2019 (1) TMI 943 - AT - Income Tax

Appeals Granted for Securities Categorization Review

The Ahmedabad Dist. Co-op. Bank Ltd. Versus DCIT, Cir. 7/ACIT, Cir. 2 (2), Ahmedabad

The Tribunal allowed the appeals for statistical purposes, directing the AO to re-examine the categorization of securities and determine if they fall ... Depreciation claimed categorized under HFT or AFS - investments Held for Trading (HFT) and Available for Sale (AFS) - Amortization of premium over the period remaining to maturity - block of assets is defined u/s. 2(11) - Held that:- In the year in which securities was acquired, it was shown under the head investment without specifying category. It is quite difficult for us to conclusively to hold that these securities were held in HFT or AFS. Orders of both Revenue authorities are silent on this aspect. We have extracted finding of the AO as well as CIT(A). We have noticed the accounting treatment given by the assessee. Faced with this difficult, we deem it appropriate to set aside this issue to the file of AO for re-adjudication. The ld.AO shall first determine the issue whether these securities are identifiable under category HFT or AFS, and if yes, then according to case of Rajkot District Cooperative Bank [2014 (3) TMI 110 - GUJARAT HIGH COURT] depreciation is to be allowed. Otherwise, the AO shall decide the issue in accordance with law. Issues Involved:1. Disallowance of the claim for deduction of investment depreciation reserve.2. Determination of the category of securities (Held for Trading or Available for Sale).Issue-Wise Detailed Analysis:1. Disallowance of the Claim for Deduction of Investment Depreciation Reserve:The sole grievance of the assessee was that the CIT(A) erred in confirming the disallowance of the claim for deduction of Rs. 3,16,00,000/- and Rs. 3,03,14,000/- in respect of investment depreciation reserve for the assessment years 2011-12 and 2012-13, respectively. The assessee, a cooperative society engaged in banking, filed its returns declaring total income of Rs. 10,68,73,920/- for 2011-12 and Rs. 12,40,78,520/- for 2012-13. Upon scrutiny, the AO noted that the assessee debited amounts as provisions for investment depreciation reserve, which the AO found inadmissible under the Income Tax Act, as there is no provision allowing investment depreciation reserve. The AO cited that depreciation of assets is governed by Section 32, which does not include investments under the definition of block of assets. Consequently, the AO disallowed the claimed amounts, adding them to the total income and initiating penalty proceedings under Section 271(1)(c).2. Determination of the Category of Securities (Held for Trading or Available for Sale):Upon appeal, the CIT(A) upheld the AO's decision, rejecting the assessee's arguments that the claim was consistent with accounting standards and guidelines issued by the RBI. The CIT(A) noted that this was the first year such an expenditure was debited to the Profit & Loss Account, questioning the consistency of the assessee's accounting practices. The CIT(A) emphasized that the Banking Regulation Act and RBI guidelines govern banking activities but not taxation, which is governed by the Income Tax Act, 1961.Before the Tribunal, the assessee referenced the ITAT Bangalore Bench decision in ACIT vs. Karnataka Bank Ltd. and a CBDT circular (No.17/2008) which provided guidelines for granting deductions to banks. The Tribunal noted that the assessee failed to demonstrate that the securities were held as stock-in-trade or available for sale, which would justify the claimed depreciation. The Tribunal required evidence such as board resolutions, financial statements, and subsequent treatment in books at the time of actual sale of securities to support the claim.The Tribunal referred to the Gujarat High Court judgment in CIT Vs. Rajkot District Cooperative Bank, which allowed amortization of the premium paid for securities held to maturity as per CBDT instructions. The Tribunal concluded that if the securities were indeed held for trading or available for sale, the depreciation should be allowed. However, due to the lack of conclusive evidence, the Tribunal set aside the issue to the AO for re-adjudication, directing the AO to determine the category of the securities and allow depreciation if they fall under Held for Trading or Available for Sale categories.Conclusion:The Tribunal allowed the appeals for statistical purposes, directing the AO to re-examine the categorization of the securities and decide the issue in accordance with the law, guided by the principles established in the Gujarat High Court judgment in the case of Rajkot District Cooperative Bank. The appeals were thus allowed for statistical purposes.