THE issues before the Bench are - Whether the provisions of I-T Act, the Companies Act and RBI Directions with respect to taxability of income from securities operate in different fields and Whether when the assessee-bank holds its securities as investment in compliance with the RBI Regulations, but shows the same as stock-in-trade, deduction for any loss arising from such stock at the end of FY can be denied merely because it was shown as investment in books. And the verdict goes in favour of the assessee.
F
acts of the case
Assessee is a bank. It is required as per the Reserve Bank of India (RBI) Master Circular dated 01-09-2003, to classify the securities held into category of 'Available for Sale', 'Held to Maturity' & 'Held for Trading'. The assessee treated such securities as stock-in-trade and claimed depreciation on book value after valuing the Securities at lowest of cost or market value as consistently followed earlier. The Revenue refusing to accept the assessee's plea that classification of Securities as per RBI guidelines was not mandatory for the purpose of computing income under the Act and observed that assessee's treatment of securities held as stock-in-trade valued at lowest of cost or market rate, was defective and violation of RBI guidelines. Therefore, the assessee's claim of depreciation on securities under Income Tax Act, 1961 was not allowable on the whole 'Investment Portfolio' (Securities) which was classified as 'stock-in-trade'.
The assessee in its reply stated that though the classification was relevant only for the purpose of actual provisions in the accounts and not for the purpose of computing the real/ taxable income and requested that depreciation in the value of investments be allowed as this was being claimed consistently and allowed as such in the income tax assessment during the last more than two decades in case of the Banks. However, the Assessing Authority over-ruled the said objection. The amount of Rs.21,57,38,957/- was disallowed and added back to the total income of the assessee. Aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). The Appellate Authority dismissed the appeal upholding the contention of the Assessing Authority. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal held that the Securities held to maturity investment were not in the nature of stock-in-trade. Whether any erosion had taken place earlier was not found its place in a sum of Rs.22.45 crores in the impugned assessment order. The real income of Bank had to be computed on the basis of the RBI guidelines when the claim of the assessee on erosion but investments valued for a sale was not allowable because it did not have ingredients of the stock-in-trade and hence up depreciation thereon can be allowed. It further recorded its finding that the securities on which, the depreciation had been claimed in earlier years had not been identified. Such erosion amounting to Rs.22.45 crores had been claimed in the impugned assessment year against the depreciation in books at Rs.12.35 crores. Therefore, the issue was restored to the file of the Assessing Officer for consideration in the light of the finding recorded above. Accordingly, the appeal was partly allowed and the matter was remitted to the Assessing Authority.
On appeal, the HC held that,
++ the RBI Directions of 1998 are only disclosure norms. They have nothing to do with the computation of total taxable income under the Income-tax Act or with the accounting treatment. The said Directions only lay down the manner of presentation of NPA provisions in the balance sheet of NBFC. It has nothing to do with the account treatment or taxability of income under the Income-tax Act. Both these Income-tax Act and 1998 Directions operate in different fields. Under the mercantile system of accounting, the interest/hire charges income accrues with time. In such cases, interest is charged and debited to the account of the borrower as "income" is recognized under accrual system. However, it is net so recognized under the 1998 Directions and therefore, in the matter of its presentation under the said Directions, there would an add back but not under the IT Act necessarily. It is important to note that collectability is different from accrual. The primary object of 1998 Directions is prudence, transparency and disclosure. Section 45-JA comes in Chapter III B which deals with the provisions relating to financial Institutions, and to non-banking institutions receiving deposits from the public. The said 1998 Directions touch various aspects such as income recognition; asset classification, provisioning, etc. Basis of the 1998 Directions is that anticipated losses must be taken into account but expected income need not be taken note of. Therefore, these Directions ensure cash liquidity for NBFCs which are now required to state true and correct profits, without projecting inflated profits. Therefore, the RBI Directions of 1998 deal only with the presentation of NPA provisions in the balance sheet of an NBFC. It has nothing to do with the computation or taxability of the provisions for NPA under the IT Act. Though RBI Directions 1998 deviate from accounting practice as provided in the Companies Act, they do not override the provisions of the IT Act. Some companies, for example, treat write offs or expenses or liabilities as contingent liabilities. For example, there are companies which do not recognize mark to market loss on its derivative contracts either by creating reserve as suggested by ICAI or by charging the same to the P&L a/c in terms of Accounting Standards. Consequently, their profits and reserves and surplus of the year are projected on the higher side. Consequently, such losses are not accounted in the books, at the highest, they are merely disclosed as contingent liability in the Notes to Accounts;
++ the point which we would like to make is whether such losses are contingent or actual cannot be decided only on the basis of presentation. Such presentation will not bind the authority under the IT Act. Ultimately, the nature of transaction has to be examined. In each case, the authority has to examine the nature of expense/loss. Such examination and finding thereon will not depend upon presentation of expense/loss in the financial statements of the NBFC in terms of 1998 Directions. Therefore, the RBI Directions and the IT Act operate in different fields. These Directions 1998 have nothing to do with the computation of taxable income. These Directions cannot over-rule the "permissible deductions" or "their exclusion" under the IT Act. The inconsistency between these Directions and Companies Act is only in the matter of income recognition and presentation of financial statements. The accounting policies adopted by the NBFC cannot determine the taxable income. It is well settled that the accounting policies followed by a company can be changed unless the Assessing Officer comes to the conclusion that such change would result in understatement of profits. Hence, as far as income recognition is concerned. Section 145 of the IT Act has no role to play;
++ Revenue has placed reliance on the judgment of this court in the case of COMMISSIONER OF INCOME TAX v/s ING VYSYA BANK LTD (2012-TIOL-571-HC-KAR-IT). It is submitted that against such demand assessee has preferred an appeal and is now pending before the Apex Court. As it is clear from the extraction of the judgment of the Supreme Court set up about, the reasoning adopted by this Court in ING VYSYA BANK's case runs counter to the law declared by the Apex Court;
++ from the judgments of the Apex Court, new it is clear that a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation. Financial institutions like Bank, are expected to maintain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be in conformity with the said requirements. RBI Act or Companies Act do not deal with the permissible deductions or exclusion under the IT Act. For the purpose of IT Act, if the assessee has consistently treating the value of investment for more than two decades as investment as stock-in-trade and claim depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations. The RBI Regulations, the Companies Act and IT Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of accounts. It is not decisive or conclusive in the matter. For the purpose of IT Act whichever method is adopted by the assessee, a true picture of the profits and gains i.e. real income is to be disclosed. For determining the real income, the entries in the balance sheet is required to be maintained in the statutory form may not be decisive or conclusive. It is open to the Income Tax Officer as well as the assessee to point out true and proper income while submitting the income tax returns. Even if the assessee under some misrepresentation or mistake fails to make an entry in the books of accounts, although under law, a deduction must be allowed by the Income Tax Officer, the assessee will not lose any right on claiming or will be debarred from being allowed the deduction. Therefore, the approach of the authorities in this regard is contrary to the well settled legal position as declared by the Apex Court;
++ in the instant case, the assessee has maintained the accounts in terms of the RBI Regulations and he has shown it as investment. But consistently for more than two decades it has been shown has stock-in-trade and depreciation is claimed and allowed. Therefore, notwithstanding that in the balance sheet, it is shown as investment, for the purpose of Income-tax Act, it is shown as stock-in-trade. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the Bank has to take into consideration the market value of the shares. If the market value is less than the cost price, in law, they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the balance sheet;
++ in that view of the matter, the order passed by the authorities holding that in view of the RBI guidelines, the assessee is estopped from treating the investment as stock-in-trade is not correct. That finding recorded by the authorities is hereby set aside. The appeal is allowed. The matter is remanded back to the Assessing Authority and he shall look into these entries in accordance with law and shall assess in terms of the law declared by the Apex Court and the assessee is entitled to the extension of the said benefit. Both the substantial questions of law are answered in favour of the assessee and against the Revenue.
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