Facts of the Case

Punjab National Bank filed an appeal under Section 260A of the Income-tax Act challenging the order dated 16.03.2018 passed by the Income Tax Appellate Tribunal for Assessment Year 2006-07. The dispute arose from the tax treatment of profits and losses relating to securities classified as “Held to Maturity” (HTM).

The assessee bank treated HTM securities as capital assets and declared profits on redemption under the head “capital gains”. Correspondingly, losses were also claimed under the same head. The Assessing Officer rejected this treatment and held that profits from sale of HTM securities were taxable as business income. The Assessing Officer also disallowed a business loss of ₹10,06,04,870 claimed on conversion of capital assets into stock-in-trade, alleging that the assessee failed to furnish details of cost of acquisition and sale consideration.

The disallowance was upheld by the Commissioner of Income Tax (Appeals) and the ITAT. Aggrieved, the assessee approached the High Court.

Issues Involved

Whether the loss claimed by the assessee on conversion of HTM securities into stock-in-trade could be disallowed on the ground of non-furnishing of details, despite the assessee asserting that relevant material had been placed before the Assessing Officer, and whether the alternate claim of business loss required fresh examination.

Petitioner’s Arguments

The assessee contended that although profits from HTM securities were taxed as business income, the corresponding losses were wrongly disallowed. It was argued that both capital gains under Section 45(2) and business loss under Section 28 arose from the same transaction and that detailed working of cost and sale consideration had already been furnished during assessment proceedings. The assessee submitted that the finding of the ITAT that no material was produced was factually incorrect.

Respondent’s Arguments

The Revenue argued that the assessee had failed to substantiate the claim of business loss by producing concrete evidence of cost of acquisition and sale price either during assessment or appellate proceedings. It was contended that Section 45(2) creates a deeming fiction only for capital gains and does not automatically allow business loss unless actual loss is proved.

Court Order / Findings

The Delhi High Court examined the record and noted that the assessee had produced documents indicating that details of cost of acquisition and sale consideration were in fact furnished before the Assessing Officer during assessment proceedings. The Court observed that the Revenue was unable to controvert this factual position.

The Court held that the finding of the ITAT that no material had been supplied by the assessee to substantiate the business loss was unsustainable. The Court clarified that while capital gains on conversion of capital asset into stock-in-trade are governed by the deeming provisions of Section 45(2), the claim of business loss on subsequent sale requires examination of factual material.

Accordingly, the Court considered it appropriate to remand the matter to the Assessing Officer for fresh consideration of the assessee’s alternate claim of business loss arising from HTM securities under the head “income from business and profession”.

The Court also recorded that the assessee accepted the ITAT’s finding insofar as taxation of profits from sale of HTM securities was concerned, and therefore no other questions of law were required to be examined.

Important Clarification

The High Court clarified that while Section 45(2) mandates taxation of capital gains on a notional basis at the time of conversion of capital assets into stock-in-trade, the allowability of business loss on subsequent sale must be examined on the basis of actual evidence. Such claims cannot be rejected without verifying material already placed on record.

Final Outcome

The appeal was disposed of. The Delhi High Court set aside the adverse finding of the ITAT on the issue of business loss and remanded the matter to the Assessing Officer to reconsider the assessee’s claim of loss on HTM securities under the head “income from business and profession” after examining the material on record.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769857041_PUNJABNATIONALBANKVsPR.COMMISSIONEROFINCOMETAXDELHIV.pdf

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