2024 (5) TMI 537 - AT - Income Tax

Banking company wins appeal on Government Securities loss disallowance under Section 6 Banking Regulation Act

Kankaria Maninagar Nagarik Sahakari Bank Ltd. Versus Deputy Commissioner of Income Tax Circle – 6 (1), Ahmedabad

ITAT Ahmedabad allowed the appeal of a banking company regarding disallowance of loss on sale of Government Securities. The AO had disallowed Rs. ... Disallowance of loss on sale of Government Securities - permissible business loss or not? - AO has disallowed the loss on the presumption that Central and State Government securities, the year for maturity of which was specified as 2028 and 2034, were not business stock-in-trade but were in the nature of investments - HELD THAT:- As per Section 6 of the Banking Regulation Act, in addition to the business of banking, a banking company may also engage in buying and selling of securities and such buying and selling is considered as part of its business activities. Therefore, the investment in Central and State Government Securities as appearing in the balance sheet of the company were its business assets and in the nature of stock-in-trade. Merely because they were shown as investment in the balance sheet they don’t become capital asset, as buying and selling of the securities including Government securities is part of business activity of the assessee company. Further, the CBDT had issued a Circular No.599 dated 24.04.1991 giving clarification regarding treatment of securities as stock-in-trade or investment by the Banks. CBDT has categorically clarified that the securities held by Banks must be regarded as stock-in-trade of the Banks. Therefore, the loss on Government securities of Rs. 38,55,000/- as debited in the books of accounts of the assessee has to be treated as loss in stock-in-trade and not a capital loss in investments. As this loss was in the nature of business loss, the AO was not correct in disallowing the same. In view of these facts, the CIT(A) was not correct in confirming the order of the AO disallowing the loss. Accordingly, the AO is directed to allow the loss in Government securities claimed by the assesse as business loss. Depreciation on Government securities claimed by the assessee bank - HELD THAT:- Depreciation on Government Securities was deterioration in the value of security. In essence, this was a loss claimed on valuation of the security. As clarified by the CBDT vide Circular No. 599, reproduced earlier, the loss claimed by the banks on valuation of their securities was a business loss and an allowable deduction. We accordingly hold that the depreciation on Government securities claimed by the assessee bank is allowable, as deduction. Appeal preferred by the assessee is allowed. Issues Involved:1. Disallowance of loss on sale of Government Securities.2. Re-assessment proceedings u/s 143(3) r.w.s. 147.3. Disallowance of depreciation on Government Securities u/s 154.Summary:1. Disallowance of Loss on Sale of Government Securities:The assessee, a bank, appealed against the disallowance of Rs. 38,55,000 as a loss on the sale of Government Securities. The CIT(A) upheld the AO's decision, presuming that the securities were not stock-in-trade but investments. The Tribunal noted that under RBI guidelines, securities are classified as HTM, AFS, and HFT for maintaining CRR and SLR. It found the AO's presumption that HTM securities cannot incur business loss untenable. The Tribunal emphasized that as per the Banking Regulation Act and CBDT Circular No. 599, securities held by banks are stock-in-trade. Therefore, the loss on Government securities should be treated as a business loss. Consequently, the Tribunal directed the AO to allow the loss claimed by the assessee.2. Re-assessment Proceedings u/s 143(3) r.w.s. 147:The original assessment was completed u/s 143(3), but the case was reopened u/s 147, leading to the disallowance of the loss on Government securities. The Tribunal, having allowed the appeal on the merits of the loss disallowance, found it unnecessary to adjudicate the grounds against the reopening of the case.3. Disallowance of Depreciation on Government Securities u/s 154:The AO disallowed depreciation of Rs. 34,48,500 on Government securities, considering it applicable only to business assets. The CIT(A) upheld this in the rectification order u/s 154. The Tribunal referred to its earlier decision in the assessee's case for A.Y. 2013-14, where it allowed such depreciation as a business deduction u/s 37, treating the securities as stock-in-trade. It reiterated that the CBDT Circular No. 599 supports the treatment of securities held by banks as stock-in-trade. Thus, the Tribunal directed the AO to allow the depreciation claimed by the assessee.Conclusion:Both appeals filed by the assessee were allowed, with the Tribunal directing the AO to treat the loss on Government securities as a business loss and to allow the depreciation claimed on Government securities.