Bank securities held as stock-in-trade can suffer deductible diminution loss, not merely depreciation under tax law.

A co-operative bank's Government securities held to meet statutory liquidity and reserve requirements were treated as liquid assets and stock-in-trade, so the diminution in their value was allowable as a business deduction. The Tribunal held that the loss was not a depreciation claim under section 32 of the Income-tax Act, 1961, but a deductible business loss under section 37, consistent with the principle that bank securities may be valued at cost or market value, whichever is lower. The disallowance was deleted and relief was granted to the assessee.

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Issues: Whether the diminution in value of Government securities held by a co-operative bank as part of its liquidity requirements is allowable as a deduction.

Analysis: The assessee-bank was required to maintain investments to satisfy statutory liquidity and reserve requirements under the Banking Regulation Act, 1949. The securities were treated as liquid assets and stock-in-trade, and the loss arising from diminution in their value was charged to the profit and loss account. The Tribunal held that such loss is not a depreciation claim under section 32 of the Income-tax Act, 1961, but a deductible business loss under section 37 of the Income-tax Act, 1961. Support was taken from prior judicial decisions recognising bank securities as stock-in-trade and permitting valuation at cost or market value, whichever is lower.

Conclusion: The diminution in value of Government securities was held to be an allowable deduction, and the addition was deleted in favour of the assessee.

Final Conclusion: The appeal succeeded and the assessee obtained relief against the disallowance of Rs. 2,44,325/-.

Ratio Decidendi: Where Government securities are held by a bank as part of its stock-in-trade and statutory liquidity requirements, a diminution in their value is allowable as a business deduction rather than being confined to depreciation under section 32 of the Income-tax Act, 1961.

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