Clarification regarding treatment of securities as stock-in-trade or investment

1. Clarifications on the following issues have been sought by banks from the Central Board of Direct Taxes :

     (i)   Whether the securities held by the banks constitute their stock-in-trade or investment, and consequently whether the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing their taxable profits ?

    (ii)   Whether deduction claimed in respect of interest paid for broken period on the purchase of securities should be allowed as a deduction from the taxable profits ?

2. The matter has been considered by the Board and it has been decided that the securities must be regarded as stock-in-trade by the banks.  Therefore, the claim of loss, if debited in the books of account, would be given the same treatment as is normally given to the stock-in-trade.  As far as the second issue is concerned, both the interest payments and receipts must be regarded as revenue payments/receipts, and only the net interest on securities shall be brought to tax as business income.

Circular : No. 599, dated 24-4-1991.

JUDICIAL ANALYSIS

EXPLAINED IN – American Express Bank Ltd. v. Dy. CIT [1998] 65 ITD 67 (Mum. – Trib.) with the following observations :

“Admittedly the Supreme Court decision in the case of Vijaya Bank Ltd. v. CIT [1991] 187 ITR 541/57 Taxman 152 was delivered on 19-9-1990 well before the issue of Circular No. 599 and secondly, though the decision was rendered after the order of the Assessing Officer but his action being in consonance with the law laid down by the Supreme Court, there was no reason for not following the decision of the Supreme Court. In view of these facts and circumstances of the case, the Tribunal was bound to follow the decision of the Supreme Court in the case of Vijaya Bank Ltd. (supra). The Circular No. 599 was issued without considering the Supreme Court decision cited supra. It was quite possible that the Board when issuing the Circular No. 599 might not be even aware of the Supreme Court decision cited supra . The language of the later Circular No. 610 made it clear that Circular No. 599 did not have the benefit of going through the Supreme Court decision in the matter. Circular No. 599 was neither existing at the time when the Assessing Officer framed the impugned assessments nor was allowed to remain in operation for a considerable period. The said circular was withdrawn as soon as the Board realised that such clarification issued by it was contrary to the principle laid down by the Supreme Court and the Board had rightly withdrawn the circular within about three months from the date of first issue of the circular. The circular issued by the Board was in the nature of clarification or, at best the departmental view on the subject, which was not binding on the Courts.”

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Category : Income Tax (28059)
Type : Circulars (7833) Notifications/Circulars (32366)

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