DCIT 6(2), MUMBAI vs. DEUTSCHE INVESTMENT INDIA LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM (A.Y:2008-09) The Dy. Commissioner of Income Vs. M/s. Deutsche Investments Tax, Circle- 6(2), Room No.563, India Pvt. Ltd.,Nicholas Aayakar Bhavan, M. K. Road, Piramal Tower, Peninsula Churchgate, Mumbai 400 021 Corporate Park, Ganpatrao KadamMarg, Lower Parel, Mumbai 400013 PAN: AACCD 1705 E Appellant .. Respondent C. O. No.161/Mum/2014 (In A.Y:2008-09) & ITA No.1276/Mum/2015 (AY: 2009-10) M/s. Deutsche Investments Vs. The Dy. Commissioner of Income India Pvt. Ltd.,Nicholas Tax, Circle- 6(2), Room No.563, Piramal Tower, Peninsula Aayakar Bhavan, M. K. Road, Corporate Park, Ganpatrao Churchgate, Mumbai 400 021 KadamMarg, Lower Parel, Mumbai 400013 PAN: AACCD 1705 E .. Cross Objector/Appellant Respondent Revenue by .. Shri Sivaji Gode, Sr. DR .. Assessee by Shri Percy Pardiwala, AR .. Date of hearing 07-11-2016 Date of pronouncement .. 07- 11- 2016 O R D E R PER MAHAVIR SINGH, JM:

One appeal ( Revenue and CO (161/Mum/2014) by Assessee is arising out of the order of the CIT (A)-12, Mumbai in appeal No. CIT(A)-12/ACIT-6(2)22/11-12 dated 26-02-2013. Other appeal by assessee (ITA No.1276/Mum/2015) is against the order of the CIT(A)- 12, Mumbai in appeal No.CIT(A)-12/DCIT.6(2)/IT-2/2013-14 dated 08-12-2014. Assessments were framed by the ACIT, Range- 6(2), Mumbai for the assessment

CO No.161/Mum/2014 year 2008-09 vide his order dated 15-12-2011 and for assessment year 2009-10 by the DCIT-6(2), Mumbai vide his order dated 15-03-2013, both u/s 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’) .

“1. On the facts and circumstances of the case ad in law, the Ld. CIT(A) erred in deleting the addition of Rs.62,00,000/- and treating the reduction in value of investment as business loss when the entire investment could not be treated as stock-in-trade.

2. On the facts and circumstances of the case and in law, the Ld. CIT(A)(A) erred in failing to appreciate that the assessee company is a NBFC which is regulated by the RBI and is bound to follow the guidelines prescribed by the RBI and has to maintain its books of accounts as per guidelines of RBI.

4. On the facts and circumstances of the case ad in law, the Ld. CIT(A) erred in failing to appreciate that the assessee company being a NBFC and regulated by the RBI is bound to divide investment as current investments and long term investment on the lines of investment by the Banks as Held For Maturity. Available For Sale, Held For Trading and treat only current investment as stock-in-trade and show at marked to market value at the end of the financial year while showing the long term

CO No.161/Mum/2014 investment at book value at the end of the financial year at par with the treatment given by the Banks for similar securities (Held For Maturity.

5. On the facts and circumstances of the case and in law, the Ld. CIT(A)(A) erred in failing to restrict the relief on account of reduction in value of investment as business loss to the current investment and allowing the reduction in value of investment for the long term investment to be shown only at book value at the end of the financial year as business loss which actually being only a notional loss is not a deductible expenditure”. 3. Briefly stated facts are that the assessee is a Non Banking Financial Company (NBFC) following mercantile system of accounting. The AO on going through the profit & loss account noticed that the assessee has debited provisions for depreciation on investments. The AO required the assessee to explain how this is allowable. It was explained by the assessee before the AO that the stock- in-trade has to be valued as per the normal principle of accounting i.e. cost or market value whichever is lower and the provisions for depreciation in value of investments is allowable as deduction. The AO was not convinced with the explanation of the assessee for the reason that the assessee had debited provisions for depreciation in the profit & loss account and thus, the expenses are not actually incurred or crystallized by the assessee and the only provisions has been made for such expenses. Accordingly, he disallowed the provisions for depreciation on investments amounting to Rs.62 lacs. Aggrieved, the assessee preferred appeal before the CIT(A), who allowed the claim of the assessee by observing in Para 4.4 and 4.5 of his order as under:-

“4.4 I have carefully considered the order of the AO and the submission of the appellant. A reading of the assessment order shows that the A O has accepted the fact that the appellant is engaged in the business of non-banking financial services for which it has obtained registration from the RBI. That the stock in trade of the appellant consists of government equity shares etc. has also not been disputed. The business income offered from such a stock I trade has been accepted by the AO. Their valuation as done by the appellant and disclosed in the closing stock has also not been held as incorrect by the AO. The only issue disputed as the claim of the appellant as made in the P & L A/c. regarding provision for depreciation on investment. This has been done as the appellant values

CO No.161/Mum/2014 current investment at cost or market value whichever is lower and either credit or debited the gain or loss. The loss is debited under the nomenclature provision, but it is actual valuation loss. The AO has rejected this claim of the appellant for the reasons as reproduced earlier on in this order. However, it is seen that the action of the AO is not based on the analysis of the facts of the case as was before him. The AO has not taken into consideration the nature of the business of the appellant even though he has accepted it and that the stock in trade of the appellant are securities which the appellant has termed as current investments in its books of accounts. These are the stock in trade of the appellant in which the appellant has regularly carried out the business in the year. The AO has also not considered the fact that the valuation of closing stock of securities has been carried on as per the mercantile / actual system of accounting regularly employed by the appellant and the method so employed by the appellant is duly supported by the RBI norms read with AS-13 of the Institute of Chartered Accountants. It is also seen that the appellant has taken into consideration provisions of section 145 and 145A of the IT Act in valuing the closing stock of securities. The deduction claimed under the head provisions for depreciation by the appellant is nothing else but actual depreciation in the value of investment held by the appellant as stock in trade, transaction from which has been offered as business income of the appellant. It is in fact a loss suffered by the appellant due to the fall in the market price of the investment in the normal course of business of the appellant. At the end of any previous year securities held as stock in trade are to be valued at actual cost initially recognized or net realizable value at the end of the previous year, whichever is lower. If there is a negative difference that results on account of such valuation the same is to be treated as a loss in the accounting done. It would be immaterial as to the nomenclature that is given to such quantum that is arrived at. All that would need to be seen that it is not a provision but the actual loss that is debited to the P & L Account. In this case, it is seen that the appellant has debited the actual loss that has accrued to it regarding the valuation of closing stock actually done. The working of the provision for depreciation submitted clearly indicates this. Besides this one needs to consider the quantitative details of these investments as available in the financials for the year ended 31/3/2008 wherein it has categorically been stated that the said investments are actually stock in hand. It is also evidenced that the appellant is not dealing in shares. The order of the AO, it is seen, is silent on the fact as to why he has considered that the claim has not actually crystallizing and that it is only provisions made that stands debited. The action of the AO in rejecting a claim made by the appellant on the basis of a suspicion without specifically establishing the fact as to why the same was not acceptable

CO No.161/Mum/2014 cannot be upheld. This especially so if the appellant has been able to establish that it has followed the provisions of Income Tax Act totally. 4.5 Rejection of the depreciation / loss claimed by the appellant would mean rejection of the regular books of accounts maintained by the appellant. It is open to the AO to reject the assessee‟s books of accounts but for doing so proper analysis of the books of accounts and the defects noticed should be detailed. The rejection cannot be based simple on the nomenclatures used by the appellant to describe a claim. This enquiry / examination has not been done by the AO. It is seen that the appellant has maintained details of stock in trade and has made available its valuation to the AO. The AO has not pointed out any defect noticed that would show that the stock in trade has not been valued properly to disclose the correct income. From the details available, it is clear that the appellant was maintaining its account on the Mercantile system. It is seen the valuation of stock in trade has been done by the appellant on the basis of cost price or market price whichever is less. The valuation has been done as by the method regularly followed by the appellant. The fall in value of investment in the case of 11.3% India Government Bond amounting to Rs.62 lakhs has been evidenced by the appellant by way of the prevailing rates. It is also seen that the difference or the interest accrued on the discounted bonds have been credited to the Profit & Loss A/c. and offered for taxation. The AO has made no remarks on the same in the assessment order. The case of Gujarat State Investment Ltd. v/s. DCIT (2002) 74 TTJ (Ahd-Tribunal) supports stand taken by the appellant. It is also seen that the appellant‟s case is directly covered by the judgment of the Hon‟ble Kolkata Tribunal in the case of ACIT v/s. Dalhousie Investment Trust Co. Ltd. (2002) 80 ITD 210, wherein the Hon‟ble Tribunal has held that the method of valuation of closing stock on the basis of cost or market value whichever is lower is a well established Rule of commercial practice and accountancy and has been recognized time the time again by various judicial decisions. In view of the above discussion as it is seen that the appellant has followed the method of accounting, it is required to follow regarding the valuation of its closing stock that consists of securities and the assessing officer has noticed no discrepancy. The AO‟s action of rejecting the claim of loss cannot be upheld simply on the basis of the fact that the same has been put under the nomenclature provision for depreciation. The addition made is, therefore, deleted and the ground of appeal allowed”. Aggrieved, now the Revenue is in appeal before the Tribunal.

Securities Quantity Book Value (Rs. Year of sale in thousands) Government Securities 11.30% GOI 100,00,000 10,83,400 2010 Bonds 2010 Certificate of Deposits & Commercial Papers Vijaya Bank 50,00,000 4,57,706 2009 State Bank of Indore 80,00,000 7,66,852 2009 IDBI 50,00,000 4,63,638 2009 HDFC 80,00,000 7,56,343 2009 Corporate Bonds 9.32% HDFC 9,85,000 9,91,120 2009 It was claimed by the assessee that these securities were sold in the next year or in the year thereafter and have not been held as long term.

CO No.161/Mum/2014 i) Securities are purchased and sold in the course of carrying on business of the assessee. Securities are held for trading as is evident from the sale made in the subsequent year as explained. ii) The treatment of securities is same in the subsequent years. The appellants have prepared the accounts on an accrual basis of accounting complying with the prescribed accounting standards as certified by the auditors. iii) As per the RBI prudential norms read with AS 13, current investments are stated at carrying value as at the year and at lower of the cost and market value. iv) Such valuation of closing stock of securities is as per section 145 and 145A of the Act.

In view of the above facts and circumstances, we are of the view that the allowability of deduction u/s 37(1) of the Act and deduction for the provisions for depreciation the assessee is entitled to. This view of ours is supported by the decision of the Hon’ble Supreme Court in the case of United Commercial Bank Ltd. Vs CIT (1999) 241 ITR 355 (SC) and the decision of the Hon’ble Bombay High Court in the case of CIT Vs Bank of Baroda (2003) 262 ITR 334 (Bom.) wherein it has been held as under:-

“We do not find any merit in this argument. In the case of United Commercial Bank v. CIT [1999] 240 ITR 355 (SC), the assessee-bank had submitted a return for the assessment year 1982-83 contending that there was a notional loss of Rs. 7.45 crores on account of closing stock of securities valued at market price which fell below the cost. The Income-tax Officer accepted the said loss vide assessment order dated March 19, 1985. However, the Commissioner of Income-tax intervened by order dated March 9, 1987, under Section 263 of the Income-tax Act. By the said order, the Commissioner set aside the order of assessment holding that the assessee-bank had no right to calculate profit or loss arising out of the investment trading account as the said account did not form part of the final account of the assessee-bank. That, since the investment trading account was not incorporated in the final account, the assessee-bank had no right to calculate profit or loss arising out of the investment trading account. In that matter, the assessee-bank was following the mercantile system of accounting and the loss claimed by the assessee was not debited in the profit and loss account. Against the order of the Commissioner under Section 263 of the Act, the assessee-

CO No.161/Mum/2014 bank preferred an appeal to the Tribunal which took the view that the assessee had claimed the loss by following the same method which it was following for the last 30 years. Consequently, the order passed by the Commissioner under Section 263 was set aside. Against the said order of the Tribunal, two questions were referred for opinion to the High Court. Answering the said questions, the High Court observed that the assessee-bank had not valued the stock of shares and securities in its books of account in accordance with the method of "cost or market price whichever is lower”; if this method was not followed in preparing the investment trading account, then the assessee-bank cannot claim notional loss/notional method of stock valuation for computing income. The High Court took the view that the book results could be rejected by the Income-tax Officer under Section 145(1) of the Income-tax Act if the method adopted by the assessee-bank did not disclose a proper and true income. That, merely because in the past the system followed by the assessee-bank was not questioned was no ground to say that it should be accepted for all times. Consequently, the matter came before the Supreme Court. The apex court came to the conclusion that preparation of balance-sheet by the assessee-bank was governed by the Banking Regulation Act, 1949. That, under the Third Schedule to that Act, the balance-sheet and profit and loss account have been prescribed. That, in the prescribed form, there is a column "property and assets". Item 4 provides for investments (mode of valuation, i.e., cost or market value). Note (f) in column 4 states that where the value of the investments was higher than the market value, the market value shall be shown separately. Further, under Section 53 of the Banking Regulation Act, 1949, the Central Government on the recommendation of the Reserve Bank of India had issued a notification for banks in respect of the assessments to the effect that Note (f) shall not apply to the United Commercial Bank in respect of its balance- sheet. On the basis of the said notification, the United Commercial Bank did not mention the market value of the investments. In the circumstances, the Supreme Court came to the conclusion that from the form of the prescribed balance-sheet, it was evident that the nationalized banks were directed to put the value of shares and securities at cost and if the market value was lower than the cost then, it was to be shown separately in brackets. Before the Supreme Court, however, it was argued on behalf of the Department that the balance- sheet/audited accounts maintained on the basis of the investment in shares at cost would not disclose the real profit/loss of the bank in view of the fact that depreciation in the value of the shares or fall in the market price of the shares and securities was not provided for in the audited accounts. On the other hand, it was argued on behalf of the CO No.161/Mum/2014 assessee-bank that even though in the balance-sheet the market price of the shares and securities was not mentioned yet, for determining the real income of the assessee, the said price was required to be taken into account. That, for the last 30 years, the assessee-bank was submitting income-tax returns after taking into account the market price of such shares and securities which was accepted by the Department. It was submitted that not making proper entries in the balance-sheet could hardly be a ground for not assessing the real income. The Supreme Court came to the conclusion on the above arguments that where the market value of shares and securities had fallen below the cost before the date of valuation and where on the date of valuation, the market value is less than the actual cost then the assessee was entitled to value the articles at market price and the assessee was entitled to claim the loss which the assessee would probably incur at the time of the sale of shares and securities. That, whichever method the assessee adopts, it should disclose the true picture of profits and gains. That, for determining the real income, the entries in the balance-sheet were required to be maintained in the statutory form. However, such entries in the balance-sheet were not decisive or conclusive. In such cases, it was open to the Income-tax Officer and the assessee to ascertain the true and proper income while submitting the income-tax returns. That, for valuing the closing stock, it was open to the assessee to value the stock at cost or market price whichever is lower. That, the assessee was valuing the stock-in-trade at cost for the purposes of statutory balance- sheet but, for the purposes of the income-tax return, the assessee was valuing the stock-in-trade at cost or market value whichever was lower and that practice was accepted by the Department for 30 years. Consequently, the Supreme Court allowed the appeal filed by the United Commercial Bank. In our view, the judgment of the Supreme Court in United Commercial Bank's case [1999] 240 ITR 355 squarely applies to the facts of this case. In fact, the present case before us is on a stronger footing because in the case of United Commercial Bank, the loss was not debited to the profit and loss account whereas in this case, as can be seen from the working at pages 25 and 26 of the paper-book, the loss of Rs. 11,82,35,007 has been debited to the profit and loss account which is reflected as a provision for liability in the balance- sheet and the shares and securities were valued at cost on the assets side.”

In view of the above discussions and facts in the present case, we confirm the order of the CIT (A) deleting the addition made by the AO and dismiss the appeal of the Revenue. Consequently, the appeal of assessee on this issue for A.Y. 2009-10 in is allowed.

23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression „does not form part of the total income‟ in Section 14A of the Act envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.