THE COMMR.OF INCOME TAX vs. THE FEDERAL BANK LTD.
What did the High Court hold?
The High Court addressed each appeal and the issues raised. For ITA No. 861/2009 (AY 1996-1997), the Court held that the Tribunal was correct in upholding the assessee's valuation of unquoted securities on a YTM basis, citing Commissioner of Income Tax v. Lord Krishna Bank Ltd. The treatment of current securities as stock-in-trade was also upheld in favour of the assessee, following Commissioner of Income Tax v. Nedungadi Bank Ltd. The expenditure on new software was deemed revenue expenditure by the Tribunal and agreed upon by the Court, considering the need for regular upgrades due to technological advancements. Thus, all three questions in ITA No. 861/2009 were answered in favour of the assessee. For ITA No. 1195/2009 (AY 2003-2004), the Court held that Section 14A was applicable only from AY 2007-2008, following Commissioner of Income Tax v. ESSAR Teleholdings Pvt. Ltd., thus favouring the assessee on the first question. The second question regarding depreciation on current investments valued at cost or market price, whichever is lower, was also answered in favour of the assessee, aligning with RBI directions and the Nedungadi Bank Ltd. precedent. For ITA No. 1222/2009 (AY 1999-2000), the Court reiterated that Section 14A applies from AY 2007-2008, favouring the assessee. However, on the second question concerning the deletion of Rs. 1,69,63,402/- related to provisions for bad and doubtful debts, the Court found that the Tribunal was wrong in deleting the addition. Following Lord Krishna Bank Ltd., the disallowance made by the Assessing Officer was upheld, answering this question in favour of the Revenue. For ITA No. 533/2009 (AY 2001-2002), the applicability of Section 14A was decided against the Revenue and in favour of the assessee, consistent with prior rulings. For ITA No. 709/2009, both questions regarding the valuation of current securities and software expenditure were answered in favour of the assessee, as decided for AY 1996-1997. Operative Directions: ITA Nos. 533, 709, 861, and 1195 of 2009 were dismissed. ITA No. 1222 of 2009 was partly allowed.
What were the facts?
These appeals by the Revenue (Commissioner of Income Tax) challenge orders of the Income Tax Appellate Tribunal (ITAT) concerning The Federal Bank Ltd. The appeals cover various assessment years, including 1996-1997, 1999-2000, 2001-2002, and 2003-2004. The core of the disputes revolves around the valuation of unquoted securities, the treatment of current securities as stock-in-trade, the classification of software expenditure as revenue or capital, the applicability of Section 14A of the Income Tax Act, and the deletion of additions made by the Assessing Officer regarding provisions for bad and doubtful debts. The High Court of Kerala heard these appeals together.
What were the issues?
The Tribunal had to decide several questions of law: 1. (ITA No. 861/2009) Whether the Tribunal was right in upholding the assessee's adoption of the Yield To Market (YTM) Ratio for valuing unquoted securities, and whether current securities sold during the year should be treated as stock-in-trade, allowing for loss deduction. (Mixed law and fact, concerning Sections 36(1)(vii) and 36(1)(viia)). 2. (ITA No. 861/2009) Whether the Tribunal was correct in treating expenditure on new software as revenue expenditure, contrary to the Assessing Officer's disallowance as capital expenditure. (Mixed law and fact). 3. (ITA No. 1195/2009) Whether Section 14A of the Income Tax Act, with retrospective effect, disentitles the assessee from claiming expenditure in respect of income not forming part of total income, and whether depreciation on current investments valued at cost or market price, whichever is lower, is permissible. (Law, concerning Section 14A and Section 36). 4. (ITA No. 1222/2009) Whether Section 14A applies, and whether the Tribunal was right in deleting an addition of Rs. 1,69,63,402/- for excess provision for bad and doubtful debts under Section 36(1)(viia). (Law and mixed law and fact, concerning Sections 14A and 36(1)(viia)). 5. (ITA No. 533/2009) Whether Section 14A applies for the assessment year 2001-2002. 6. (ITA No. 709/2009) Whether loss on valuation of current securities can be permitted at cost price or market value, whichever is lower, and whether software acquisition is revenue expenditure. Assessee's Contentions: The assessee bank generally contended that its methods of valuation and expenditure classification were correct and in line with RBI directives and established judicial precedents. They argued for software expenditure to be treated as revenue due to rapid technological obsolescence. Revenue's Contentions: The Revenue argued against the assessee's methods, seeking to disallow losses on securities and classify software expenditure as capital. They also sought to apply Section 14A retrospectively and upheld the Assessing Officer's disallowance of provisions for bad and doubtful debts.
Which sections of the Income-tax Act were involved?
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
JUDGMENT K. Vinod Chandran, J. In I.T.A. No.861 of 2009 for the assessment year 1996-1997, the following three questions arise: “(i) Whether the Tribunal was right in having upheld the action of the assessee adopting the valuation of unquoted securities on Y.T.M. [Yield To Market Ratio] basis ? (ii) Whether the Tribunal was correct in having treated the current securities held by the Bank and sold, in the course of the assessment year as stock in trade and thus permitted the loss incurred to be deducted in computing the income of the assessee Bank for that particular year ? (iii) Whether the Tribunal was correct in having found the expenditure incurred on acquisition of new software purchased along with the computers as revenue expenditure and interfered with the disallowance of the same by the Assessing Officer as capital expenditure ?”
On the first question regarding the adoption of YTM Ratio, the view has been upheld by ITA Nos.533, 709, 861, 1195 & 7 1222 of 2009 a Division Bench of this Court in Commissioner of Income Tax v. Lord Krishna Bank Ltd. [(2011) 339 ITR 606 (Ker)]. The first question
hence has to be answered in favour of the assessee and against the Revenue. The second question regarding treatment of current securities as stock in trade has also been answered in favour of the assessee in Commissioner of Income Tax v. Nedungadi Bank Ltd. [(2003) 264 ITR 545 (Ker)]. The second question is also answered in favour of the assessee and against the Revenue.
The last question is on whether the Tribunal was correct in having treated the expenditure for acquisition of new software as revenue expenditure. The Tribunal found that software is to be revised on a regular basis and cannot be considered as a permanent asset. We agree with the Tribunal, especially considering the technological advancement made at a fast pace and the need to upgrade the software regularly for better facilitation of banking services. The ITA Nos.533, 709, 861, 1195 & 8 1222 of 2009 software is also used for the banking facilities and hence we are clearly of the opinion that the same can be considered as revenue expenditure. The last question is also answered in favour of the assessee and against the Revenue.
I.T.A. No.1195 of 2009 arises from the assessment year 2003-2004 and raises two questions of law: “(i) Whether, on the facts and in the circumstances of the case and also in the light of Section 14A of the Income Tax Act introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962, the assessee is entitled to claim the expenditure in respect of income which does not form part of total income? (ii) Whether the Tribunal was correct in having allowed depreciation on current investments accepting the assessee's method of valuing the securities held by the assessee on the cost or market price, whichever is lower?”
On the first question of applicability of Section 14A of the Income Tax Act, 1961,
ITA Nos.533, 709, 861, 1195 & 9 1222 of 2009 Commissioner of Income Tax v. ESSAR Teleholdings Pvt. Ltd. [(2018) 401 ITR 445 (SC)] held that Section 14A would be applicable only from the assessment year 2007-2008. Hence the first question has to be answered in favour of the assessee and against the Revenue.
On the second question the Reserve Bank has directed the assessee to treat certain securities as current investments and certain as stock in trade. In the present case the investments being considered to be permanent in nature are treated as current investments and the valuation is done by the assessee at the close of the financial year on the cost or market price, whichever is lower, as stipulated by the Reserve Bank of India. The said valuation has been upheld by this Court in Nedungadi Bank Ltd. [supra]. Hence that question is also answered in favour of the assessee and against the Revenue.
ITA No.1222 of 2009 arises from the assessment year 1999-2000 and raises the following
ITA Nos.533, 709, 861, 1195 & 10 1222 of 2009 questions of law: “(i) Whether, on the facts and in the circumstances of the case and also in the light of Section 14A of the Income Tax Act introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962, the assessee is entitled to claim the expenditure in respect of income which does not form part of total income? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal is right in deleting the addition made by the Assessing
Officer
amounting
to Rs.1,69,63,402/- being excess provision for bad and doubtful debts created by the assessee in terms of Section 36(1)(viia)?”
As has been held in the earlier case, Section 14A has application only from the assessment year 2007-2008 and hence the question has to be answered in favour of the assessee and against the Revenue. The next question in fact raises the question as to how the rural branches have to be classified. The answer is evident in Lord Krishna Bank Ltd.
[supra], which found that though classification has to be based on the ITA Nos.533, 709, 861, 1195 & 11 1222 of 2009 population, the reference to population has to be related to a Revenue Village and not to Wards within a local authority, which would even bring in certain Wards within a municipal area also within the classification of a rural branch. Following the aforesaid dictum of another Division Bench, we have to set aside the order of the Tribunal in so far as the interference caused to the Assessing Officer's order and disallowance carried out of Rs.1,69,63,402/- has to be upheld. The second question hence is answered in favour of the revenue and against the assessee.
The learned Senior Counsel draws the attention of this Court to the fact that though the amounts were claimed as provision for bad and doubtful debts under Clause (viia) of Section 36(1) of the Act, in fact they were written off debts, which could be claimed under Clause (vii) of Section 36(1) of the Act, which write off has now been upheld by the decision of the Hon'ble Supreme Court in Vijaya Bank Ltd. v. Commissioner of Income Tax And Another [(2010)
ITA Nos.533, 709, 861, 1195 & 12 1222 of 2009 323 ITR 166 (SC)].
It is to be noticed that as of now we are only dealing with the Revenue's appeal and such an issue does not arise from the Tribunal's order. The assessee Banks have also not raised such an issue before the Tribunal for the particular assessment year. Hence this Court cannot permit such an alternate plea in an appeal by the Revenue.
ITA No.533 of 2009 from the assessment year 2001-2002 raises only the applicability of Section 14A for the said year. This has already been held against the Revenue and in favour of the assessee for the years prior to 2007-2008. We follow the same here too.
In ITA No.709 of 2009 two questions arise. The first question is with respect to the deduction claimed in respect of loss claimed on valuation of the current securities; whether it can be permitted at cost price or market value, whichever is lower. The second question on sustainability of treating acquisition of software
ITA Nos.533, 709, 861, 1195 & 13 1222 of 2009 as a revenue expenditure. Both the questions had been found in favour of the assessee for the assessment year 1996-1997 in ITA No.861 of 2009. Here too, the questions are answered in favour of the assessee and against the Revenue. ITA Nos.533, 709, 861 & 1195 of 2009 are dismissed. ITA No.1222 of 2009 is partly allowed. K. VINOD CHANDRAN JUDGE ASHOK MENON
JUDGE sp/12/12/18 //// P.A. To Judge
ITA Nos.533, 709, 861, 1195 & 14 1222 of 2009
Appendix — schedule of exhibits
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