The loss resulting from the sale of government securities is a commercial loss: ITAT
The Visakhapatnam Bank of Income Tax Appeal Tribunal (ITAT) ruled that the loss arising from the sale of government securities is a trading loss.
The two-member bench of Duvvuru Rl Reddy (judicial member) and S. Balakrishnan (accounting member) observed that the treatment of AFS (Available for Sale) category titles should be seen in contradiction and contrast to the category titles HTM (held to maturity), which are purchased and held for investment purposes only.
Assessed/Respondent is an Urban Co-operative Bank Limited, which filed its income tax return for AY 2010-11, declaring total income of Rs. 8,72,100/-. Subsequently, the case was selected for review. In response to statutory notices under Sections 143(2) and 142(1) of the Income Tax Act, the assessee’s representative provided various details requested by the AA. After reviewing the books and the information provided by the assessor’s representative, the OD completed the assessment.
The assessee was aggrieved by the AO’s order and appealed to the CIT(A). The CIT(A), in view of the observations made by the representative of the appraisee, authorized the request for allowances for bad debts and doubtful debts in accordance with the first conditional clause of subparagraph (a) of article 36 (1 ) (viia) of the Income Tax Act. The CIT(A) also allowed the loss on the sale of government securities in line with the guidelines issued by the RBI. Injured by the order of the CIT (A), the tax authorities are appealing to the Tribunal.
The department argued that, pursuant to the provisions of paragraph 36(1)(viia)(a) of the Income Tax Act, the amount claimed by the assessee exceeds seven and one-half percent of the income claimed and declared. Accordingly, the excess deduction claimed should be disallowed. The applicability of the first qualification to subparagraph (a) of Article 36(1)(viia) was not raised before the valuation officer. Since the assessee did not disclose the sale and purchase of government securities in the income statement, 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 argued that the government securities were held in the “Available for sale” category and therefore the loss after adjusting for reserves already created in previous years is debited from the P&L account of the assessee. ‘current year.
The ITA considered that banks, by the very nature of their business, may have to store excess trading funds in securities and, although intended to be trading assets, may have to hold them. for longer periods if the funds are not needed. The treatment of securities of the AFS categories should be considered in contradiction and in contrast to the securities of the HTM categories, which are purchased and held for investment purposes only.
“The disputed loss arose on the sale of government securities from the investments classified in the AFS category. ‘state is a commercial loss notwithstanding the securities are grouped under the investment heading due to the prescribed format of the RBI We find that the order of Ld. CIT(A) is consistent with the instructions of the CBDT as well as the facts of the case and does not require any interference”, judged the ITAT.
Case title: Asst. Income Tax Commissioner v The Eluru Cooperative Urban Bank Limited
Quote: ITA No. 384/Viz/2018
Counsel for the Appellant: C. Subrahmanyam
Counsel for the Respondent: Sr. AR SPG Mudaliar
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