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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.2308 OF 2009
The Commissioner of Income Tax,
(Central) - II, Room No.415,
Aayakar Bhavan, M.K. Road,
Mumbai - 400 020
ig ..Appellant.
Versus
M/s. Development Credit Bank Limited
391, 'Trade Plaza', Veer Savarkar Marg,
Prabhadevi, Mumbai - 400 025 ..Respondent.
Mr.Suresh Kumar for the appellant.
Mr.Satish R. Mody with Ms.Aasifa Khan for the respondent.
CORAM : Dr.D.Y. Chandrachud &
J.P. Devadhar, JJ.
DATE : 26th February, 2010.
ORAL JUDGMENT : (Per Dr.D.Y. Chandrachud, J.)
1. Admit
2. The appeal under Section 260A of the Income Tax Act, 1961 arises out
of an order passed by the Income Tax Appellate Tribunal on 15th January 2009, by
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which the Tribunal held that the jurisdiction under Section 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 under Section 263 was not justifiable, on the ground thatthe order of the Assessing Officer was not erroneous or prejudicial to
the interests of the Revenue ?”
3. The assessee is a Bank. In the present case, an order of assessment
under Section 143(3), in relation to assessment year 2002-2003, 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
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into account the guidelines issued by the Reserve Bank of India in this regard from
time-to-time. The Assessing Officer concluded that according to the guidelines of
the the Reserve Bank of India, banks were permitted to provide depreciation on
investments category-wise 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.
4. 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
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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.
5. On 26th March 2007, the Commissioner of Income Tax passed an order
under Section 263(1), by which he set aside the assessment order and directed the
Assessing Officer to re-frame 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 stock-in-trade
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 long-term 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.”
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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 stock-in-trade 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 stock-in-trade. Consequently, the
case of the assessee was that capital gain and depreciation was referable
respectively to two different classes of investments.
6. 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 under Section 143(3). Hence, the Tribunal
came to the conclusion that the Commissioner of Income Tax was not justified in
exercising the suo-motu power of revision under Section 263.
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7. 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 stock-in-trade. 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 stock-in-trade 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 under Section
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 stock-
in-trade. 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 stock-in-trade. We have
indicated this only as and by way of an illustration in aid of our finding that there
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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 under Section 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.
8. 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 under Section 263 was not warranted in the
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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.
(J.P. Devadhar, J.) (Dr.D.Y. Chandrachud, J.)
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