The Commissioner of Income Tax vs Development Credit Bank Limited

D.Y. Chandrachud, J.—Admit

The appeal u/s 260A of the Income Tax Act, 1961 arises out of an order passed by the Income Tax Appellate Tribunal on 15th January 2009, by which the Tribunal held that the jurisdiction u/s 263 had not been validly exercised by the Commissioner of Income Tax. Hence, the appeal by the Revenue raises the following substantial question of law :

Whether the Tribunal was justified in holding that the initiation of proceedings u/s 263 was not justifiable, on the ground that the order of the Assessing Officer was not erroneous or prejudicial to the interests of the Revenue ?

The assessee is a Bank. In the present case, an order of assessment u/s 143(3), in relation to assessment year 20022003, was passed on 24th December 2004. In so far as it is material to this proceeding, the Assessing Officer, while dealing with a provision for depreciation on current investments noted that in the computation of total income of the assessee, depreciation on current investments was computed at Rs. 6.22 crores. The assessee was called upon to clarify the treatment of depreciation. The assessee clarified that as in the past, it has been dealing in Government and other Approved Securities and at the end of the year, the stock of those securities constitutes the trading stock. This stand of the assessee - Bank has been accepted by the Department while finalizing assessments in the past. The assessee inter alia relied upon Circular No. 665 issued by the Central Board of Direct Taxes (''CBDT''), in which it was noted that the question as to whether a particular item of investment in securities constitutes stock in trade or a capital asset is a question of fact. Banks are generally governed by instructions of the Reserve Bank of India with regard to classification of their assets and by accounting standards for investments. The CBDT, therefore, decided that the Assessing Officers 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 timetotime. The Assessing Officer concluded that according to the guidelines of the Reserve Bank of India, banks were permitted to provide depreciation on investments categorywise after considering the appreciation, if any, in that category. Following the said direction devaluation in the value of securities was computed at Rs. 6.22 crores and provided in the accounts of the assessee. However, while calculating taxable income the guidelines had not been followed to the extent that appreciation, as suggested by the Reserve Bank of India had been ignored. In these circumstances, depreciation on current investment was allowed only to the extent computed in accordance with the guidelines of the Reserve Bank of India and booked in the amount of Rs. 6.22 crores. The claim of the assessee to the extent of Rs. 10.81 crores in the computation was disallowed.

At this stage, it would be necessary to note that during the course of the assessment proceedings, a communication was addressed by the Assessing Officer to the assessee on 20th September 2004. The communication inter alia sought a disclosure of the following items, namely (i) Details of capital gains in the amount of Rs. 1.62 crores deducted in the computation of business income; (ii) Details of securities sold during the year on which long term capital gain has been shown; and (iii) A break up of the investments held and value under each category as reflected in Schedule 17 forming part of the accounts of the assessee. These details were sought in items 17, 18 and 20 of the aforesaid letter of the Assessing Officer. In pursuance thereto, the assessee in its response furnished a break up of long term investments held in excess of one year on which capital gains of Rs. 1.26 crores came to be computed separately. The assessee also communicated a break up of permanent investments and current investments held by the Bank. The permanent investments were regarded as those being ''held to maturity'' (HTM). The current investments were those which constitute the stock in trade. Consequently, during the course of the assessment proceedings, the assessee supplied to the Assessing officer, in response to a specific query in that regard, details of investments which were held as permanent investments or those held to maturity on one hand and those which on the other hand constitute current investments or stock in trade.

On 26th March 2007, the Commissioner of Income Tax passed an order u/s 263(1), by which he set aside the assessment order and directed the Assessing Officer to reframe the assessment denovo after furnishing to the assessee an opportunity and after conducting an enquiry on the following issues:

(i) Whether the capital gain of Rs. 1,26,30,070/- has been earned by the assessee on transactions related to investments held to maturity.

(ii) Whether the depreciation of Rs. 622.39 lakhs allowed on investments is only for those investments held as stockintrade and whether it is an allowable deduction.

(iii) Whether long term capital loss of Rs. 1,66,021/- is to be allowed to be carried forward.

(iv) Whether the profit on transfer of tenancy rights amounting to Rs. 21,32,427/- can be set off against longterm capital loss claimed on sale of Government securities mainly in the light of the fact that sale of Government securities is a trading transaction and, therefore, long term capital loss cannot be set off against such trading income.

(v) Whether the provisions of Section 70 are applicable in this regard.

Of the aforesaid issues, it would be noticed at the outset that (i) and (ii) above formed the principal bone of contention. Both the counsel concede that the rest followed in consequence. The Commissioner of Income Tax was of the view that the Assessing Officer failed to examine (i) Whether the capital gains of Rs. 1.26 crores have been earned by the assessee on transactions related to investments held to maturity as claimed by the assessee; and (ii) Whether the depreciation of Rs. 622.39 lakhs claimed and allowed on investments is only for those investments held as stockintrade as claimed by the assessee. The assessee, it may be noted, had contended that the capital gain of Rs. 1.26 crores was earned from transactions relating to investments held to maturity and was, therefore, required to be treated as a long term capital gain. The assessee had also urged that depreciation of Rs. 622.39 lakhs was incurred on investments held as stockintrade. Consequently, the case of the assessee was that capital gain and depreciation was referable respectively to two different classes of investments.

The Tribunal, on an appeal being filed by the assessee against the order of the Commissioner of Income Tax, held that the Assessing Officer had specifically called upon the assessee to furnish details with regard to the capital gain of Rs. 1.26 crores in the computation of business income. Moreover, a break up of the investments was called for by the Assessing Officer. The Tribunal noted that all the details were furnished and, after they were considered by the Assessing Officer, an assessment order was passed u/s 143(3). Hence, the Tribunal came to the conclusion that the Commissioner of Income Tax was not justified in exercising the suomotu power of revision u/s 263.

A reading of the order passed by the Commissioner of Income Tax would show that the principal objection which the Revisional Authority expressed against the order of the Assessing Officer was an alleged failure of the Assessing Officer to examine; firstly whether the capital gain of Rs. 1.26 crores has been earned by the assessee on transactions relating to investments ''held to maturity'', and secondly whether the depreciation of Rs. 622.39 lakhs was claimed on investments which were held as stockintrade. Now from the material on record before the Court it is evident that the assessee, in response to a specific query of the Assessing Officer dated 20th September 2004 supplied details of the long term investments held for a period in excess of one year which the assessee treated as investments held to maturity. The profit on these investments was computed at Rs. 1.26 crores. In so far as the aspect of depreciation of Rs. 622.39 lakhs on investments held as stockintrade was concerned, the assessee had similarly supplied to the Assessing Officer details of the current investments in response to the query of the Assessing Officer. In addition, it would also have to be noted that, in pursuance of the order passed by the Commissioner of Income Tax u/s 263, an assessment order came to be passed on 28th December 2007. During the course of the assessment order, the Assessing Officer noted that the assessee has explained depreciation claimed against the investments held and classified as stockintrade. The explanation of the assessee in this connection was accepted and the Assessing Officer came to the conclusion that depreciation of Rs. 622.39 lakhs has been claimed towards investments held and classified as stockintrade. We have indicated this only as and by way of an illustration in aid of our finding that there was no basis or justification for the Commissioner of Income Tax to invoke the provisions of Section 263. In the order of assessment, the Assessing Officer had after making an enquiry and eliciting a response from the assessee come to the conclusion that the assessee was entitled to depreciation to the extent of Rs. 622.39 lakhs on the value of securities held on the trading account. In the absence of any tangible material to the contrary, the Commissioner of Income Tax could not have treated this finding to be erroneous or to be prejudicial to the interest of the Revenue. The observation of the Commissioner of Income Tax that the Assessing Officer had arrived at his finding without conducting an enquiry was erroneous, since an enquiry was specifically held with reference to which a disclosure of details was called for by the Assessing Officer and made by the assessee. We have adverted earlier to the directions which have been issued by the Commissioner of Income Tax to the Assessing Officer with regard to the holding of a fresh enquiry. Before us it is common ground between counsel that the first and the second issues therein relating to the capital gain of Rs. 1.26 crores and depreciation of Rs. 622.39 lakhs constitute the basis of the view of the Revisional Authority and the others follow in consequence. Once we come to the conclusion that the Revisional Authority was not justified in exercising the jurisdiction u/s 263 with reference to the aforesaid issues {(i) and (ii) in the directions of the Commissioner of Income Tax noted earlier}, the other issues are consequential to the enquiry which was directed in respect of the first and second issues. This has not been disputed.

In these circumstances, for the reasons which we have set out herein above, we are of the view that the Tribunal was justified in coming to the conclusion that recourse to the powers u/s 263 was not warranted in the facts and circumstances of the case. The question of law which has been formulated shall stand answered in the aforesaid terms. The appeal shall accordingly stand dismissed. There shall be no order as to costs.