Clarification regarding treatment of securities as stock-in-trade or investment
1. By Circular No. 599, dated 24-4-1991 (see clarification 2), it was clarified that securities held by 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 is normally given to the stock-in-trade. It was also clarified that the interest paid for broken period on the purchase of securities must be regarded as revenue payment and allowed accordingly.
2. Consequent upon the judgment of the Supreme Court in the case of Vijaya Bank Ltd v. CIT [1991] 187 ITR 541, the above circular was withdrawn by the issue of Circular No. 610, dated 31-7-1991 [See Clarification 1]. There have been representations from the Indian Banks’Association to the effect that the Supreme Court in the case of Vijaya Bank Ltd. was concerned only with the claim for broken period interest and did not decide the issue whether the securities constituted stock-in-trade or investment. It has therefore been represented that the withdrawal of Circular No. 599, dated 24-4-1991 in toto was not called for.
3. The Board has reconsidered the treatment to be accorded to securities held by banks. In the case of Vijaya Bank Ltd. (supra), the Supreme Court considered the issue whether, in a case where the assessee purchases securities at a price determined with reference to their actual value as well as the interest accrued thereon till the date of purchase, the entire price paid for them would be in the nature of capital outlay or whether the interest portion could be claimed as a revenue expenditure. It was in this context that the Supreme Court held that whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of capital outlay and no part of it could be set off as expenditure against income accruing on those securities. The Court was not directly concerned with the issue whether the securities form part of stock-in-trade or capital assets.
4. The question whether a particular item of investment in securities constitutes stock-in-trade or a capital asset is a question of fact. In fact, the banks are generally governed by the instructions of the Reserve Bank of India from time to time with regard to the classification of assets and also the accounting standards for investments. The Board has, therefore, decided that the Assessing Officers should determine on the facts and circumstances of each case as to whether any particular security constitutes stock-in-trade or investment taking into account the guidelines issued by the Reserve Bank of India in this regard from time to time.
Circular : No. 665, dated 5-10-1993.
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.”
