2014 (7) TMI 724 - HC - Income Tax

High Court affirms ITAT's decision on notional loss claim, dismisses appeal under Income Tax Act

Commissioner of Income Tax-2 Versus HDFC Bank Ltd.

The High Court upheld the ITAT's decision to allow the Assessee's claim for a notional loss on the transfer of securities, setting aside the Commissioner ... Power of revision u/s 263 – Deduction on depreciation in the value of investments – Held that:- A method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the revenue on the view that he should have adopted a different method of keeping the accounts or on valuation - the assessee has maintained the accounts in terms of the RBI Regulations and he has shown it as investment - consistently for more than two decades it has been shown as stock-in-trade and depreciation is claimed and allowed - notwithstanding that in the balance-sheet , it is shown as investment, for the purpose of Income Tax Act, it is shown as stock-in-trade - the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the bank has to take into consideration the market value of the shares - If the market value is less than the cost price, in law, they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the balance-sheet - THE KARNATAKA BANK LTD Versus ASSISTANT COMMISSIONER OF INCOME TAX MANGALORE [2013 (7) TMI 656 - KARNATAKA HIGH COURT] followed – there was no infirmity in the order passed by the Tribunal – no substantial question of law arises for consideration – Decided against Revenue. Issues:Challenge to ITAT order under section 260A of the Income Tax Act 1961 by Commissioner of Income Tax-2 regarding the allowance of a notional loss on transfer of securities by the Assessee from 'Available for Sale' to 'Held to Maturity' categories.Analysis:1. The Appellant contended that the ITAT misdirected itself in setting aside the order passed under section 263 of the Act, disallowing a notional loss of Rs. 87.11 lakhs by the Assessee. The Appellant argued that such an allowance was impermissible under the Act, justifying the invocation of powers under section 263. Substantial questions of law were raised, questioning the correctness of the ITAT's decision. However, the High Court found that the issue was settled by previous judgments, notably Commissioner of Income Tax v/s Bank of Baroda and Karnataka Bank Ltd. v/s Assistant Commissioner of Income Tax.2. The High Court noted that the Assessee, a Public Limited Company, initially declared a total income of Rs. 9,10,41,00,000 for the Assessment Year 2005-06. The Assessing Officer later determined the total income at Rs. 12,27,85,00,000. The dispute arose when the Appellant observed a notional loss of Rs. 87.11 lakhs due to the reclassification of securities by the Assessee, leading to the invocation of powers under section 263 to disallow this deduction.3. The ITAT, after hearing both sides, allowed the Assessee's appeal without delving into jurisdictional issues. Relying on precedents like State Bank of Mysore v/s DCIT and Karnataka Bank Ltd. cases, the ITAT held that the Assessee's claim for the loss on the transfer of securities was allowable, setting aside the Appellant's order under section 263. The High Court upheld the ITAT's decision, emphasizing the Assessee's entitlement to the deduction based on consistent accounting practices.4. The High Court referenced the judgment in Commissioner of Income Tax v/s Bank of Baroda, where the Assessee's claim for deduction on depreciation in the value of investments was allowed. The Court emphasized the importance of maintaining consistent accounting practices and upheld the Assessee's right to claim deductions based on the true income disclosed. Similarly, the judgment in Karnataka Bank Ltd. v/s Assistant Commissioner of Income Tax reiterated the importance of allowing deductions based on the method of accounting adopted by the taxpayer, even if it differs from regulatory requirements.5. Ultimately, the High Court found no grounds to interfere with the ITAT's decision, as the issue was settled by prior judgments and the Assessee's claim for deduction was deemed valid. The Appeal was dismissed, with no order as to costs, highlighting the importance of consistent accounting practices and the Assessee's right to claim deductions based on true income disclosure.