Clarification regarding treatment of securities as stock-in-trade or investment
Circular No. 665 was issued by the Central Board of Direct Taxes on 5 October 1993. 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.
Restores the position that whether securities held by a bank are stock-in-trade or a capital asset is a question of fact. Circular No. 599 dated 24-4-1991 had said securities held by banks must be regarded as stock-in-trade and broken period interest on purchase treated as a revenue payment; that circular was withdrawn in its entirety by Circular No. 610 dated 31-7-1991 after the Supreme Court's decision in Vijaya Bank Ltd. v. CIT, which the circular names. On the Indian Banks' Association's representation the Board reconsiders and accepts that the Court in that case was dealing only with whether the interest element in the purchase price was capital outlay or revenue expenditure, and was not directly concerned with whether the securities were stock-in-trade or capital assets. Assessing Officers are therefore to decide the character of any particular security on the facts and circumstances of each case, taking into account the Reserve Bank of India's guidelines on classification of assets and accounting standards for investments as issued from time to time.
The Indian Banks' Association represented that withdrawal of Circular No. 599 in toto was not called for, since the Supreme Court decision that prompted it had decided only the broken period interest point.
Clarification regarding treatment of securities as stock-in-trade or investment
1. By Circular No. 599, dated 24-4-1991 (see clarification 2), it was clarified that securities held by banks must be regarded as their stock-in-trade and the claim of loss, if debited in the books of account, should be given the same treatment as is normally given to the stock-in-trade. It was also clarified that the interest paid for broken period on the purchase of securities must be regarded as revenue payment and allowed accordingly.
2. Consequent upon the judgment of the Supreme Court in the case of Vijaya Bank Ltd v. CIT [1991] 187 ITR 541, the above circular was withdrawn by the issue of Circular No. 610, dated 31-7-1991 [See Clarification 1]. There have been representations from the Indian Banks’Association to the effect that the Supreme Court in the case of Vijaya Bank Ltd. was concerned only with the claim for broken period interest and did not decide the issue whether the securities constituted stock-in-trade or investment. It has therefore been represented that the withdrawal of Circular No. 599, dated 24-4-1991 in toto was not called for.
3. The Board has reconsidered the treatment to be accorded to securities held by banks. In the case of Vijaya Bank Ltd. (supra), the Supreme Court considered the issue whether, in a case where the assessee purchases securities at a price determined with reference to their actual value as well as the interest accrued thereon till the date of purchase, the entire price paid for them would be in the nature of capital outlay or whether the interest portion could be claimed as a revenue expenditure. It was in this context that the Supreme Court held that whatever was the consideration which prompted the assessee to purchase the securities, the price paid for them was in the nature of capital outlay and no part of it could be set off as expenditure against income accruing on those securities. The Court was not directly concerned with the issue whether the securities form part of stock-in-trade or capital assets.
4. The question whether a particular item of investment in securities constitutes stock-in-trade or a capital asset is a question of fact. In fact, the banks are generally governed by the instructions of the Reserve Bank of India from time to time with regard to the classification of assets and also the accounting standards for investments. The Board has, therefore, decided that the Assessing Officers should determine on the facts and circumstances of each case as to whether any particular security constitutes stock-in-trade or investment taking into account the guidelines issued by the Reserve Bank of India in this regard from time to time.
Circular : No. 665, dated 5-10-1993.
In a bank's assessment where a depreciation or loss claim on the securities portfolio is disallowed on the footing that the securities are investments.
Source: the Income Tax Department’s own published text — its page for this instrument.
