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 constitute LTCG. The tribunal followed SC precedents distinguishing HTM from AFS/HFT (which are treated as stock-in-trade) and agreed with the CIT(A)/NFAC that the purchases were shown as investments in the balance sheet. Revenue's appeal was dismissed, confirming that such HTM-category holdings by banks generate capital gains treatment.
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.
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