Brief of the Case
ITAT Ahmedabad held In the case of ACIT vs. The Mehsana Urban Co-op. Bank Ltd. that intention of assessee at the time of purchase of securities is relevant factore to decide whether it is held for trading or investment . In this case , the banks as per their nature of the business may have to park surplus trading funds in securities and although intended to be trading assets may have to keep them for longer periods if funds are not required. These securities are classified as available for sale as per the RBI guidelines to keep apart some of the assets in the specified mode at certain percentage which are known as CLR and SLR. The profit/loss on sale of such securities (AFS) cannot be treated as capital gain/loss.
Facts of the Case
The return of income for AY 2008-09 was filed on 29.9.2009 declaring total income at Rs.11,39,98,430/-. The case was selected for scrutiny on CASS and assessment proceedings was initiated so as to complete assessment under section 143(3) of the Act. The AO completed the assessment by making addition including addition by way of disallowing claim of assessee of loss on sale of securities by treating it as long term capital loss instead of business loss at Rs.3,39,79,600. The AO relied on the judgment of Pari Mangaldas Girdhardas vs. CIT (1997) CTR 647 (Guj) while making these additions.
Contention of the Assessee
The ld counsel of the assessee submitted that the purchase and sales of securities are banking business & day to day activities of the bank. It is not investments. As per RBI guideline and circulars bank hs to maintain liquid assets which at close of the business on any day should not be less than 25% of its demand & time liabilities in addition to cash reserve called SLP. The said investment to be shown under the following heads- under the main head “Stock in Trade” and then “Held to maturity (HTM), Available for sales (AFS) and Held for trading (HFT). During the year under consideration we have sold the securities held for “available for sales”.
Further submitted that If there is direct & proximate nexus between business operation & if loss or it is incidental to it then loss is deductible as business loss. For this he relied on the decision of Ramchandra Shivnarayan vs. CIT 1978 111 ITR 263 (SC) and CIT vs. Nainital Bank Ltd.(1965) 55 ITR 707 (SC).
It was also submitted that the Apex court in Patnaik & Co. Ltd. vs. CIT (1986) 161 ITR 365 (SC), in which the assessee dealer in automobile spare parts acquired Orissa Government Floated loan, 1972 because of the insistence of the transport authorities. The Supreme Court allowed the claim of the assessee as business loss.
Contention of the Revenue
The ld counsel of the revenue supported the orders of Assessing Officer.
Held by CIT (A)
CIT (A) deleted the addition made by AO on the basis of guidelines issued by RBI as well as Circular No.665 of the CBDT dated 5.10.1993. It was held that as per the guideline issued by the Reserve Bank of India, Investment activities is the normal banking activity and should be treated as banking stock in trade. The format of the balance sheet has been prescribed by the legislature and bank has to report their financial result in that format only. As per this format the investment in Non-SLR Securities though treated as banking assets (stock in trade) has to be shown in the balance sheet as investment.
Further it was held that 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 amortized 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.
In nut shell, as discussed above, the bank has claimed loss in respect of securities which it had always meant to hold as trading assets and shown as AFS as per RBI’s guidelines and classifications. Just because the banks have to keep them for longer times because of the nature of their business, it would not change the nature of the asset. Further as held by Hon’ble Mumbai High Court in the case of CIT vs. Bank of Baroda (2003) 262 ITR 334 the mere fact that the banks are required as per RBI’s guidelines to show these in the balance sheet as investment would not affect the nature of the asset. The banks by the very nature of the business may have to park surplus trading funds in securities and although intended to be trading assets may have to keep them for longer periods if funds are not required. In fact the assessee has purchased and sold some securities of AFS category in relatively shorter periods also. So the AO is not correct to say that securities were meant to be held for very long periods and therefore were in nature of capital investments.
Held by ITAT
It is clear that the loss incurred by the assessee of Rs.3,39,79,600/- is from sale of securities held for “Available for Sale (AFS) and the detailed working of the same has been provided by the ld counsel of the assessee. These securities which are available for sale as per the RBI guidelines to keep apart some of the assets in the specified mode at certain percentage which are interalia known as CLR and SLR and the profit/loss on sale of such securities (AFS) cannot be treated as capital gain/loss.
In the case of Yes Bank Ltd. vs. Dy.CIT in ITA Nos.5833 & 5910 (Mum) of 2012 & 2829 (Mum) of 2013 dated July 21, 2015 wherein it was held that a single largest test to decide whether the security is held as capital asset or in stock-in-trade is the intention of the assessee at the time of purchase. Merely because some items so purchased happen to be held till maturity cannot convert what is acquired as stock in trade into a capital asset at a later point of time. Intention at the time of purchase is relevant and not a subsequent event of holding the security for a longer period. Instruction No.17/2008 dated 26.11.2008 issued by the CBDT wherein, at para vi. It has been clearly stated that in the case of HFT and AFS Securities of the Bank, the depreciation and appreciation to be aggregated script wise and only depreciation, if any, is required to be provided in the accounts.
We, therefore, on the basis of our examination of facts vis-à-vis RBI guidelines and above referred CBDT Circulars as well as relying on the decision of ITAT, Mumbai Bench, see no reason to interfere with the order of CIT (A).
Accordingly appeal of the revenue dismissed.