Commissioner of Income Tax Vs Karur Vysya Bank Ltd.

B. Rajendran, J.@mdashThe assessee, the Karur Vysya Bank Ltd., originally challenged the orders of the assessing officer in respect of various disallowances including the bad debts claims of the assessee relating to non-rural branches, which according to the assessee were made without appreciating the provisions of Section 36(1)(viia) of the Act in its proper perspective, which was allowed by the Tribunal. Aggrieved against the said order of the Tribunal, the revenue has come forward with the present appeal with the below-mentioned questions of law:

1. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the diminution in the value of securities held by the bank should be allowed as deduction disregarding the method prescribed in the RBI circular as per which "permanent" investments had to be valued only at cost and only current investments were to be valued at market price at the close of the accounting year ?

2. Whether on the facts and circumstances of the case the Tribunal was right in law in holding that the interest paid on charge of investment is allowable as revenue expenditure disregarding the principle that the interest paid on charge of investments categorised as "permanent" are to be treated as capital expenditure and not as revenue expenditure ?

3. Whether on the facts and circumstances of the case the Tribunal was right in holding that the loss on sale of security incurred by the assessee bank was allowable as revenue loss ignoring the fact that loss oh sale of securities categorised as permanent assets cannot be treated as business loss ?

4. Whether on the facts and circumstances of the case the Tribunal was right in law in holding that the payment of subscription fees paid to Securities and Exchange Board of India (SEBI) to carry on business of merchant banking by the assessee bank was allowable as revenue expenditure ?

2. Insofar as the first question of law raised by the revenue is "whether the Tribunal is right in holding that the diminution in the value of the securities held by the bank should be allowed as deduction disregarding the method prescribed in the RBI circular as per which permanent investments had to be valued only at cost and only current investments were to be valued at market price at the close of the accounting year". The very same issue came up for consideration before this Court in the decision reported in Commissioner of Income Tax Vs. The Karur Vysya Bank Ltd., which was rendered by relying upon the decision of the Supreme Court reported in United Commercial Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal-III, Calcutta, . In that case, the Honble Supreme Court categorically formulated the principles as under:

1. That for valuing the closing stock, it is open to the assessee to value it at the cost or market value whichever is lower ?

2. In the balance sheet, if the securities and shares are valued at cost but from that no firm conclusion can be drawn. A taxpayer is free to employ for the purpose of his trade, his own method of keeping accounts, and for that purpose, to value stock-in-trade either at cost or market price.

3. 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 accounts or of valuation.

4. The concept of real income is certainly applicable in judging whether there has been income or not, but, in every case, it must be applied with care and within their recognized limits.

5. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation.

3. Following the principles laid down by the Honble Supreme Court, this Court has clearly held that the assessee is entitled to change the method of valuation of Government securities to market value from cost and claim depreciation on the difference in the diminution of value. The Tribunal also rightly pointed out the above ruling and held that the securities are trading assets of the bank and the loss arising on its sale is an allowable deduction. The loss on sale of securities is a revenue loss considering that the securities are trading assets and not investments. Hence, this question of law is answered in favour of the assessee and against the revenue.

4. The next question of law is as to "whether the Tribunal was right in law in holding that the interest paid on charge of investment is allowable as revenue expenditure disregarding the principle that the interest paid on charge of investments categorized as permanent are to be treated as capital expenditure and not as revenue expenditure". As far this question of law is concerned, the main contention raised by various parties in respect of the Government securities held by the banks are to be treated as stock-in-trade, came up for consideration before this Court and this Court in the decision reported in Commissioner of Income Tax Vs. The Karur Vysya Bank Ltd., , by following the decision of the Honble Supreme Court reported in United Commercial Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal-III, Calcutta, , held that those Government securities, which are held by the banks are all stock-in-trade, the security will not be of permanent nature, not a capital expenditure and whatever expenditure incurred in the purchase and the subsequent realisation will all be treated as revenue expenditure. That broad principle on the nature of Government securities has been held to be stock-in-trade and the question now arises in this case is whether the interest paid on charge of investments is allowable as revenue expenditure disregarding the principle that the interest paid on charge of investments categorised as permanent is to be treated as capital expenditure and not as revenue expenditure. The departments contention that the interest paid on charges of investments cannot be treated as revenue expenditure is not now available when the very Government securities itself is treated to be stock-in-trade as per the decision of this Court. Whatever expenses incurred or interest paid therein on such shares was only revenue expenditure and not a capital expenditure in nature and the Tribunal by following the decision of this Court reported in Commissioner of Income Tax Vs. The Karur Vysya Bank Ltd., and by following the Honble Supreme Court decision reported in United Commercial Bank, Calcutta Vs. Commissioner of Income Tax, West Bengal-III, Calcutta, has arrived at the conclusion that the interest paid will not be a capital expenditure and only a revenue expenditure. Hence, we hold that the Tribunals finding is legal, valid and correct. Therefore, this question is also answered against the revenue and in favour of the assessee following the above decisions of this Court and the Honble Supreme Court.

5. The third question of law raised by the revenue is "whether the Tribunal was right in holding that the loss on sale of security incurred by the assessee bank was allowable as revenue loss ignoring the fact that loss on sale of securities categorised as permanent assets cannot be treated as business loss". As far as this question of law is concerned, here again, the question arises in respect of the sale made by the bank in respect of Government securities and if any loss is sustained by bank, such transfer would be treated as capital loss or revenue expenditure. Now applying the principle as enunciated in the ruling viz. Commissioner of Income Tax Vs. The Karur Vysya Bank Ltd., , when once the Government securities have already been held as stock-in-trade, any further subsequent sale by the bank to either third party and any loss on such transfer will also be treated only as a revenue-expenditure and cannot be of a permanent nature treating the security as a capital expenditure. Since the main question has already been decided following the Honble Supreme Court decision that such securities are stock-in-trade and loss of Government security transfer would only amount to revenue expenditure and the Tribunal was right in holding the same following the decision of this Court. Hence this question of law is also answered against the revenue.

6. The last question of law raised on behalf of the revenue is "whether the Tribunal was right in law in holding that the payment of subscription fees paid to Securities and Exchange Board of India (SEBI) to carry on business of merchant banking by the assessee bank was allowable as revenue expenditure ?." Following the decision rendered in Bikaner Gypsums Ltd. Vs. Commissioner of Income Tax, Rajasthan, the Tribunal has rightly held that the bank which was carrying out its merchant banking business hitherto, having been required by the subsequent operation of law to pay authorisation fee to SEBI has paid the same and hence, the expenses have to be viewed only as having been incurred to facilitate the carrying on of an existing business and it is in the nature of revenue expenditure. The Honble Supreme Court in the case cited above had categorically held that where the assessee has an existing right to carry on a business, any expenditure made by it during the course of business for the purpose of removal of any restriction or obstruction or disability would be on revenue account, provided the expenditure does not acquire any capital asset. Payments made for removal of restriction, obstruction or disability may result in acquiring benefits to the business, but that by itself would not acquire any capital asset. Hence, following the decision of the Supreme Court, the Tribunal also has come to the conclusion that the expenditure in respect of the subscription fee to SEBI is only a revenue expenditure and the finding of the Tribunal is correct in law.

7. Thus, all the questions of law are answered against the revenue by this Court as well as the Honble Supreme Court and the Tribunal, following the same, has rightly rejected the contention of the revenue.

We do not find any other reason to interfere with the order passed by the Tribunal. Accordingly, the appeal is dismissed. No costs.