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1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 2ND DAY OF MARCH 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE ASHOK S. KINAGI I.T.A. NO.4 OF 2015 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX
C.R. BUILDING, QUEENS ROAD
BANGALORE. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX
CIRCLE-12(3), RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE-560001. ... APPELLANTS (BY SRI. K.V. ARAVIND, ADV.,) AND: THE VYSYA BANK LTD., (NOW ING VYSYA BANK LTD.,) ING VYSYA HOUSE NO.25, M.G. ROAD BANGALORE-560001 PAN:AABCT0529M. ... RESPONDENT (BY SRI. A. SHANKAR, SR. COUNSEL FOR SRI. M. LAVA, ADV.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 28.08.2014 PASSED IN ITA NO.748/BANG/2011 FOR THE ASSESSMENT YEAR 2001-02, PRAYING TO:
2 (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.748/BANG/2011 DATED 28.08.2014 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(3), BANGALORE. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2001-02. The appeal was admitted by a bench of this Court vide order dated 31.07.2015 on the following substantial questions of law: "(i) Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee is eligible for claim of Rs.23,05,49,466/- as revenue expenditure without appreciating that the assessee has spent the same on networking of 125 branches with a
3 centralized processing solution and the activity has a long term benefit, warranting capitalization of the expenditure spent for the same? (ii) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing deduction of Rs.1,00,000/- under Section 36(1)(vii) even though the assessee did not receive any income during the year and is not eligible for the deduction? (iii) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing the amortization of cost over face value of investment "held to maturity" of Rs.3,19,37,457/- without appreciating that such securities have characteristic of capital asset rather than stock in trade and the investment done as per RBI Guidelines is not an allowable revenue expenditure in terms of Section 37(1) of the Act?
4 (iv) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the provisions of Section 115JB are not applicable to the assessee, it being a banking company, even though there is no such provision/exclusion under the IT Act?" 2. Facts leading to filing of this appeal briefly stated are that the assessee is a Schedule Bank carrying on the business of banking across the country. The assessee filed its return for the Assessment Year 2001- 02. The assessee claimed a sum of Rs.28,73,88,373/-as income exempt under Section 10 without debiting any expenses for the same. The return was selected for scrutiny and notices were issued to the assessee. The Assessing Officer passed an order under Section 143(3) of the Act, and held that since, administrative expenses are to be incurred for earning exempt income, 50% of the exempt income has to be treated as expenses incurred to unexempt income. Thus, Assessing Officer
5 added 50% of the amount to income of the assessee. The assessee debited the aforesaid amount as write off of non convertible debentures under 'provision and contingencies in the statement of computation of income'. The aforesaid claim was disallowed by the Assessing Officer. The assessee had also claimed the aforesaid amount as expenditure for computerization of its 125 branches which were networked with a centralized processing solution. The assessee claimed the aforesaid expenditure as revenue expenditure The Assessing Officer capitalized the aforesaid expenditure and allowed depreciation at the rate of 12.5%. The Assessing Officer added a sum of Rs.1,00,000/- since, assessee did not have any income from rural branches during the Assessment Year and the provisions of Section 36(1)(viia) stipulate to allow deduction not exceeding 5% of the income and 10% of the aggregate income from rural branches. The Assessing Officer computed the book profit of Rs.38,38,87,065/-.
6 3. Against the order of assessment, the assessee filed appeal before the Commissioner of Income Tax (Appeals) who by an order dated 19.05.2011 partly allowed the appeal. Being aggrieved, by the order passed by the Commissioner of Income Tax (Appeals) the revenue as well as the assessee filed appeals before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by a common order dated 28.04.2014 has dismissed the revenue's appeal and has allowed the assessee's appeal. In the aforesaid factual background, this appeal has been filed by the revenue. 4. Learned counsel for the revenue with regard to the first substantial question of law submitted that the assessee had incurred expenditure towards computerization, by which 125 branches of the bank were networked with the centralized processing solution. It is further submitted that the computerization project has resulted an enduring advantage to the assessee and
7 assessee has acquired capital infrastructure in the form of code banking solution, integrated licence software, implementation software, hardware and internal licence related to manpower service, consultancy service, networking of computer, which amounts to acquisition of capital asset having enduring benefit and constitutes a capital expenditure. It is also urged that if an expenditure has resulted in acquisition of capital asset either tangible or intangible, the same would constitute capital expenditure. It is also pointed out that the fact that intangible asset has been provided for depreciation under Section 32(1)(ii) of the Act would demonstrate that intangible asset is capital asset eligible for depreciation. It is also pointed out that the tribunal has failed to take into account the fact that in the decision of IBM INDIA LTD. rendered by this court, the expenditure incurred was towards acquisition of an application software which has a limited period of operation. However, in the instant case, not only the
8 software but the entire computerized network has been acquired including the software, hardware and networking of computer etc., therefore, the expenditure is capital in nature. It is also submitted that second substantial question of law has been answered against the revenue in 'COMMISSIONER OF INCOME TAX VS. SYNDICATE BANK', 422 ITR 460 (KAR). In support of aforesaid submissions, reliance has been placed on decision of the Supreme Court in 'EMPIRE JUTE CO. LTD. VS. COMMISSIONER OF INCOME TAX', (1980) 3 TAXMAN 69 (SC). 5. On the other hand, learned Senior counsel for the assessee with reference to substantial question of law submitted as follows: (i) The expenditure was incurred for the purposes of computerization of its 125 branches and the aforesaid expenses are incurred towards a licence of integrated software viz., profile in its branches and other relevant expenditure in the nature of implementation of the
9 software and the networking of the branches. (ii) The software is a core banking solution software which enables the assessee for efficient management of its day to day operations and seemless integration of its customers, loan and deposit accounts maintained at its branches and ultimately enabling the assessee in rendering quality services to its customers. (iii) The expenditure is incurred towards efficient management of day to day operations of the assessee and the same does not create any asset which is capital in nature. (iv) The expenditure incurred towards core banking solution software is a common expenditure in the banking industry to enable it to render quality services to its customers and Reserve Bank of India has made it mandatory for all the banks to have core banking solution software. (v) The core banking solution software effectively substitutes manpower costs and results in effective
10 ultilization of the manpower and therefore, the expenditure incurred is revenue in nature and cannot be considered as capital expenditure. (vi) Alternatively, it is submitted that the entire exercise is revenue neutral as assessee is earning profits year after year. 6. With regard to second substantial question of law, it is urged that tribunal has rightly held that the amount is allowable as a deduction under Section 36(1)(viia) of the Act. With regard to third and fourth substantial question of law, it is pointed out that the aforesaid substantial questions of law are covered by judgment of this court in CIT VS. KARNATAKA VIKAS GRAMEEN BANK, (2016) 282 CTR 517 (KARNATAKA) and CIT VS. ING VYSYA BANK LTD., (2020) 422 ITR 116 (KAR) respectively and have been answered against the revenue. The aforesaid submission could not be disputed by learned counsel for the revenue. For the reasons assigned in the aforesaid
11 judgments substantial question of law Nos.3 and 4 are answered against the revenue and in favour of the assessee. 7. We have considered the submissions made by learned counsel for the parties and have perused the record. From the perusal of the order passed by the tribunal, it is evident that the issue with regard to eligibility of claim for deduction of an amount of Rs.23,05,49,466/- as revenue expenditure incurred by the assessee has been dealt with by the tribunal by extracting para 9 of the decision of this court in CIT VS. IBM India Ltd. (2013) 357 ITR 88 (KAR). Thereafter, the tribunal has recorded the conclusion that the expenditure incurred by the assessee for computerization of its branches is revenue in nature, which is evident from para 7.3 of the order. The order passed by the tribunal is cryptic in nature and suffers from vice of non application of mind. Even the contention by the revenue that the decision rendered in
12 IBM India Ltd. supra does not apply to the case of the assessee has not been considered. No reasons have been assigned for holding that decision rendered in the case of IBM India Ltd. Applies to the facts of the case of the assessee. Therefore, in view of contentions raised by both the parties before us, we deem it appropriate to quash the order passed by the tribunal so far as it pertains to findings of substantial question of law No.1 and remit the matter to the tribunal for decision afresh in accordance with law after considering the rival submissions made on both sides. Therefore, the first substantial question of law is answered accordingly. 8. The second substantial question of law is covered by decision of this court in 'COMMISSIONER OF INCOME TAX VS. SYNDICATE BANK', 422 ITR 460 (KAR). For the reasons assigned in the aforesaid judgment, the second substantial question of law is answered in favour of the revenue and against the assessee.
13 9. For the reasons assigned in the decisions in CIT VS. KARNATAKA VIKAS GRAMEEN BANK, (2016) 282 CTR 517 (KARNATAKA) and CIT VS. ING VYSYA BANK LTD., (2020) 422 ITR 116 (KAR), the third and fourth substantial questions of law are answered against the revenue and in favour of the assessee. In the result, the impugned order of the tribunal insofar as it contains findings on first substantial question of law is quashed and the matter is remitted to the tribunal to decide the aforesaid question after hearing the parties. Needless to state that all the contentions which are available to the parties in law are kept open. Accordingly, the appeal is disposed of. Sd/- JUDGE Sd/- JUDGE ss