SAMASTIPUR KSHETRIYA GRAMIN BANK,PATNA vs. DCIT, CIRCLE-3, DARBHANGA

This is an appeal preferred by the assessee against the order of the Commissioner of Income-tax (Appeals), Jamshedpur (hereinafter referred to as the “Ld. CIT(A)”] dated 16.10.2018 for the AY 2011- 12.As the facts and circumstances are exactly identical in both the appeals of the assessee, hence, we take and decide the issue.

3.1. The facts in brief are that the assessee is a bank constituted under Regional Rural Banks Act, 1976 and is engaged in carrying on business of banking activities and derives income from the business of bank activities as such. The assessee filed the return of income on 29.09.2011, declaring total income at ₹nil, after setting off all the carry forward losses. During the course of assessment proceedings, the learned AO observed from the profit and loss account that the assessee has debited a sum of ₹34,18,516/- on account of provision for amortization of investment which according to the learned AO was of capital nature and could not be allowed as Revenue expenditure and accordingly, the same was disallowed and added to the income of the assessee.

3.2. In the appellate proceedings, the learned CIT (A) confirmed the order of the learned AO.

3.3. After hearing the rival contentions and perusing the materials available on record, we find that the assessee is carrying on the banking business under the banking regulation Act 1949 and under Regional Rural Banks Act, 1976. The assessee is required to purchase government securities in order to maintain the capital adequacy norms in order to maintain the statutory liquidity ratio prescribed by Reserve Bank of India. The assessee purchased the securities at a premium and amortized the same over the period of maturity and claimed the amount as revenue expenditure. In our considered view, the premium amortized on the purchase of securities by the assessee “7. We have carefully considered the rival submissions. Having considered the rival stands, we find no reason to interfere with the conclusion drawn by the CIT(A). Pertinently, assessee’s claim for amortization of premium paid on the purchase of Government securities classified as HTM is consistent with the prudential norms issued by the RBI. It is also undeniable that the acquisition of the Government securities under the HTM categories has been undertaken by the assessee in the course of carrying on the ‘banking business’ under the mandate of RBI. Ostensibly, the predominant motive to purchase securities is to maintain the statutory liquidity ratio prescribed by the RBI. The Central Board of Direct Taxes vide its circular No.665 dated 5/10/1995 also provides that the question as to whether any particular securities constitute stock-in-trade or investment in the case of a bank shall be determined, inter-alia, having regard to theguidelines issued by RBI from time to time. In this background, it would be relevant to refer to the judgment of the Hon’ble Kerala High Court in the case of Nedungadi Bank Ltd. (supra), wherein it has been held that securities held by a Co-operative society engaged in the business of banking would constitute the ‘stock-in-trade’ of thebusiness of the said society. Therefore, in the context of the present assessee, which is also a Co-operative society engaged in the business of banking, the impugned Government securities are liable to be considered as the stock-in-trade of its business of banking. Thus, considering the aforesaid fact- situation and also the mandate of the RBI, the amortization of premium paid on purchase of securities classified under HTM category is liable to be allowed as a deduction while computing the business income of the assessee bank. At this point, it would also be appropriate to refer to the judgment of the Hon’ble Jurisdictional High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 89 CCH 0185 (Mum), wherein the assessee bank was held entitled for deduction with respect to the amortization of premium paid on acquisition of securities classified as HTM category on the ground ofthe mandate by RBI guidelines. In our considered opinion, the aforesaid judgment of the Hon’ble Bombay High Court clearly supports the inference reached by the CIT(A), which we hereby affirm. 7.1 Before parting, we may refer to the judgment of the Hon’ble Madras High Court in the case of T.N Finance & Infrastructure Development Corporation Ltd.,280 ITR 491(Mad), which has been relied upon by the Assessing Officer in support of his stand that the RBI guidelines do not over-ride the statutory provisions of the Act and, thus, amortization claimed by the assessee on the investment held in the HTM category cannot be allowed as a deduction. We have perused the said judgment of the Hon’ble Madras High Court and find that the same does not help the case of the Revenue. Firstly, the assessee before the Hon’ble Madras High Court was a non-banking financial corporation (i.e. NBFC), whereas the assessee before us is a Co-operative society engaged in the business of banking under licence from RBI, which is quite distinct from an entity enjoying status of NBFC. Moreover, in the case before Hon’ble Madras High Court, the claim of the assessee was in relation to section 36(1)(vii) of the Act on