TaxTMI 
TaxTMI 
2002 (11) TMI 29
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.... All these appeals are filed by the Revenue challenging the orders of the Income-tax Appellate Tribunal, Cochin Bench. The Nedungadi Bank Ltd., Calicut, is the respondent assessee in I. T. A. Nos. 157 of 2001, 17 of 2002, 5 of 2002, 39 of 2002, 48 of 2002, 32 of 2002, 89 of 2002, 95 of 2002, 92 of 2002, and 4 of 2002. The Dhanalakshmi Bank Ltd. is the respondent assessee in I. T. A. Nos. 214 of 2001, 62 of 2002, 21 of 2002, 33 of 2002 and 14 of 2002. The South Indian Bank Limited is the respondent assessee in I. T. A. Nos. 47 of 2002, 13 of 2002, 63 of 2002, 51 of 2002, 65 of 2002, 38 of 2002, 59 of 2002 and 90 of 2002. The Catholic Syrian Bank is the respondent/assessee in I. T. A. No. 25 of 2002. Various assessment years ranging from 1981-82 up to 1992-93 are involved in these appeals. It is not necessary to give all the details of the assessment years, for nothing turns on the relevant assessment years in deciding the issue involved. Since the Income-tax Appellate Tribunal has passed a detailed order in the case of Nedungadi Bank Ltd. in I. T. A. Nos. 848, 841 and 842 of 1994 for the assessment years 1982-83 and 1984-85, we are taking I. T. A. No. 157 of 2001 arising from th....
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....e securities forming part of the SLR are not stock-in-trade, and therefore, are not capital assets of the bank. Various other contentions are also urged before the Tribunal to the effect that the securities purchased by the assessee-bank for the purpose of complying with the requirement of maintaining the SLR cannot be treated as stock-in-trade of the assessee. It was also contended that the securities purchased for the purpose of fulfilment of the SLR and remaining at the close of the year cannot be treated as unsold stock in trade for the purpose of revaluing the closing stock and for claiming depreciation on account of the notional loss. The appellant had also filed a very detailed argument note, annexure E to substantiate the contention that the securities held by the assessee-bank cannot be treated as the stock-in-trade of the business of the assessee, and that the same cannot be revalued and the difference between the cost price and the market price, if it is a loss, cannot be allowed as a deduction in the computation of the profits and gains of the business of the assessee. The assessee had also filed cross-objection challenging the orders of the assessing authority as confi....
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....g these years. Senior counsel further submits that even if the securities can be considered as stock-in-trade for the limited purpose, still they cannot be understood as unsold stock-in-trade remaining at the close of the assessment year for the purpose of revaluing the same based on the market value of the securities and for claiming depreciation on that basis. Senior counsel also took us to the various decisions of this court and of the Supreme Court relied on by the assessee and accepted by the Tribunal, and submitted that none of those cases related to the present situation of the assessee-bank holding securities for the purpose of maintaining the SLR and also dealing in securities by way of purchase and sale frequently and, therefore, the Tribunal was not justified in deciding the issue in favour of the assessee relying on those decisions. On the question of reopening of the assessment and the limitation contained in the proviso to section 147, senior counsel submits that those limitations are applicable only in a case where the assessee had filed return as contemplated under the provisions of section 139(1) of the Act. The contention of senior counsel is that even in a cas....
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....he Kerala High Court in Malabar Co-operative Central Bank Ltd. v. CIT [1975] 101 ITR 87, the decision of this court in CIT v. South Indian Bank Ltd. [2000] 241 ITR 374, as affirmed by the Supreme Court in CIT v. South India Bank Ltd [2001] 249 ITR 304. (Of course, the Supreme Court left open the main issue in the said judgment) and also the decision of the Supreme Court in United Commercial Bank v. CIT [1999] 240 ITR 355). Counsel also relied on the decisions of the Karnataka High Court in CIT v. Corporation Bank Ltd. [1988] 174 ITR 616, and the decisions of the Supreme Court in CIT v. Karnataka State Co-operative Apex Bank [2001] 251 ITR 194 and Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522. Counsel relying on all these decisions, submits that the two appellate authorities have rightly held that the securities held by the assessee-bank are the stock-in-trade of the assessee and, therefore, the assessee was perfectly justified in revaluing the closing stock and in claiming the loss suffered in such revaluation and claiming depreciation of such loss as computed. Learned counsel has also relied on the circular issued by the Central Government which has als....
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....anking Regulation Act, 1949, specifies the forms of business in which banking companies may engage. It provides that in addition to the business of banking, a banking company may engage in anyone or more of the following businesses, namely: "6. (a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing, making, accepting; discounting, buying, selling, collecting and dealing in bills of exchange, hundis, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments, and securities whether transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations, securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of constituents or others, the negotiati....
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.... have been sought by banks from the Central Board of Direct Taxes: (i) Whether the securities held by the banks constitute their stock-in-trade or investment, and consequently whether the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing their taxable profits? (ii) Whether deduction claimed in respect of interest paid for broken period on the purchase of securities should be allowed as a deduction from the taxable profits? 2. The matter has been considered by the Board and it has been decided that the securities must be regarded as stock-in-trade by the banks. Therefore, the claim of loss, if debited in the books of account, would be given the same treatment as is normally given to the stock-in-trade. As far as the second issue is concerned, both the interest payments and receipts must be regarded as revenue payments/receipts, and only the net interest on securities shall be brought to tax as business income." It is now settled by a series of decisions of this court and of the Supreme Court that the securities held by the banks constitute their stock-in-trade or investment and consequently the loss claimed by th....
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....sitors or it maintained in the form of short-term deposits cash in other banking institutions, can it be said that it was not doing its business, that the cash was actually not in circulation, and, therefore, it did not form circulating capital and was, therefore, not part of its stock-in-trade? Certainly not; . . . . . 'It is a normal mode of carrying on banking business to invest moneys in a manner that they are readily available and that is just as much a part of the mode of conducting a bank's business as receiving deposits or lending moneys or discounting hundies or issuing demand drafts. That is how the circulating capital is employed and that is the normal course of business of a bank. The moneys laid out, in the form of deposits as in the instant case, would not cease to be a part of the circulating capital of the appellant nor would they cease to form part of its banking business. The returns flowing from them would form part of its profits from its business. In a commercial sense the directors of the company owe it to the bank to make investments which earn them interest instead of letting moneys lie idle. It cannot be said that the funds of the bank which were not lent t....
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....therefore, it is entitled to exemption under the provisions of section 80P(2)(a)(i) of the Act. A Bench of this court in CIT v. South Indian Bank Ltd. [2000] 241 ITR 374 had occasion to consider this question, though in the context of challenge against the order of rectification of the assessment under section 154 of the Act. The said case was originally considered by a Division Bench consisting of Justice P. A. Mohammed and Justice P. Shanmugam. When the Bench differed on the opinion, the matter was referred to a third judge (one of us Sivarajan J.) who agreed with the view expressed by P. A. Mohammed. Mohammed J. in his judgment has considered this question with reference to Circular No. 599, dated April 24, 1991 and on the basis of the decision in Malabar Co-operative Central Bank Ltd.'s case [1975] 101 ITR 87 (Ker) besides other decisions of the Supreme Court and ultimately held that the securities held by the assessee-bank constitute the stock-in-trade of the business of the assessee. Sivarajan, J. in the concurring judgment has also considered this question with reference to the circular issued by the Central Board of Direct Taxes as also the decision in Malabar Co-operati....
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.... the market value of the investments under the sub-heads "separately" within the brackets, in the balance-sheet. It was also the case of the assessee in that case that the requirement of disclosing the value of closing stock of shares and securities at cost and mentioning the market price is lower (now it is dispensed with by a circular dated June 28, 1992, issued by the Reserve Bank of India) and by the said circular standard investments in securities other than approved securities are to be classified under current category or at cost whichever is less and its depreciation is to be provided for the shortfall, if any. The Supreme Court then observed that the question would be when such a bank has submitted its statutory return of income, whether it can disclose it on the basis of the market value of the securities and shares. The Supreme Court noted the following undisputed facts: "(a) the appellant is a nationalised bank and, therefore, is governed by the Banking Regulation Act, 1949 ; (b) the appellant follows the mercantile system of accounting both for book-keeping purpose as well as for tax purposes; (c) the appellant consistently and for over 30 years prior to the a....
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....ercantile system, he was entitled to show his real income by taking into account the market value of such investments in arriving at the real taxable income. On that basis, therefore, the Assessing Officer has taxed the assessee." It was further held as follows: "In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance-sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance-sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) be....
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....m circulating or working capital would fall within section 80P(2)(a)(i). There is nothing in the phraseology of that provision which makes it applicable only to income derived from working or circulating capital." This decision is followed by the same Bench of the Supreme Court in Mehsana District Central Co-operative Bank Ltd. v. ITO [2001] 251 ITR 522. In the decision in CIT v. Corporation Bank Ltd. [1988] 174 ITR 616, the Karnataka High Court had also considered this question as to whether the Appellate A Tribunal was justified in approving the system of valuation of stock-in-trade adopted by the assessee for the purpose of assessment. Of course, it was noted in the said decision that the fact that the securities form part of stock-in-trade of the assessee-bank, and that it was a trading loss, was not disputed at any point of time and, therefore, the only question that remains for consideration B is whether the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, notwithstanding the fact that the assessee had failed to debit it in its books of account. The Karnataka High Court relying on the decision of the Supreme Court in....
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....he provisions of the Banking Regulation Act have to be treated as stock-in-trade of the business of the bank. In fact, the Central Board of Direct Taxes in the circular extracted above has taken the very same view which, according to us, is consistent with the view taken in the decisions of this court and of the Supreme Court discussed above. Here, it must be noted that till the decision of the Supreme Court in Vijaya Bank Ltd.'s case [1991] 187 ITR 541, the assessing authority has been taking the consistent view that the assessees are entitled to depreciation on account of the notional loss suffered by them on revaluation of the securities. In fact, in all the reassessment cases, the assessing authority had originally granted deduction by way of depreciation of the notional loss incurred by the assessee and the only reason for denying the said relief to the assessees, is the decision of the Supreme Court in Vijaya Bank Ltd.' case [1991] 187 ITR 541. Vijaya Bank Ltd.'s case [1991] 187 ITR 541 (SC) as we have already noted, does not lay down any clear proposition that the securities held by a bank cannot be considered as stock-in-trade of the business of the bank. For all these r....
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....or section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year. It must be noted that the assessing authority has no case that the assessee has not fully and truly disclosed all material facts necessary for his assessment for that assessment year. This is evident from the fact that the reason for reopening the assessment is the decision of the Supreme Court in Vijaya Bank Ltd.' case [1991] 187 ITR 541, which is clearly stated in the notice and extracted in paragraph 26 of the order of the Tribunal. Therefore, it cannot be said that the reassessment happened to be made due to the failure on the part of the assessee to disclose truly all the material facts for the assessment year. In the instant case, admittedly, the assessee had filed return for all the years concerned. The contention of senior counsel appearing for the Revenue, as already noticed, is that the return filed by the assessee cannot be treated as one under the Act. Senior counsel has relied on a decision of a Division Bench of this court in I. T. R. No. 30 of 1977. The Division Bench observed that the first limb of section 147(a) of the Act, viz., the omission or f....