Tribunal Partially Allows Deductions for Embezzlement Losses; Upholds Loss Deduction on Securities Revaluation for Bank.

The Tribunal upheld the CIT(A)'s decision, allowing the deduction of losses on revaluation of securities, affirming these as stock-in-trade for the banking company. For embezzlement losses, the Tribunal partially allowed the deductions for 1983-84 and remanded the 1984-85 issue for further verification by the AO. Appeals for 1983-84 and 1984-85 were partly allowed, while those for 1982-83, 1985-86, 1991-92, and 1988-89 were dismissed.

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Issues Involved:

1. Deduction of loss on revaluation of securities.
2. Deduction of embezzlement loss.

Issue-wise Detailed Analysis:

1. Deduction of Loss on Revaluation of Securities:

The first common issue raised in all these appeals is whether the CIT(A) was justified in allowing the deduction of loss due to revaluation of securities as trading loss. The assessee, a banking company, changed its method of valuing securities from book/face value to cost or market price, whichever was less, starting from the assessment year 1982-83. This change resulted in a claimed loss of Rs. 2,24,54,054 for that year. The Assessing Officer disallowed this loss, arguing that the securities were capital investments, not stock-in-trade.

The CIT(A) reversed this decision, stating that the securities were always treated as stock-in-trade by the assessee, and the change in valuation method was bona fide and consistent with the Banking Regulation Act. The CIT(A) observed that the change aligned with the requirement to consider the market value of securities for maintaining the statutory liquidity ratio. The CIT(A) cited various judgments, including those from the Kerala High Court and ITAT Chandigarh Bench, supporting the view that securities held by banks are stock-in-trade and can be valued at cost or market price, whichever is lower.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the securities were integral to the banking business and constituted stock-in-trade. The Tribunal noted that the change in the method of valuation was bona fide, consistently followed in subsequent years, and aligned with accepted accounting principles. The Tribunal cited several judgments, including those from the Supreme Court and various High Courts, supporting the view that securities held by banks are part of their stock-in-trade and that a bona fide change in the method of valuation is permissible.

2. Deduction of Embezzlement Loss:

The second issue pertains to the deduction of embezzlement loss for the assessment years 1983-84 and 1984-85. The assessee claimed embezzlement losses of Rs. 4,24,000 for 1983-84 and Rs. 3,20,000 for 1984-85. The Assessing Officer disallowed these claims, arguing that the losses were premature as the matters were pending in court and some losses occurred in earlier years.

The CIT(A) allowed the claims, stating that the losses were detected in the respective assessment years and were incidental to the assessee's business. The CIT(A) relied on Supreme Court judgments and CBDT instructions, which clarified that embezzlement losses should be allowed in the year they are discovered.

The Tribunal partially upheld the CIT(A)'s decision for 1983-84, allowing a deduction of Rs. 40,000 but disallowing Rs. 3,84,000 as these losses were detected in earlier years. For 1984-85, the Tribunal remanded the issue to the Assessing Officer to verify the timing of the losses and allow deductions accordingly, emphasizing that losses should be allowed in the year they are discovered.

Conclusion:

The appeals for the assessment years 1983-84 and 1984-85 are partly allowed, while the appeals for the assessment years 1982-83, 1985-86, 1991-92, and 1988-89 are dismissed. The Tribunal confirmed the CIT(A)'s decisions regarding the deduction of losses on revaluation of securities and provided specific directions for the deduction of embezzlement losses based on the year of detection.

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