Tax authorities must allow revenue deduction for amortized premium on HTM government securities bought to meet statutory liquidity norms

ITAT Patna held that the assessee, a banking entity governed by the Banking Regulation Act, 1949 and the Regional Rural Banks Act, 1976, was entitled to claim deduction of premium paid on purchase of government securities as revenue expenditure. The securities were acquired to meet statutory liquidity ratio and capital adequacy norms and were classified under the "Held to Maturity" (HTM) category. The Tribunal held that amortization of such premium over the period of maturity is allowable as a revenue deduction, and the assessee's claim was upheld.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether amortization of premium paid on purchase of Government securities held to comply with statutory banking requirements is allowable as revenue expenditure.

1.2 Whether disallowance of carry forward loss required adjudication when the ground was not pressed at hearing.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of amortization of premium on Government securities as revenue expenditure

Legal framework (as discussed)

2.1 The assessee is engaged in banking business under the Banking Regulation Act, 1949 and the Regional Rural Banks Act, 1976, and is required to purchase Government securities to maintain statutory liquidity ratio as per Reserve Bank of India norms. Reference is made to CBDT Circular No. 665 dated 05.10.1995 regarding characterization of securities in the hands of banks with regard to RBI guidelines. Reliance is placed on a coordinate bench decision allowing amortization of premium on Government securities classified as HTM, treating such securities as stock-in-trade of banking business, and on judicial precedents supporting deduction of such amortization in computing business income.

Interpretation and reasoning

2.2 The Court records that the assessee purchased Government securities at a premium in the course of carrying on banking business to meet statutory liquidity ratio requirements and amortized the premium over the period up to maturity, claiming it as revenue expenditure.

2.3 It is noted, following the coordinate bench decision, that securities acquired under HTM category pursuant to RBI mandate for maintaining statutory liquidity ratio are to be regarded as stock-in-trade of the banking business, and that amortization of premium on such securities, being in line with RBI prudential norms, is deductible in computing business income.

2.4 The Court further notes that, as held by the coordinate bench, RBI guidelines and CBDT Circular No. 665 support treating such securities as stock-in-trade in the case of a bank, and that judicial authority has upheld deduction of amortization of premium on HTM securities in such circumstances. Distinction is drawn in that earlier decision between banking entities and NBFCs, and between claims governed by specific statutory provisions (e.g., section 36(1)(vii) regarding provision for bad and doubtful debts) and claims for amortization of premium on Government securities, which are not barred in a like manner.

2.5 Observing that the facts of the present case are materially identical to those in the cited coordinate bench decision, the Court follows that precedent.

Conclusions

2.6 The premium paid on purchase of Government securities, amortized over the period up to maturity and claimed in accordance with RBI norms, constitutes allowable revenue expenditure in the hands of the assessee bank.

2.7 The disallowance made by the Assessing Officer and confirmed by the first appellate authority on account of provision for amortization of premium on Government securities is set aside, and the Assessing Officer is directed to allow the claim for the relevant assessment year.

2.8 For the subsequent assessment year, the issue being identical, the above conclusion is applied mutatis mutandis and the assessee's claim for amortization of premium is allowed.

Issue 2: Disallowance of carry forward loss

Interpretation and reasoning

2.9 The Court records the assessee's statement at hearing that the carry forward loss in question has already been allowed as set off by the department, and that the corresponding ground is not pressed.

Conclusions

2.10 In view of the ground not being pressed, no adjudication on merits is undertaken and the ground relating to disallowance of carry forward loss is dismissed as not pressed.

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