The Visakhapatnam Bench of the Income Tax Appellate Tribunal (ITAT) held that the loss arising out of the sale of government securities is a trading loss.
The two-member bench of Duvvuru Rl Reddy (Judicial Member) and S. Balakrishnan (Accountant Member) observed that the treatment of securities of the AFS (available for sale) categories has to be seen in contradiction and contrast with securities of the HTM (held to maturity) categories, which are purchased and held for the purpose of investment only.
The assessee/respondent is a co-operative urban bank limited, which filed its return of income for the AY 2010-11, declaring a total income of Rs. 8,72,100/-. Subsequently, the case was selected for scrutiny. In response to the statutory notices under sections 143(2) and 142(1) of the Income Tax Act, the assessee's representative furnished various details called for by the AO. After examining the books and the information furnished by the assessor's representative, the AO completed the assessment.
The assessee was aggrieved by the order of the AO and filed an appeal before the CIT (A). The CIT (A), considering the submissions made by the assessee's representative, allowed the claim for provisions of bad and doubtful debts as per the first proviso to sub-clause (a) of section 36(1)(viia) of the Income Tax Act. The CIT (A) also allowed the loss on sale of government securities in accordance with the guidelines issued by the RBI. Aggrieved by the order of the CIT (A), the Revenue is on appeal before the Tribunal.
The department contended that as per the provisions of section 36(1)(viia)(a) of the Income Tax Act, the amount claimed by the assessee is in excess of seven and a half percent of the income claimed and reported. Hence, the excess deduction claimed should be disallowed. The applicability of the first proviso to sub-clause (a) of section 36(1)(viia) was not raised before the Assessing Officer. Because the assessee did not disclose the sale and purchase of government securities in the P&L Account, the loss incurred as a result of the sale of government securities held as investments should be treated as a capital loss rather than a business loss.
The assessee contended that the government securities were held under the category of "Available For Sale" and hence the loss after adjustment of the reserves already created in the earlier years is being debited to the P & L Account of the current year.
The ITAT held that banks, by the very nature of their 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. The treatment of securities of AFS categories has to be seen in contradiction and contrast with securities of HTM categories, which are purchased and held for the purpose of investment only.
"The impugned loss arose on sale of Government securities emanated from the investments which were classified under AFS category. In view of that, we find merit in the claim of the assessee that the loss arising out of sale of Government Securities is of trading loss notwithstanding the securities are grouped under the head investment owing to the prescribed format of the RBI. We find that the order of the Ld. CIT(A) is in consonance with the CBDT instructions as well as the facts of the case and does not require any interference," the ITAT ruled.
Case Title: Asst. Commissioner of Income Tax Versus The Eluru Cooperative Urban Bank Limited
Citation: I.T.A. No.384/Viz/2018
Counsel For Appellant: C. Subrahmanyam
Counsel For Respondent: Sr. AR SPG Mudaliar