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Taxability of government securities held by bank

Nidhi Chatwani (Chartered Accountant) (39 Points)

17 September 2014

Dear all,

Government securities held by a bank as investments were sold during the year. Whether the profit on the same will be business profit or capital gain ?

Thanks & regards,

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Abhijeet Deshpande (Co-Founder & Manager @ Tax-Yantra) (1171 Points)
Replied 17 September 2014

Please find below case laws and CBDT circular based on which you can treat the gains under PGBP: 1. CIT vs. Nedungadi Bank Ltd. [2003] 264 ITR 545 (Ker.), High Court stated that the income from such securities either on sale or on maturity is assessed as “business income”, and consequently securities held by banks constitutes their stock in trade. 2. State Bank of Patiala vs. ACIT ITA 124 of 1979 dated 24.07.1982, the ITAT, Chandigarh held that in carrying the business of banking, the act of making investment in government securities and in trustee securities is an essential incident of the assessees’ business. In fact, it is sine qua non in view of the provisions of Section 24 of The Banking Regulation Act 1949 for the assessee to carry on the business in a lawful manner. Therefore, these investments are made in the ordinary course of the business of the assessee and should be treated as stock-in-trade. 3. Karnataka Bank Ltd. vs. ACIT (Supra), the High Court of Karnataka held that even though the assessee bank disclosed shares as investments in its Balance Sheet to comply with RBI Guidelines, it has not stopped from treating the same as Stock-in-trade for Income Tax and claiming valuation loss thereon where these shares have been consistently shown as stock in trade for Income Tax purpose in the past year also. 4. CBDT vide its circular no. 665 dated 05.10.1993 also stated that the Assessing Oficer has to decide the issue on the basis of facts in each case, taking into consideration the guidelines issued by RBI from time to time. It is nowhere prescribed that securities are not to be treated as stock in trade in the hands of the banks.