on securities claimed as current trading securities therefore required fresh examination to decide whether they were stock in trade or investments. The claimed amortisation of premium on securities also depended on that character and could not be finally allowed on the existing record. The disallowance relating to reverse entry of interest paid to sellers of securities likewise required factual verification because the figures in the books were uncertain. All contested issues were remanded for fresh assessment.

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Issues: (i) Whether depreciation on investments held by a bank as current trading securities was allowable in computing taxable income. (ii) Whether amortisation of premium paid for purchase of securities shown as permanent investments was deductible. (iii) Whether the disallowance of Rs. 2.09 crores on account of reverse entry of interest paid to sellers of securities required verification and reconsideration.

Issue (i): Whether depreciation on investments held by a bank as current trading securities was allowable in computing taxable income.

Analysis: The question turned on the real character of the securities and not merely on the manner in which they were shown in the balance sheet under Reserve Bank of India requirements. The authorities had proceeded on the basis that the claim represented a notional loss, but no finding had been recorded on whether the securities were in truth stock in trade. The assessment and appellate orders did not determine the issue on the proper tax-test, namely whether the securities were held for trading and had to be valued on ordinary commercial principles.

Conclusion: The issue was remanded to the Assessing Officer for fresh determination of whether the securities constituted stock in trade or investment.

Issue (ii): Whether amortisation of premium paid for purchase of securities shown as permanent investments was deductible.

Analysis: This claim depended upon the character of the securities. If the securities were trading assets, the premium could be examined on commercial principles along with the valuation issue. If they were investments, the treatment would differ. Since the first issue itself had not been conclusively determined, the deduction claim for amortisation could not be finally adjudicated on the existing record.

Conclusion: The issue was also remanded to the Assessing Officer.

Issue (iii): Whether the disallowance of Rs. 2.09 crores on account of reverse entry of interest paid to sellers of securities required verification and reconsideration.

Analysis: The amount disallowed depended on the correctness of the figures appearing in the books and the effect of the reverse entry. As the record showed factual uncertainty regarding whether the debit was Rs. 15.61 crores or Rs. 13.52 crores, the matter required factual verification by the Assessing Officer rather than final adjudication in appeal.

Conclusion: The issue was remanded to the Assessing Officer for verification and fresh decision.

Final Conclusion: The appeals were disposed of by sending all contested questions back for fresh examination by the Assessing Officer, so the merits remained open for reconsideration in accordance with law.

Ratio Decidendi: For tax purposes, the true character of bank securities must be determined on the basis of the substantive facts and commercial reality, and the treatment in the statutory balance sheet or RBI guidelines is not ative by itself.

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