THE COMMISSIONER OF INCOME TAX, TRICHUR vs. THE DHANALAKSHMI BANK LTD., TRICHUR

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ITA/86/2012HC KeralaKLHC01024008201217 December 2018Bench: HONOURABLE MR.JUSTICE K.VINOD CHANDRAN,HONOURABLE MR. JUSTICE ASHOK MENON6 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the principle laid down in CIT v. Nedungadi Bank Ltd. [(2003) 264 ITR 545 (Ker.)] and CIT v. Lord Krishna Bank Ltd. [(2011) 339 ITR 606 (Ker.)] squarely applies. In those cases, the Court had approved the RBI's directive for banks to value securities at the market price or cost price, whichever is lower, to prevent inflated book profits. While those cases dealt with depreciation, the Court found the dictum equally applicable to appreciation. The Court ruled that even when there is an appreciation in the value of a security, it does not enure to the bank as income. Therefore, the valuation must be made as stipulated by the RBI, i.e., at the market price or cost price, whichever is lower. Consequently, the valuation carried out by the bank at the cost price was accepted. The question of law was answered in favour of the assessee-bank and against the Revenue.

What were the facts?

These appeals by the Commissioner of Income Tax, Trichur, challenge orders of the Income Tax Appellate Tribunal (ITAT), Cochin Bench. ITA No. 550 of 2009 pertains to Assessment Year 1998-99, and ITA No. 86 of 2012 relates to Assessment Year 2006-07. The core issue in both cases concerns the valuation of trading assets, specifically securities purchased by the assessee-bank, M/s. Dhanalakshmi Bank Ltd. The dispute revolves around how to account for appreciation in the market value of these securities in the bank's profit and loss account. The appeals arise from the ITAT's decisions which favored the assessee-bank.

What were the issues?

1. Whether the Tribunal erred in law by accepting the assessee-bank's valuation of trading assets (securities) at cost price when there was an appreciation in their market value, contrary to the principle of recognizing unrealized gains as income. Assessee's Contention: The assessee-bank argued that the valuation of securities should be made at the market price or cost price, whichever is lower, as stipulated by the Reserve Bank of India (RBI). This method, approved by this Court in previous judgments, prevents the inflation of book profits. Even in cases of appreciation, the bank contended that the valuation should adhere to this RBI directive, and therefore, valuing at cost price is acceptable. Revenue's Contention: The Revenue contended that when securities appreciate in market value, this appreciation should be recognized as income and credited to the profit and loss account. The Revenue likely argued that the RBI stipulation of 'whichever is lower' was intended to prevent overstating profits due to depreciation, but it should not preclude recognizing gains from appreciation.

Which sections of the Income-tax Act were involved?

Not Specified

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON MONDAY, THE 17TH DAY OF DECEMBER 2018 / 26TH AGRAHAYANA, 1940 I.T.A.No.550 of 2009 AGAINST THE ORDER IN ITA 1197/COCH/2004 DATED 29-12-2006 OF I.T.A. TRIBUNAL, COCHIN BENCH. [ASSESSMENT YEAR 1998-99] APPELLANT/RESPONDENT: THE COMMISSIONER OF INCOME TAX, TRICHUR. BY ADV. SRI.JOSE JOSEPH, SC FOR INCOME TAX. RESPONDENT/APPELLANT: M/S. DHANALAKSHMI BANK LTD., TAXATION DEPARTMENT, HEAD OFFICE, NAIKANAL, THRISSUR. BY ADV. SRI.P.BALAKRISHNAN (E) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 17.12.2018, ALONG WITH ITA.86/2012, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA.550 of 2009 & - 2 - 86 of 2012 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE ASHOK MENON MONDAY, THE 17TH DAY OF DECEMBER 2018 / 26TH AGRAHAYANA, 1940 I.T.A.No.86 of 2012 AGAINST THE ORDER IN ITA 133/COCH/2009 DATED 30-12-2011 OF I.T.A. TRIBUNAL, COCHIN BENCH [ASSESSMENT YEAR 2006-07] APPELLANT/APPELLANT: THE COMMISSIONER OF INCOME TAX, TRICHUR. BY ADVS. SRI.P.K.RAVINDRANATHA MENON (SR.) SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/RESPONDENT: THE DHANALEKSHMI BANK LTD., NAIKKANAL, TRICHUR-680001. BY ADVS. SRI.P.BALAKRISHNAN (E) SRI.MOHAN PULIKKAL THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 17.12.2018, ALONG WITH ITA.550/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA.550 of 2009 & - 3 - 86 of 2012 JUDGMENT [ ITA 550/2009, ITA.86/2012 ] Vinod Chandran,J. The issue arising in both these appeals are with respect to the appreciation of trading assets and the manner in which the value has to be credited to the profit and loss account. The assessee-Bank admittedly engages inter alia in making investments by way of purchasing securities. They are also treated as trading assets of the Bank. The question raised is as to the value to be taken when the securities appreciate in their market value. 2. The issue has been considered by this Court in CIT v. Nedungadi Bank Ltd. [(2003) 264 ITR 545 (Ker.)] and CIT v. Lord Krishna Bank Ltd. [(2011) 339 ITR 606 (Ker.)]. There the question was with respect to the valuation of securities when there is a claim raised of depreciation or loss. This Court had approved the measure adopted by the assessee-Banks following the stipulations made by the Reserve Bank of India. RBI had directed the security to be valued at market price or cost price, whichever is lower. The stipulation was brought in force, to ensure that the Banks do not claim escalated book profits. Though in the present case

ITA.550 of 2009 & - 4 - 86 of 2012 a contrary situation has arisen, where there is an appreciation of the value of the security, the dictum squarely applies. Even when there is an appreciation of the value, it does not enure to the Bank as income and, hence, the valuation has to be made as stipulated by the RBI; at the market price or cost price, whichever is lower. Hence, the valuation carried out by the Bank at the cost price has to be accepted. The question of law is answered in favour of the assessee-Bank and against the Revenue. The appeal stands dismissed, leaving the parties to suffer their respective costs in these appeals. Sd/- K.VINOD CHANDRAN JUDGE Sd/- ASHOK MENON JUDGE

ITA.550 of 2009 & - 5 - 86 of 2012 APPENDIX OF ITA 550/2009 APPELLANT'S ANNEXURES: ANNEXURE A TRUE COPY OF THE ORDER OF THE ASSESSING OFFICER U/S. 143(3) OF THE I.T.ACT DATED 16.11.2000. ANNEXURE B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN ITA NO.15/RI/JC/TCR/CIT-V/2000-01 DATED 10.09.2004. ANNEXURE C TRUE COPY OF THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL IN I.T.A.NO.1197/COCH/2004 DATED 29.12.2006.

ITA.550 of 2009 & - 6 - 86 of 2012 APPENDIX OF ITA 86/2012 APPELLANT'S ANNEXURES: ANNEXURE-A COPY OF ASSESSMENT ORDER DATED 28/3/2008 ANNEXURE-B TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 21/11/2008. ANNEXURE-C COPY OF THE ORDER OF THE TRIBUNAL DATED 31/12/2011. Vku/- [true copy]

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