Deductibility of security premium and special reserve claims upheld, while non-SLR securities gains were remanded for fresh review.

Amortisation of premium on Government securities held in the HTM category was treated as deductible because the premium was amortised in line with RBI guidelines and CBDT Instruction No. 17 of 26.11.2008. Deduction for transfer to special reserve was also accepted, as the reserve represented 20% of eligible profits from housing loans and SSI term loans and satisfied the statutory computation requirement. Gains on sale of non-SLR securities were not finally characterised, because the matter required fresh adjudication on whether the receipts were capital gains or business income; no conclusive finding was recorded on that point.

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Issues: (i) Whether amortization of premium paid on purchase of Government securities was allowable as a deduction; (ii) Whether deduction in respect of transfer to special reserve under the relevant provision was correctly claimed; (iii) Whether gains arising from sale of non-SLR securities were to be assessed as capital gains or business income.

Issue (i): Whether amortization of premium paid on purchase of Government securities was allowable as a deduction.

Analysis: The investments in Government securities were held in the HTM category and the premium paid over face value was amortized in accordance with RBI guidelines. CBDT Instruction No. 17 dated 26.11.2008 recognized that such premium should be amortized over the remaining period to maturity. The appellate authority followed the binding instruction and allied Tribunal decisions.

Conclusion: The deduction for amortized premium on Government securities was allowable and the addition was rightly deleted, in favour of the assessee.

Issue (ii): Whether deduction in respect of transfer to special reserve under the relevant provision was correctly claimed.

Analysis: The reserve created by the assessee was supported by the working of eligible profits from housing loans and SSI term loans. The record showed that the amount transferred represented 20% of the relevant profits, and the appellate authority accepted that the computation satisfied the statutory requirement.

Conclusion: The special reserve deduction was allowable and the deletion of the addition was justified, in favour of the assessee.

Issue (iii): Whether gains arising from sale of non-SLR securities were to be assessed as capital gains or business income.

Analysis: The appellate authority distinguished between SLR securities, which are required for banking business, and non-SLR securities, which were treated by the assessee as investments. However, the Revenue had relied on Supreme Court authority to contend that the characterization required closer examination. As that aspect had not been considered by the first appellate authority, the matter required fresh adjudication.

Conclusion: The issue was restored for fresh consideration and no final finding was recorded on the character of the gains.

Final Conclusion: The appeal succeeded only on the third issue to the extent of remand for fresh adjudication, while the first two additions remained deleted.

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