Revenue vs. PNB Gilts Ltd [TU-DT-09-ITAT-2026]
Background of the Case
The case involved appeals filed by the Revenue before the ITAT Delhi Bench, against the orders of the CIT (Appeals) concerning AY 2012–13 and 2013–14. The assessee is a Non-Banking Financial Company engaged in trading in government securities, debt instruments, and other money market instruments. During the scrutiny assessment under the Income Tax Act, the Assessing Officer made several additions including disallowance under Section 14A, disallowance of interest expenditure under Section 36(1)(iii), and disallowance relating to provision for diminution in the market value of securities held as stock-in-trade.
On appeal, the Commissioner (Appeals) deleted major portions of these additions, retaining only a small disallowance. Aggrieved by the relief granted to the assessee, the Revenue preferred appeals before the Tribunal challenging the deletion of these disallowances.
Arguments by the Appellant (Revenue)
The Revenue contended that the Commissioner (Appeals) erred in deleting the disallowances made by the Assessing Officer. It was argued that the assessee had earned exempt income and therefore the provisions of Section 14A were applicable, warranting disallowance of expenditure incurred in relation to such income. The Revenue further argued that the deletion of disallowance under Section 36(1)(iii) relating to interest expenditure was not justified as borrowed funds were allegedly used in a manner inconsistent with the provisions of the Act. Additionally, the Revenue challenged the deletion of the disallowance relating to the provision for diminution in the value of securities held by the assessee. According to the Department, such provision represented a contingent or notional loss and therefore should not have been allowed as a deduction while computing taxable income.
Respondent’s Response (Assessee)
The assessee submitted that it was an NBFC registered with the Reserve Bank of India and engaged in the business of trading in securities, which constituted its stock-in-trade. It was argued that the investments and securities were part of its regular business operations and were valued in accordance with the guidelines issued by the Reserve Bank of India as well as accepted accounting principles. The assessee further contended that the diminution in the value of securities represented a genuine valuation loss arising from the method of valuing stock-in-trade at cost or market value whichever is lower. It was also argued that the Assessing Officer had incorrectly invoked the provisions of Section 14A as the securities were held as stock-in-trade and not as investments for earning exempt income. Therefore, the disallowances made by the Assessing Officer were unjustified and had rightly been deleted by the Commissioner (Appeals).
Court Findings and Decision
The ITAT Delhi examined the facts and the reasoning adopted by the Commissioner (Appeals) and found no infirmity in the relief granted to the assessee. The Tribunal observed that the assessee, being engaged in the business of trading in securities, had consistently valued its stock-in-trade in accordance with recognized accounting principles and regulatory guidelines. The Tribunal relied on judicial precedents which recognize that banks and financial institutions are entitled to value their stock-in-trade at cost or market value whichever is lower, and any resultant diminution represents a legitimate business loss. It was further observed that such valuation losses cannot be treated as contingent in nature when they arise from accepted accounting practices followed consistently by the assessee.
Considering these aspects, the Tribunal upheld the order of the Commissioner (Appeals) and dismissed the appeals filed by the Revenue for both assessment years.
To download official order, Click Here
“The site is for information purposes only and does not provide legal advice of any sort. Viewing this site, receipt of information contained on this site, or the transmission of information from or to this site does not constitute an attorney-client relationship. The information on this site is not intended to be a substitute for professional advice.”