The Commissioner of Income Tax vs Union Bank of India

This appeal under Section 260A of the Income Tax Act, 1961 (the Act) taking exception to the order dated 18th January, 2013 of the Income Tax Appellate Tribunal (Tribunal) for Assessment Year 2007-08 has already been admitted on 1st December, 2015 in respect of question Nos. 4, 5 and 7 while question Nos. 1, 2 and 3 were dismissed. However, question No. 6 as formulated by the Revenue in its memo of appeal could not be dealt with on 1st December, 2015 for the following reasons as recorded in the order dated 1st December, 2015.

"6. Regarding question No. (6)

(a) The impugned order of the Tribunal dismissed the revenue''s appeal following its order for the Assessment Years 2005-06 and 2006-07 which in turn had followed the order for the Assessment year 1982-83 all in respect of the same respondent-assessee. Besides following the decision of the High Court in the case of CIT v. Bank of Baroda [, 262 ITR 334]which in turn has placed reliance upon the Apex Court decision in UCO Bank (Supra). In view of the issue being concluded, we were inclined not to entertain the question as formulated.

(b) However, Mr. Malhotra, learned counsel appearing for the revenue, pointed out that the revenue''s appeal from the order of the Tribunal for the Assessment Years 2005-06 and 2006-07 had been admitted. However, while admitting that appeal, the present question has not been considered as it does not state whether it admits or rejects the above questions. Thus it is submitted that this question is still open in the earlier appeals for Assessment Year 2005-06 and 2006-07 bearing Income Tax Appeal Nos. 152 of 2012 and 176 of 2012. Therefore this question could be considered at the final hearing of this appeal alongwith the two appeals bearing Income Tax Appeals Nos. 152 of 2012 and 176 of 2012.

(c) We were not inclined to adjourn the consideration of this question for admission at the stage to final hearing. This is particularly so as it would have a cascading effect as a number of appeals before the authorities under the Act as also appeals before us would increase. Besides creating uncertainty in respect of a settled issue.

(d) Mr. Malhotra thereafter states that when the appeal was adjourned at the request of the respondent assessee on the last occasion, while adjourning the appeal, the bench (one of us i.e. M.S. Sanklecha J. was a member of that Bench) had indicated that this question would be considered alongwith Income Tax Appeal Nos. 152 of 2012 and 176 of 2012. Further in terms of the above observation he has informed his clients i.e. Revenue. We understand his submissions therefore the dismissal of this question at this stage would cause embarrassment.

(e) It may be pointed out that (one common member - M.S. Sanklecha, J.) does not remember the same. However there is no reason to disbelieve Mr. Malhotra and we proceed on the basis that such an observation was made. Mr. Malhotra also points out that the above observations were made, without having looked into the papers and only while considering the request of the respondent for an adjournment.

(f) We wish to note that it may not be correct for the counsel to elevate the status of our parole observations, during the course of hearing, to that of orders and to communicate such observations to their clients, thereby creating an impression that such observations are conclusions or orders made by the Court. In this case, observations, if any, were admittedly at the stage when the case papers were no before us and only motion for adjournment was being considered.

(g) At one stage, we were inclined to adjourn this question for consideration at the final hearing of the appeal. However on further thought it appears to us that it may not be advisable, as it would only create uncertainty. We would have adjourned the hearing of the appeal to another date but this bench has been constituted only for today. Thus after having spent over half an hour on the other questions, we are disposing of all the above questions mentioned but as Mr. Malhotra is not ready today on this question we adjourn the hearing of this question for consideration of admission to 15th December, 2015 by the bench taking up Income Tax appeals."

It was in the above circumstances, that question No. 6 raised by the Revenue in the present appeal, which reads as under, had been deferred for consideration.

"(6) Whether on the facts and in the circumstances of case and in law, the Tribunal is right in allowing the claim of the assessee in respect of loss on revaluation of investments amounting to Rs. 359,93,42,619?"

The respondent assessee had for Assessment Year 2007-08 claimed a loss of Rs. 476 crores on revaluation of investment i.e. depreciation in the value of securities. The Assessing Officer by his order dated 30th December, 2009 under Section 143(3) of the Act disallowed the depreciation on investment on the ground that the respondent had claimed deduction differently in its books of account from that being claimed for the purposes of income tax. It was noted by the Assessing Officer that for the purposes of its books of accounts, the respondent has been netting off the depreciation in its securities against appreciation in other securities while for the purpose of payment of tax, the respondent assessee has been claiming gross depreciation that is without netting of the appreciation in other securities held as a part of investment. In the aforesaid circumstances, the Assessing Officer was of the view that the netting basis for valuation as adopted in its books of accounts should be followed even for the payment of tax by the respondent assessee. Further, support for this was on the basis of CBDT Circular No. 665 dated 5th October, 1993 wherein in paragraph 4 it is observed as under:--

"4. 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."

In the circumstances, the set off on account of appreciation in some other securities being allowed, an amount of Rs. 359 Crores claimed as a loss, was disallowed. Thus added to the income of the Respondent-Assessee.

In appeal, the Commissioner of Income Tax (Appeals) by order dated 30th June, 2010 reversed the order of the Assessing Officer, inter alia, by placing reliance upon the following decisions:--

"(a) Apex Court in United Commercial Bank v. CIT , 240 ITR 355

(b) Decision of this Court in CIT v. Bank of Baroda, , 262 ITR 334 and

(c) The order of Tribunal in Respondent-Assessee''s own case for earlier year."

It further holds that computation of income under the Act is not to be accordance with Reserve Bank of India Circulars/Guidelines in the absence of specific provisions in the Act. In this behalf, attention was drawn to Sections 43(D) and 36(1)(viia) of the Act, mandating computation keeping in view the guidelines of the Reserve Bank of India.

Being aggrieved, the Revenue carried the issue in appeal to the Tribunal. By the impugned order, the Tribunal dismissed the Revenue''s appeal, holding that the issue stands covered by the decisions of the Tribunal on the same issue in respect of the same respondent assessee for the Assessment Years 2005-06 and 2006-07 wherein the revaluation on account of depreciation in the value of the securities was allowed. Besides, the impugned order places reliance upon the decisions of the Apex Court in the UCO Bank (Supra) and decision of this Court in Bank of Baroda (Supra) which covers the issue in favour of the Respondent-Assessee. We have been informed that the Revenue''s appeal for the Assessment Year 2005-06 and 2006-07 from the order of the Tribunal in respect of the same respondent assessee being Income Tax Appeal Nos. 152 of 2012 and 176 of 2012, were not entertained in respect of question No. 6 raised herein inasmuch as no question in respect thereof was admitted. However, the Revenue wanted to urge this issue on the ground that this question was not considered by this Court while admitting the Income Tax Appeal No. 152 of 2012 and 176 of 2012.

In support of the appeal, Mr. Malhotra, learned Counsel for the Revenue places reliance upon the CBDT Circular No. 665 dated 5th October, 1993 and in particular para 4 thereof as reproduced hereinabove to contend that the valuation of investments in the nature of securities of the respondent assessee bank has to be necessarily done in terms of the RBI guidelines i.e. by netting of the appreciation in the securities with depreciation in other securities. In support, Mr. Malhotra, places reliance upon the Master Circular dated 1st July, 2011 as updated/communicated by letter dated 2nd July, 2012. It is submitted that in view of the RBI guidelines, it is not open for the assessee to apply the well accepted norm of valuing investments at costs or market price whichever is less. In the above view, it is submitted that question No. 6 as formulated should be admitted for consideration along with Question Nos. 4,5 and 7 as admitted on 1st December, 2015.

We find that the issue as raised before us is no more res integra. This Court had an occasion to deal with identical question in the case of Commissioner of Income Tax v. HDFC Bank, reported in , 366 ITR 505, and this Court refused to entertain the same. In fact, in the above case, this Court relied upon the decision of Karnataka High Court in Karnataka Bank Ltd. v. ACIT , 356 ITR 549. In fact, the following observations in the Karnataka Bank Ltd., (supra) were quoted with approval as under:--

"From the aforesaid judgments of the apex court, now it is clear 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. Financial institutions like bank, are expected to maintain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be in conformity with the said requirements. The RBI Act or the Companies Act do not deal with the permissible deductions or exclusion under the Income Tax Act. For the purpose of the Income Tax Act, if the Assessee has consistently been treating the value of investment for more than two decades the investments as stock-in-trade and claimed depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations. The RBI Regulations, the Companies Act and the Income Tax Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of account. It is not decisive or conclusive in the matter. For the purpose of the Income Tax Act whichever method is adopted by the assessee, a true picture of the profits and gains, i.e. real income is to be disclosed. For determining the real income, the entries in the balance-sheet is required to be maintained in the statutory form may not be decisive or conclusive. It is open to the Income Tax Officer as well as the assessee to point out true and proper income while submitting the income tax returns. Even if the assessee under some misrepresentation or mistake fails to make an entry in the books of account, although under law, a deduction must be allowed by the Income Tax Officer, the assessee will not lose any right on claiming or will be debarred from being allowed the deduction. Therefore, the approach of the authorities in this regard is contrary to the well settled legal position as declared by the apex court.

In the instant case, the assessee has maintained the accounts in terms of the RBI Regulations and he has shown it as investment. But consistently for more than two decades it has been shown as stock-in-trade and depreciation is claimed and allowed. Therefore, notwithstanding that in the balance-sheet, it is shown as investment, for the purpose of Income Tax Act, it is shown as stock-in-trade. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the bank has to take into consideration the market value of the shares. If the market value is less than the cost price, in law, they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the balance-sheet."

(emphasis supplied)

Thus, the view that the securities of the Banks are investment and have to be valued at costs or market price, whichever is less.

Further, in the decision of the Apex Court in UCO Bank (Supra) which was followed by this Court in Bank of Baroda (Supra) it is observed therein that the respondent assessee had for over 30 years has been valuing the securities in its income tax Returns at market price or cost whichever is less and the same was accepted by the Department. The Court further observed that for the purposes of income tax, what has to be taxed is a real income and not necessarily the income on the basis of the manner in which the accounts are prepared. Thus, the issue is settled issue.

It must be pointed out that Mr. Malhotra very fairly states that the decision of this Court in HDFC Bank Ltd. (Supra) has been accepted by the Revenue and no SLP therefrom has been filed.

In view of the above, question No. 6 as framed for our consideration does not give rise to any substantial question of law as it stands concluded by the decision of this Court in HDFC Bank Ltd. (Supra) which has been accepted by the Revenue. Thus, question No. 6 is not being entertained.

The appeal having been admitted on 1st December, 2015 in respect of Question Nos. 4,5 and 7 as found in the appeal memo will come up for final hearing at its turn.