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May 28, 2022

Trading loss on the selling of government ‘Available For Sale’ securities

by CA Shivam Jaiswal in Income Tax

Trading loss on the selling of government ‘Available For Sale’ securities

The appeal filed by the Revenue against the order of the Ld. CIT(A)-11, Hyderabad in appeal No. 241/2017-18, ACIT, C-1, Eluru/CIT(A)-11/Hyd, dated 2/2/2018 passed U/s. 143(3) r.w.s 147 and U/s. 250(6) of the Act for the AY 2010-11. The Cross Objection No.108/Viz/2019 is filed by the assessee in support of the decision of the Ld. CIT(A).

The Revenue has raised the following grounds of appeal before the Tribunal.

1. The order of the Ld. CIT(A) is erroneous on facts and in law.

2. The Ld. CIT(A) erred in deleting the addition of Rs. 2,93,452/- made by the AO on account of disallowance of provision in excess of seven and one half percent of the income as provided in section 36(1)(viia).

3. The Ld. CIT(A) erred in not appreciating the fact that the assessee has not submitted any evidence whatsoever to show that the claim of the assessee is as per the RBI guidelines either during the re-assessment or before the CIT(A) during the appellate proceedings.

4. The Ld. CIT(A) ought to have further appreciated that the provisions was made against standard asset and not for bad and doubtful debts and therefore the same is not an admissible deduction as held by Hon’ble ITAT, Visakhapatnam in ITA No.449/Viz/2012 dated 30/09/2016 in the case of Visakhapatnam Coop Bank Ltd for AY 2008-09.

5. The CIT(A) erred in deleting the addition of Rs. 5,66,869/- made by the AO on account of loss on sale of Govt. Securities.

6. The CIT(A) ought to have appreciated the fact that the transactions pertaining to purchase and sale of government securities were not passed through the profit and loss account and as such, the said loss is not an allowable deduction.

7. The CIT(A) ought to have considered that, the motive of the assessee in purchase and sale of government securities was not to earn profit, but to derive income by way of dividends/capital gains and as such, the loss on sale of Government securities is not business loss, but capital loss.

8. Though the tax effect is below monetary limit prescribed by CBDT for filing Revenue Appeal, the case is covered by exception 8(c) of CBDT Circular No.21/2015, dated 10/12/2015.

9. The appellant craves leave to add or amend or alter or delete any ground at the time of hearing of the appeal.

10. For these grounds an any other ground that may be urged at the time of appeal hearing before the ITAT, it is prayed that the additions made by the AO on the aforesaid issues be restored.

Facts and Issue of  the case

The  assessee is a  Co-operative Urban Bank Limited filed its return of income for the AY 2010-11 on 30/09/2010 declaring total income of Rs. 8,72,100/-. Subsequently, the case was selected for scrutiny. In response to the statutory notices u/s. 143(2) and 142(1) of the Act, the assessee’s Representative furnished various details called for by the Ld. AO.  After examining the books and the information furnished by the Assessee’s Representative.

  1. disallowance towards provisions for standard asset/NPA Reserve as per section 36(1)(viia) of the Act Rs. 2,93, 452/-.
  2. Loss on sale of Government Securities Rs. 5,66,869/-.

Aggrieved by the order of the Ld. AO, the assessee filed an appeal before the CIT(A)-11, Hyderabad. The Ld. CIT(A) considering the submissions made by the assessee’s Representative allowed the claim for provisions of bad and doubtful debts as per First proviso to sub-clause (a) of section 36(1)(viia) of the Act. The Ld. CIT(A) also allowed the loss on sale  of  Government  securities  in  accordance  with  the  guidelines issued by the  RBI.   Aggrieved by the  order of the  Ld.  CIT(A), the  Revenue is in appeal before the Tribunal.

The Ld.  DR supporting the  order  of  the  Ld.  AO argued that  as per the provisions of section 36(1)(viia)(a) of the Act as  claimed  by  the assessee is in excess of 7½ % of the income claimed and reported, and hence the excess deduction  claimed  should  be  disallowed.  The  Ld.  DR also argued that the applicability of first proviso  to  sub-clause  (a)  of section 36(1)(viia) was not  raised  before  the  Assessing  Officer.  The  Ld. DR also submitted that the assessee has not  disclosed  the  sale  and purchase of government securities in the  P  &  L  Account  and  hence  the loss incurred under  the  sale  of  Government  securities  held  as investments should be considered as a capital  loss  only  and  not  as business loss. The  Ld.  DR  also  referred  to  para  4.2 of  the  order  of  the Ld. CIT(A) stating that  the  trading in  securities is not  reflected  in the  P  & L Account.

 The Ld. AR argued  that  the  provision  for  bad  and doubtful debts is in accordance  with RBI  guidelines.   The Ld. AR argued that as per section 5 of the Banking Regulations Act, an Urban Cooperative Bank is also  a  non-Scheduled  Bank  and hence the First proviso is applicable for the assessee.  The  Ld. AR conceded that the  provision  towards standard assets is not liable for deduction under the Income Tax Act, 1961. The Ld. AR also submitted that the Government  Securities  were  held  under  the  category of “Available For Sale”  and  hence  the  loss  after  adjustment  of  the reserves already created in the earlier years is being debited to the P & L Account of the current year.

Observation of the court

The court have  heard both the sides and perused the materials available on record and the orders of the authorities below. The court  has find that the issue of eligible deduction under the First proviso was not raised before the Ld. AO.  The court has also noted that this option of claiming deduction under the first proviso was exercised by the assessee only before the Ld. CIT(A).

The court  notes that the Cooperative Bank is basically mentioned in sub clause (a) of section 36(1)(viia) of the Act whereas in the first proviso only a scheduled and non-scheduled bank is being referred in the Act.  The court has  therefore note that the term “Cooperative Bank” is specifically excluded in the first proviso to sub clause (a) of section 36(1)(viia) of the Act. Accordingly, the Ld. AO has rightly computed the deduction eligible U/s. 36(1)(viia) of the Act. The court has therefore uphold the order of the Ld. AO on this ground.

With respect to Grounds on the loss incurred by the sale of Government Securities, The court has find merit in the arguments of the Ld. AR that such  investments  were  classified  as  “Available  for  Sale”  category. RBI categorises investments into three categories for both SLR and non- SLR categories as follows:

  1. Held To Maturity (HTM)
  2. Available For Sale (AFS)
  3. Held For Trading (HFT)

Investments classified under HTM category need not be marked to market and are  carried  at  acquisition  cost  unless  there  are  more  than the face value, in which case the premium should be amortized over the period remaining to maturity. In the  case  of  HFT  and  AFS  securities forcing stock-in-trade of the bank, the depreciation/appreciation is to be aggregated scrip wise and only net depreciation, if any, is required to be provided for in the accounts.   The above Instruction was issued by CBDT vide Instruction No.17/2008  dated  26/11/2008.  The  Hon’ble  Mumbai High Court in the case of  GIT  vs.  Bank  of  Baroda  (2003)  262  ITR  334 held that the  banks are  required as per RBI’s guidelines to show these  in the balance sheet  as  investments  would  not  affect  the  nature  of  the asset. The banks by the very nature of the business may have  to  park surplus trading funds in securities and although intended to be  trading assets may have to keep them  for  longer  periods  if  funds  are  not required. The treatment of securities of AFS categories has to be seen in contradiction and contrast with securities of HTM category which are purchased and held for the purpose of investment only. The Circular and Instruction of the  CBDT  being  squarely  applicable,  leaves  no  doubt  on the allowability of the assessee’s claim.

In this case, the impugned loss arose on sale of Government securities emanated from the  investments  which  were  classified  under AFS category.   In view of that, the court has  find merit in the  claim of the  assessee that the loss arising  out  of  sale  of  Government  Securities  is  of  trading loss notwithstanding the securities  are  grouped  under  the  head investment owing to the prescribed format of the RBI. The court has find  that  the order of the Ld. CIT(A) is in  consonance  with  the  CBDT  instructions  as well as the facts of the case and does not require any interference.

While  dealing  with  the  Revenue’s  appeal,   the   grounds related to  the  addition made  by  the  AO  with regard to  loss  on  sale of Government securities, we have upheld the decision of the Ld. CIT(A) and dismissed  the  Grounds  raised  by  the  Revenue. Therefore, to this  extent,  the cross  objection  raised  by  the assessee is treated as allowed. With regard to disallowance of provision towards standard assets  /  NPA  reserve  of  Rs.  2,93,452/-,  we  have  upheld  the  decision of the Ld. AO and therefore, to this extent the  cross objection raised by the assessee is dismissed.In the result, cross objection filed by the assessee is partly allowed.


The appeal filed by the revenue was dismissed and the assessee appeal was  partly allowed by the court.


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