M/S. ORIENTAL BANK OF COMMERCE,GURGAON vs. ADDL.CIT, NEW DELHI

Per L.P. Sahu, Accountant Member:

“1. The Ld. CIT(A) has erred in law and on the facts and circumstances of the case in disallowing the claim of loss on fall in value of investments held as stock-in-trade of Rs. 209.99 crores at the time of shifting from AFS category to HTM category. The loss is an actual loss debited in the Profit & Loss Account and not a notional loss. The disallowance is wrong and bad in law, the claim of the assessee bank should be allowed.

4. The Appellant contends the appellant's case is directly covered by the decision of Hon'ble ITAT Bangalore 'Bf bench in the case of State Bank of Mysore vs. DCIT reported in [2009] 33 SOT 7 (Bang). Therefore based on the same, the claim of the appellant should be allowed.

5. The Ld. CIT(A) has erred in law and on the facts and circumstances of the case in not accepting the plea of the assessee that there is no expenditure incurred by the assessee bank for earning tax free income and hence no disallowance should be made u/s 14A of the Income Tax Act, 1961.

6. The appellant contends that no expenditure is incurred for earning tax free income because a) expenditure incurred is for banking business of the assessee, b) assessee has sufficient non- interest bearing own funds to invest c) the investments made by the bank are to meet RBI norms like CRR, SLR ratios etc. d) the investments in the bank are made to realize gains or losses and earning dividend is only incidental e) neither the Assessing Officer nor the CIT(A) has any material to support nexus between expenditure incurred and earning of tax free income for disallowance. Hence the order of the CIT(A) upholding disallowance u/s 14A is wrong and bad in law.

7. The CIT(A) has erred in upholding the disallowance of claim of Rs. 2,60,56,117/- in respect of software expenses alleging them to be of capital nature. These are revenue expenditure being software expenses not resulting in any enduring benefit and are of recurring nature being year to year renewal of licenses charges, anti-virus software etc. which should be allowed as revenue expenditure.”

2. The grounds raised by the Revenue in both of its appeals are as under:

Grounds raised in appeal for A.Y. 2008-09:

1. On the facts & in the circumstances of the case the Ld. CIT(A) has erred in deleting indirect interest expenditure of Rs 45.52 crores under Rule 8D(2)(ii) by holding that the AO has not recorded any cogent reason ignoring the fact that the AO has specifically mentioned that the expenses incurred is independent of the fact that the investment were made in compliance to RBI Guidelines or of its own accord.

1.1 On the facts & in the circumstances of the case, the Ld. CIT(A) has erred in ignoring the fact that even after providing many opportunities, the assessee was not able to submit the bifurcation between the expenses incurred on exempted and non- exempted incomes during assessment proceedings.

2. On the facts & in the circumstances of the case, the Ld CIT(A) erred in the case by giving relief to the assessee on excess depreciation claimed by the assessee on computer LAN/ WAN equipments without considering the fact that the revenue is already in appeal against the order of the High Court on the similar issue. Hence, the issue is sub-judice and has not attained its finality.

3. On the facts & in the circumstances of the case, the Ld. CIT(A) erred in the case by giving relief to the assessee on 100% depreciation claimed by the assessee on temporary fixtures by ignoring the fact that fixtures noted by the assessee have longer life than one year, hence does not come in the purview of temporary fixtures.

3.1 On the facts & in the circumstances of the case, the Ld. CIT(A) erred in the case by deleting the addition on account of disallowance of excess claim of depreciation on fixture & fittings on temporary structures by not considering the observation of the AO that the life of wooden partitions, cabins and wiring etc. for computers etc. are easily for a period of four to five years.”

Grounds raised in appeal for A.Y. 2009-10:

1. On the facts & in the circumstances of the case the Ld. CIT(A) has erred in reducing the disallowance u/s 14A from Rs.62.33 crores to Rs.4.3 crores ignoring the fact that in order to earn significant interest income from tax free bonds, the assessee has not incurred expenditure like salary, rent and other management expenses neither has maintained any separate books of account.

2. On the facts & in the circumstances of the case, the Ld. CIT(A) erred by giving relief to the assessee on 100% depreciation claimed by the assessee on temporary fixtures by ignoring the fact that fixtures noted by the assessee have longer life than one year, hence does not come in the purview of temporary fixtures.

2.1 On the facts & in the circumstances of the case, the Ld. CIT(A) erred by deleting the addition on account of disallowance of excess claim of depreciation on fixture & fittings on temporary structures by not considering the observation of the AO that the life of wooden partitions, cabins and wiring etc. for computers etc. are easily for a period of four to five years.

3. On the facts & in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of Rs. 83.00 crores ignoring the fact that the liability to pay interest on overdue deposits neither crystallized nor ascertained and it was a contingent liability which depends on the renewal of the deposits by the customers.”

From the above grounds of appeals raised by both the parties, it transpires that following issues are involved in all these appeals of the assessee and Revenue :

2008-09 2009-10 Assessee’s appeal: (i) Loss due to fall in value of investments held as 209.99 crores 119.55 crores Stock in trade (ii) Disallowance u/s. 14A 3.63 crores 4.30 crores (iii) Expenditure on Software 2.60 crores 10.91 crores ----------------------------------------------------------------------------------------- Revenue’s appeal: (i). Disallowance u/s. 14A 45.52 crores 58.03 crores (ii). Depreciation on LAN/WAN 1.54 crores - (iii). 100% Depreciation on 7.29 crores 7.68 crores Temp. Wooden structures (iv). Interest on overdue Deposits. - 83.00 crores -----------------------------------------------------------------------------------------

Issue No. 1 : This issue pertains to disallowance of claim loss due 3. to fall in value of investments, held as stock in trade. The brief facts relevant to this issue involved in both the appeals of the assessee are that during the years under consideration the assessee claimed depreciation on account of fall in value of investments held as stock in trade. The assessee valued these investments on the principle of valuation of stock in trade at cost or market value whichever is less. The loss due to fall in valuation of investments held as stock in trade comprised of two portions – fall in value of investments as on 31.03.2008 and 31.03.2009 and the fall in value of investments based on the market value on the date of shifting of SLR securities from AFS(available for sale) category to HTM (held to maturity) category amounting to Rs.209.99 crores and 119.55 crores respectively for A.Y. 2008-09 and 2009-10. The AO allowed the loss due to fall in valuation as on 31.03.2008 and 31.03.2009 as deduction, but disallowed the claim of loss of Rs.209.99 crores and Rs.119.55 crores respectively caused at the time of shifting of securities from AFS category to HTM category holding same as notional loss. The learned CIT(A) confirmed the disallowance after following the order of first appellate authority dated 31.12.2010 rendered in appeal of the assessee for A.Y. 2007- 08 whereby the issue was decided against the assessee.

“13. We have carefully considered the rival contentions. During the year, assessee has debited the loss of Rs. 205.43 crores arising of on account of transfer of securities of Rs. 1664.32 crores from ‘available for sale’ category to ‘held to maturity’ category in terms of resolution of the Board of Directors of the appellant. Claim has arisen because of the circular issued by Reserve Bank of India on prudential norms for classification, valuation and operation of investment portfolio bank dated 1st July, 2006. According to that circular the banks are allowed to transfer securities from one category to another category once every year at the least value of following :-

(a) Acquisition cost (b) Book value and (c) Market value.

It is further provided that if because of such transfer any depreciation arises, it should be fully provided for. The claim of the assessee is that this loss should be allowed as deduction because of transfer of securities from one category to another category. Therefore, the issue in appeal is that whether a banking company claims the loss, based on circulars and instructions of Reserve Bank of India, is allowable because of transfer of security from category of “available for sale” to “held to maturity”. This issue now no longer survives in view of two decisions of Hon’ble Karnataka High Court in case of Karnataka Bank Ltd. vs. Assistant Commissioner of Income Tax 356 ITR 549 and CIT vs. Bank of Baroda 262 ITR 334 and a decision of honourable Bombay High Court in case of CIT vs. HDFC Bank Ltd. reported at 368 ITR 377 considering decision of honourable supreme court in case of united commercial bank V CIT 240 ITR 355 and Southern technologies Limited V Jt CIT 320 ITR 577, wherein Hon’ble High Court has held as under:-

“9. In the present case, we find that the facts and issues that are covered by the aforesaid judgment squarely apply to the facts and issues raised in the present Appeal. Not only are we in full agreement with the judgment of this Court in the case of Bank of Baroda (supra) but we are bound by the same. We therefore respectfully follow the ratio laid down in the said judgment.

“10. We find that even the judgment of the Karnataka High Court in the case of Karnataka Bank Ltd. (supra), reliance on which was placed by Mr Mistry, squarely covers the issue raised in this Appeal. The facts in the case before the Karnataka High Court were that the Assessee was holding securities in different categories as mandated by the RBI Master Circular dated 1st September 2003. The Assessee treated such securities as stock-in-trade and claimed depreciation on the book value after valuing the securities at cost or market value whichever was lower. The Revenue refused to accept the Assessee's plea for the deduction and disallowed the same and added back to the total income the said amount. Aggrieved by the said order, the Assessee preferred an Appeal before the CIT (Appeals). The same was dismissed upholding the contention of the Assessing Authority. Aggrieved thereby, the Assessee preferred an Appeal to the Tribunal. The Tribunal inter alia held that since the securities on which the depreciation had been claimed on the earlier years had not been identified, the issue was restored to the file of the Assessing Officer for consideration afresh and partly allowed the Appeal. Being aggrieved by the said order, Karnataka Bank Ltd. preferred an Appeal to the Karnataka High Court under section 260A of the Act. After discussing various judgments of the Supreme Court, the Karnataka High Court held as under :—

"From the aforesaid judgments of the apex court, now it is clear that a method of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation. Financial institutions like bank, are expected to maintain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be in conformity with the said requirements. The RBI Act or the Companies Act do not deal with the permissible deductions or exclusion under the Income Tax Act. For the purpose of the Income Tax Act, if the Assessee has consistently been treating the value of investment for more than two decades the investments as stock-in-trade and claimed depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations. The RBI Regulations, the Companies Act and the Income Tax Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of law relating thereto and not the way, in which the entries are made in the books of account. It is not decisive or conclusive in the matter. For the purpose of the Income Tax Act whichever method is adopted by the assessee, a true picture of the profits and gains, i.e. real income is to be disclosed. For determining the real income, the entries in the balancesheet is required to be maintained in the statutory form may not be decisive or conclusive. It is open to the Income Tax Officer as well as the assessee to point out true and proper income while submitting the income tax returns. Even if the assessee under some misrepresentation or mistake fails to make an entry in the books of account, although under law, a deduction must be allowed by the Income Tax Officer, the assessee will not lose any right on claiming or will be debarred from being allowed the deduction. Therefore, the approach of the authorities in this regard is contrary to the well settled legal position as declared by the apex court.

In the instant case, the assessee has maintained the accounts in terms of the RBI Regulations and he has shown it as investment. But consistently for more than two decades it has been shown as stock-in-trade and depreciation is claimed and allowed. Therefore, notwithstanding that in the balance-sheet , it is shown as investment, for the purpose of Income Tax Act, it is shown as stock-in-trade. Therefore, the value of the stocks being closely connected with the stock market, at the end of the financial year, while valuing the assets, necessarily the bank has to take into consideration the market value of the shares. If the market value is less than the cost price, in law, they are entitled to deductions and it cannot be denied by the authorities under the pretext that it is shown as investment in the balance-sheet." (emphasis supplied) 11. We therefore find that the issue raised in this Appeal is also squarely covered by the judgment of the Karnataka High Court in the case of Karnataka Bank Ltd. (supra).

12. In view thereof, we find no infirmity in the order passed by the ITAT. The present Appeal does not raise any substantial question of law as projected by the learned counsel appearing for the Appellant. The Appeal is therefore dismissed.”

14. Therefore, we find that the issue raised in this appeal squarely covered by the decision of Hon’ble Karnataka High Court as well as Mumbai High Court in favour of asssessee. Therefore, respectfully following those judicial precedents, we reverse the order of CIT (A) and delete the disallowance of Rs. 205.43 crores on account of claim of loss of transfer of security from ‘available for sale’ category to ‘held to maturity’ category by the appellant bank in accordance with direction/ circular of Reserve Bank of India.”

This decision has been confirmed by the Hon’ble High Court in appeal of the Revenue No. 306/2016 vide order dated 11.05.2016 holding as under :

“3. The ITAT found that the Assessee has been consistently reflecting the investment as stock-in-trade in its balance sheet. The ITAT has noted that the Assessee had in compliance with the direction of the Reserve Bank of India (RBI) transferred SLR securities appreciating to Rs. 1664.32 crores from the 'available for sale1 category to the 'held to maturity' category during the AY in question. This resulted in mark to market devaluation of Rs. 205.43 crores which was debited to the P&L account, regarding maintaining a minimum amount of stock as reserve. The AO disallowed this by terming it as a notional and not a real loss. The ITAT disagreed and reversed the AO in light of the legal position explained in the decision of the High Court of Karnataka in Karnataka Bank Ltd. v. Assistant Commissioner of Income Tax [2013] 356 ITR 549 (Kar.) and the decisions High Court of Bombay in Commissioner of Income Tax v. Bank of Baroda [2003] 262 ITR 334 (Bom) and Commissioner of Income Tax v. HDFC Bank Ltd. [2014] 368 ITR 377 (Bom). The ITAT has noted that the above decisions referred to the decisions of the Supreme Court in United Commercial Bank v. Commissioner of Income Tax [1999] 240 ITR 355 (SC) and Southern Technologies Ltd v. The Joint Commissioner of Income Tax [2010] 320 ITR 577 (SC).

4. However, Mr. Shivpuri, learned Senior standing counsel appearing for the Revenue, seeks to place reliance on another decision of High Court of Karnataka in Commissioner of. Income Tax v. ING VYSYA Bank Ltd. [2013] 356 ITR 532 (Kar.) where, in the facts of that case it was held that where the Assessee invested in securities for the purpose of complying with RBI instructions, such investments could not be termed as investment in the form of security ready for sale. The Court is not persuaded to concur with the view expressed in ING VYSYA Bank Ltd. (supra) which appears to have been decided in the peculiar facts of that case. The Court prefers to adopt the reasoning in the decision the Karnataka High Court in Karnataka Bank Ltd. (supra) and the Bombay High Court in HDFC Bank Ltd. (supra). The Court accordingly declines to frame a- question on this issue.”

Therefore, respectfully following the above decisions of coordinate Bench and of Hon’ble Jurisdictional High Court, we decide this issue in favour of the assessee by deleting the additions of Rs.209.99 crores and Rs.119.55 crores respectively for A.Yrs. 2008-09 and 2009-10. Accordingly, grounds Nos. 1 to 4 in both the appeals of the assessee are allowed.

(Rs. in crores)

31st March 2007 31st March, 2008 31st March 2009 Investment in shares 305.76 498.34 563.52 Mutual Funds 177.64 92.64 88.63 Investment in Tax Free Bonds 210.93 168.06 308.49 Total 694.33 759.04 960.64 From the above investments, the assessee had earned exempt income of Rs.46,56,79,236/- and Rs.16,33,33,303/- respectively for A.Y. 2008-09 and 2009-10 as per details given at page No. 26 of the impugned order. The assessee did not make any deduction u/s. 14A in respect of expenditure incurred in relation to above exempt income. The assessee claimed that no expenditure were incurred for earning the exempt income and the expenditure, whatsoever incurred y the bank is in the course of conducting the banking business under the banking Regulation Act, 1949 and hence, the expenditure is allowable as business expenditure as allowed in the past. The assessee had adequate share capital and reserves to cover the entire investment and therefore, there would be no expenditure for disallowance u/s. 14A. The AO was not satisfied with the explanation of the assessee and disallowed the expenditure of Rs.49.15 crores and Rs.62.33 crores respectively. The ld. CIT(A) after considering the submissions of the assessee, decision of Hon’ble Bombay High Court, relevant provisions of section 14A and Rule 8D, deleted the indirect interest expenditure of Rs.45.52 crores and 58.03 crores computed by AO u/r 8D(2)(ii) of the IT Rules. The ld. CIT(A), however, sustained the disallowance of Rs.3.63 crores Rs.4.30 crores as computed by AO u/r 8D(2)(iii) of the IT rules, being 0.5% of average value of investments, as contemplated in the last limb of Rule 8D.

24.03.2008 and as such was not applicable for the assessment year 2007-08.

Therefore, the findings recorded by the Tribunal in appeal for the assessment year 2007-08 would have no application in appeal for the assessment years under consideration, i.e., 2008-09 and 2009-10. Therefore, the order of the ld. CIT(A) on this issue does not require any interference being based on sound reasonings. The relevant portion of the impugned order reads as under for ready reference:

“5.2.2 Section 14A provides that all the expenditure incurred in relation to the exempt income shall be disallowed. Rule 8D clearly provides for disallowance of direct expenditure incurred in relation to the exempt income under clause (i) of sub-rule (2) and indirect expenditure by way of interest of relevant previous year, under clause (ii) of sub rule (2). Further other indirect expenditure of the relevant previous year are to be disallowed as per clause (iii) of sub- rule (2), which is to be determined on the basis of average value of investment from which the exempt income is earned.

2.2.3 Hon'ble High Court of Bombay in Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010] 194 Taxman 203 (Bom) held that as a result of the enactment of section 14A, no expenditure can be allowed as a deduction in relation to income which does not form part of the total income under the Act. Only that part of the expenditure, which is incurred in relation to income which forms part of the total income, can be allowed. The expenditure incurred in relation to income which does not form part of the total income has to be disallowed. The expression 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for. Hon'ble High court further held that sub- sections (2) and (3) of section 14A are intended to enforce and implement the provisions of sub-section (1). The object of sub- section (2) is to provide uniformity of method where the Assessing Officer is, on the basis of the accounts of the assessee, not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act. Sub-section (2) of section 14A does not enable the Assessing Officer to apply the method prescribed by rule 8D without determining in the first instance the correctness of the claim of the assessee, having regard to the accounts of the assessee. 5.2.4 Hon'ble High Court of Delhi in Maxopp Investment Ltd. v. CIT [2011] 15 Taxmann.com 390 (Delhi) held that while rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same.

5.2.5 From the particulars furnished it is seen that as against the above investments of Rs. 759.04 crore the bank has its own share capital of Rs. 250.54 crore, Reserve and Surplus of Rs. 5525.36 crores and balances under current deposits of Rs. 7,762.39 crore on which the bank does not pay any interest. Therefore the available funds which are non interest bearing is Rs.13,538.29 crore. Thus, it is seen that sufficient interest free funds are available to make the investment of Rs. 759.04 crores from which tax free exempt income is earned. The appellant also submitted that the investments as stated above are out of the said funds available to the assessee.

5.2.6 The AO held that the amount of direct expenditure in relation to exempt income is nil under Rule 8D(2)(i). The AO computed the indirect interest expenditure under rule 8D(2)(ii) at Rs. 45.52 crores. However while computing indirect interest expenditure of Rs. 45.52 crore for disallowance u/s 14A, the AO has not indicated any cogent reason as to how the interest expenditure are indirectly incurred in connection with investment from which the exempt income is earned. In the light of the fact that sufficient funds are available to make the investments and the appellant's submission that the investments were made out of interest free funds available, therefore, AO is required to indicate cogent reason on the basis of the accounts that the claim of the appellant is not correct. In the absence of any finding on the basis of accounts that interest expenditures are incurred in relation to exempt income and considering the fact that sufficient interest free funds are available, therefore, no disallowance of indirect interest expenditure can be made under Rule 8D(2)(ii). In view of the above the indirect interest expenditure of Rs. 45.52 crores computed by the AO under Rule 8D(2)(ii) for disallowance u/s 14A is not justified.

5.2.7 However, considering the tax exempt investment of Rs. 759.04 crores and tax exempt income of Rs. 46.56 crores, some administrative and managerial expenses are definitely incurred which are attributable to tax exempt investment income. Therefore, as per Rule 8D(2)(iii), 0.5% of average value of investment calls for disallowance u/s 14A keeping in view the administrative and managerial expenses attributable to tax free investment income. The AO has disallowed Rs. 3,63,00,0007- under Rule 8D(2)(iii) being 1/2% of average value of tax exempt investment which is, therefore, justified. In view of the above factual and legal position, the disallowance made by the AO u/s 14A is reduced from Rs. 49.15 crores to Rs. 3.63 crores. Accordingly the grounds of appeal are partly allowed.”

Similar finding has been recorded by the ld. CIT(A) in appeal for the assessment year 2009-10. Both the parties could not be able to place any material on record to discard the findings recorded by the first appellate authority as above. Therefore, grounds Nos. 5 & 6 of assessee’s appeals and ground No. 1 & 1.1 in Revenue’s appeals are dismissed.

During the years under consideration, amounts of Rs. 2,83,89,975/- and Rs.11,66,05,590/- respectively were claimed to have been expended on account of Software Expenses which were charged to revenue. Assessee stated that the expenditure pertained to license fee for use of various software applications, purchase of new software licenses of Oracle Data Base, Anti Virus Software, Support Charges for Software Items etc. AO observed that no breakup of expenses with reference to AMC etc. was provided except a list outlining total expenses incurred. The assessee also did not furnish any reason for not capitalizing the said expenses and charging them to revenue.

The AO, therefore, following the decision in CIT v. Aravali Construction Co.

Pvt. Ltd. 124 Taxman 146 (Raj) (2002) concluded that the expenditure incurred on acquisition of computer software was to be treated as capital in nature. Accordingly, the expenditure of Rs. 2,83,89,975/- was disallowed for A.Y. 2008-09 and in A.Y. 2009-10 after giving corresponding depreciation, the expenditure of Rs.7,11,05,582/- was disallowed by the AO. The ld. CIT(A) deleted the disallowance of expenditure incurred for AMC holding them as Revenue expenditure but sustained the disallowance of remaining expenditure incurred on software as capital expenditure. The findings recorded by the ld. CIT(A) on this issue are identical except difference in the amounts of AMC expenses and other expenses incurred on software. The observations made by ld. CIT(A) in appeal for A.Y. 2009-10 read as under :

“5.4.3 In I.T. Rules Part A under the main heading III Machinery and Plant item no. (5) shows depreciation allowance on Computer including computer software is 60%. Further, note 7 below Part - B says: "Computer Software" means any computer program recorded on any disc, tape, perforated media or other information storage device. From the above, it is clear that computer software is included as Machinery and Plant where allowable rate of depreciation is 60%.

5.4.4 In Hindustan Construction Co. Ltd. v. DCIT [2013] 29 taxmann.com 82 (Mum.) the assessee incurred expenses for purchase of software development of E- Construct Suit. These programmes were specifically and exclusively designed for the purpose of business of the assessee and not general software. Hon'ble ITAT held that the expenditures have been laid out for acquiring intangible assets and the same will have an enduring benefit. Therefore, assessee is entitled for depreciation at 60%. Hon'ble ITAT Mumbai in Sandoz (P) Ltd. v. DCIT [2013] 34 taxmann.com 28 held that purchase of software whose life was more than 2 years, was capital in nature. Hon'ble Rajasthan High court in CIT v. Aravali Construction Co. Pvt. Ltd. 124 Taxman 146 (Raj)(2002) and Hon'ble ITAT, Delhi in Maruti Udhyog Ltd. v. DCIT (ITAT, Del) 92 ITD 119 held that expenditure incurred in relation to acquisition of computer software was to be treated as capital in nature. 5.4.5 In view of the above, I am of the opinion that all the expenses incurred on computer software except AMC is to be treated as Capital in nature. In the case of AMC, because it is specific that the contract is for one year, therefore, expenditure on AMC is required to be treated as revenue expenses. In the case of software license, unless it is specifically for one year, the expenditure cannot be treated as revenue. Moreover, sec 32 also specifically provides that licenses are intangible assets. In the Issue in appeal, from the detail of software expenses furnished before the AO, it is seen that only the following expenses are incurred for AMC: Date Name of the Vendor Software Details Amount (in Rs.) 09-08-2008 Mithi Software Tech P.L. AMC Relay Server 41,800/- 14-08-2008 Network Solution P.L. AMC of Networking at PDC 3,25,000/- 01-10-2008 Logica P.L. AMC of QPH & QLM for 4,63,5007- RTGS 03-01-2009 HCL Infosystems Ltd. AMC IBM Websphare for rtgs 2,62,045/- application Network Solution P.L. AMC Information Security 1,62,500/- Infrastructure Logica Pvt Ltd. AMC of QPH & QLM 1,54,500 software Network Solutions P.L. AMC networking of 440 OBC 4,60,591/- & 104 Egtb 24-03-2009 Wipro Limited AMC of hw/sw cluster 27,79,357/- installed at PDC 26-03-2009 FSS Pvt. Ltd. AMC of BASE 24 Software 16,73,010/- PDC 26-03-2009 FSS Pvt. Ltd. AMC of BASE 34 Software DR 7,83,180/- Site 27.03.2009 Network Solutions Pvt. Ltd. AMC cluster cisco router & 4,40,000/- software switches at PDC Total Total: 74,95,483/-

Therefore, the above expenses of Rs. 74,95,4837- are clearly revenue expenses and AO is not justified in treating the same as capital item. Out of the remaining expenses only the under mentioned five items are licenses, but nothing has been provided by the appellant to support that these are for annual use only.

Date Name of the Vendor Software Details Amount (in Rs.) 09-08-2008 Wipro Ltd. FINACLE Lisence 1,42,38,415.66 03-01-2009 Wipro Ltd. ATS on license of FINACLE 1,42,38,415.66 Wipro Ltd. 5 licenses Citric Integrated 99,927.97 Treasury Solution at IBD HCL Infosystems 500 Symentec AntJvirus licenses 2,25,000.00 Ltd. 30-03-2009 Wipro Ltd. 50 Symantec Antivirus licenses 32,500.00

Therefore, the remaining expenses on acquisition of computer software Rs. 10,91,10,107/-including the licenses are to be treated as capital in nature. Further, the case laws relied upon by the A/R viz. Amway India Enterprises Vs. DCIT [2008] 301 ITR (AT.) 0001 ITAT (Del.) (SB), CIT Vs. G.R Capital Services Ltd. [2008] 300 ITR 420 (Delhi), Business Information Processing Services Vs. ACIT [1999] 239 ITR (AT) 19 ITAT (Jai) and CIT Vs. Southern Roadways Ltd [2008] 304 ITR 84 (Mad.) are not of any help because all the decisions are pertaining to assessment years prior to amendment brought in w.e.f. April 1, 2003 where computer software was also included along with computer as a different class of asset within Machinery and Plant. In view of the above factual and legal position the AMC expenses Rs. 74,95,483/- mentioned above are to be treated as revenue expenditure and the remaining expenses Rs. 10,91,10,107/- are capital in nature. AO is directed to recompute the depreciation allowable on the above items of capital expenditure of Rs. 10,91,10,107/- on acquisition of software. Therefore, appeal fails in ground No. 10 of appeal with direction to the AO.”

On the similar reasoning, the ld. CIT(A) deleted the AMC charges of Rs.23,33,858/- and sustained other computer software expenses of Rs.2,60,56,117/- for the A.Y. 2008-09.

We, therefore, find that the ld. CIT(A) has passed a good order which needs no interference on this issue. Accordingly, grounds No. 7 in both the appeals of the assessee are dismissed.

The AO restricted the depreciation to 15% relying on the judgment of ITAT in the case of Nestle India Ltd., whereby the UPS has been treated as part of plant and machinery and not as part of computer. According, the AO made addition of Rs.1,54,12,500/- being excess depreciation disallowed. The ld. CIT(A) deleted the addition after relying on the decision of ITAT, Delhi Benches in the case of assessee itself (ITA No. 22 & 173/Del. /2011 for A.Y. 2006-07) dated 15.03.2013 wherein it has been laid down that LAN and WAN both formed integral part of computer system as computer could not be utilized without these devices for assessee’s business purposes and therefore, the assessee was entitled to depreciation @ 60%.

“29. Ground No 3 of the appeal is Ld. CIT(A) has erred in deleting the disallowance of Rs. 5,77,71,439/- made by the AO on account of excess claim of depreciation of LAN and WAN equipment. On these assets assessee claimed depreciation @ 60 % considering them as computers whereas AO granted the depreciation @ 15 % as plant and machinery.

In view of above decisions of coordinate bench in the cases of assessee, we decide this issue in favour of the assessee and against the revenue.

Accordingly, ground No. 2 in Revenue’s appeal for A.Y. 2008-09 is dismissed.

“36. We have carefully considered the rival submissions. Assessee banks has shown addition of Rs. 15,73,78,019/- to the opening WDV of Rs 15622208/- and reduction therefrom of Rs 100163 resulting in to WDV of Rs. 99748028 and claimed depreciation thereon of Rs 75136583/-. Firstly, assessee has shown these items as furniture and fixtures and we do not find that Appendix I as per Income tax rules 1962 prescribed under the head furniture and fixtures any class of items, which is eligible for 100 % depreciation. As per annexure D of the tax audit report, assessee himself has classified it is temporary wooden structure. Definitely, it is apparent that it is not building which CIT (A) has considered. Therefore, from the facts it is not clear that whether it is building or furniture and fittings. Secondly, we agree with the views of the CIT (A) that AO has erred in allowing depreciation at the correct rates has amortized these expenditure over 5 years. Therefore, in absence of these facts, this ground of appeal is restored back to the file of AO for fresh verification. Hence ground no four of the appeal is allowed for statistical purposes.”

Respectfully following the decision of Co-ordinate Bench, we also restore this issue to the file of AO to decide the same in the same lines as directed by the Tribunal in appeal for A.Y. 2007-08 as noted above. Accordingly, grounds Nos.3 & 3.1 in Revenue’s appeal for A.Y. 2008-09 and ground Nos. 2 & 2.1 in Revenue’s appeal for A.Y. 2009-10 are allowed for statistical purposes.

“(xi). Interest on saving bank accounts should be credited on regular basis whether the account is operative or not. If a fixed Deposit Receipt matures and proceeds are unpaid, the amount left unclaimed with the bank will attract savings bank rate of interest.”

This issue has been discussed in detail by the ld. CIT(A) in his order. The assessee Bank is covered by the Banking Regulation Act, 1949 and it has to follow the directions of Reserve Bank of India which regulates all the banks operation in India. The books of accounts are to be maintained as per directions of the Reserve Bank of India and financial results of the banks are also prepared by the banks as per the prescribed norms fixed by RBI. The Reserve Bank of India has considered in its circular that interest should be paid at the rate of saving banks interest rate on overdue deposits. Accordingly, the assessee bank has made the provision of Rs.83.00 crores as on the date of balance sheet, i.e., 31.03.2009. No such provision is proved to have been made by the assessee bank prior to this circular. However, the AO has observed that the assessee failed to identify the customers to whom such interest is payable and for which period and that the statutory auditors of the bank have qualified that the bank has changed the method of account. The ld. AR submitted that it is not the change in the method of accounting, but it was the change in accounting policy which is necessary to follow the guidelines of RBI in preparing the financial statement. The ld. CIT(A) has also accepted the view taken by the assessee and relied on a decision as is applicable to this case.

However, the claim of assessee, in our opinion, is not acceptable until it is ascertained that the actual payment of the provision has been made to the customers or not. We, therefore, restore this issue to the file of AO for the limited purpose to verify whether actual payment of the provision has been made to the customers or not and to decide the same accordingly as per law.

Needless to say, the assessee shall be given reasonable opportunity of being heard. Accordingly, ground No. 3 of Revenue’s appeal for A.Y. 2009-10 is allowed for statistical purposes.

Order pronounced in the open court on 27.12.2016.