2013 (7) TMI 656 - HC - Income Tax

Bank Allowed Depreciation on Securities as Stock-in-Trade Despite RBI Guidelines Under IT Act Section Rules

THE KARNATAKA BANK LTD Versus ASSISTANT COMMISSIONER OF INCOME TAX MANGALORE

The HC held that the assessee bank was entitled to claim depreciation on securities treated as stock-in-trade, despite RBI guidelines and presentation in ... Depreciation on securities - Computation of income of Bank - Revenue held Assessee violated RBI guidelines - Tribunal declined to grant depreciation - Held that:- Method of accounting adopted by the tax payer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation - RBI Act or Companies Act do not deal with the permissible deductions or exclusion under the IT Act - if the assessee has consistently treating the value of investment for more than two decades as investment as stock-in-trade and claim depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations - The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of accounts - Following decision of UNITED COMMERCIAL BANK 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] - Decided in favour of assessee. ISSUES: Whether securities held by a banking institution can be treated as stock-in-trade for the purpose of claiming depreciation under the Income-tax Act, despite being classified as investments under RBI guidelines.Whether RBI guidelines and directions govern the treatment and valuation of securities for income tax purposes, particularly regarding classification as stock-in-trade.Whether a consistent and regular method of accounting adopted by the assessee can be discarded by tax authorities if it conflicts with RBI or Companies Act regulations. RULINGS / HOLDINGS: The Court held that a method of accounting adopted by the taxpayer consistently and regularly 'cannot be discarded by the departmental authorities' merely because it differs from RBI or Companies Act prescriptions; for Income-tax Act purposes, the securities treated as stock-in-trade and depreciation claimed thereon is allowable notwithstanding their classification as investments in the balance sheet.The RBI guidelines and directions, including the 1998 Directions under section 45JA of the RBI Act, 'have nothing to do with the computation or taxability' of income under the Income-tax Act and 'operate in different fields'; they are primarily disclosure norms and do not override permissible deductions under the Income-tax Act.The real income for income tax purposes must be disclosed in conformity with the Income-tax Act, and 'the entries in a balance-sheet required to be maintained in the statutory form may not be decisive or conclusive' for determining taxable income; the Assessing Officer and assessee can point out the true and proper income irrespective of accounting classification.The Tribunal's finding that securities held were not stock-in-trade and denial of depreciation claim based on RBI guidelines was set aside as contrary to settled legal position; the assessee is entitled to claim depreciation on securities treated as stock-in-trade for more than two decades. RATIONALE: The Court applied the principle under section 145 of the Income-tax Act that income shall be computed in accordance with the method of accounting regularly employed by the assessee, unless such method does not properly disclose income.Precedents from the Apex Court were relied upon, including rulings that unrealized losses on stock-in-trade can be allowed as deductions, and that the method of accounting consistently followed cannot be disregarded merely because a different method is prescribed by other regulatory bodies.The Court distinguished the RBI Directions 1998 as prudential regulatory measures aimed at transparency and disclosure for NBFCs, emphasizing that these directions do not affect the computation of taxable income or permissible deductions under the Income-tax Act.The Court reaffirmed that the classification of securities under RBI guidelines or presentation in financial statements under Companies Act does not determine tax treatment; rather, the nature of the transaction and consistent accounting treatment govern the allowance of deductions such as depreciation.The Court noted that the real income theory requires disclosure of true profits and gains, and that accounting entries or classification in statutory financial statements are not conclusive for income tax assessment.