Bank securities treated as stock-in-trade allow premium amortisation, redemption loss as business loss, and late notice invalidates assessment.

A bank's securities held under Held to Maturity classification were treated as stock-in-trade where acquired in the course of banking business and maintained under RBI prudential norms, so amortisation of premium on those securities was allowable as a business deduction. On the same reasoning, loss on compulsory redemption of bonds was characterised as a revenue loss, not a capital loss, because the bonds formed part of the bank's commercial investment activity and liquidity management. The document also states that an assessment cannot be sustained where the mandatory notice under section 143(2) is issued beyond the statutory time limit after reopening proceedings.

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Issues: (i) Whether amortization of premium paid on purchase of securities classified under the Held to Maturity category was allowable as a deduction in computing the business income of a banking assessee; (ii) Whether loss arising on compulsory redemption of bonds held by the bank was a revenue loss or a capital loss; (iii) Whether the assessment for the relevant year was invalid for want of a timely notice under section 143(2) of the Income-tax Act, 1961.

Issue (i): Whether amortization of premium paid on purchase of securities classified under the Held to Maturity category was allowable as a deduction in computing the business income of a banking assessee.

Analysis: The securities were acquired in the course of banking business and were held to maintain statutory liquidity requirements under RBI norms. The Board circulars and RBI prudential guidelines treated such investment portfolio as part of the banking activity. The securities were therefore regarded as stock-in-trade, and the premium amortized over the remaining period to maturity represented an allowable business expenditure. The contrary view that HTM securities were capital assets was not accepted.

Conclusion: The deduction was allowable and the finding was in favour of the assessee.

Issue (ii): Whether loss arising on compulsory redemption of bonds held by the bank was a revenue loss or a capital loss.

Analysis: The bonds were purchased in the course of the banking business, were regularly quoted, and were held with the object of earning income and maintaining liquidity. Banking activity includes deployment of funds in securities, and such investments form part of the commercial operations of the bank. Since the bonds constituted stock-in-trade, the loss on forced redemption was treated as a business loss and not as a capital loss.

Conclusion: The loss was allowable as a revenue loss and the finding was in favour of the assessee.

Issue (iii): Whether the assessment for the relevant year was invalid for want of a timely notice under section 143(2) of the Income-tax Act, 1961.

Analysis: The notice under section 143(2) was issued beyond the statutory time limit after reopening proceedings had commenced. Since the notice was belated, the consequent assessment could not be sustained in law.

Conclusion: The assessment was invalid and the finding was in favour of the assessee.

Final Conclusion: The Revenue's appeals failed on all surviving issues, and the consolidated order sustained the relief granted to the assessee.

Ratio Decidendi: Securities and investments acquired by a bank in the course of its banking business, and held under RBI-directed investment norms, constitute stock-in-trade, so losses or amortized premium arising from such holdings are deductible as business items; an assessment is invalid if the mandatory notice under section 143(2) is issued beyond the prescribed limitation period.

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