Decided on July 24,1982



S.K. Chander, Accountant Member - (1.) APPEALS bearing IT Appeal Nos. 327 and 380 of 1978-79 are cross-appeals for the assessment year 1976-77 and the remaining appeal pertains to the assessment year 1975-76. Since these appeals involve related issues, these are disposed of by a consolidated order for the sake of convenience. Before we set out the issues, it is necessary to record the factual background from which they emanate and this is as under.
(2.) The assessee is the State Bank of Patiala. As the very name suggests, the assessee is a banking institution. Under the Banking Regulation Act, 1949, the assessee is required to maintain a specified percentage of its assets in liquid form. Inter alia, Section 24 of the Banking Regulation Act requires that after the expiry of two years from the commencement of this Act, every banking company shall maintain in India in cash, gold or unencumbered approved securities (emphasis supplied), valued at a price not exceeding the current market price, an amount which shall not at the close of business on any day be less than the prescribed percentage of the total of its time and demand liabilities in India. There is an Explanation to this section which gives an inclusive definition of, 'unencumbered approved securities'. According to this Explanation, such securities shall include its approved securities lodged with another institution for an advance or any other credit arrangement to the extent to which such securities have not been drawn against or availed of as detailed thereunder. At the time, when these assessment proceedings were going on, according to the manager, general department of the assessee, this percentage of the liquid assets required to be so maintained was 34 per cent of the total time and demand liabilities of the bank. The bank in this regard, therefore, has to make investment in the Government and other trustee securities which are approved in compliance of the above provisions of the Banking Regulation Act. The bank finds the Government securities available in bulk and also approved for investment and, therefore, makes investment generally in these securities in view of the statutory requirements of the Banking Regulation Act. The practice followed by the assessee with regard to these securities was that their purchase price was debited in its books of account and the securities were shown as such in the final accounts for each of the assessment years of the bank. Whenever, these securities were sold by the assessee, the difference in positive or negative form was not earlier considered as the trading profit or loss. In fact, the assessment for the year 1973-74, appearing at pages 15 and 16 of the assessee's paper book, shows that the profit, if any, arising from change of such securities was considered as capital gains. It appears that for the assessment year 1974-75, the issue did not come up for appellate consideration as there was no dispute about it. However, for the assessment year 1975-76, the assessee-company claimed a loss of Rs. 29,127 incurred by it on securities switched over with State Bank of India and further, claimed the loss of Rs. 14,27,868 as a deduction from its total income on account of loss arising from valuation of the Government and other trustee securities held by the bank at the end of the accounting period relevant to this assessment year, in view of the statutory obligation under the Banking Regulation Act.
(3.) FOR the assessment year 1976-77, for which the previous year was calendar year 1975, the assessee claimed deduction of Rs. 7,89,558 as loss on valuation of securities held in the manner described above. The ITO considered these claims but rejected it on the ground that such a claim for deduction as business loss could be entertained if the assessee was holding the securities as stock-in-trade and was then engaged in regular business of purchase and sale of securities. He also observed in his impugned order for the assessment year 1975-76 that the assessee had earlier sold some securities and the profit thereon had been assessed to tax as capital gains and not as business profit. The ITO further observed that 'it seems that the loss has been claimed on the basis of valuation of securities at the close of the year and there is no loss on the purchase and sale thereof. Since it has been stated by the assessee that some of the securities which have been sold, were purchased more' than 5 years back, the nature of loss, therefore, will be as that of long-term capital loss. Hence, it is not deductible from the profits of the current year.' The ITO also noted that even otherwise it was only a book loss because earlier, the securities were being valued at cost and only on sale of such securities the profit or loss was worked out. It was for the first time, according to him, that the assessee worked out the loss on the difference between the market value and the book value of these securities for the assessment year 1975-76.;

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