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Whether loss on account of depreciation in value of securities held as stock is notional and allowable as deduction?

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Court :
Bombay High Court

Brief :
Commissioner of Income Tax – Versus – HDFC Bank Ltd.

Citation :
In case under scrutiny of the Assessee Bank, the Assessing Officer completed the assessment and passed his Assessment Order under section 143(3)determining the total income of the Assessee at Rs.12,27,85,00,000/-.Subsequently it was noticed by the Appellant that a sum of Rs.87.11 lakhs had been debited to the profit and loss account by the Assessee, as a loss on account of transfer of securities from the category “Available for Sale” to “Held to Maturity” and the same had been allowed by the Assessing Officer. According to the Appellant, since the allowance of such a notional loss was erroneous and prejudicial to the interest of the Revenue, he invoked his powers under section 263 of the Act and passed an order directing the Assessing Officer to modify his Assessment Order and disallow the deduction of Rs.87.11 lakhs. It was held 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. The assessee was entitled to claim a deduction for the depreciation in the value of the securities held by it.

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

INCOME TAX APPEAL NO.250 OF 2012

Commissioner of Income Tax-2,

Mumbai 400 020

Appellant

Versus

HDFC Bank Ltd.

Respondent

Mr Suresh Kumar for Appellant.

Mr J.D. Mistry, Sr. Counsel with Mr AtulJasani for Respondent.

Before CORAM :

Hon’bleS.C. DHARMADHIKARI AND

Hon’bleB.P. COLABAWALLA JJ.

Reserved on: 10th July 2014.

Pronounced on: 17thJuly 2014.

JUDGMENT:-[Per B.P. Colabawalla J.] :-

1. By this Appeal under section 260A of the Income Tax Act 1961,challenge has been laid by the Commissioner of Income Tax-2 to the orderpassed by the Income Tax Appellate Tribunal (hereinafter referred to as “theITAT”) dated 15th July 2011 whereby the ITAT allowed the Appeal filed bythe Assessee and set aside the order dated 23rd March 2009 passed by theAppellant invoking his powers under section 263 of the Act.

2. Mr Suresh Kumar, the learned counsel appearing on behalf of theAppellant / Revenue submitted that the ITAT has totally misdirected itself insetting aside the order passed by the Appellant under section 263 of the Act.According to Mr Suresh Kumar, it was noticed by the Appellant that a sumof Rs.87.11 lakhs had been wrongly debited to the profit and loss account bythe Assessee as a loss on account of transfer of securities held under thecategory “Available for Sale” to “Held to Maturity” which was allowed bythe Assessing Officer in his Assessment Order dated 28th February 2007.Since such an allowance of a notional loss was impermissible under theprovisions of the Act, the Appellant was fully justified in invoking hispowers under section 263 of the Act, is the submission. In view thereof, Mr Suresh Kumar submitted that the impugned order passed by the ITAT requires interference and gives rise to the following substantial questions oflaw that need to be answered by this Court and read as under :-

“(A) Whether on the facts and circumstances of the case, the Hon'bleTribunal was correct in allowing the appeal of the assessee by settingaside the order u/s 263 of the act passed by the CIT ?

(B) Whether on the facts and circumstances of the case, the Hon'bleTribunal was correct in holding that the assessee bank is entitled forclaim of notional loss arising out of mere re-classification and consequentrevaluation of securities based on RBI's guidelines particularly in view ofHon'ble Supreme Court's decision in the case of Southern TechnologiesLtd. v/s Jt. Commissioner of Income Tax (320 ITR 577) ?”

3. We are unable to accept the submission of Mr Suresh Kumar onbehalf of the Appellant / Revenue that any substantial questions of law arisein the present case that require our answer. We find that the issue raised inthis Appeal is squarely covered by a judgment of a Division Bench of thisCourt in the case of Commissioner of Income Tax v/s Bank of Baroda,reported in (2003) 262 ITR 334 and a judgment of a Division Bench of theKarnataka High Court in the case of Karnataka Bank Ltd. v/s AssistantCommissioner of Income Tax, reported in (2013) 356 ITR 549. We willanalyse these two judgments later, after we advert to the facts in the presentcase.

4. The facts stated briefly are that the Assessee Bank, being a PublicLimited Company, filed its return of income for the Assessment Year 2005-06 on 29th October 2005 declaring a total income of Rs.9,10,41,00,000/-.The said assessment was selected for scrutiny and after the requisite noticeswere issued to the Assessee, the Assessing Officer completed the assessmentand passed his Assessment Order under section 143(3) on 28th February,2007 determining the total income of the Assessee at Rs.12,27,85,00,000/-.

5. Subsequently it was noticed by the Appellant that a sum of Rs.87.11 lakhs had been debited to the profit and loss account by the Assessee, as aloss on account of transfer of securities from the category “Available forSale” to “Held to Maturity” and the same had been allowed by theAssessing Officer. According to the Appellant, since the allowance of sucha notional loss was erroneous and prejudicial to the interest of the Revenue,he invoked his powers under section 263 of the Act and passed an orderdated 21st March 2009 directing the Assessing Officer to modify hisAssessment Order and disallow the deduction of Rs.87.11 lakhs. In anutshell, the Appellant mainly held that since the Assessee Bank had nottransferred the securities to any other third person but had only done a reclassificationfrom “Available for Sale” to “Held to Maturity” categories,the said transfer did not result in any actual loss to the Assessee andtherefore the allowance thereof was erroneous and prejudicial to the interestof the Revenue.

To read the full judgment, please find the attached file:

Attached file:

http://bombayhighcourt.nic.in/generatenewauth.php?auth=cGF0aD0uL2RhdGEvanVkZ2VtZW50cy8yMDE0LyZmbmFtZT1PU0lUWEEyMzMxMi5wZGYmc21mbGFnPU4=

 

Hetvi Sheth
on 25 July 2014
Published in Others
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