By C. N. Vaze
Shailesh Kamdar
Jagdish T. Punjabi
Bhadresh Doshi
Chartered Accountants
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New Page 1
23. (2010) 126 ITD 448
(Mum.)
DDIT v. Chohung Bank
A.Ys. : 1997-98, 1999-2000
to 2003-04
Dated : 25-6-2009
S. 28(i) — Business Loss v.
Capital Loss — securities held as current asset should be treated as
stock-in-trade. The loss incurred on the same should be treated as business
loss.
S. 145 — Method followed by
the assessee was cost or market price whichever is less — accordingly loss
should be recognised but appreciation in the value should not be booked.
Facts :
The assessee is a
non-resident banking company. It incurred a loss of Rs.77,000 on sale of
Government securities held as ‘current investments’. The Assessing Officer
treated the same as capital loss stated. The assessee contended that the
securities were as ‘current asset’ in the balance sheet as per the norms laid
down by the RBI. It was further contended that buying and selling of securities
was a normal business activity of a banking company and the current investments
were thus stock-in-trade.
Held :
As per the guidelines issued
by the RBI, the securities are to be divided into (i) permanent investments and
(ii) current investments. Permanent investments are the securities purchased
with the intention of retaining them while the current investments are the
securities purchased with an intention of trading to take advantage of
short-term price. Thus the securities in the nature of current investments
automatically become the stock-in-trade of the assessee and not investment. The
loss incurred is thus on account of stock-in-trade which is referred as current
investments by the assessee.
Facts :
The assessee had revalued
certain securities being a part of closing stock and incurred loss of Rs.45,000.
The same was debited to the profit and loss account. The Assessing Officer
observed during the course of assessment proceedings that the assessee had also
revalued certain other securities forming part of the closing stock and incurred
profit of Rs.15,43,400 on the same. This profit was not offered to tax. The
Assessing Officer held that the assessee incurred loss on revaluation of one
portion of the closing stock and profit on revaluation of the another portion of
the same closing stock. While the loss was claimed as deduction, the profit was
not offered to tax. The AO held that the assessee could not be allowed to follow
different methods for valuing different portions of stock. Accordingly, an
addition of Rs.15,43,400 was made.
Held :
1. The method ‘cost or
market price’ whichever is less is a recognised method of valuation of
closing stock. The logic behind this method is that the loss in the value be
recognised without recognising unduly the appreciation in the value of
stock.
2. The Circular issued
by the RBI for valuation and classification of investments states that the
valuation is to be done scripwise and further any appreciation in the value
should not be booked.
3. Further, this method
is being consistently followed by the assessee. Going by the method adopted
by the assessee as ‘cost or market price whichever is less’, there can be no
addition of appreciation on account of revaluation.
Note :
The other issues being minor, have been ignored
for the purpose of above gist.
