1. The appeals by the Revenue and the cross objections by the assessee relate to the assessment years 1982-83, 1983-84 and 1984-85.
2. The only ground of objection by the Revenue in the appeals is directed against the order of the CIT (Appeals) deleting depreciation on stock-in-trade which was disallowed by the Assessing Officer. The case of the Revenue is that the first appellate authority should have noticed that the assessee was regularly following the method of valuation of Government securities at cost price, that the revaluation of the same adopting market value was a change in the method of accounting regularly followed by the assessee and that consequently the income chargeable to tax for the relevant assessment years is not properly deducible. For the above proposition, the Revenue relies on the decision of the Hon'ble Supreme Court in the case of CIT v. British Paints (India) Ltd. [1991] 188 ITR 44' and of the Calcutta High Court in the case of CIT v. UCO Bank [1993] 200 ITR 68.
3. In this case, the original assessments for the assessment years 1982-83, 1983-84 and 1984-85 were completed on 21-3-1985, 26-12-1985 and 29-9-1986 fixing the income at Rs. 13,76,160, Rs. 2,90,470 and loss of Rs. 28,11,413 respectively. Subsequently, assessment proceedings were reopened by issuance of notice under Section 148 of the Income-tax Act, 1961. The reopening was done on the ground that income chargeable to tax has escaped assessment on account of allowing the claim made by the assessee with regard to depreciation and investment allowance and broken period interest. The basis for reopening was the decision of the Supreme Court in the case of Vijaya Bank Ltd. v. Addl. CIT [1991] 187 ITR 541. In this case, the Hon'ble Supreme Court held that investment in Government securities is a capital outlay and, therefore, broken period interest paid was not revenue expenditure. In the light of the above decision, the Assessing Officer held the view that the investment in Government securities is a capital loss and the broken period interest constituted capital expenditure, hence the reopening.
4. In this case, investments were made by the assessee as per the provisions of Section 24 of the Banking Regulation Act, 1949 and the guidelines issued by the Reserve Bank of India from time to time in order to maintain a minimum percentage of its funds, which is known as 'statutory liquidity requirement' (SLR) in Government securities. The Government securities can be purchased and sold by the bank (assessee) from time to time without affecting S.L.R. According to the assessee this would clearly go to show that securities were held by the assessee as stock-in-trade.
5. The Assessing Officer after hearing the parties and perusing all the details and explanations furnished on behalf of the assessee, came to the conclusion that the assessee was investing in Government securities in order to meet the statutory liquidity requirement (SLR) as per the directions and guidelines of the Reserve Bank of India and on no occasion the assessee had sold any security before its maturity date.
The Assessing Officer held that it was for the sole purpose of investment the assessee has been purchasing securities and there was no element of trading in any securities during any of the previous years.
The Assessing Officer held that, in other words, these were only investments made by the assessee not intended for trading as stock-in-trade as the assessee had not done any activities in respect of these Government securities. The Assessing Officer relied on the circular of the Board No. 665, dated 5-10-1993 which is a clarification by the Board in response to the representations from the Indian Banks Association in the light of the decision of the Hon'ble Supreme Court in the case of Vijaya Bank Ltd. (supra), wherein their Lordships considered the issue whether in a case where the assessee purchased securities at a price determined with reference to the 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.
The Assessing Officer held that looking from any angle the assessee was only investing in Government securities to meet the statutory liquidity requirement (SLR) as per the direction and guidelines of the Reserve Bank of India and on no occasion the assessee has sold any security before its maturity date. Therefore, it was only investment and did not constitute stock-in-trade of the assessee. The assessee's transactions in Government securities are in the nature of capital' outlay and hence the claim of loss, if any, on the revaluation of such investments, according to the Assessing Officer, can at best be a capital loss which is only notional at this stage and in any case cannot be allowed as a revenue loss. The Assessing Officer, therefore, held that interest paid for the broken period can only be treated as part and parcel of the capital outlay and cannot be treated as a revenue item. Consistent with the stands taken by the assessee, the difference between the sale price and the depreciated book value has been offered by the assessee as profit on sale of investments. However the Assessing Officer held that since the investments in securities are to be held as capital outlay, the profit arising on the sale of such securities will have to be reckoned with reference to the purchase cost and should be assessed as capital gain as against business income as offered by the assessee.
6. Aggrieved by the order of the Assessing Officer, the assessee approached the first appellate authority. Apart from challenging the validity of the reopening of the assessments it was contended by the assessee that the Hon'ble Supreme Court had no occasion to consider whether the investment in securities made by the bank itself was a capital expenditure (investment or stock-in-trade) in the case of Vijaya Bank Ltd. (supra). It was contended that the very nature of the banking industry is such that investment in securities held by banks is to be treated as stock-in-trade. Further it was contended that under Section 6, read with Section 5(b) and (c) of the Banking Regulation Act, the business of the banking company has been defined, in addition to banking, as consisting among other things, buying, selling, collecting and dealing in the bills of exchange and hundies etc.
Debentures, certificates, bonds, and other instruments or securities whether transferable or negotiable or not, as also undertaking and dealing in stocks and funds, shares, debentures, debenture stocks, bonds, securities, investments of all kinds. It was, therefore, pleaded that all the securities held by banks are nothing but stock-in-trade.
As a consequence, any expenditure incurred by a bank on acquiring these stock-in-trade is to be treated as a revenue expenditure and also any depreciation arising from the fall in market value of the investment held as stock-in-trade is to be allowed as a deduction, whether such loss is actually written off in the books or not. In this connection, the assessee relied on the decision of the Hon'ble Karnataka High Court in the case of CIT v. Corporation Bank Ltd. [1988] 174 ITR 6161. It was contended that capital outlay could be for capital or current assets.
As per the Banking Regulation Act, Section 24, banks are liable to keep 20% to 25% of the total demands in Government securities. This percentage is varied by Reserve Bank of India from time to time by notifications. This maintenance of liquidity ratio in banking parlance is treated as statutory liquid ratio. Investments in approved securities represent fund better managed by banks by investing them in such securities instead of keeping them in current with RBI or other banks. The investment in securities is only a current asset or stock-in-trade. The assessee also cited a few cases where securities have been sold prior to their maturity dates. Even otherwise, the assessee contended that merely because a security has not been sold it cannot be considered to have become an investment or capital expenditure so long as the basic test of its being in the nature of stock-in-trade is satisfied. The selling or buying depends on the requirements and exigencies of the situation and this alone cannot be made a yardstick for determining the nature of investment. For the above proposition, the assessee relied on the following decisions : 7. The CIT (Appeals) mainly relying on the Circular of the Board No.665, dated 5-10-1993, held that the Assessing Officer went wrong in not taking note of the above circular. The Assessing Officer was not justified in holding that the Government securities were purchased by the assessee-bank as capital investment and not as stock-in-trade. The CIT (Appeals) held that the assessee is a banking company and as per the guidelines issued by the Reserve Bank of India, the assessee is required to have a minimum percentage of investment in Government securities. However, since the securities can be purchased and sold from time to time, without affecting the minimum statutory percentage, the securities are held by the assessee bank as stock-in-trade. The reasoning of the CIT (Appeals) as appearing in para 9 of his appellate order reads as under : In the light of the latest circular of the Board dated 5-10-1993, quoted above, the question for consideration is whether the investment in securities should be treated as stock-in-trade or capital assets of the appellant. The appellant is a banking company and under the guidelines issued by the Reserve Bank of India, banks are required to have a minimum percentage of investment in Government securities. However, the securities as such can be purchased and sold from time to time without affecting the minimum statutory percentage. Therefore, it is clear that the securities are held by the bank as stock-in-trade, especially in view of the fact that the Bank enjoys freedom to trade in the securities from time to time subject only to the condition regarding the minimum percentage of such investments. In the circumstances, I agree with the submissions made by the learned representative of the appellant as quoted above (para 5) with due regard to the case laws mentioned therein. I also agree with the learned representative that the decision in Vijaya Bank's case (supra) is not strictly applicable to the instant issue as that decision pertains to the question whether broken period interest was allowable as a revenue expenditure or not.
Considering the detailed submissions made by the learned representative and also considering the latest circular of the Board dated 5-10-1993,1 am of the view that in the present case, the Government securities held by the appellant bank are its stock-in-trade. In the case of stock-in-trade, an assessee may value it according to the recognised principles of accountancy. The normal method of valuation of closing stock is at cost price or market price whichever is lower. On reference to the printed P & L account and the balance-sheet of the appellant-company for the relevant period, I find that this principle of valuation has been adopted for valuing the closing stock. In the present case, the market price is lower than the cost price and, therefore, the difference between the two figures represents the depreciation in the value of the stock-in-trade and this can be allowed as a deduction in computing the business income of the appellant because the depreciation refers not to a capital asset but to stock-in-trade. Reliance in this connection is also placed on the decision of the Karnataka High Court in the case of Corporation Bank Ltd. (174 ITR 616) and of the Supreme Court in Brooke Bond India Ltd. v. CIT(162 ITR 373, 380).
Aggrieved by the above order, the Revenue is in appeal before the Tribunal.
8. The learned departmental representative vide his written arguments submits as follows : Banking companies are formed to carry on business of banking. Section 5(b) of the Banking Regulation Act, 1949, defines "banking". Banking means accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft or otherwise. The bank utilises the deposits for purpose of lending it to others to earn interest income for investment in approved securities, shares, bonds, debentures and other forms of investments to earn investment income.
"Security" has not been defined in the Income-tax Act. It is only defined in Section 2(h) of Securities Contracts (Regulation) Act, 1956, on the following lines : 2. Definitions - In this Act, unless the context otherwise requires,- (i) shares, scrips, stocks, bonds, debentures, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (iia) such other instruments as may be declared by the Central Government to be securities; and According to this definition, the learned departmental representative submitted that securities include shares, bonds, debentures or marketable securities of a like nature of a company, Government securities, investments declared as securities by the Central Government and rights of interests on securities. "Approved securities" are defined in Section 5(a) of the Banking Regulation Act, 1949. This section defines that "approved securities" mean securities in which a trustee may invest money, under Clause (a), (b), (bb), (c) or (d) of Section 20 of the Indian Trust Act, 1882 and such other securities prescribed by the Central Government under Section 20 of the Indian Trust Act. The learned departmental representative submitted that examination of this section would show that approved securities are Government securities, securities issued under the authority of any Central or State Act and other securities declared as such by the Central Government. According to the DR approved securities are securities in which interest is guaranteed and also return of the principal on or after the date of maturity of the security is also guaranteed. He contended that in view of the above, these securities are known as gilt-edged securities. As per Section 24(2A) of the Banking Regulation Act, every Scheduled Bank should maintain 25% (or such other percentage notified by the RBI) of the total demand and time liabilities in India in cash, or gold, or unencumbered approved securities. Thus, the learned departmental representative submitted that the main characteristics of approved securities are :- (a) guaranteed interest at fixed intervals, half yearly or annually, and Further the approved securities are the safest investments for trusts and banks since they are backed by the credit of a sovereign nation. In other words, approved securities are risk free investments which give rise to definite income at definite intervals and redeem the invested amount on a definite date. The banks cannot dispose of these securities unless and until their value exceeds the SLR in view of Section 24(2A) of the Banking Regulation Act.
8. The learned departmental representative submitted that every banking company is required as per Section 29 of the Banking Regulation Act to prepare a balance-sheet as on the last working day of the year in Form A of the Third Schedule to the Banking Regulation Act and a profit and loss account in Form B of the said Schedule. In this Form 'A' the liabilities are shown under five heads and assets under six heads in a columnar form of the balance-sheet. The third item in the 'Assets' side is the 'Investment' whose break up is given in Schedule '8' of the balance-sheet.
In this schedule 'investments' in India are categorised under six heads, the first being "Government securities" and the second one "Other Approved securities". Form 'B' shows income under two heads "interest earned" as per Schedule 13 and "other income" as per Schedule 14 of the profit and loss account. Schedule 13 shows the interest earned under three heads, the second head being "Income on Investments". The "other income" as per Schedule 14 consists of seven items of which the second item is "Profit or loss on sale of investments" and the third item is "profit or loss on revaluation of investments". This only indicates that "approved securities" are shown as investments in the balance-sheet and such securities are purchased and held by the banks for "the purpose of earning income and not for the purpose of sale. Since the investments in approved securities are made for the purpose of SLR the banks cannot dispose of the securities which have been acquired for maintenance of SLR. The income derived by the banks from the investments are shown separately under the head "Interest earned", as "Income on investments". The learned departmental representative submitted further that as per the definition of banking itself, accepting of deposits from the public and utilising these deposits to lend and to invest is one of the businesses of the bank.
All other kinds of businesses carried on by the banks are incidental which are enumerated in Section 6 of the Banking Regulation Act. Since the main business of banks is accepting and lending of money, the assets of the banks are categorised as six items consisting of cash, balances with RBI and other banks, investments, advances, fixed assets and other assets which include interest accrued, tax paid and inter-office adjustments in the balance-sheet. There is no stock-in-trade for banks because banks do not engage in any business of purchase and sale of any asset and whatever purchase and sale take place are only incidental to the main business of banking. The learned departmental representative submitted that it is on account of this fact that none of the assets are classified as stock-in-trade in the balance-sheet and profit and loss account of the banks. The learned departmental representative further submitted as under : A comparison of the balance-sheet of a bank with that of any other company will indicate the reason for a different kind of classification of assets followed in the case of banks. The form of balance-sheet followed in the case of companies is that given in part I B of the Schedule VI of the Companies Act, 1956. Here, the application of funds is classified as four items consisting of fixed assets, investments, current assets, loans and advances, reduced by current liabilities and provisions, and the losses and expenditure not written off. The current assets are further classified into five items-consisting of inventories, sundry debtors, cash and bank balances, other current assets and loans and advances. The term 'Inventory' includes "stock-in-trade". While companies other than banking companies can carry on any business and can show the relevant stock-in-trade under the head Inventory' in the balance-sheet and in the profit and loss account, the banking companies do not have any stock-in-trade to show in these statements since they do not purchase any asset for selling at a profit but invest in them only to earn income from these assets. The investment in certain assets such as approved securities is also mandatory, assessee already, for the maintenance of SLR. From what has been stated above, it is clear that the approved securities are treated only as a investment by banking companies and are held by them for maintenance of SLR and simultaneously for earning income by way of interest. The learned departmental representative submitted that the question for consideration is whether the approved securities are treated as investments by banking companies in the balance-sheet prepared as per the Banking Regulation Act. As per banking rules, it is to be noted that in none of the Circulars issued by the RBI securities have been classified as stock-in-trade. The circulars classify the approved securities only as permanent investments and as current investments.
Therefore, the claim that any loss resulting from adopting the Regulation Act, can be treated as stock-in-trade for income-tax purposes. Investments, according to the learned departmental representative, are assets held by an assessee for earning income.
Stock-in-trade represents assets which are bought and sold by an assessee for making profit.
9. The learned departmental representative submitted that as per Section 2(14) of the Income-tax Act, 1961,"capital asset" does not include stock-in-trade. There is no definition of stock-in-trade in the Income-tax Act. As per dictionary meaning 'stock-in-trade' is "all the goods a shopkeeper has for sale". "Inventories" are assets, viz., (a) held for sale in the ordinary course of business, (b) in the process of production for such sale, and (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services. The learned departmental representative further submitted that the item stock-in-trade, consumable stores and raw materials are covered under the single head 'Inventories' in the balance-sheet of the non-banking companies. The term 'investment' is defined in Accounting Standard AS 13 as- assets held by an enterprise for earning income by way of dividends, interest and rentals, for capital appreciation, or for other benefits to the investing enterprise and assets held as stock-in-trade are not investments.
Thus, the learned departmental representative submitted that if an enterprise holds securities, shares or debentures as stock-in-trade, then such assets are disclosed as such under the head 'Current assets' and not as 'Current investments'. The fact that approved securities are classified as 'investments' by banking companies is clear indication that they are held by the banks for earning income (and for S.L.R.maintenance). They are not purchased by the banks to make profit by selling them in case of any upward trend in the market for such securities, 10. As per the Circular dated 27-4-1991 issued by the RBI "Investments in approved securities should be bifurcated into permanent and current investments". Permanent investments are those which banks intended to hold till maturity and current investments are those which banks intend to deal in i.e., buy and sell on a day-to-day basis. It has been decided that to begin with, banks should keep not more than 70% of their investments in permanent category from the accounting year 1992-93. Permanent investments should be valued at cost. Any gain on sale of these has to be taken to the capital reserve account and any loss written off. The learned departmental representative submitted that banks are required to fully provide for the depreciation in the case of current investments, while the depreciation in the case of permanent investments should not be provided for. In fact, the RBI has already stated that the depreciation in respect of permanent investments is not likely to affect their realisable value. The learned departmental representative submitted that Circulars dated 20-6-1992,3-4-1995, 19-3-1996 and 6-4-1996 speak of permanent invest ments/securities to be treated as capital in the light of the Wordings of the Circulars. Whatever be the changes brought by the Circulars the requirement of S.L.R. has not been changed. Therefore, the approved securities cannot be treated as stock-in-trade.
11. The learned departmental representative submitted that the CBDT Circular No. 665, dated 5-10-1993 asks the Assessing Officer to determine whether any particular security constitutes stock-in-trade or investment on the facts and circumstances of each case and the learned departmental representative continues at page 6 of the written argument that- It may be noted that in none of these circulars issued, the RBI has classified securities as stock-in-trade. All these Circulars classify the approved securities only as permanent investments (called long term investment in AS 13) and as current investments.
Therefore, the claim of any loss resulting from adopting the method of valuation of securities at lower of cost or market value is factually and legally incorrect.
The learned departmental representative submitted that the following decisions of the Apex Court would clearly show what are the characteristics of assets that can be treated as stock-in-trade as laid down by the Court : (3) Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC).
In the first case, plots of land were purchased in order to sell them for profit which was held by the Apex Court as gains made in an adventure in the nature of trade. The learned departmental representative submitted that the assessee is investing money in approved securities intending to hold them to enjoy them for some time and then sell them at a profit. Secondly, the assessee is not a trader in this line of business and the purchase and sale is not connected with or incidental to the assessee's business. The assessee only purchases securities for S.L.R. maintenance and there was no sale of the securities purchased. The assessee did not do anything to make them more readily resaleable. The purchases are only for S.L.R. maintenance and not for sale at profit. In fact, there is no active market for securities. The investment in approved securities is not a usual business operation. There is no repetition of the purchase and sale of S.L.R. by the assessee. They are highly secured financial investments yielding definite returns at definite intervals. They are usually purchased by trusts and banks for investment as per legal requirements.
They are not the type of financial assets like shares which are traded regularly on the stock exchange. The purchase was made only to comply with S.L.R. requirements and to get financial returns. There is no price fluctuation for securities as in the case of shares. There is no intention to resell at a profit. Hence the learned departmental representative contended that approved securities are only investments to be classified under capital assets and not the stock-in-trade of the banking business.
12. In respect of the second case referred to above also the learned departmental representative submitted that the intention of the assessee in that case is important. In the third case, cited above, the learned departmental representative submitted that while reversing the orders of the Tribunal and the High Court, the Hon'ble Supreme Court held that since the transactions of the assessee were not diversifying, nor gradual, according to opportunities offered by fluctuating market conditions but were in bulk and almost at a time, the transactions lacked business character and hence the learned departmental representative submitted that the purchase and sale of securities was not gradual but was in bulk. The purchases were not according to opportunities offered by fluctuating market conditions. Similarly, the purchases were necessarily made to comply with the S.L.R. requirements.
There is no evidence of any sale of the securities when there is an upward trend in the market. Hence all the tests laid down by the Supreme Court are lacking in the assessee's case and therefore the learned departmental representative submitted that the order of the Assessing Officer may be restored.
13. Replying to the above, the assessee's learned representative submitted that the Assessing Officer was not justified in reopening the assessments and treating the investments made by the assessee-bank in Government securities as its capital investment. Investments were made by the assessee as per Section 24 of the Banking Regulation Act and on the basis of the guidelines issued by the Reserve Bank of India in order to maintain minimum percentage of its funds in Government securities which is known as statutory liquidity ratio (S.L.R.).
Securities were purchased and sold by the assessee-bank from time to time without affecting the S.L.R. Therefore, it is clear that securities were held by the assessee as its stock-in-trade. In this connection, the assessee's representative submitted vide para 4 of the written submission referring to the Boards Circular No. 599, dated 24-4-1991,No. 600, dated 23-5-1991 and No. 665, dated 5-10-1993. As per the first circular, the Board clarified that the loss on revaluation of securities held by banks and broken period interest paid was allowable as deduction. The circular was subsequently withdrawn consequent on the decision of the Supreme Court in the case of Vijaya Bank Ltd. (Supra).
Subsequently, on account of the representations from Indian Banks Association, the Board reconsider the matter and issued another circular clarifying that the Assessing Officers should determine on the facts and circumstances of each case as to whether the securities held by the bank constitute stock-in-trade or investment taking into account the guidelines issued by the Reserve Bank of India. The learned representative of the assessee submitted that it was on the basis of the above Circular only the learned CIT (Appeals) treated the securities held by the assessee-bank as its stock-in-trade. Therefore, the difference between the market value of the securities and their cost treated as depreciation in the value of stock-in-trade should be allowed as a deduction in computing the business income of the assessee. The learned representative of the assessee supported the order of the CIT (Appeals) placing reliance on the following decisions : The learned representative also relied on the following decisions in support of the order of the CIT (Appeals):- (2) Malabar Co-operative Central Bank Ltd. [1975] 101 ITR 87 (Ker.); and In the case reported in Bank of Cochin Ltd. (supra), the assessee's learned representative submitted, it was held by the jurisdictional High Court that the loss on revaluation of the Government securities was deductible in determining the total income for income-tax assessment. Coming to the instant case of the assessee, it was contended that the Assessing Officer's version that the assessee had not sold any securities before the maturity date and hence the securities could not be treated as its stock-in-trade is a view palpably incorrect. In the case reported Malabar Co-oprative Bank Ltd. (supra), the Hon'ble jurisdictional High Court held that it is not necessary that the securities held by a banking institution must be dealt with daily or often to constitute such securities as the stock-in-trade. The assessee also relied on the following decisions for the above proposition : (1) Bihar State Co-operative Bank Ltd. v. CIT [I960] 39 ITR 114 (SC); 14. Even otherwise, the assessee's learned representative submitted the Revenue has not, in fact, disputed the finding of the learned CIT(A) that the investments of the bank are its stock-in-trade and depreciation is an allowable deduction. But the deletion of the depreciation on investment is disputed by the Revenue on the ground that the assessee is regularly following the method of valuation of Government securities at cost price and the revaluation of the securities by adopting market value is a change in the method of valuation regularly followed by the assessee and consequently the income for the relevant assessment years is not properly deducible and hence the disallowance of depreciation should have been sustained by the CIT(A). In making the disallowance the Assessing Officer relied on the decision of the Supreme Court in the case of British Paints (India) Ltd. (supra) and of the Calcutta High Court in the case of UCO Bank (supra). The Assessing Officer had not given a finding in the assessment orders that the revaluation of the investments at market value was a change in the method of accounting regularly followed by the assessee and that consequently the income chargeable to tax was not properly deducible. Even otherwise, the learned representative of the assessee submitted, the decision of the Calcutta High Court in the case of UCO Bank (supra) has since been reversed by the Supreme Court in United Commercial Bank v. CIT [ 1999] 240 ITR 355". The learned representative of the assessee supported the order of the CIT (Appeals) relying on the decision of the Supreme Court mentioned (supra) and contended that depreciation in the value of investments held by the assessee as its stock-in-trade is an allowable deduction in computing the business income. He also contended that CIT(A) was justified in deleting the disallowance of depreciation on investment made by the Assessing Officer and hence the order of the CIT(A) should be upheld.15. Coming to the disallowance of the assessee's claim for broken period interest also the assessee's learned representative submitted relying on the decision of the Supreme Court in the case of United Commercial Bank (supra) that investments made in Government securities being stock-in-trade, broken period interest paid for the purchase of the securities should also be treated as revenue expenditure and allowed as a deduction. The assessee's learned representative also relied on the decision of the Kerala High Court in the case of South Indian Bank Ltd. (supra) for the proposition that broken period interest paid is a revenue expediture and allowable as a deduction. The assessee's representative also challenged the ground of the Revenue that because of the change in the method of accounting the income cannot be properly determined. The method changed by the assessee cannot be rejected simply because the income has been reduced by an amount of Rs. 13 lakhs or so. The assessee had to change the method of accounting for bonus from cash basis to accrual basis as all other items of expenses are accounted for on accrual basis and in order to give a true and fair view of the profit and the state of affairs of the respondents it was considered necessary to change the method of accounting for bonus to accrual basis. The assessee has changed the method of accounting from one acceptable method to another acceptable method and the changed method being bona fide and continued regularly thereafter the claim of the assessee cannot be disallowed. For the above proposition, reliance was also placed on the following decisions : (2) Forest Industries (Travancore) Ltd. v. CIT [1964] 51 ITR 329 (Ker.); (3) CIT v. Eastern Bengal Jute Trading Co. Ltd. [1978] 112 ITR 575 (Cal.); (4) CIT v. Rajasthan Investment Co. (P.) Ltd. [1978] 113 ITR 294 (Cal.); 16. Replying to the above, the learned departmental representative submitted that the following cases relied on by the assessee are distinguishable and hence are not applicable to the instant case of the assessee : The learned departmental representative submitted that in none of the above decisions, the question whether approved Government securities constituted the stock-in-trade or capital asset was not an issue. The department did not raise the issue regarding the capital nature of the approved securities in any of these decisions. Hence these decisions are not an authority for allowing the notional loss on revaluation of securities in the computation of taxable income. The observations, if any, in these decisions regarding the nature of securities, are only obiter dicta and do not have the force of a decision on a question of law. The learned departmental representative further submitted that in most of the above cases, the issue before the Courts was "whether the receipt of interest on fixed deposits was income under the head "Other sources", and whether the receipt of interest on fixed deposit was income not exempt from tax under the CBR Notification No. 35, dated 20th October, 1934 and No. 33, dated 18th August, 1945?". The learned departmental representative submitted that "fixed deposits" are entirely different from investment in "approved securities". "Fixed deposits" are treated on par with cash which is clear from Schedule 6 of the Balance-sheet where "cash on hand" includes "Balance with the RBI in current account and other accounts". The fixed deposits are not mandatory form of investment under Section 24(2A) of the Banking Regulation Act, which can be dealt with freely by banks. But the approved securities cannot be dealt with freely by banks due to the requirement of S.L.R. The learned departmental representative stressed the fact again that the assessee cannot sell the approved securities which are held in compliance with S.L.R. requirements. These securities are classified by the assessee as "investments" and not as "stock-in-trade", in its balance-sheet. Stock-in-trade is only kept for sale; whereas securities are held for S.L.R. compliance. There is no evidence that the approved securities were regularly dealt with by the assessee so as to call them "stock-in-trade". In some of the cases, the learned departmental representative submitted, the finding of the Tribunal that the securities formed part of the stock-in-trade of the assessee-bank was never challenged; whereas in the instant case, the Revenue is disputing the very issue. The learned departmental representative submitted that approved securities would never depreciate and are always redeemed at par on maturity date. These facts were never urged and hence were not considered by the Courts in any of the above decisions.
17. We have heard rival submissions and gone through the orders of the Revenue authorities and the decisions cited supra. We do not find much force in the arguments of the learned senior departmental representative.
18. First of all, the Board's Circular No. 665, dated 5-10-1993 clarifies the point whether securities constitute stock-in-trade or not. At para 6 of the Circular it states- 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 Officer 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.
The argument of the learned departmental representative is that in none of the Circulars issued by the Reserve Bank of India, 'investment' in approved Government securities is described as 'stock-in-trade', but always referred to as 'investment' only and, therefore, it is incorrect to say that these securities are 'stock-in-trade' of the assessee-bank.
We are afraid, the decision of the Supreme Court in the case of United Commercial Bank (supra) does not support the view canvassed by the learned departmental representative. So also the decision of the jurisdictional High Court in the case of South Indian Bank Ltd. (supra), wherein the Hon'ble High Court observed- The assessee was a banking company and a scheduled bank. Under the provisions of the Banking Regulation Act, 1949, the bank was required to invest a portion of its funds in Government securities.
The bank was thus required to buy and sell Government securities to maintain certain ratios. During the assessment years 1979-80 and 1980-81,the assessee sold Government securities ex-interest and received sums of Rs. 5,70,740 and Rs. 4,75,294, respectively, for the two years concerned with respect to the broken period upto the date of sale. Similarly, during the said periods, the assessee purchased Government securities-cum-interest and paid interest for the broken period, of Rs. 6,36,411 and Rs. 5,15,659 respectively. In the computation of total income for the years in question, the assessee deducted the interest paid for the broken period and this was originally allowed by the assessing authority in the assessments. Later, the assessing authority withdrew the said deductions by resort to the provisions of Section 154 of the Act, which was upheld by the Commissioner of Income-tax (Appeals). The Tribunal cancelled the orders of the authorities below. On a reference : it was held,- (i) That the Government securities held by the assessee-bank were part of its trading assets. The purchase and sale of Government securities was incidental to the carrying on of the business of the assessee.
The Hon'ble jurisdictional High Court noted the Board's Circular No. 599, dated 24-4-1991 which explains the legal position that the securities held by the banks constitute their stock-in-trade and that the claim for deduction of interest paid for the broken period on the purchase of securities should be allowed. It is to be noted that though this Circular is not relevant for the assessment years under consideration in the instant case of the assessee, the observations of the Hon'ble High Court are still relevant. The banks are required to keep minimum S.L.R. by way of approved securities as per the provisions of Banking Regulation Act, 1949. The banks are not precluded from or prevented from dealing in such securities notwithstanding the fact that they are required to maintain minimum level of securities intact. The mere fact that in the R.B.I. Circulars the words "stock-in-trade" have not been used, but only the word "investment" is used, it does not alter the character. This is so clear from the observations of the Hon'ble Supreme Court in the case of United Commercial Bank (supra). The case arose under the following circumstances: The assessee-bank in the above case submitted the return for the assessment year 1982-83 contending that there was a notional loss of Rs. 7,45,35,029 on account of closing stock of securities at the market value. The IAC accepting the same.
The Commissioner of Income-tax, West Bengal, invoking the jurisdiction invested in him under Section 263 of the Income-tax Act, 1961,set aside the assessment order holding that the bank had no right to calculate profit or loss arising out of investment trading account as it has excluded it from the preparation of its own final accounts. Unless a bank itself accepts the position by incorporating such loss or profit in the final accounts, it would have no right to put across such hypothetical loss for the purpose of income-tax assessment. The Tribunal held that a method constantly followed cannot be changed and that the practice followed by the assessee was not contrary to the decision of the Apex Court in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102. The Revenue approached the High Court and the High Court reversed the order of the Tribunal. On further reference, the Supreme Court, reversing the order of the High Court and upholding the order of the Tribunal held, In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance-sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and that there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with statutory provision would not disentitle the assessee in submitting the income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. For the purpose of income-tax, as stated earlier, what is to be fixed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case.
19. The learned departmental representative referred to the Third Schedule prepared in consonance with Section 29 of the Banking Regulation Act, 1949 in support of his contention that the investments made by banks in approved Government securities are nothing but capital investment and not stock-in-trade. Schedule 8 deals with 'investments'.
Therefore, it is the case of the Revenue that investments made by the banks in approved Government securities do not constitute stock-in-trade but capital investment. Here, we are of the view that the observations of the Hon'ble Supreme Court in United Commercial Bank's case (supra), extracted above, impliedly go against the arguments advanced by the learned senior departmental representative.
The schedules (and) the statutory forms prescribed under the Banking Regulation Act and the assessee has no right to change the form of the Schedule. The assessee can neither add or delete or alter the columns.
It is for these reasons the Hon'ble Supreme Court held that in such cases, there is no question of following two different methods for valuing the stock-in-trade (investments) because the bank was required to prepare the balance-sheet in the prescribed form and it had no option to change it. The same is the case with regard to investment.
The argument of the learned departmental representative that in none of the cases relied on by the assessee, the department has accepted the claim that the approved Government securities were the assessee's stock-in-trade and has never disputed the capital nature of the approved securities, and therefore there is no question of looking to the facts of those cases from the view canvassed, also cannot be accepted. The observations of the Hon'ble Supreme Court in United Commercial Bank's case (supra), extracted above, make it clear that their Lordships were aware of these facts and that is why the words "stock-in-trade" and "investments" were made interchangeable or mentioned the word "investments" in bracket after the words "stock-in-trade".
20. Even otherwise, we are of the view that the decision of the jurisdictional High Court in the case of Malabar Co-operative Central Bank Ltd. (supra) supports the view canvassed by the assessee. In this case, the assessee was a co-operative society carrying on banking business. The assessee, in the assessment year 1968-69, earned certain amount of income by way of interest on securities. The assessee claimed that the above sum earned by it should be exempted under Section 80P(2)(a)(f) of the Income-tax Act, 1961,for the reason that the Banking Regulation Act, 1949, had been made applicable to the assessee and the provisions of the Regulation clearly indicated that the holding of securities, the realisation of those securities and the earning of interest from those securities all spelt carrying on of the business of banking and, therefore, the interest that accrued on the securities should be treated as business income. The Tribunal held that the assessee had not discharged the burden of showing that the securities represented stock-in-trade and, therefore, the Appellate Asstt.
Commissioner was justified in rejecting the assessee's claim for exemption. On a reference, it was held by the jurisdictional High Court as under: The Tribunal had erroneously held that the burden of proving that the securities were held as stock-in-trade would be discharged only if the bank established that, as a matter of practice, it had been buying and selling securities or dealing with them otherwise. This was a wrong approach. A banking institution, as a part of its business activity, has to maintain ready resources to meet its liabilities the extent of which could never be foreseen. It must, therefore, have liquid resources which of course will normally be cash and, secondly, easily realisable securities. This is in the interest of the public also and, therefore, the Legislature has made it obligatory that banking institutions must maintain a certain percentage, one-fifth of its assets, in the form of securities at any given day. Therefore, holding of securities could not be presumed to be not a part of its business, nor could it be said that the securities held were not part of its stock-in-trade.
It is not necessary that the securities so held by a banking institution must be dealt with daily or often in order that those securities might become stock-in-trade. If money held in short-term deposit for the same purpose as the securities held by the assessee is part of its normal banking business and the income earned from that money is income from business, as has been held by the Supreme Court in Bihar State Co-operative Bank Ltd. v. CIT [1960] 39 ITR 114, there can be no hesitation in holding that the income earned by the assessee from the securities held by the assessee in the form of interest is also income from the business of the assessee-bank.
The above finding of the jurisdictional High Court answers the arguments advanced by the learned senior departmental representative that then investments made by the assessee-bank in approved Government securities are not its stock-in-trade, but only investments (capital).
According to the learned departmental representative in order to consider the investments in approved Government securities as part of assessee's stock-in-trade, the assessee should deal in securities always by buying and selling securities daily or very often. The Hon'ble High Court of Kerala while answering the question that it is not necessary also held that the investments in securities are as good as keeping money in short-term deposits. The court also held that cash in the hands of the banking companies are stock-in-trade but of varying degrees. Cash is immediate and the other is secondary and easily realisable.
21. It is to be noted that the decisions relied on by the learned departmental representative, viz., are distinguishable on facts. In these cases none of the assessees were banks. In all these cases, the assessees made investments either in land or dealt in shares and securities at its own free will. The assessees in these cases were free either to sell or purchase. It was under these circumstances, the Hon'ble Supreme Court held that the intention of the assessee is the most important factor as it decides the character of the investment, whether it is stock-in-trade or capital. In all these cases, there was no dealing by any of the assessees; whereas in the instant case of the assessee the assessee is bound to maintain a minimum level of investment as per the direction of the R.B.I. in order to gain the confidence of the public and to meet any unforeseen circumstances. In the case of the assessee before us, the assessee is not prevented from buying and selling securities. In fact, it is the case of the assessee that it had purchased and sold securities and held securities as its stock-in-trade. But the assessee could not show these securities as its stock-in-trade because the assessee was bound to follow the guidelines issued by the Reserve Bank of India and also the Forms issued by it. Therefore, the assessee had no option to show it as investment.
22. Coming to the arguirient of the learned departmental representative relying on the decision of the Supreme Court in the case of British Paints (India) Ltd. (supra) and of the Calcutta High Court in the case of UCO Bank (supra), that the assessee was not justified in changing the method of accounting regularly followed by it for valuation of the approved Government securities at cost price and that the valuation of the same adopting market rate was a change in the method regularly employed by the assessee and hence the true income could not be properly deduced does not hold good in view of the fact that the assessee had changed the system of accounting from one accepted method to another accepted method, and followed this system consistently thereafter. The decision reported in UCO Bank's case (supra) has been reversed by the Hon'ble Supreme Court, as noted above, in the case in United Commercial Bank's case (supra). The issue in the case of British Paints (India) Ltd. (supra) was entirely different. The question in that case was not with regard to the change in the method of accounting or following a method consistently. The issue was whether a wrong method consistently followed by the assessee could be changed by the Assessing Officer. Their Lordships held in the affirmative. The assessee valued its goods in raw material prices and finished goods excluding overhead expenses. Justification of the assessee for this practice was that the goods being paints had limited storage life, and if not quickly disposed of, were liable to lose their market value. The Assessing Officer was of the opinion that the assessee was not following any of the recognised methods to value the stocks. The Assessing Officer therefore held that the stock should be valued at cost, viz., raw material plus expenditure, or market price, whichever is lower. The Tribunal upheld the decision of the Assessing Officer.
The High Court, on a reference, reversed the decision of the Tribunal holding that having regard to the consistent practice of the respondent, the Tribunal was not justified in rejecting the respondent's method of valuation of its stock-in-trade. On appeal, the Supreme Court reversed the decision of the High Court. Coming to the instant case of the assessee, the decision of the Hon'ble Supreme Court in the case of United Commercial Bank (supra) is on identical facts.
Hence the ground taken by the Revenue that the assessee had been regularly following the method of valuation of approved Government securities at cost price, that the revaluation of the same was a change in the method of accounting regularly followed by it and consequently the income chargeable to tax for the relevant assessment year was not properly deducible cannot be accepted. The assessee has not changed the method of accounting regularly followed by it to a system not recognised by any accounting standard. More so, if the change made by the assessee is also an accepted method. If that be so, the change cannot be faulted with merely because by that change there is loss of revenue. Such changed method of valuation was upheld by the Karnataka High Court in the case of Corporation Bank Ltd. (supra) though in that case the Revenue had not disputed that the securities formed part of the stock-in-trade.
23. In the case of Bihar State Co-operative Bank (supra), the Hon'ble Supreme Court held that the assessee who is carrying on the general business of banking, its normal business being to deal in money and credit, its normal mode of carrying on banking business is to invest moneys in such a manner that they are readily available. The money laid out in the form of deposits did not cease to be part of the assessee's circulating capital. Hence, it was held, in that case that interest received from such deposits arose from the business of the bank and was exempt from income-tax under the notifications and nothing turned on the manner in which the assessee chose to show this income in its return. In the instant case of the assessee also, the assessee made investments in approved Government securities in order to keep the S.L.R. requirement intact. We have already noted hereinabove that the assessee is not prevented from buying and selling the approved securities but the assessee is required to maintain a minimum ratio intact so as to satisfy the interest of the general public who are dealing with the assessee-bank. Therefore, we hold that the investments made by the assessee in approved Government securities form part of its stock-in-trade and, therefore, the claim of depreciation on the revaluation of the securities was rightly claimed by the assessee.
Hence, for the reasons mentioned hereinabove, we find no merit in the appeals of the Revenue for the three assessment years in question. The appeals by the Revenue are dismissed.
24. Coming to the cross objections filed by the assessee, they are directed against the orders of the learned CIT (Appeals) holding that there was prima facie reason to believe that a deduction was wrongly allowed in the original assessment and thereby income chargeable to tax has escaped assessment for the assessment years under consideration.
25. The assessments for the three assessment years under appeal were reopened under Section 147 of the Income-tax Act, 1961,on the ground that income chargeable to tax for these years has escaped assessment on account of the allowance of the claim made by the assessee for depreciation on investment and broken period interest paid thereof.
26. In these cases the original assessments were completed under Section 143(3) for the assessment years 1982-83, 1983-84 and 1984-85 on 21-3-1985, 26-12-1985 and 19-9-1986 determining the income at Rs. 13,76,160, Rs. 2,90,470 for the first two years and loss of Rs. 28,11,413 for the last year. Subsequently, notice under Section 148 was issued on 22-3-1993 for all the three years under consideration on the ground that income assessable to tax has escaped assessment in the light of the decision of the Hon'ble Supreme Court in the case of Vijaya Bank Ltd. (supra). The relevant observations of the Assessing Officer recording the reasons for reopening the assessments under Section 143(3) read with Section 147 as appearing in para 2 of the assessment order (assessment year 1982-83) are as below : Subsequently on the basis of the decision of the Supreme Court in the case of Vijaya Bank Ltd. v. CIT [1991] 187 ITR 541 that investment in Government securities is capital in nature, the assessment was reopened under Section 147 of the IT Act and notice under Section 148 was issued to the assessee and served on 25-3-1993. The very purpose of the reassessment proceedings was primarily to disallow a sum of Rs. 7,72,500. Which is the amount claimed by the assessee as depreciation on investments, .being the loss on revaluation of Government securities.
It is the case of the assessee that even according to the Assessing Officer there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment in respect of the assessment year except the decision of the Hon'ble Supreme Court mentioned (supra) and, therefore, the reopening of the assessments is bad in law for the reason that the notices were issued beyond the stipulated time of four years.
27. The facts in this regard are briefly stated as follows: It was the case of the assessee before the Assessing Officer also that there was no failure on its part to disclose fully and truly all material facts necessary for the assessment at the 'time of the original assessment proceedings and, therefore, there was no reason to reopen the assessments under Section 147 on the basis of a change of opinion. This objection was overruled by the Assessing Officer observing that "it is only after satisfying the requirements of the above provision of law the relevant assessment proceedings have since been reopened and as such the assessee's argument is untenable". When the matter was carried before the learned first appellate authority the same objection was repeated by the assessee. The contention of the assessee was rejected by the learned first appellate authority vide para 4 of his appellate order on the following lines : Before proceeding to the other arguments advanced by the learned representative, I shall first deal with the objection raised to the validity of the reassessment proceedings. On going through the records of the case, I find that the legal formalities in the reopening the assessment. There was prima facie reason to believe on the basis of the reported decision of the Supreme Court that a deduction was wrongly allowed in the original assessment. Even after intimation of the reassessment proceedings, it was open to the appellant to advance arguments in support of its contentions regarding the non-assessability of the amount proposed to be brought to tax in the reassessment proceedings and it was equally an open matter for the Assessing Officer to decide the issue on merits by concluding the reassessment proceedings or dropping them altogether.
In this view of the matter, I hold that the reassessment proceedings cannot be challenged on the ground of lack of jurisdiction on the part of the Assessing Officer.
The learned departmental representative supported the orders of the revenue authorities.
28. Under Section 147, the Assessing Officer is empowered to re-open the assessment if he has reason to believe that any income chargeable to tax has escaped assessment for the assessment year. The proviso to Section 147 restricts the scope of the re-opening of the assessment. It reads as under: S.147. Income escaping assessment.-the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of Sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in Sections 148 to 153 referred to as the relevant assessment year): Provided that where an assessment under Sub-section (3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to a notice issued under Sub-section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment for that assessment year.
A reading of the proviso to Section 147 makes it clear that the re-opening of the assessment completed under Section 143(3) or Section 147 can be done again before the lapse of four years even if there is no failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment, for that assessment year.
This also means, negatively, that the re-opening of the assessment completed under Sub-section (3) of Section 143 or the one completed under Section 147 read with Section 148 can be done after the laps of 4 years, only if there is a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for the assessment years under consideration. In the instant case of the assessee, there is no case even for the Revenue that the reason to reopen the assessments was the failure of the assessee to disclose fully and truly all material facts necessary for the completion of the assessments. But the reopening was done on the basis of a decision of the Apex Court in the case of Vijaya Bank Ltd. (supra). It is true. The Revenue authorities are empowered to reopen a completed assessment on the basis of a decision of the Hon'ble Supreme Court. But this power is not absolute. It should be within the time prescribed under the statute, otherwise there will be no finality and the reopening can go on, ad infinitum, which is against the canons of jurisprudence.
Since there was no failure on the part of the assessee to disclose fully and truly all material facts for the assessment, we are of the view that the Assessing Officer has no jurisdiction to reopen the assessments for these years. The cross-objections filed by the assessee are liable to be allowed on this ground alone. Even otherwise, we have also decided the issue on merits in the appeals preferred by the Revenue, in favour of the assessee. In this view of the matter, the cross-objections are allowed.