Case Note & Summary
The case involves an appeal by the Commissioner of Income Tax-2 against an order of the Income Tax Appellate Tribunal (ITAT) dated 15 July 2011. The ITAT had allowed the appeal of the assessee, HDFC Bank Ltd., and set aside the order of the Commissioner passed under Section 263 of the Income Tax Act, 1961. The Commissioner had invoked revisional powers to disallow a notional loss of Rs.87.11 lakhs claimed by the assessee on transfer of securities from the category 'Available for Sale' to 'Held to Maturity'. The Assessing Officer had originally allowed this deduction in the assessment order dated 28 February 2007 for Assessment Year 2005-06. The Commissioner considered this allowance erroneous and prejudicial to revenue, but the ITAT reversed his order. The Revenue appealed to the High Court, raising two substantial questions of law: whether the ITAT was correct in setting aside the Section 263 order, and whether the assessee was entitled to claim notional loss on reclassification based on RBI guidelines, particularly in light of the Supreme Court's decision in Southern Technologies Ltd. v. JCIT. The High Court, after hearing arguments, found that the issue was squarely covered by two Division Bench decisions: CIT v. Bank of Baroda (2003) 262 ITR 334 (Bom) and Karnataka Bank Ltd. v. ACIT (2013) 356 ITR 549 (Kar). These decisions held that notional loss on reclassification of securities as per RBI guidelines is allowable as a deduction. The court distinguished the Supreme Court's decision in Southern Technologies, noting it dealt with provisioning for doubtful debts, not securities reclassification. The High Court concluded that no substantial question of law arose, as the ITAT's view was a possible one and the CIT could not invoke Section 263 merely because he disagreed with the Assessing Officer. The appeal was dismissed with no order as to costs.
Headnote
A) Income Tax - Revisional Jurisdiction - Section 263 of Income Tax Act, 1961 - The CIT cannot invoke revisional powers if the Assessing Officer has taken a possible view, even if the CIT considers it erroneous. The assessment order must be erroneous and prejudicial to revenue. (Paras 3-6) B) Income Tax - Deduction of Notional Loss - Securities Reclassification - RBI Guidelines - Notional loss on transfer of securities from 'Available for Sale' to 'Held to Maturity' is allowable as deduction under the Income Tax Act, 1961, as per RBI guidelines which are binding on banks. The loss is not merely notional but a real loss computed as per RBI directions. (Paras 3-6) C) Income Tax - Precedent - Binding Effect - Division Bench decisions in CIT v. Bank of Baroda (2003) 262 ITR 334 (Bom) and Karnataka Bank Ltd. v. ACIT (2013) 356 ITR 549 (Kar) hold that such notional loss is deductible. The Supreme Court decision in Southern Technologies Ltd. v. JCIT (320 ITR 577) is distinguishable as it dealt with provisioning for doubtful debts, not securities reclassification. (Paras 3-6)
Issue of Consideration
Whether the ITAT was correct in allowing the assessee's claim for notional loss arising out of reclassification and revaluation of securities based on RBI guidelines, and whether the CIT was justified in invoking powers under Section 263 of the Income Tax Act, 1961.
Final Decision
Appeal dismissed. No substantial question of law arises. The ITAT's order is upheld. No order as to costs.
Law Points
- Notional loss on reclassification of securities is allowable as deduction
- RBI guidelines prevail over accounting standards for banks
- Section 263 cannot be invoked if Assessing Officer has taken a possible view
