THE ZORASTRIAN CO-OPERATIVE BANK LTD,MUMBAI vs. CIT 1, MUMBAI

Brief facts leading to the present appeal are that the assessee a Co- operative Bank engaged in the business of banking, filed its return of income for the A.Y. 2010-11 declaring the total income of Rs. 4,65,17,921/-. The 2 Assessment Year: 2010-11 assessment was completed u/s 143 (3) of the Act accepting the returned income.

Later on the Ld. CIT noticed that the assessee had debited an amount of Rs. 4,68,65,000/- on account of loss on shifting of securities from the category ‘Available for Sale’ to the category ‘Held to Maturity’. The Ld. CIT accordingly issued show cause notice u/s 263 of the Act observing that the loss has arisen to the assessee from re-categorization of securities is notional loss not arising from any actual transaction of purchase and sale, therefore not allowable. In response to the said notice the authorized representative of the assessee filed written submissions contending that the issue of shifting of securities was explained to AO during the assessment proceedings. Therefore, the revision of order is not permissible. It was further contended that the re-categorization of the investment was done in accordance with the guidelines of the Reserve Bank of India, therefore, the loss is allowable. However, the Ld. CIT rejecting the contention of the assessee passed the impugned order and issued directions to the AO to frame the assessment order afresh taking into account the observations made in the said order.

Aggrieved by the order of Ld. CIT, the assessee preferred this appeal before us on the following effective grounds:-

1:0 Re: Validity of Order u/s. 263: 1:1 The Commissioner of Income-tax has erred in holding that the Order dated 12 November 2012 passed by the Assessing Officer u/s 143(3) of the Income-tax Act, 1961 was passed without application of mind and was erroneous and prejudicial to the interest of revenue and in setting aside the same.

The Ld. counsel at the outset submitted that the assessee’s case is covered by the judgment of Hon’ble Bombay High Court passed in CIT Vs. HDFC Bank Ltd., 368 ITR 377 (Bom) and the identical issue has been decided by the Hon’ble Court in favour of the assessee. Hence, the impugned order is liable to be set aside.

On the other hand, the Ld. Departmental Representative (DR) relying on the impugned order passed by the Ld. CIT submitted that since the assessee had wrongly debited the amount of Rs. 4,68,65,000/- the Ld. CIT has rightly held that the loss is notional and the same is not allowable.

We have heard the rival submissions and also gone through the material placed on record. We notice that in CIT Vs. HDFC Bank (supra), the Hon’ble Bombay High Court has held that the claim of the assessee for the loss on transfer of securities from the category ‘Available for Sale’ to ‘Held to Maturity’ was an allowable deduction. In the said case, the assessee bank being a Public Ltd. Company filed its return of income for the relevant assessment year. After the scrutiny, the assessment order was completed taking into consideration the submissions made by the assessee. Subsequently, it was noticed that the assessee had debited to the profit & loss account a sum of Rs. 87.11 lacs as a loss on account of transfer of securities from category ‘Available for Sale’ to ‘Held to Maturity’ which was allowed by the Assessing Officer. The Ld. CIT set aside the assessment order invoking jurisdiction u/s 263 of the Act holding that the allowance of such a notional loss was erroneous and prejudicial to the interest of the revenue. The assessee challenged the said order before the ITAT, Mumbai Bench. The co-ordinate Bench of ITAT set aside the revisional order holding that the claim of the assessee for the loss on transfer of securities from the category ‘Available for Sale to ‘Held to Maturity’ was an allowable deduction.

The Department challenged the order passed by the ITAT before the Hon’ble High Court. Before the Hon’ble High Court, the Department contended that since such an allowance of a notional loss was impermissible under the provision ns of the Act, the Ld. CIT was fully justified in invoking his powers u/s 263 of the Act, therefore, the impugned order passed by the ITAT requires interference.

The Hon’ble High Court rejected the contention of the revenue and decided the issue in favour of the assessee. The relevant portions of the 5 Assessment Year: 2010-11 judgment of the Hon’ble Bombay High Court in the aforesaid case are reproduced below:

The issue involved in the present case is identical to the case discussed above and since, the Hon’ble Bombay High Court has decided the identical issue in favour of the assessee in the said case, by confirming the findings of the ITAT that the claim of the assessee for loss on the transfer of securities from the category ‘Available for Sale’ to ‘Held to Maturity’ is an allowable deduction, we find merit in the contention of the assessee/appellant. Since, the loss in question is allowable, the Ld. CIT has no jurisdiction to exercise the powers under section 263 of the Act. We, accordingly, set aside the impugned order passed by the Ld. CIT u/s 263 of the Act as bad in law and allow ground No 1.1 to 1.3.

In so far as ground No 2.1& 2.2 are concerned, since we have allowed ground No 1.1 to 1.3 of the assessee’s appeal we do not consider necessary to adjudicate these grounds which have been raised as alternative grounds.