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Income Tax Appellate Tribunal, BENCH ‘A’ KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ]
ORDER PER N.V.VASUDEVAN, JM:
This is an appeal by the assessee against the order dated 05.02.2013 of CIT(A)- Durgapur relating to A.Y.2009-10.
2. Ground No.A raised by the assessee reads as follows :- “A. Addition of Rs. 4,53,27,014/- disallowing the Provision for Loss of Investment in computing the business income of the appellant:
1. 1. The learned ACIT failed to appreciate that investments/ securities held by the appellant are the stock-in-trade of the (banking) business of the appellant and the notional loss suffered on account of the revaluation of the said 'securities at the close of the year is an allowable deduction in the computation of the profits of the appellant. Therefore the addition is unjustified and may be deleted.
2. The learned ACIT erred in law by non considering relevant case laws and applicable CBDT circulars produced before him by the appellant during the assessment proceedings. Therefore the addition is arbitrary and bad in law and may be deleted.
3. The order of the learned ACIT is self contradictory: therefore the addition is unjustified and may be deleted.”
The Assessee is a cooperative society engaged in the business of banking. In the course of assessment proceedings u/s 143(3) of the Income Tax Act, 1961 (Act), the –Burdwan Central Co-opt.Bank Ltd. A.Y. 2009-10 1 AO noticed that the assessee has debited in the profit and loss account a sum of Rs.4,53,27,014/- as provision for loss on investments. It is not in dispute that the amount of loss/depreciation in the market value securities that was claimed as deduction in the profit and loss account was securities held by the assessee under the category “available for sale”(AFS). The assessee relied on the decision of the Hon’ble Kerala High Court in the case of CIT vs Nedungadi Bank Ltd. (2003)_264 ITR 545 (Ker.) for the proposition that deduction for depreciation in value of securities held by the banks is an allowable deduction in computing the taxable profits and that securities held by the banks constitute therein stock in trade. It was further held in the aforesaid decision that notional loss claimed by the assessee on valuation of such securities at the close of the year is allowable as deduction in computing the taxable profits. The assessee also relied on the Circular No.599 dated 24.04.1991 issued by the CBDT wherein the CBDT laid down that securities held by the banks must be regarded as their stock in trade and the claim of loss, if debited in the books of account should be given the same treatment as given to stock in trade.
4 The AO however referred to the decision of the Hon’ble Supreme Court in the case of Vijaya Bank vs CIT 187 ITR 541 (SC) and also referred to the fact that consequent to the aforesaid judgement CBDT had issued vide Circular No.610 dated 31.07.1991 wherein it clarified that whether a particular investment in securities constitute stock in trade or capital asset was a question of fact and therefore AO should determine on the facts and circumstances of each case as to whether any particular security constitute stock in trade or investment taking into account the guidelines issued by the RBI from time to time. If the investments in securities are regarded as stock in trade then the claim for deduction on account of diminution in the value of such securities must be allowed. After referring to the said circular the AO further observed that the bank is not in the business of trading in securities and that the bank in the present case was maintaining investment portfolio and therefore the same cannot be treated as stock in trade. The AO accordingly disallowed the claim of the assessee for deduction –Burdwan Central Co-opt.Bank Ltd. A.Y. 2009-10 2 on account of loss on investments or diminution in the value of securities claimed by the Assessee.
On appeal by the assessee the CIT(A) confirmed the order of AO which gave rise to ground No.A before the Tribunal.
We have heard the submissions of the ld. Counsel for the assesseee, who reiterated the stand taken by the assessee before the AO. He further brought to our notice that the CBDT issued a circular/Instruction No.17/2008 dated 26.11.2008 wherein the CBDT has given instructions with regard to the claim for deduction on account of loss on investments of securities held by a bank which are as follows :- “vii) As per RBI guidelines dated 16th October, 2000, the investment portfolio of the banks is required to be classified under three categories viz. Held to Maturity (HTM), Held for Trading (HFT) and Available for Sale (AFS). Investments classified under HTM category need not be marked to market and are carried at acquisition cost unless these are more than the face value, in which case the premium should be amortised over the period remaining to maturity. In the case of HFT and AFS securities forming· stock- in-trade of the bank, the depreciation/appreciation is to be aggregated scrip-wise and only net depreciation, if any, is required to be provided for in the accounts. The latest guidelines of the RBI may be referred to for allowing any such claims. “ According to him the securities held by the assessee in the present case were admittedly in the category of “available for sale” and therefore even as per the CBDT instruction the claim of the assessee has to be allowed. The ld. DR relied on the order of AO.
We have given a careful consideration. In our view the issue is squarely covered by the decision of the Hon’ble Kerala High Court in the case of Nedungadi Bank Ltd. The Hon’ble Kerala High Court also considered the decision rendered by the Hon’ble Supreme Court in the case of Vijaya Bank (supra) referred to by the AO in the order of assessment and has taken the view that securities held by banks constitute their stock-in-trade and consequently the notional loss claimed by the assessee-banks on valuation of such securities at the close of the year is allowable as deduction in computing the taxable profits. The Hon’ble Court has referred to CBDT Circular and –Burdwan Central Co-opt.Bank Ltd. A.Y. 2009-10 3 has held that same view has been taken by the CBDT in Circular No. 599, dt. 24th April, 1991. The Court further held that it is now settled by a series of decisions that the securities held by the banks constitute their stock-in-trade or investment and consequently the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing the taxable profits. In fact, the CBDT in Circular No. 599, dt. 24th April, 1991, has taken the very same view which is consistent with the view taken in the decisions of this Court and of the Supreme Court. For all these reasons, the Tribunal has rightly held that the securities held by the assessee-bank in all these cases are the stock-in-trade of the business of the assessee-banks and the notional loss suffered on account of the revaluation of the said securities at the close of the year is an allowable deduction in the computation of the profits of the appellant. The Hon’ble court referred to the following judgments —CIT vs. South India Bank Ltd. 241 ITR 374 (Ker), Malabar Co-operative Central Bank Ltd. vs. CIT 101 ITR 87 (Ker), UCO Bank vs. CIT 240 ITR 355 (SC), CIT vs. Karnataka State Co-operative Apex Bank 251 ITR 194 (SC) and Mehsana District Central Co-operative Bank Ltd. vs. ITO 251 ITR 522 (SC) and distinguished the decision in the case of Vijaya Bank Ltd. vs. Addl. CIT (1991) 94 CTR (SC) 216 : (1991) 187 ITR 541 (SC). The Hon’ble Court finally concluded that Securities held by banks constitute their stock-in-trade and consequently the notional loss claimed by the assessee-banks on valuation of such securities at the close of the year is allowable as deduction in computing the taxable profits. The Hon’ble Court distinguished the decision of the Hon’ble Supreme Court in the case of Vijaya Bank (supra) as follows:
“20. Here, it must be noted that the assessing authority had in fact reopened the assessment on the basis of the decision of the Supreme Court in Vijaya Bank Ltd. vs. Addl. CIT (supra). In that case, the question which arose for consideration was as to whether a sum of Rs. 58,568 representing interest accrued on securities taken by the assessee-bank from the Jayalakshmi Bank Ltd. and another sum of Rs. 11,630 representing interest accrued upto the date of purchase in the case of securities purchased by the assessee-bank from the open market are admissible as deduction under the provisions of ss. 19, 20 and 37 of the Act. In that context, the Supreme Court relied on a decision of the Court of Appeal in IRC vs. Pilcher (1949) 31 Tax Cases 314 (CA) where it was observed that outlay on purchase of an income-bearing asset is in the nature of capital asset. The Supreme Court observed in Vijaya Bank’s case that the price paid for the securities was determined with reference to their –Burdwan Central Co-opt.Bank Ltd. A.Y. 2009-10 4 actual value as well as the interest which had accrued on them till date of purchase, that whatever was the consideration which prompted the assessee to purchase the securities the price paid for them was in the nature of a capital outlay and no part of it can be set off as expenditure against income accruing on those securities. Here, it must be noted that the Supreme Court has not at all considered the question with regard to the character of securities from which interest income is earned. No contention is seen taken by any of the parties that the securities involved in the said case represented stock-in-trade. Hence, the decision rendered in the said case cannot be taken as an authority for the position that the securities held by the assessee in the present case in compliance with the provisions of the Banking Regulation Act is to be held as a capital investment. As we have already noted, this Court and the Supreme Court have clearly taken the view that the Government securities acquired by the assessee-bank in compliance with the provisions of the Banking Regulation Act has 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’s case (supra) 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 to the Supreme Court in Vijaya Bank’s case. Vijaya Bank’s case (supra) 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 reasons, we are of the view that the Tribunal has rightly held that the securities held by the assessee-bank in all these cases are the stock-in-trade of the business of the assessee-banks and the notional loss suffered on account of the revaluation of the said securities at the close of the year is an allowable deduction in the computation of the profits of the appellant. This disposes of the first two questions mentioned in para 10 above.”
In the light of the above judicial pronouncements, we are of the view that the claim for deduction made by the assessee should be allowed. Accordingly the AO is directed to allow the claim of the assessee for deduction of the aforesaid sum. Gr.No.A is accordingly allowed.
Ground No. B raised by the assessee reads as follows :- “B. Addition of Rs. 1,50,00,000/- disallowing the provision of arrear salary in computing the business income of the appellant: –Burdwan Central Co-opt.Bank Ltd. A.Y. 2009-10 5
The learned ACIT failed to appreciate that arrear salary is an allowable deduction for computing the profit of the appellant; therefore the addition is unjustified and may be deleted.
In his order the learned ACIT admitted that "revision of pay scale become certain, therefore liability for arrear of scale was also become obvious". Therefore the learned ACIT contradicted himself by disallowing the certain and obvious liability in computing the business income of the appellant. Hence the addition is arbitrary and bad in law and may be deleted. “ 10. As far as ground no. B is concerned, the assessee claimed as deduction a sum of Rs.1,50,00,000/- on account of provision for arrears of salary in profit and loss account. It was submitted by the assessee that on 31.10.2007, the earlier agreement between the assessee and the employees union regarding pay scales of the employees came to an end and therefore there was a need to determine fresh pay scales after negotiation with the employees union. The assessee submitted that the talks with the employees union were in progress and the new pay scales were not determined. The assessee further submitted that the liability on account of arrears of salary payable to the employees by the assessee is certain and that a sum of Rs.1.5 crore quantified by the assessee was reasonable and fair estimation and therefore the claim of the assessee for deduction of the aforesaid sum should be allowed. 11. The AO however was of the view that the liability in question had not crystallised during the previous year and therefore the claim for deduction cannot be allowed. On appeal by the assessee the CIT(A) confirmed the order of AO. Hence Gr.No.B by the Assessee before the Tribunal. 12. We have heard the rival submissions. The allowability with regard to claiming deduction on account of provision has been laid down by the Hon’ble Supreme Court in the case of Bharat Earth Movers 245 ITR 428. In the aforesaid decision of the Hon’ble Supreme Court it has been held that if a business liability has definitely arisen in the accounting year, deduction is allowable although the liability may have to quantified and discharged at a future date. The Court held that what should be certain is the incurring of the liability and its quantification with reasonable certainty. At the time of hearing the ld. Counsel for the assessee pointed out that an agreement has been reached with the employees union and fresh pay scales have been finalised. We are of –Burdwan Central Co-opt.Bank Ltd. A.Y. 2009-10 6 the view that now that the actual salaries quantified are available, it would be just and proper to compare and see as to whether the estimate of the liability made by the assessee based on which provision on account of arrears of salary payable was made was reasonable. If the estimate is found to be reasonable then the deduction claimed by the assessee should be allowed. In this regard we are of the view that in the present case the liability of the assessee was certain in the sense that as per the agreement with the employees union, salary scales had to be revised w.e.f. 01.11.2007. It is only the quantification of the liability based on which provision was made by the assessee that needs to be examined. We therefore set aside the order of CIT(A) and direct the AO to examine the claim of the assessee in the light of the directions given above.
The other grounds of appeal
raised by the assessee are either general or consequential in nature and do not need any adjudication.
14. In the result the appeal of the assessee is partly allowed. Order pronounced in the Court on 02.09.2016.