2015 (12) TMI 295 - AT - Income Tax

Cooperative bank's loss on government securities sale is a business loss, not capital loss.

Asstt. CIT, Mehsana Circle, Mehsana Versus The Mehsana Urban Co-op. Bank Ltd.

The Tribunal upheld the CIT(A)'s decision that the loss on the sale of government securities by a cooperative bank should be treated as a business loss, ... Addition on account of business loss of security including premium written off treating it as a long term capital loss - CIT(A) deleted the addition - Held that:- Assessee has sold government securities and met net loss of ₹ 3,28,78,600/- after adjustment of profit of ₹ 5,35,800/- and premium on purchase of securities of ₹ 11,01,000/- total amounting to ₹ 3,39,79,600/-. As per RBI guidelines securities purchased by the primary urban co-op. banks can be classified under three heads - i) Held to Maturity (HTM), ii) Available for Sale (AFS) and iii) Held for Trading (HFT) The loss incurred by the assessee of ₹ 3,39,79,600/- is from sale of securities held for “Available for Sale (AFS) and the detailed working of the same has been provided by the ld. AR of the assessee in the Paper Book. These securities which are available for sale which are held by the assessee as per the RBI guidelines to keep apart some of the assets in the specified mode at certain percentage which are inter alia known as CLR and SLR and the profit/loss on sale of such securities (AFS) cannot be treated as capital gain/loss. As decided in Yes Bank Ltd. vs. Dy.CIT [2015 (1) TMI 1012 - ITAT MUMBAI ] Decision of the Hon'ble Bombay High Court in the case of CIT v. HDFC Bank (2014 (7) TMI 724 - BOMBAY HIGH COURT) and that of the Bangalore bench of the Tribunal in the case of State Bank of Mysore (2009 (5) TMI 610 - ITAT BANGALORE) are in support of assessee’s claim of provision for re-valuation in respect of securities transferred from HTM to AFS category should be allowed as a deduction. - Decided in favour of assessee. Issues Involved:1. Whether the loss on sale of government securities should be treated as business loss or long-term capital loss.2. Whether the CIT(A) was correct in deleting the addition made by the AO.3. Whether the order of the CIT(A) should be set aside and the AO's order restored.Issue-Wise Detailed Analysis:1. Treatment of Loss on Sale of Government Securities:The primary issue was whether the loss of Rs. 3,39,79,600/- on the sale of government securities should be treated as a business loss or a long-term capital loss. The assessee, a cooperative bank, claimed the loss as a business loss, asserting that the securities were part of its stock in trade, as per the guidelines issued by the Reserve Bank of India (RBI) and the Banking Regulation Act. The AO, however, treated the loss as a long-term capital loss, applying tests from the case of Pari Mangaldas Girdhardas vs. CIT, which concluded that the securities were held as investments rather than for trading purposes.2. Deletion of Addition by CIT(A):The CIT(A) deleted the addition made by the AO, relying on the RBI guidelines and CBDT Circular No.665 dated 5.10.1993, which clarify that securities held by banks should be treated as stock in trade. The CIT(A) noted that the bank's investment activities are part of its normal banking operations and should be treated as such, despite being shown as investments in the balance sheet. The CIT(A) also referenced judicial precedents, including the Hon'ble Mumbai High Court's decision in CIT vs. Bank of Baroda, which supported the treatment of such securities as stock in trade.3. Appeal by Revenue:The Revenue appealed against the CIT(A)'s order, arguing that the AO's decision should be upheld. However, the Tribunal found that the CIT(A) had correctly applied the relevant guidelines and judicial precedents. The Tribunal also referenced the ITAT, Mumbai Bench's decision in Yes Bank Ltd. vs. Dy.CIT, which emphasized the intention at the time of purchase as the key factor in determining whether securities are held as stock in trade or capital assets.Conclusion:The Tribunal upheld the CIT(A)'s order, confirming that the loss on the sale of government securities should be treated as a business loss. The Tribunal found no reason to interfere with the CIT(A)'s decision, which was based on a thorough examination of the facts, RBI guidelines, CBDT Circulars, and relevant judicial precedents. The appeal filed by the Revenue was dismissed.Order Pronouncement:The order was pronounced in the open Court on 14/10/2015, dismissing the Revenue's appeal.