2025 (9) TMI 1011 - AT - Income Tax

HTM-classified bank shares are capital assets, sale results in long-term capital gains, not stock-in-trade, confirmed

ITAT-Bang held that shares classified and held by a banking concern as HTM investments are capital assets, not stock-in-trade, and gains on their sale ... LTCG on sale of shares - investment made by a banking concern - HELD THAT:- In the case of Navanshahar Central Co-operative Bank Ltd [2005 (8) TMI 28 - SC ORDER] the issue was Whether where a Co-operative bank, carrying in business of banking, is statutorily required to place a part of its fund in approved securities, income arising from such investment is deductible under section 80P. The Apex court had categorically held that investments made by a banking concern are part of the business of banking. In the present case also the investments held by banks are treated only as part of the business of banking only but not as a Stock in Trade but as a Capital Asset. Both the parties also relied upon the judgment of the Apex Court in the case of Bank of Rajasthan Ltd [2024 (10) TMI 875 - SUPREME COURT] held that as per the RBI’s guideline dated 16/10/2000, there are three categories of securities i.e. HTM, AFS and HFT. As far as AFS and HFT concerned, there is no difficulty. When these two categories of securities are purchased, obviously, the same are not investments but are always held by Banks as stock-in-trade. In the present case the shares of CARE Ltd./ Can Fin Homes Ltd. are held as Investment under the category of HTM & therefore it cannot be treated at par with AFS & HFT categories. We are completely in agreement with the view taken by the ld. CIT(A)/NFAC in allowing the appeal of the assessee. The AO has accepted that purchase of shares of CARE Ltd. had been classified as investment in schedule 8 of the Balance sheet and accordingly the same has to be treated as capital asset and gains arising there from as LTCG and accordingly we dismiss the appeal of the Revenue. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether profit on sale of shares held by a banking company classified as Held To Maturity (HTM) and disclosed as 'Associates' in the balance sheet is taxable as Long Term Capital Gain (LTCG) under capital gains provisions or as business income under section 28. 2. Whether precedents and administrative instructions holding that investments of banking concerns form part of banking business (thereby making gains business income) are determinative where shares are strategically held with substantial stake and classified as investments/HTM. 3. Whether the assessee's own treatment/option in an assessment year (treating listed shares as investments/HTM and not stock-in-trade) is binding for the purpose of characterisation of subsequent transfers, in light of relevant CBDT circulars. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of profit on sale of shares classified as HTM: capital gain vs business income Legal framework: Characterisation of income as capital gain or business income depends on nature of asset, intention, mode of holding, accounting classification and factual matrix; banking regulations classify securities into HTM, AFS (Available For Sale) and HFT (Held For Trading), which inform treatment. Precedent Treatment: Apex Court decisions have held that securities in AFS and HFT categories, and securities dealt with in the ordinary course of banking business, are treated as stock-in-trade/business assets. However, HTM classification has been recognised as indicative of investment intent and not stock-in-trade. Interpretation and reasoning: The Tribunal emphasises undisputed facts: substantial stake acquired, strategic investment intent, classification in financial statements as 'Associates', and placement under HTM. These facts demonstrate investment character and long-term holding intent. As HTM is intended for investments to be held to maturity and distinct from AFS/HFT, shares so classified cannot be treated as stock-in-trade. Ratio vs. Obiter: Ratio - Where a bank acquires substantial stake, treats shares as associates and classifies them as HTM in the balance sheet, such shares constitute capital assets and gains on their sale are taxable as capital gains (LTCG) rather than business income. Obiter - General statements about banks' routine dealing in marketable securities as part of liquidity management are not applicable where HTM classification and strategic holding are shown. Conclusion: Profit on sale of shares held as HTM and disclosed as strategic investments/associates is long-term capital gain and not business income; appeal dismissing revenue's challenge is upheld on this point. Issue 2 - Application of precedents and CBDT circulars that investments of banks are part of banking business Legal framework: Judicial precedents recognise that investments made by banks in the normal course for liquidity and banking operations may form part of banking business; CBDT circulars and RBI classification guidelines inform characterisation. Precedent Treatment (followed/distinguished): The Tribunal distinguishes precedents holding that investments of banks are part of banking business where facts involved statutory or operational compulsion or treatment as business assets (e.g., requirement to place funds in approved securities). Precedents and administrative instructions are applied contextually: AFS/HFT categorisation and compelled investments point towards business character, whereas HTM strategic holdings do not automatically fall within those precedents. Interpretation and reasoning: The Tribunal finds factual distinction crucial - in prior authority the issue concerned statutory compulsion and/or routine liquidity investments; in the present case there is a substantial shareholding treated as strategic investment and disclosed under HTM/associates. Thus, the precedents and CBDT circulars relied upon by revenue do not squarely apply. Ratio vs. Obiter: Ratio - Precedents that treat bank investments as part of banking business do not govern where the bank's shares are held as HTM strategic investments and disclosed as associates; such holdings retain capital nature. Obiter - Administrative circulars and precedent remain relevant for AFS/HFT and compelled investment situations. Conclusion: Authorities holding that all bank investments constitute business assets are distinguished on facts; those authorities do not mandate treating HTM strategic shareholdings as stock-in-trade. Issue 3 - Effect of assessee's election/consistent accounting classification and CBDT Circular on binding nature of treatment Legal framework: CBDT guidance provides that where an assessee elects to treat listed shares as stock-in-trade, income will be business income; conversely, where listed shares held >12 months are treated as capital assets and so reported, AO should not dispute characterisation if choice is consistently followed; the stand taken in a particular assessment year is binding for subsequent years. Precedent Treatment: Administrative instructions and prior judicial decisions uphold that the taxpayer's declared treatment, supported by facts and consistent accounting, is a significant determinative factor unless there is compelling evidence to the contrary. Interpretation and reasoning: The Tribunal applies CBDT Circular No.6/2016 (and related administrative guidance) to hold that the assessee's classification of the shares as HTM and as associates, coupled with substantial shareholding and disclosure in financial statements, constitutes a definitive election to treat these as investments. The AO has not shown contrary facts to rebut that treatment. The Tribunal emphasises that once the assessee elects a particular characterisation in an assessment year, it cannot adopt a contrary stand in subsequent years. Ratio vs. Obiter: Ratio - The taxpayer's clear, consistent classification of listed shares as HTM/investment in financial statements is binding and should be respected by the assessing officer absent contrary factual justification; such classification leads to capital gain treatment when sale occurs. Obiter - The mechanistic application of the circular to all bank investments is not endorsed; factual inquiry remains necessary where classification or intention is ambiguous. Conclusion: The assessee's HTM classification and disclosure as associate constitutes a binding election and supports LTCG treatment; the AO's re-characterisation to business income without adequate contrary facts is untenable. Overall Conclusion The Tribunal affirms that where a bank acquires substantial stake in a company, treats the holding as a strategic investment disclosed as an associate and classifies it as HTM, gains on sale are long-term capital gains and not business income; precedents and circulars on bank investments being part of banking business are distinguished on the factual matrix; consequently, the revenue's appeal is dismissed.