2015 (12) TMI 292 - AT - Income Tax

Investment depreciation upheld as deduction in bank's stock-in-trade securities case.

Asstt. CIT, Sabarkantha Circle, Himatnagar Versus The Sabarkantha Dist. Co-op. Bank Ltd., Himatnagar, Dist. Sabarkantha.

The Tribunal upheld the CIT(A)'s decision, allowing the investment depreciation as a deduction. The appeal by the Revenue was dismissed, confirming that ... Addition on account of investment depreciation account - CIT(A) deleted the addition - as per revenue notional depreciation of Government of India securities as on 31.3.2008 which were held by the bank as investment and not as stock - Held that:- After going through the guidelines of RBI and CBDT Circular loss invoice the facts of the assessee that as per audited balance sheet of the assessee investment in Central and State Government Securities its book value was valued at ₹ 109 crores out of which permanent category securities were ₹ 101.50 crores and current category securities were of ₹ 7.5 crores and as per the submissions made by the ld. AR these investments of ₹ 109 crores are investments held as stock-in-trade and for valuing closing stock at the end of the year the value prevailing on the last date of the year is relevant and assessee has, therefore, claimed 1,47,66,239/- as investment depreciation. Similar facts were examined in assessee’s own case by the Tribunal for AY 2007-08 allowing the claim of assessee as relying on United Commercial Bank vs. CIT [1999 (9) TMI 4 - SUPREME Court] - Decided in favour of assessee. Issues Involved:1. Deletion of addition on account of investment depreciation.2. Whether the securities held by the bank are investments or stock-in-trade.3. Allowability of investment depreciation as a deduction.Issue-Wise Detailed Analysis:1. Deletion of Addition on Account of Investment Depreciation:The Revenue's primary contention was that the CIT(A) erred in deleting the addition of Rs. 1,47,48,785 on account of investment depreciation. The amount was notional depreciation of Government of India securities as of 31.3.2008, held by the bank as investments and not as stock. The AO had disallowed the investment depreciation of Rs. 1,47,66,239 on the grounds that the depreciation in value of securities was notional and not actual, and the government securities held were investments, not stock-in-trade.2. Classification of Securities:The bank, governed by the Reserve Bank of India Act and its regulations, classified its investments into three categories: Held to Maturity (HTM), Available for Sale (AFS), and Held for Trading (HFT). The bank valued the securities at cost or market price, whichever was lower, as per RBI guidelines. The fall in market value, termed as investment depreciation, amounted to Rs. 1,47,66,239. The bank argued that these investments were stock-in-trade, even though they were listed as investments in the balance sheet. The AO accepted the provision for amortization of Rs. 1,26,69,000 but disallowed the investment depreciation.3. Allowability of Investment Depreciation:The assessee bank followed the mercantile system of accounting consistently, and the ITAT Ahmedabad Bench had previously dismissed the Revenue's appeal for AY 2007-08, following decisions in UCO Bank and Woodward Governor cases. The Supreme Court in United Commercial Bank vs. CIT held that for valuing closing stock, it is permissible to value it at cost or market value, whichever is lower. The method of accounting adopted by the taxpayer consistently cannot be discarded by the authorities unless it does not reflect true profits. The Madras High Court in Laxmi Vilas Bank vs. CIT applied the same principle, allowing the fall in market price of government securities held for trading as a deduction.The CBDT Circular No.599 and Instruction No.17/2008 clarified that securities held by banks constitute their stock-in-trade, and the claim of loss on valuation should be treated as such. The RBI guidelines and CBDT Circulars were considered, which mandated that investments should be classified and valued accordingly. The Tribunal found that the investments were indeed held as stock-in-trade and allowed the investment depreciation of Rs. 1,47,66,239.Conclusion:The Tribunal upheld the CIT(A)'s order, allowing the investment depreciation as a deduction, following the consistent method of accounting adopted by the assessee and in line with the Supreme Court and High Court rulings. The appeal filed by the Revenue was dismissed, affirming that the securities held by the bank were stock-in-trade and the depreciation was allowable.Order Pronounced:The appeal by the Revenue was dismissed, and the order was pronounced in the open Court on 14/10/2015.