Premium paid in excess of the face value of the security held under ‘Held to Maturity’ (‘HTM’) category which has been amortised over the period remaining till maturity is allowable – rules Mumbai Tax Tribunal
• The Assessee had a unit at Bhopal which was not functioning since the assessment year 1997-98.
• The Bank of Rajasthan Ltd (‘the assessee’) was a company engaged in the business of banking.
• The assessee had filed its Return of Income claiming loss on valuation of investments which included an amount towards amortization of premium paid for securities held under ‘Held to Maturity’ (HTM) category.
• The Assessing Officer (“AO”) held that securities held by the assessee under HTM category were in nature of investment and not stock in trade. Therefore, the claim for amortization of premium paid at the time of purchase of the securities was not allowed being in the nature of capital expenditure.
• The assessee contended that all the investments were stock-in-trade and this fact had been accepted by the income-tax authorities in the past, as diminution in the value of stock in trade had always been allowed as deduction. Further, the securities on which premium was paid at the time of purchase and which were held under HTM category were held as stock in trade and not as investments. All income/loss whatever arose on account of such securities has been treated as business income/loss and assessed accordingly in all past years by the income-tax authorities.
• The AO however rejected the claim and disallowed the deduction of premium amortized in respect of HTM securities.
• The CIT (A) upheld the assessee’s claim. It held that as per the circular issued by the Central Board of Direct Taxes („the CBDT?), Circular No.17 dated 26/11/2008, investments classified under HTM category need not be marked to market and could be carried at acquisition cost unless it was more than the face value, in such case the premium should be amortized over the period remaining to maturity. Such premium was held allowable as revenue expenditure.
• Aggrieved by the above order, the AO preferred an appeal before the Tribunal.
Issues before the Tribunal
Whether premium paid in excess of the face value of investments classified under HTM category which has been amortized over the maturity period is allowable as business loss.
Observations and Ruling of the Tribunal
• There was no dispute in accepting the assessee’s claim that all investments were in the nature of stock in trade. This was already accepted by the income-tax authorities in earlier years in the assessee’s own case.
• Amortization of premium in respect of investments held in HTM was in accordance with the method of valuation prescribed the Reserve Bank of India and was consistently followed by the assessee. A consistently and regularly followed method of accounting cannot be disregarded.
• It referred to the Hon’ble Supreme Court decision in the case of UCO bank (240 ITR 355), wherein it was held that under the Banking Regulation Act, banks are required to disclose securities held, as investment, but that does not mean that they are to be treated as investment for all purposes. The HTM securities could be sold before maturity, in fact they had been sold in the subsequent year and income/loss was treated as business income/loss and not capital gain/loss.
• Further, reference was made to the decision of the Jodhpur Tribunal in Bank’s own case in the earlier years, wherein it was held that investment was stock in trade and entire loss on account of diminution in value was allowable as a deduction. This judgment was accepted by the AO and not contested before the Rajasthan High Court.
• The Tribunal held that since the claim of assessee was as per RBI guidelines and the circular issued by the CBDT, the AO was directed to allow the assessee’s claim.
The above decision lays down that in the case of banks the premium paid in excess of the face value of investments classified under HTM category, which has been amortized over the period till maturity, is allowable as revenue expenditure since the claim is as per RBI guidelines and the CBDT also has directed to allow such premium.
Source: ACIT V/s The Bank of Rajasthan Ltd (2011-TIOL-35-ITAT-MUM)