Banking securities treated as stock in trade: loss on sale held deductible as business loss, not capital loss.

Government securities held by a co-operative bank as available-for-sale securities, acquired and maintained in the course of banking operations under RBI norms, were treated as part of the bank's trading assets. CBDT circulars and the consistent accounting and regulatory classification supported the view that such securities functioned as stock in trade, making profit or loss on sale incidental to banking business rather than a capital transaction. The loss on sale was therefore deductible as business loss and could not be assessed as long-term capital loss.

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Issues: Whether the loss arising on sale of government securities held by a co-operative bank as available-for-sale securities was to be treated as business loss or as long-term capital loss.

Analysis: The securities were acquired and held in the course of banking operations and were required to be maintained in accordance with RBI guidelines and statutory banking requirements. The relevant CBDT circulars clarified that securities held by banks are to be examined on the facts, taking RBI classification into account, and that in the case of trading assets such securities are to be treated as stock in trade. The classification of the portfolio, the nature of banking business, and the consistent accounting treatment supported the view that available-for-sale securities formed part of the bank's trading assets and that profit or loss on their sale was incidental to banking operations rather than a capital transaction.

Conclusion: The loss on sale of government securities was deductible as business loss and could not be assessed as long-term capital loss.

Ratio Decidendi: Securities held by a bank as part of its banking operations and classified in a trading portfolio under RBI norms are to be treated as stock in trade, so loss on their sale is a revenue loss deductible in computing business income.

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