Bank securities as stock-in-trade: loss on sale and depreciation of Government securities are allowable deductions.

Securities held by a bank in the course of its banking business are treated as stock-in-trade, so loss on sale of Government securities is allowable as a business loss even if the securities are shown as investments in the balance sheet. The banking business includes dealing in securities, and RBI classification does not control income-tax treatment where CBDT guidance supports business characterization. On the same reasoning, depreciation or diminution in value of Government securities held as trading assets is allowable as a deduction because it is in substance a valuation loss on stock-in-trade.

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Issues: (i) Whether the loss on sale of Government securities held by a bank is allowable as a business loss. (ii) Whether the depreciation claimed on Government securities is allowable as a deduction.

Issue (i): Whether the loss on sale of Government securities held by a bank is allowable as a business loss.

Analysis: The securities held by the bank were part of its banking business and were not to be treated as capital assets merely because they were shown under investments in the balance sheet. The banking business includes buying and selling securities, and the CBDT circular clarified that securities held by banks are to be regarded as stock-in-trade. The classification under RBI guidelines did not justify disallowance of the loss for income-tax purposes.

Conclusion: The loss on sale of Government securities was allowable as business loss and the disallowance was unsustainable.

Issue (ii): Whether the depreciation claimed on Government securities is allowable as a deduction.

Analysis: The claim represented diminution in the value of securities held as part of the bank's trading assets and was in substance a valuation loss. The same issue in the assessee's own case had already been decided in its favour, and the CBDT circular supported treatment of such securities as stock-in-trade with corresponding business treatment of losses.

Conclusion: The depreciation on Government securities was allowable as a deduction.

Final Conclusion: Both additions relating to loss on sale of Government securities and depreciation on Government securities were deleted, and the assessee's appeals succeeded.

Ratio Decidendi: Securities held by a bank in the course of its banking business are stock-in-trade, and loss or diminution in their value is allowable as a business deduction notwithstanding their presentation as investments in the balance sheet.

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