Circular No. 599 — Clarification regarding treatment of securities as stock-in-trade or investment

What this is

Circular No. 599 was issued by the Central Board of Direct Taxes on 24 April 1991. Its subject is Clarification regarding treatment of securities as stock-in-trade or investment.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Settles two long-running questions for banks. On the first, whether securities held by a bank are its stock-in-trade or its investments, and whether a loss on valuing them is deductible, the Board decides that the securities must be regarded as stock-in-trade, so that a valuation loss debited in the books gets the treatment normally given to stock-in-trade. On the second, the interest paid for the broken period on the purchase of securities, the Board holds that both the interest paid and the interest received are revenue payments and receipts, and only the net interest on securities is brought to tax as business income.

Why it was issued

Banks had sought clarification from the Board on both points, the treatment of their securities and the deductibility of broken period interest.

Who it reaches

Banks holding Government and other securities
Assessing Officers disallowing valuation losses on bank securities
Banks paying interest for the broken period on buying securities

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

Clarification regarding treatment of securities as stock-in-trade or investment
1. Clarifications on the following issues have been sought by banks from the Central Board of Direct Taxes :
(i) Whether the securities held by the banks constitute their stock-in-trade or investment, and consequently whether the loss claimed by the banks on the valuation of their securities should be allowed as a deduction in computing their taxable profits ?
(ii) Whether deduction claimed in respect of interest paid for broken period on the purchase of securities should be allowed as a deduction from the taxable profits ?
2. The matter has been considered by the Board and it has been decided that the securities must be regarded as stock-in-trade by the banks. Therefore, the claim of loss, if debited in the books of account, would be given the same treatment as is normally given to the stock-in-trade. As far as the second issue is concerned, both the interest payments and receipts must be regarded as revenue payments/receipts, and only the net interest on securities shall be brought to tax as business income.
Circular : No. 599, dated 24-4-1991.

What to watch

The valuation loss must be debited in the books; the treatment follows the accounts, not a claim made only in the computation.
Netting works both ways: the interest received on securities is set against the broken period interest paid, and only the balance is business income.
The circular speaks of securities held by banks, and its reasoning is tied to that character of holder.
It settles the character of the holding and the netting, and works out no rule for valuing the securities themselves.

Where you meet it

In a bank's assessment where the depreciation on the securities portfolio is disallowed as a notional loss on investments, and in the appeal on broken period interest.

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A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.