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IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 27TH DAY OF JUNE, 2022 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON’BLE MR. JUSTICE C.M. POONACHA
I.T.A NO. 350 OF 2015 C/W I.T.A NO. 309 OF 2015 I.T.A NO. 312 OF 2015
IN I.T.A NO. 350 OF 2015
BETWEEN:
THE COMMISSIONER OF INCOME-TAX
C.R. BUILDING
QUEENS ROAD
BANGALORE
THE ASST. COMMISSIONER OF INCOME-TAX
CIRCLE-11(4)
RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE - 560 001.
…APPELLANTS
(BY SHRI. K.V. ARAVIND, ADVOCATE)
AND:
M/s ING VYSYA BANK LTD. ING VYSYA HOUSE NO.22, M.G. ROAD BANGALORE - 560 001. PAN: AABCT 0529M …RESPONDENT
(BY SHRI. A. SHANKAR, SENIOR ADVOCATE FOR SHRI. M. LAVA, ADVOCATE)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED: 06/02/2015
2 PASSED IN ITA NO.967/BANG/2013, FOR THE ASSESSMENT YEAR 2007-2008, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND ETC.
IN I.T.A NO. 309 OF 2015
BETWEEN:
THE COMMISSIONER OF INCOME-TAX
C.R. BUILDING
QUEENS ROAD
BANGALORE
THE ASST. COMMISSIONER OF INCOME-TAX
CIRCLE-11(4)
RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE - 560 001.
…APPELLANTS
(BY SHRI. K.V. ARAVIND, ADVOCATE)
AND:
M/s ING VYSYA BANK LTD. ING VYSYA HOUSE NO.22, M.G. ROAD BANGALORE - 560 001. PAN: AABCT 0529M …RESPONDENT
(BY SHRI. A. SHANKAR, SENIOR ADVOCATE FOR SHRI. M. LAVA, ADVOCATE)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED: 06/02/2015 PASSED IN ITA NO.288/BANG/2013, FOR THE ASSESSMENT YEAR 2005-2006, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND ETC.
IN I.T.A NO. 312 OF 2015
BETWEEN:
THE COMMISSIONER OF INCOME-TAX
C.R. BUILDING
QUEENS ROAD
BANGALORE
3 2. THE ASST. COMMISSIONER OF INCOME-TAX
CIRCLE-11(4)
RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE - 560 001.
…APPELLANTS
(BY SHRI. K.V. ARAVIND, ADVOCATE)
AND:
M/s ING VYSYA BANK LTD. ING VYSYA HOUSE NO.22, M.G. ROAD BANGALORE - 560 001. PAN: AABCT 0529M …RESPONDENT
(BY SHRI. A. SHANKAR, SENIOR ADVOCATE FOR SHRI. M. LAVA, ADVOCATE)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED: 06/02/2015 PASSED IN ITA NO.898/BANG/2013, FOR THE ASSESSMENT YEAR 2007-2008, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND ETC.
THESE ITAs COMING ON FOR HEARING, THIS DAY, P.S.DINESH KUMAR J., DELIVERED THE FOLLOWING:
JUDGMENT
ITAs No.350/2015 & 312/2015 are filed by the Revenue challenging order dated February 6, 2015 in ITAs No.967 & 898/Bang/2013. ITA No.309/2015 is also by the Revenue challenging order dated February 6, 2015, in ITA No.288/Bang/2013.
We have heard Shri. K.V. Aravind, learned Senior Standing Counsel for the Revenue
4 and Shri. A. Shankar, learned Senior Advocate for the Assessee.
Revenue has framed following questions in ITA No.309/2015: "
Whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that the securities held under 'held to maturity' have the material characteristics of capital asset rather than stock in trade and the form part of investments only?
Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in allowing relief to the assessee writing off entire expense as revenue when the expenditure towards software item is capital in nature having enduring benefit eligible for depreciation at 60%?
Whether the Hon'ble Tribunal was justified in allowing relief with regard to ESOP when the assessing officer rightly disallowed the same on the ground that the liability is purely contingent and not an ascertained liability?
Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing relief to the assessee when the assessing officer rightly held that the losses which are contingent in nature cannot be allowed to be written off and disallowed the same on the ground that the liability is purely contingent and not an ascertained one?
Whether on the facts and on the circumstances of the case, the Tribunal is justified in law in allowing relief on the issue of 'broken period interest' without appreciating the fact that the assessee cannot follow receipt bais of accounting for some items of income and
5 follow accrual basis of accounting for other items of income?
Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in allowing relief to the assessee towards diminution in value of investment under AFS/HFT categories when the assessing officer have made the addition based on RBI guidelines dated 16.11.2008 wherein it clearly states that the depreciation on these securities has to be aggregated script-wise and only net depreciation, if any, is to be provided and allowed for in the account?
The questions of law in ITAs No.350/2015 & 312/2015 are common and they read as follows: "
Whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that the securities held under 'held to maturity' have the material characteristics of capital asset rather than stock in trade and the form part of investments only?
Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in allowing relief to the assessee writing off entire expense as revenue when the expenditure towards software item is capital in nature having enduring benefit eligible for depreciation at 60%?
Whether the Hon'ble Tribunal was justified in allowing relief with regard to ESOP when the assessing officer rightly disallowed the same on the ground that the liability is purely contingent and not an ascertained liability?
Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing relief to
6 the assessee when the assessing officer rightly held that the losses which are contingent in nature cannot be allowed to be written off and disallowed the same on the ground that the liability is purely contingent and not an ascertained one?
Whether on the facts and on the circumstances of the case, the Tribunal is justified in law in allowing relief on the issue of 'broken period interest' without appreciating the fact that the assessee cannot follow receipt basis of accounting for some items of income and follow accrual basis of accounting for other items of income?
Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in allowing relief to the assessee towards diminution in value of investment under AFS/HFT categories when the assessing officer have made the addition based on RBI guidelines dated 16.11.2008 wherein it clearly states that the depreciation on these securities has to be aggregated script-wise and only net depreciation, if any, is to be provided and allowed for in the account?
Whether on the facts and in the circumstances of the case, the Tribunal erred in concluding that banking companies are exempt from MAT provisions even when there is no specific exemption for the banking companies in the provisions of section 115 JB of Act?
Whether on the facts and in the circumstances of the case, the Tribunal erred in allowing the relief with regard to losses which were due to operational mistakes, related mainly to ATM transactions of customer and that loss is essential capital loss incurred for operational purposes?
Whether on the facts and in the circumstances of the case, the Tribunal erred in allowing relief to the assessee in
7 respect of disallowance of MTM losses even when the assessing authority the has rightly disallowed it as it is contingent in nature and cannot be allowed as expenditure?
Whether on the facts and in the circumstances of the case, the Tribunal erred in allowing relief to the assessee in respect of insurance premium even when assessing authority rightly held that as per the mutual agreement the insurance premium for housing loans is to be amortized over the period of 17 years?
In ITA No.309/2015
Re. Question No.1:
Shri A.Shankar, learned Senior Advocate for the respondent submitted that question No.1 is held against the Revenue by the Apex Court in • Commissioner of Income-tax, Hubli Vs. Karnataka Vikas Grameen Bank1
• Commissioner of Income-tax Vs. M/s Corporation Bank
ITA No.369/2011 D.D. 24.01.2020
• Commissioner of Income-tax Vs. M/s Corporation Bank
ITA 344/2012 decided on December 18, 2018
• SLP against the order in ITA No.344/2012 has been dismissed by the Hon'ble Supreme Court in
1 [2017]79 taxmann.com 359 (Karnataka)
8 Commissioner of Income-tax Vs. Corporation Bank2
Shri Shankar further submitted that the ITAT has remanded the matter to the Assessing officer in this case. The Assessing Officer has not granted relief and the appellant has accepted that position for the period 2005-06.
Shri. Shankar's submissions are not disputed by Shri K.V.Aravind, for the Revenue. Accordingly, this question is answered against the Revenue and in favour of the assessee.
Re:Question No.2: In ITA No.309/2015, ITA No.350/2015 & ITA No.312/2015
Shri. Shankar submitted that this question is covered against the Revenue in ITA No.130/20073. The same was opposed by Shri. Aravind contending that ITA No.130/2007 is
2 [2019)110 taxmann.com 336 3 CIT and Another Vs. M/s. IBM India Ltd., decided on 10.04.2013
9 with respect to A.Y. 1998-99. Therefore, on facts, the said ruling is not applicable. He submitted that the expenditure towards software is a Capital expenditure and the Tribunal has erred in treating the same as Revenue expenditure. He further submitted that the rate of depreciation with effect from 2003-04 for Computers including Computer software is 60%. Though the life of hardware is limited for want of up-gradation in technology, the software can be used for long period. Since the depreciation is 60%, the Tribunal's order on this aspect is unsustainable. In reply, Shri. Shankar argued that though the depreciation is allowed at 60% from the A.Y. 2003-04, the assessee will be entitled to claim depreciation at 60% in the first year and at the same rate on the remaining capital equipment for subsequent years.
In ITA No.130/2007, this Court has recorded detailed reasons and held that software is an aid in manufacturing process rather than a tool itself.
10 Though certain application has enduring benefit, it does not result into acquisition of capital asset. It merely enhances the productivity or the efficiency and therefore, it has to be treated as a Revenue expenditure.
We may record that in Oriental Bank of Commerce Vs. Additional Commissioner of Income- tax4 it is held as follows: " 7. The mere circumstance that the depreciation rate is spelt out in the Schedule to the Income-tax Act in our opinion is not conclusive as to the nature of the expenditure and whether it resulted in enduring advantage to a particular assessee. It is nobody's case that the assessee is dealing with computer softwares or is in the business of any related services. Rather it uses specific customized software, which is specific to its banking activities. But for the use of such software, the nature of expenditure otherwise incurred for streamlining its functions i.e. towards fee payable to the consultants for systems and employment of special professionals to carry on the tasks that the software in fact performs, would have fallen undoubtedly in the
4 [2018] 93 taxmann.com 432 (Delhi)
11 revenue stream. Taking these into account and the further circumstance that the software itself would have run its course or life span as it were, given that the earlier assessment year in question is 2008-09, we are of the opinion that the question of law framed is to be answered in favour of the assessee and against the revenue. "
We are in respectful agreement with the said Authority. Accordingly, this question is answered in favour of the assessee and against the Revenue.
Re. Question No.3:
Shri Aravind, sought to amend the question as follows and Shri Shankar has no objection for the same.
“Whether the Hon’ble Tribunal was justified in allowing the relief with regard to Stock Option ESOP when the assessing officer rightly disallowed the same on the ground that the liability was contingent liability and not an ascertained liability?
Shri Shankar submitted that said issue is held against the Revenue by the Special Bench of ITAT
12 in Biocon Ltd., V. Dy.CIT5 and the same has been upheld by this Court in Commissioner of Income Tax, LTU Vs. Biocon Ltd.6 He further submitted that the ITAT for the assessment Year 2005-06 has remanded the matter to the Assessing Officer, who by following the ITAT Special Bench decision has granted the relief.
Shri. Aravind, in his usual fairness, does not dispute the same.
In substance, this question of law is covered against the Revenue and accordingly answered. Re. Question No.4: 15. Shri Shankar, submitted that for the assessment year 2004-05, the ITAT has given relief by following the decision in Syndicate Bank v. DCIT7. The said order has been challenged by the Revenue before a Division Bench of this Court in CIT Vs. Syndicate Bank8. Following the decision in CIT Vs. Bharat heavy
5 2013 (35) taxmann.com 335 6 (2020) 121 Taxmann.com 351 (Karnataka). 7 ITA No.709/Bang/2012 8 ITAT No.477/2014 DD 31.O1.2020
13 Electricals Ltd.9 this Court has answered the issue in favour of the assessee. Thus, this issue is also covered against the Revenue and answered accordingly.
Re. Question No.5:
Shri Aravind submitted that questions No.5 and 6 do not arise for consideration in the facts and circumstances of the case. His submission is placed on record.
In ITA Nos.312/2015 & 350/2015: Re. Question No.1:
Shri A.Shankar submitted that question No.1 is held against the Revenue by the Apex Court in • Commissioner of Income-tax, Hubli Vs. Karnataka Vikas Grameen Bank10
• Commissioner of Income-tax Vs. M/s Corporation Bank
ITA No.369/2011 D.D. 24.01.2020
• Commissioner of Income-tax Vs. M/s Corporation Bank
ITA 344/2012 decided on December 18, 2018
9 (2012) 26 TAXMAN.COM 252 (DEL.) 10 [2017]79 taxmann.com 359 (Karnataka)
14 • SLP against the order in ITA No.344/2012 has been dismissed by the Hon'ble Supreme Court in Commissioner of Income-tax Vs. Corporation Bank11
He further submitted that the ITAT has remanded the matter to the Assessing officer in this case. The Assessing Officer has not granted relief to the appellant and the appellant has accepted that position for the period 2005-2006.
This factual position is not disputed by Shri K.V.Aravind. Hence, this question is held against the Revenue and answered accordingly.
Re. Question No.2:
This question has been considered in ITA No.309/2015 (Supra) and answered in favour of the assessee.
Re. Question No.3:
Shri Aravind, sought to amend the question as follows and Shri Shankar, learned Senior advocate has no objection for the same.
11 [2019)110 taxmann.com 336
“Whether the Hon’ble Tribunal was justified in allowing the relief with regard to Stock Option ESOP when the assessing officer rightly disallowed the same on the ground that the liability was contingent liability and not an ascertained liability?
Shri Shankar submitted that the above question has been held against the Revenue by the Special Bench of ITAT in Biocon Ltd., V. Dy.CIT12 which has been upheld by this Court in Commissioner of Income Tax, LTU Vs. Biocon Ltd.13 He further submitted that the ITAT for the assessment Year 2005-06 has remanded the matter to the Assessing Officer, who by following the ITAT Special Bench decision has granted the relief.
Shri. Aravind does not dispute the same.
In substance, the legal question is covered against the Revenue and answered accordingly.
12 2013 (35) taxmann.com 335 13 (2020) 121 Taxmann.com 351 (Karnataka).
16 Re. Question No.4: 25. Shri Shankar submitted that for the assessment year 2004-05, the ITAT has given relief by following the decision in Syndicate Bank v. DCIT14. The said order has been challenged by the Revenue before a Division Bench of this Court in CIT Vs. Syndicate Bank15. Following the decision in CIT Vs. Bharat heavy Electricals Ltd.16 this Court has answered the issue in favour of the assessee. This submission in not disputed by the Revenue. Thus, this issue is also covered against the Revenue and answered accordingly. Re. Question No.5: 26. Shri Shankar, submitted that this question is covered against the Revenue in The Commissioner of Income Tax & another Vs. The Karnataka Bank Ltd.17 and the same is not disputed by the Revenue. Thus, this issue is also covered against the Revenue and answered accordingly.
14 ITA No.709/Bang/2012 15 ITAT No.477/2014 DD 31.O1.2020 16 (2012) 26 TAXMAN.COM 252 (DEL.) 17 ITA No.433/2006 & conn. cases DD 12.09.2012
17 Re. Question No.6: 27. Shri Shankar submitted that this issue is answered against the Revenue in Commissioner of Income-tax Vs. M/s Corporation Bank18 and Commissioner of Income-tax Vs. M/s Corporation Bank19. SLP filed against the order in ITA No.344/2012 has been dismissed by the Hon'ble Supreme Court in Commissioner of Income-tax Vs. Corporation Bank20. 28. The same is not disputed by Shri K.V. Aravind. 29. Thus, this issue is also covered against the Revenue and answered accordingly. Re. Question No.7: 30. Shri Shankar Submitted that this issue is covered against the Revenue in Commissioner of Income Tax, Bangalore, Vs. ING Vysya Bank Ltd.21 and the same is not disputed by Shri Aravind.
18 ITA No.369/2011 D.D. 24.01.2020 19 ITA 344/2012 D.D.December 18, 2018 20 [2019)110 taxmann.com 336 21(2020) 114 taxman.com 506
18 31. Hence, this issue is answered against the Revenue. Re. Question No.8: 32. The Bank had claimed expenses of Rs.36,99,509/- as operational losses. The Assessing Officer disallowed the same. The CIT (appeals) reversed the findings of the Assessing Officer. The ITAT in it's order in ITA No.898/Bang/2013, at para No.14 has recorded that the discrepancies arose due to delayed posting of offline ATM transactions, reversals for suspect ATM transactions which were subsequently debited back from customers accounts, offline ATM transactions not debited to customers account and credits given to wrong ATM claims which were debited back etc., The ITAT has further held that the losses had arisen due to operational mistakes in the course of banking activity of the assessee and they had been written off as irrecoverable. Therefore, it must be treated as revenue expenditure.
19 33. Thus, the Bank has claimed operational losses and it has been written off. Therefore, in our considered view, the same is revenue expenditure as rightly held by the Tribunal. Accordingly, this question is answered against the Revenue and in favour of the Assessee. Re. Question No.9: 34. The Assessee claimed deduction of Rs.2,03,15,166/- towards mark-to-market losses. Relying upon CBDT's Instruction No17/2008, the Assessing Officer disallowed the claim. The CIT(Appeals) allowed the deduction claimed by the Assessee. The ITAT has confirmed the same. 35. Shri Aravind submitted that the mark-to- market losses have to be treated as contingent liability and it cannot be allowed as revenue expenditure. 36. Shri Shankar, submitted that ITAT has rightly followed the decision in Woodward Governor
20 India (P) Ltd22 wherein, the ITAT, Mumbai Special Bench in the case of Bank of Bahrain and Kuwait23 has held that loss arising out of forward contract is not notional. On examination of facts, the ITAT has recorded a finding that there exists a contract with a binding obligation against the assessee when it entered into a derivative contract. Hence, transaction in question cannot be termed as a speculative transaction. The decision of CIT(Appeals) which has been confirmed by the ITAT is completely based on facts inasmuch as ITAT has recorded a finding of fact that the assessee had a binding obligation under a contract and therefore, no question of law arose for consideration. Therefore this issue is held against the revenue and in favour of assessee. Re. Question No.10:
The assessee has claimed a sum of Rs.2,39,38,811/- as insurance premium paid on Housing Loan Policies. The Assessing Officer held that the amount has to be spread over for a period of 17
22 312 ITR 254(SC) 23 41 SOT 290 SC)
21 years and disallowed the expenses. The CIT (Appeals) reversed the said finding. The ITAT affirming the order passed by the CIT (Appeals), has held that the premium on Housing Loans is a revenue expenditure and deduction is allowable. It is not the case of the assessing officer that the expenses are not for the purpose of assessee’s business or that they are capital in nature.
Shri.Aravind submitted that the Housing loans are spread over for several years. Therefore, claim has to be made in that particular year.
Shri.Shankar placing reliance on Taparia Tools Ltd., v. Joint Commissioner of Income-tax, Nasik24, submitted that once the expenses are spread over, that benefit will have to be extended to the assessee and the Department has no option to impose its view that the expenses have to be claimed in the relevant year.
24 (2015) 55 taxmann.com 361- paragraphs 17 to 19
ITAT has recorded that the expenses are relatable to Housing Projects which are part of the assessee’s business activities. Payment of insurance premium on the Housing projects is revenue in nature. We concur with the view taken by the CIT (Appeals) confirmed by the ITAT.
Resultantly, this question is also answered in favour of the assessee and against the Revenue.
In the result, these appeals fail and are accordingly dismissed.
No costs.
Sd/- JUDGE
Sd/- JUDGE
YN/BS/ND