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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI ABRAHAM P. GEORGE
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA No.288/Bang/2013 Assessment year : 2005-06 M/s. ING Vysya Bank Ltd., Vs. The Assistant Commissioner of ING Vysya House, Income Tax, No.22, M.G. Road, Circle 11(4), Bangalore – 560 001. Bangalore. PAN: AABCT 0529M APPELLANT RESPONDENT ITA No.318/Bang/2013 Assessment year : 2005-06 The Deputy Commissioner of Vs. M/s. ING Vysya Bank Ltd., Income Tax, Bangalore – 560 001. Circle 11(4), PAN: AABCT 0529M Bangalore. APPELLANT RESPONDENT Assessee by : Shri S. Ananthan, C.A. Revenue by : Shri C.H. Sundar Rao, CIT-I(DR) Date of hearing : 20.01.2015 Date of Pronouncement : 06.02.2015 O R D E R Per N.V. Vasudevan, Judicial Member ITA No.288/B/13 is an appeal by the assessee, while ITA No.318/B/13 is an appeal by the revenue. Both these appeals are directed against the order dated 28.9.2012 of CIT(Appeals)-I, Bangalore relating to assessment year 2005-06.
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ITA No.288/B/13 (Assessee's appeal)
There are about 11 grounds of appeal raised by the assessee, out of which ground No.1 is general in nature and calls for no specific adjudication. Ground No.11 relates to levy of interest u/s. 234D of the Act, which is purely consequential.
At the time of hearing, ld. counsel for the assessee submitted that ground No.8 is not pressed and therefore the same is dismissed as not pressed. Similarly, it was submitted that ground No.10 was also not pressed because of adverse order on identical issue in assessee's own case for A.Y. 2004-05. Consequently, ground No.10 is also dismissed.
We shall first take up for consideration grounds raised by the assessee which are identical to the grounds in its own case for A.Y. 2004- 05, which has already been adjudicated by this Tribunal in ITA No.443/Bang/2010 by order dated 30.12.2014.
Ground No.3 reads as follows:-
“3. Income claimed exempt under Section 10(23G) of the Act amounting to Rs 2,82,53,262 3.1 The learned CIT (A) has erred on facts and in law in confirming the disallowance made by the learned AO of the income claimed exempt under Section 1 0(23G) the Act.”
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The assessee is a scheduled bank and carries on banking business. The assessee claimed to have earned an amount of Rs.11.77 crores by way of interest from investments in entities approved u/s. 10(23G). The AO, however, found that some of the entities did not have approval from the competent authority for claiming exemption. The assessee had furnished a list of such companies, where the approval was yet to be received. Interest from these parties totaling to Rs.2,82,53,262 as tabulated below, was therefore brought to tax by the AO denying exemption u/s. 10(23G).
Sl. Party Amount No. 1. Gujarat Industries Power Co. Ltd. 1,15,25,477 2. Lanco Kondapalli Power Corpn. Ltd. 46,26,609 3. Samalpatti Power Co. Ltd. 3,06,988 4. BSES Kerala Power Ltd. 72,44,263 5. Rajahmundry Express Way 56,52,800 6. Spectrum Power Generation Ltd. 32,86,000 7. Samalpatti Power Co. Ltd. 2,37,735
Even before CIT(Appeals), assessee was not able to file required certificates.
Before us, the limited request of the learned counsel for the assessee was hat the necessary approvals from the CBDT is available and will be provided to the Assessing Officer. He prayed that the order of the Assessing Officer may be set aside and the assessee allowed opportunity of providing the necessary approvals for grant of exemption u/s.10(23G) of
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the Act. We are of the view that it would be just and appropriate to set aside the addition made by the Assessing Officer in this regard and allow opportunity to the assessee to produce the required certificate which will enable the assessee to claim exemption u/s.10(23G) of the Act. For statistical purpose, the ground of appeal is treated as allowed.
Ground No.5 reads as follows:-
“5. Revenue expenditure claimed on account of software expenses amounting to Rs 84,64,720 5.1 The learned CIT (A) has erred on facts and in law in confirming the disallowance made by the learned AO with respect to software expenses claimed as revenue expenditure, as capital in nature. 5.2 The learned CIT (A) ought to have appreciated the fact that the said software does not provide any enduring benefit to the Appellant and would be required to be replaced/renewed within a short span of time.”
The assessee claimed as a deduction a sum of Rs.2,11,61,800 on account of purchase of software. The Assessing Officer was of the view that software is a depreciable asset and expenditure incurred thereon was a capital expenditure. He was of the view that 60% of the value of software alone would be allowed as a depreciation and disallowed 40% of the same, which resulted in an addition of Rs.84,64,720 to the total income of the assessee.
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Before the CIT(Appeals), the assessee submitted that software in question were all application software, which were for the purpose of day to day usage. It was pointed out that assessee does not have ownership rights over the software and has a right only for its usage. Therefore there was neither an enduring benefit as the software had a short lifespan, nor the assessee owner of the software. It was therefore submitted that the expenditure should be allowed as revenue expenditure. The CIT(A), however, did not agree with these submissions and he confirmed the order of AO. Aggrieved, the assessee has raised ground No.5 before the Tribunal.
At the time of hearing, it was brought to our notice that identical issue came up for consideration in assessee's own case before this Tribunal in A.Y. 2004-05 in ITA No.1143/Bang/2010. The Tribunal by its order dated 30.12.2014 dealt with issue in paras 13 to 21 of its order. Paras 19 to 21 of the said order relevant to the present case read thus:-
“19. The learned counsel for the assessee brought to our notice the decision of the Hon'ble Karnataka High Court in the case of IBM India Ltd., in ITA No.130/2007, dt 10.04.2013. The Hon'ble Karnataka High Court in the aforesaid decision considered the following question of law : “Whether the Tribunal was correct in holding that the purchase of software amounting to Rs.33,14,298/- should be allowed as a revenue expenditure without recording a finding as to the nature of the purchase, its durability and its application before deciding the issue ?
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The Hon'ble High Court on the aforesaid question of law held as follows : “9. The second substantial question of law relates to application of the amount utilized for projects of Software in a sum of Rs.33,14,298/-. The Tribunal on consideration of the material on record and the rival contentions held, when the expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company’s working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acquired certain application software. The amount is paid for application of software and not system software. The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. In fact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh licence fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the
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operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it does not result into acquisition of any capital asset. It merely enhances the productivity or efficiency and therefore, it has to be treated as revenue expenditure In that view of the matter, the finding recorded by the Tribunal is in accordance with law and do not call for any interference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue.”
According to the learned counsel for the Assessee, the aforesaid ruling of the Hon'ble Karnataka High Court that the expenditure incurred for acquiring application software has to be treated as revenue expenditure. The learned counsel further pointed out that in the remand report filed by the AO before CIT(A) on the aforesaid issue, the AO did not dispute the fact that the computer software which was claimed as revenue expenditure were not application software as was contended by the assessee in his submission before the CIT (A). In other words, the fact that the nature of the expenses as one being licence fees for using MS office and MS windows was not disputed by the Assessing Officer. He also pointed out that the AO did not dispute the contention before CIT(A) that the Assessee had not made double deduction once in the profit and loss account and again in the computation of total income nor has the Assessee claimed depreciation on the capitalized value of the software expenditure incurred on purchase of application software. According to him therefore the claim of the Assessee had to be allowed. The learned DR relied on the order of the CIT(A) and further submitted that the issue may be set aside to the AO for a consideration afresh in the light of the submissions made by the Assessee before the Tribunal. 21. We have considered the rival submissions and are of the view that in the light of the submissions before CIT(A) and the remand report of the AO before CIT(A), it is clear that the revenue does not dispute the fact that there was no double claim of expenditure either in the form of a debit in the profit and loss account and thereafter a deduction claimed in the computation of total income. The revenue has also not disputed the fact that the expenditure in question though capitalized in the books of
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accounts, no claim for depreciation on the application software had been claimed by the Assessee. The fact that the software in question is application software has also not been disputed. In these circumstances we are of the view that the plea of the learned DR for a remand of the issue to the AO for a fresh consideration will be an exercise in futility and would result in harassment to the Assessee. In the light of the above legal position laid down by the Hon’ble Karnataka High Court in the case of IBM (India) Ltd. (supra) and the factual position, in the assessee's case, we are of the view that the disallowance of expenditure on purchase of software was not proper. Accordingly the addition made by the Assessing Officer and confirmed by the CIT (A) is directed to be deleted.”
The facts and circumstances in the present assessment year are identical to those as it prevailed in A.Y. 2004-05 and therefore the decision rendered by the Tribunal in A.Y. 2004-05 will be applicable to the present assessment year also. Respectfully following the said decision of the Tribunal, we hold that expenditure incurred on purchase of software should be allowed as revenue expenditure. Ground No.5 is therefore allowed.
Ground No.6 reads as follows:-
“6. Amortization of investments under HTM category amounting to Rs 5,26,36,981 6.1 The learned CIT (A) has erred on facts and in law in confirming the order of the learned AO of not allowing an amount of Rs 5,26,36,981 as deduction in computing the income from sale of HTM category of investments. The learned CIT (A) ought to have appreciated the fact that such amount represents the amortization of HTM category of investments sold during the year, which have been disallowed in the past assessment years. 6.2 The learned CIT (A) ought to have appreciated that having disallowed the amortization in the past assessment years, the
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same should form part of the cost in the year in which such investments are sold.”
The assessee claimed deduction of amortisation of investments held under HTM category, which were disallowed in A.Ys. 2001-02, 2002-03 and 2003-04 while computing total income. The AO rejected the claim observing as follows:-
“12. Amortization of Investments under HTM category disallowed in asst. year 2001-02 & 2002-03 – Rs.3.51 or. and pertaining to asst. year 2003-04 – R.s.1.74 cr. 12.1 The above two claims for a deduction of Rs 5,26,36,981/- are not allowed presently as the assessee is in appeal against the above adjustments. The claim of the assessee would be considered u/s. 154 as and when the appeal is dismissed on these issues or it withdraws its claim on these issues and files a letter suitably. An amount of Rs.5,26,36,981/- Is therefore disallowed and is added back.”
The CIT(Appeals) concurred with the view of AO.
Aggrieved by the order of CIT(A), assessee has raised ground No.6 before the Tribunal.
At the time of hearing, it was brought to our notice by both the parties that identical issue was also considered by this Tribunal in assessee's own case for A.Y. 2004-05 (supra) and on the issue of amortisation of premium paid on securities under HTM category, the Tribunal held as follows:-
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“06. Ground no.2 raised by the assessee reads as follows : "2. Amortisation of investment held under "Held to Maturity" category – Rs.2,90,77,263/- : Learned CIT (A) has erred in law and on fact by confirming the addition of Rs.2,90,77,263/- made by the Assessing Officer being amortization of investment under the "Held to Maturity" category." 07. The assessee while computing its total income claimed deduction of a sum of Rs.2,90,77,263/-. The aforesaid deduction was claimed under the head amortization of held to maturity. The assessee explained that in the course of its banking business, to meet the statutory liquidity ratio requirements prescribed by the RBI, the Assessee had to make investments in Central and State Government securities. The assessee also pointed out that as per RBI directions such investments are classified into three categories as under : i) Available for sale (AFS) ii) Available for trading (AFT) iii) Held to Maturity (HTM).
The assessee pointed out that the investments which were made by the assessee and categorized as HTM were purchased at a price which was higher than its redeemable value. In other words, these securities were purchased at a premium. The difference between the actual cost of these investments and the face value of such investments were spread over to the life of the investments and proportionate deduction was claimed by the assessee under the head "Amortization of HTM". The further claim of the Assessee was that all the securities held by the Assessee were held as “stock-in-trade” by the Assessee. The face value of the securities held in HTM category is alone shown in the books as cost and the premium is not claimed as cost of the securities, as the premium is claimed by way of amortization of premium over the life of the security. 08. The Assessing Officer disallowed the claim of the assessee on the ground that the HTM category of investments were not held by the assessee till maturity and had been sold off even before the maturity period. The Assessing Officer therefore held
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that the assessee had not followed the RBI guidelines. According to the Assessing Officer, the value of the securities would increase with each year and at any point of time the market value would be more than the purchase value and therefore there was no requirement for amortization. The Assessing Officer accordingly rejected the claim of the Assessee. 09. On appeal by the assessee, the CIT (A) confirmed the order of the Assessing Officer. According to the CIT (A), investments made by a banking company which are categorized as HTM are in the nature of investments and cannot be treated as stock-in-trade and the claim of amortization of the assessee was disallowed. Aggrieved by the order of the CIT (A), assessee has raised ground no.2 before the Tribunal. 10. At the time of hearing of the appeal it was brought to our notice that similar issue had come up for consideration in assessee's own case and this Tribunal upheld the plea of the Assessee for deduction on account of amortization of premium paid of securities held in HTM Category. The following were the relevant observations of the Tribunal in ITA No.443/Bang/2012 for AY 02-03 order dated 14.8.2013: “10. We have heard the rival submissions. The issue raised by the assessee in ground No.2 is no longer res integra and has been decided by this Tribunal in the case of M/s. Sir M.Visweswaraya Cooperative Bank Ltd. Vs. JCIT ITA No.1122/Bang/2010 for AY 07-08 order dated 11.5.2012. The following were the relevant observations of the Tribunal: “03. Let us first take up the issue relating to amortization of premium on investment in government securities. Relevant grounds read as under : " i) The learned Commissioner (Appeals) ought to have appreciated that the appellant has to invest surplus fund in Government Securities as per RBI guidelines and the premium paid while investing in Government Securities that are bought in open market would have to be amortized till the maturity date of the security and thus the premium was written off was liable to be allowed as depreciation of value of securities ;
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ii) The learned Commissioner (A) ought to have appreciated that the classification of securities for RBI purposes would not take away the benefit which the appellant was entitled to and he ought to have appreciated that the case law referred were distinguishable and accordingly he ought to have allowed the deduction as claimed in full." 04. The brief facts pertaining to this issue are that while framing the assessment u/s.143(3) of the IT Act, for the assessment year 2007-08, the Assessing Officer noticed that the assessee has claimed a sum of Rs.26,40,237/- under amortization of premium on investments and the assessee had no explanation for the claim. Hence, he disallowed the same. While disallowing the same, the Assessing Officer followed the decision of the Madras High Court in the case of TN Power Finance and Infrastructure Development Corporation Ltd., v. JCIT (2006) 280 ITR 491. Aggrieved, the assessee moved the matter in appeal before the first appellate authority. 05. The learned Commissioner of Income-tax (Appeals) after considering the submissions made before him and following the decision of the Madras High Court cited supra, came to the conclusion that the Hon'ble Madras High Court has that merely because the RBI had directed the assessee to provide for non-performing assets, that direction cannot override the mandatory provisions of the Income-tax Act contained in section 36(1)(viia) which stipulate for deduction not exceeding 5 per cent of the total income only in respect of the provision for bad and doubtful debts which are predominantly revenue in nature or trade related and not for provision for non-performing assets which are of predominantly capital nature. Thus, he was of the view that the assessee was not entitled to deduction of amortization of premium on investments u/s.36(1)(vii). Aggrieved, the assessee is in second appeal before us with this issue. 06. The learned counsel for the assessee submitted that the Commissioner of Income-tax (Appeals) had failed to see the reason that a issue similar to that of the present
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one had been allowed by various benches of the Hon'ble Tribunals, namely : • Catholic Syrian Bank Ltd., v. ACIT – Cochin (2010) 38 SOT 553 ; • Khanapur Coop.Bank Ltd., v. ITO in ITA.141/PNJ/2011 (Panaji); • Corporation Bank v. ACIT, M'lore in ITA.112/Bang/2008 (Bang) The learned counsel also placed reliance on Board's Instructions No.17 of 2008(vii) and pleaded that the claim of the assessee be allowed as the assessee had the powers to debit in its P&L account a sum of Rs.29,02 lakhs of amortization of premium. 07. Per contra, the learned DR was unable to controvert to the submissions of the learned counsel for the assessee. 08. We have carefully considered the rival submissions and perused the relevant facts and materials on record. We have also considered the findings of the various benches of the Tribunal, as under : (i) Catholic Syrian Bank Ltd v. ACIT – (2010) 38 SOT 553 (Coch) : An identical issue to that of the subject matter under consideration had arisen before the Cochin Bench. After analyzing the issue in depth, the bench has observed that with regard to amortization of premium on purchase of Government securities, it was clarified that this was made as per the prudential norms of the RBI. Following the Tribunal decision in the assessee's own case and considering that the assessee bank is following consistent and regular method of accounting system, there is no justification in interfering with the order of the Commissioner of Income-tax (Appeals) on this issue of amortization of premium on government securities. United Commercial Bank v. CIT (1999) 156 CTR (SC) 380 ; (1999) 240 ITR 355 (SC) and South Indian Bank Ltd., (ITA No.126/Coch/2004, dated.___ Sept, 2005 followed."
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(ii) The Khanapur Co-op Bank Ltd v. ITO – ITA No.141/PNJ/2011, dated.8.9.2011 : The Hon'ble Bench of Panaji Tribunal had recorded its findings that "6. Likewise, the premium amortized at Rs.1,78,098/- is claimed to be in respect of securities held under the category 'held to maturity'. The Assessing Officer has taken them as long term investments. In other words, he has accepted the assessee's claim that the securities are 'held to maturity'. That being so and having regard to the CBDT Instruction No.17 of 2008 dated.26.11.2008 as reproduced herein above, the premium paid on such government securities is required to be amortized over the period remaining to maturity ………." (iii) In the case of Corporation Bank v. ACIT, M'lore in ITA.112/Bang/2008 (Bang), for the assessment year 2004- 05, the earlier bench had also held a similar view. In the light of the above discussion and the case laws discussed supra, taking into account the totality of the facts and materials, we are of the considered view that the assessee is entitled to claim this deduction and hence we allow the grounds of the assessee relating to this issue.” 11. We are of the view that in the light of the decision on the issue considered by the Tribunal, the claim made by the assessee has to be allowed. Accordingly, the AO is directed to allow the claim of the assessee for deduction.” 11. It was also brought to our notice that on identical issue the Hon'ble Kerala High Court in CIT Vs. South Indian Bank Ltd., ITA.946 of 2009, dt 9.10.2009 decided similar issue holding as follows : “The respondent-assessee is a Bank which purchased securities at market value above the face value. Admittedly when the securities were redeemed, respondent will be entitled to get only face value. Consequently, the loss arising on account of purchase at market value is written off in instalments by spreading over the same equally for every year until date of maturity. We are of the vie hat the Tribunal rightly
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upheld the assessee’s entitlement to write-off of loss in instalments. Consequently the departmental appeal is dismissed.” 12. In view of the aforesaid decisions rendered on identical issue, we are of the view that the claim of the assessee ought to be allowed. Accordingly, ground no.2 raised by the assessee is allowed.”
Having considered the order of Tribunal and the facts of case for the year under consideration, we are of the view that the issue requires to be examined by the AO afresh in the light of the ultimate decision on the claim of assessee for deduction for amortisation of investments in A.Ys. 2001-02, 2002-03 and 2003-04. If, consequent to appellate orders, amortisation is allowed as deduction in those assessment years, then the assessee will not be entitled to claim deduction in the present assessment year, which is stated to be the year in which the securities were sold. The AO is therefore directed to verify this aspect and consider the claim of assessee afresh, after affording the assessee an opportunity of being heard.
Ground No.7 reads as follows:-
Expenditure incurred on Employee Stock Options (ESOP) amounting to Rs 1,04,46,542 7.1 The learned CIT (A) has erred on facts and in law by confirming the disallowance made by the learned AO of a sum of Rs 1,04,46,542 relating to employee compensation expenses. 7.2 The learned CIT (A) ought to have appreciated that the observation in the tax audit report is not conclusive of the nature of the expense.
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7.3 The learned CIT (A) ought to have appreciated that the treatment adopted by the Appellant is in accordance with the SEBI guidelines and that the expenditure is not a contingent liability and is an allowable revenue expenditure. 7.4 The learned CIT (A) erred in holding that the ESOP expenses are only notional and unascertained in the absence of exercise of the options by the employees.”
At the time of hearing, it was brought to our notice by both the parties that identical issue was also considered by this Tribunal in assessee's own case for A.Y. 2004-05 (supra) and this Tribunal held as follows:-
“67. Ground no.10 raised by the assessee reads as follows : “10. Liability relating to employees compensation cost — Rs 97,73,232 : Learned CIT(A) has erred in law and on fact by confirming the disallowance made by the AC on the ground that employees compensation cost of Rs 97,73,232 is an unascertained expense and contingent in nature.” 68. During the previous year relevant to ÀY 2004-05, the assessee debited an amount of Rs. 9,773,232/- towards employee compensation expense under the Employee Stock Option Scheme (ESOP). These expenses were debited to the profit and loss account in accordance with the SEBI guidelines. The learned AO has disallowed the claim for deduction while computing income of the aforesaid expense on the ground that they are contingent in nature and hence not allowable as revenue expenditure. 69. Before CIT(A), the Assessee submitted that the treatment adopted by the Assessee is in accordance with the SEBI guidelines and that the expenditure is not a contingent liability and allowable revenue expenditure. Further the Assessee placed reliance on the decision of the Madras Tribunal in the case of SSI
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Ltd. V DCIT (85 ITJ 1049) wherein it was held that such expenditure was allowable as revenue in nature. The CIT(A) however upheld the order of the AO. Aggrieved by the order of the CIT (A), assessee has raised ground no.10 before the Tribunal. 70. The issue raised by the assessee in ground no.10 has since been considered by the Special Bench of the ITAT Bangalore in the case of Biocon (2013) 35 Taxmann.Com 305 (Bangalore – Trib) (SB). The Special Bench in the aforesaid decision held that when an Assessee issues shares under an Employee’s Stock Option Plan (ESOP) and claimed difference between market price and exercise price as deduction under section 37(1), spread equally over vesting period of years, on basis of SEBI Guidelines and accounting principles, the AO cannot disallow the same holding it to be contingent liability. It was further held that the mere fact that quantification is not precisely possible and time of incurring liability is not certain would not make an ascertained liability a contingent. The Special Bench further held that where liability in respect of ESOP is incurred at end of each year, which is quantified at end of vesting period when employees become entitled to exercise options, on ESOP it is an ascertained liability and not a contingent liability. It was held that discount on ESOP being a general expense, is an allowable deduction under section 37(1) during years of vesting on basis of percentage of vesting during such period, subject to upward or downward adjustment at time of exercise of option. 71. In view of the aforesaid decision of the Hon'ble Special Bench, we are of the view that the claim of the assessee for deduction has to be allowed in principle. We, however, remand the issue to the Assessing Officer for considering quantification of the deduction to be allowed in the light of the observations made by the Special Bench in this regard.”
We are of the view that it would be just and appropriate to direct the AO to consider the claim of assessee for deduction afresh in the light of directions given in para 71 of the order of Tribunal for A.Y. 2004-05.
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Needless to say that assessee will be afforded opportunity of being heard before deciding the issue by the AO.
Ground No.9 reads as follows:-
“9. Provision for salary arrears amounting to Rs 21,75,53,603 9.1 The learned CIT (A) has erred on facts and in law by confirming the disallowance made by the learned AO of a sum of Rs 21,75,53,603 being the provision for salary arrears. 9.2 The learned CIT (A) ought to have appreciated that the provision is made on the basis of bipartite agreement between the India Banks Association and the Appellant. 9.3 The learned CIT (A) ought to have observed that the same does not represent a contingent liability.”
At the time of hearing, it was brought to our notice by both the parties that identical issue was also considered by this Tribunal in assessee's own case for A.Y. 2004-05 (supra) and this Tribunal held as follows:-
“43. Ground no.7 raised by the assessee reads as follows : “7.Provision for salary arrears — Rs 11,65,00,270 : Learned CIT(A) has erred in law and on fact by upholding the disallowance made by the Assessing Officer on the ground that provision for salary arrears amounting to Rs 11,65,00,270 is contingent in nature. Learned CIT(A) failed to appreciate the fact that the provision for salary arrears was an actual and accrued expenditure.” 44. During the previous year relevant to AY 2004-05, the assessee had made a provision of Rs. 116,500,000 for employees
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in the IBA Cadre in anticipation of enhanced wages. During the AY 2005-06, the Assessee made a further provision of Rs. 217,553,603 thereby the total provision amounting to Rs. 334,053,603. The Bank had created a provision for salary arrears totaling to Rs.334,053,603 as tabulated below: Amount On payment Amount debited to Amount Year of Whether Assessment claimed as the P&L actually payment debited to Year Provision account paid P&L a/c 2004-05 116500000 116500000 Nil NA NA 2005-06 217553603 217553603 Nil NA NA 2006-07 Nil Nil 283813002 2006-07 No* Total 334053603 334053603 283813002
From the aforesaid it can be seen that the actual liability discharged by the Assessee in AY 06-07 was less than the provision made in AY 04-05 & 05-06. Excess provision of Rs. 5.021 Crores so made in the said two AYs was offered to tax under section 41(1) of the Act in AY 2006-07. According to the Assessee provision for liability on account of enhancement in wages was made on the basis of a bipartite agreement between the Indian Banks Association (IBA) and the Bank. The agreement was finalized and signed before finalization of accounts for the A Y 2005-06. 45. The claim of the Assessee for deduction of Rs. 116,500,000 was disallowed by the AO on the ground that the liability was contingent in nature. 46. Before CIT(A) the Assessee reiterated submission that the liability on account of wage arrears was not contingent in nature as the bank had almost finalized the negotiation with IBA. As the amount has been provided based on negotiations between the IBA and the Employees Union, the same cannot be said to be contingent in nature and is allowable as revenue expenditure under the Act. Alternatively the Assessee claimed that the sum should be allowed as deduction in AY 06-07 on payment basis. 47. The CIT(A) upheld the order of the AO holding that the liability was contingent in AY 04-05 but accepted the alternative
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argument to allow the said deduction in AY 06-07 on the basis of actual payment after due verification. Aggrieved by the order of CIT (A), assessee has raised ground no.7 before the Tribunal. 48. The learned counsel for the assessee submitted that the liability on account provision for salary arrears is not a contingent liability. It was submitted by him that the Hon'ble Delhi High Court in the case of CIT v. Bharath Heavy Electricals Ltd. (352 ITR 88 (Del) while dealing with a similar provision made on account of wage revision, held, following the decision of the Hon'ble Supreme Court in the case of BEML (245 ITR 428) (SC) that when the incurring of the liability is certain and it was only a question of quantification of the liability and if the quantification of the liability by the assessee is on a reasonable basis, then the deduction claimed has to be allowed and cannot be termed as contingent. Our attention was also drawn to the decision of the Hon'ble ITAT, Bangalore Bench in the case of Syndicate Bank v. DCIT in ITA.709/Bang/2012, wherein the Hon'ble ITAT in the case of a bank which also had to revise its wages on the basis of a bipartite settlement held that the provision for arrears of wages has to be held as a deduction. 49. The learned DR while relying on the order of the CIT (A) submitted that going by the figures set out by the assessee, it is clear that the estimat3 of liability made by the assessee in the books of account was excessive compared to the actual liability consequent to bipartite settlement. It was therefore submitted by him that the ratio of cases relied on by the AR cannot be applied in the facts of the assessee's case. 50. The learned counsel for the assessee pointed out that the excess provision was offered to tax by the assessee in AY 2006- 07. It was his submission that there is no prejudice to the Revenue in this regard and therefore ratio of the decisions cited on behalf of the assessee will apply to the case of the assessee also. 51. We have considered the rival submissions. Identical issue was considered by the ITAT, Bangalore Bench in the case of Syndicate Bank (supra) and it was held by this Tribunal as follows :
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“41. We have considered the rival submissions. From a perusal of the chart of the 8th and 9th Bipartite Settlement for the period from Nov.2002 to May 2005 and from Nov.2007 to May 2011 respectively, it is seen that right from AY 03-04 to 11-12, the Assessee has been making a claim for deduction on account of wage arrears to be paid and the revenue has allowed the claim except in AY 2009-10. In this year the provision for wage arrears made by the Assessee was at 8% of the wages prevailing while the ultimate settlement with the workers was at 12%. Thus the estimate made by the Assessee was conservative and well below the ultimate increase that the Assessee conceded to workers in the settlements. As laid down by the Hon’ble Supreme Court in the case of BEML v. CIT, 245 ITR 428 (SC), the criteria for allowing deduction on account of a provision is that the liability to incur the expenditure which is claimed by way of a provision should be certain and secondly the quantification of such liability should be scientific/reasonable. In the present case, the assessee was legally bound to pay the ultimate revision of wages to be settled. In our view going by the past history, the basis on which the provision was made was reasonable. The liability of the assessee to pay increased wages is certain but what was pending was only quantification. The revenue has not disputed the basis of quantification of such liability. In such circumstances, we are of the view that in the light of the principles laid down by the Hon’ble Supreme Court in the case of BEML (supra), the claim for deduction should be allowed. We accordingly direct the AO to allow the claim of the assessee in this regard.” 52. We are of the view that the ratio laid down in the aforesaid decision will squarely apply to the facts of the assessee's case. In our view the estimate made by the assessee is reasonable and the assessee has written back the excess provision. In these circumstances, we are of the view that the claim of the assessee for deduction has to be allowed as it cannot be said that the liability in question is a contingent liability. For the reasons given above we allow ground no.7 raised by the assessee.”
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The decision rendered by the Tribunal for A.Y. 2004-05 will apply to the facts and circumstances of the present case also. In fact, in para 44 of the said order of the Tribunal, the provision made on account of wage arrears for A.Y. 2005-06 has also been noted by the Tribunal. We are of the view that the conclusions of the Tribunal in para 52 of the said order will equally apply to the present assessment year also. Respectfully following the aforesaid decision of this Tribunal, we hold that the assessee should be allowed deduction on account of provision for salary arrears. Ground No.9 is accordingly allowed.
Thus the two contested grounds viz., Ground No.2 and 4 in Assessee’s appeal alone are left to be adjudicated. Ground No.2 raised by the Assessee reads as follows:-
Interest paid to MMRDA amounting to Rs 30,72,52,362 2.1 The learned CIT (A) has erred on facts and in law in confirming the disallowance made by the learned Assessing officer [“learned AO”] of interest paid to MMRDA. 2.2 The learned CIT (A) ought to have appreciated that the liability in respect of the said payments had crystallized during the year. 2.3 The learned CIT (A) ought to have appreciated that the same is revenue expenditure. 2.4 The learned CIT (A) ought to have appreciated that Section 37 of the Act allows an assessee to claim deduction of expenses other than the ones that are capital in nature, laid out or expended wholly and exclusively for the purpose of business or profession.”
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The facts with regard to this ground of appeal are as follows. The assessee was allotted leasehold rights for a period of 80 years in respect of a piece of land in Mumbai by Mumbai Metropolitan Regional Development Authority (MMRDA). The lease premium payable in respect of lease was a sum of RS.100.20 crores. First installment of lease premium (which is 50% of Rs.100.20 crores) was paid by the assessee on 12.6.1995. The remaining 50% was to be paid within six months. The assessee sought extension of time for making payment of the balance installment. MMRDA agreed for extension of last date of payment of balance installment by 28.3.1997, imposing a condition that assessee should pay interest of Rs.10.95 crores by 31.10.1996. Assessee paid Rs.10.95 crores being interest on 30.10.1996. In the books of account, Rs.10.95 crores was shown as advance payment to MMRDA and was not charged to Profit & Loss account.
The assessee filed a Writ Petition in W.P. No.449/1997 before the Hon'ble Bombay High Court seeking for surrender of leasehold rights and return of installments already paid by the assessee. The Hon'ble Bombay High Court passed an interim order in the W.P. on 27.3.1997 whereby it directed the assessee to deposit balance lease premium installment of Rs.54,72,28,140 [Rs.50,10,24,108 being the 50% of the balance lease premium payable and the remaining sum probably towards interest for the period from 1.11.1996] with IDBI Bank, pending disposal of the writ petition.
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The said deposit yielded interest income which was offered by the assessee to tax in the various assessment years as follows:-
Deposit with IDBI Bank – Interest recognized in the accounts yearwise Year Amount Rs. 1998-99 12,18,64,978 1999-00 6,80,21,372 2000-01 7,88,17,501 2001-02 7,54,62,407 2002-03 6,79,35,432 2003-04 5,52,79,892 2004-05 Upto July 2004 1,98,30,502 TOTAL 48,72,12,084
The proceedings before the Hon'ble Bombay High Court ultimately ended in a compromise between the assessee and MMRDA. The terms of compromise recorded by the Hon'ble High Court in the order passed on 24.8.2004 specifically mention that the assessee was to pay the balance installment of Rs.50,10,24,108 together with interest of Rs.19,77,32,295. This interest was calculated at 5% on the balance lease amount premium for the period 29.9.1996 to 24.8.2004.
The assessee claimed as a deduction a sum of Rs.10,95,20,067 paid on 30.10.96 as interest for delayed repayment of balance installment and further sum of Rs.19.77 crores being the interest payable for the delayed payment of balance of installment of lease premium, pursuant to the order of Hon'ble High Court. The Assessing Officer was of the view
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that the sum of Rs.10,95,20,067 paid by the assessee on 30.10.1996 was not an expenditure which accrued to the assessee during the previous year and therefore it cannot be allowed as a deduction. In other words, the AO took the view that this was a prior period expense and cannot be allowed as a deduction in A.Y. 2005-06. The AO was also of the view that the aforesaid amounts viz., Rs.10,95,20,067 as well as Rs.19,77,32,295 were expenditure of capital nature and therefore cannot be allowed as deduction. The AO was of the view that interest paid on delayed payment of cost for acquiring capital asset will also partakes the character of capital expenditure.
The assessee relied on the decision of Hon'ble High Court of Karnataka in the case of HMT Ltd., 208 ITR 820, wherein a view was
taken that premium paid for acquiring leasehold interest was akin to payment of rent in advance and should be allowed as revenue expenditure. However, the AO was of the view that premium paid in the case of assessee cannot be treated as rent paid in advance. He was also of the view that since period of leased asset was more than 80 years, assessee derives an enduring benefit by incurring the aforesaid expenditure. He accordingly disallowed the claim of assessee for deduction of the aforesaid amounts.
On appeal by the assessee, the ld. CIT(Appeals) confirmed the order of AO expressing the view that expenditure in question was of a
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capital nature. The CIT(A) also held that the question whether sum of Rs.10,95,20,067 which was interest paid by assessee on 30.10.96 accrued as a liability during the previous year or not was required to be adjudicated, as the expenditure has been held to be a capital expenditure.
Aggrieved by the order of CIT(A), the assessee has raised ground No.2 before the Tribunal. The ld. counsel for the assessee firstly submitted that liability of the assessee in respect of interest payment crystallizes only on 24.8.2004 when the Hon'ble Bombay High Court passed an order in terms of the compromise entered into between the parties. He brought to our notice clause 3 of the compromise memo between the assessee and MMRDA, which reads as follows:-
“3. AGREED AND DECLARED that : (i) Petitioner No.1 has, on the date hereof, paid to Respondent No.1, the second and final installment of the lease premium payable in respect of Plot No. C-12. G-Block International Finance and Business Centre, Bandra-Kurla Complex (hereinafter “the said plot”) aggregating to Rs. 69,87,56,403.00 (Rupees Sixty Nine Crores Eighty Seven Lakhs Fifty Six Thousand Four Hundred and Three only) (by Bank Pay Order No. 094677 dated August 18, 2004 ) being the balance 1ease premium amount of Rs.50,10,24,108 (Rupees Fifty Crores Ten Lakhs Twenty Four Thousand One Hundred and Eight only) together with interest thereon of Rs. 19,77,32,295.00 (Rupees Nineteen Crores Seventy Seven Lakhs Thirty Two Thousand Two Hundred and Ninety Five only) computed at the rate of 5% per annum for the period from 29th September, 1996, till date hereof in full and final satisfaction of all the claims of Respondent No.1 in respect of the lease premium payable to it for allotment of the said plot, (the receipt whereof Respondent No.1 does hereby admit and acknowledge);
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(ii) Respondent No.1 has no further claim against Petitioner No.1 in respect of the lease premium for allotment of the said Plot; AGREED AND DECLARED that the sum of Rs.10,95,20,067/- (Rupees Ten Crores Ninety Five Lakhs Twenty Thousand and Sixty Seven only) paid by the Petitioners to Respondent No.1 towards interest for delayed payment of the said second installment of lease premium calculated at the rate of 18% per annum for the period 13th July, 1995 to 28th September, 1996 shall be retained by Respondent No.1 and Petitioner No.1 shall not claim any refund or appropriation of the said amount or any part thereof;”
It was his submission that as far as sum of Rs.19,77,32,295 is concerned, the liability crystallizes only on the court passing the order in terms of compromise. As far as sum of Rs.10,95,20,067 paid by assessee to MMRDA on 30.10.96 is concerned, the same represents interest @ 18% p.a. for the period from 13.7.95 to 28.9.96 on the balance installment of lease premium. It was his submission that this sum was not treated as a revenue expenditure by the assessee, but was treated as advance payment of lease premium. It was only consequent to the order of the Hon'ble Bombay High Court that the aforesaid payment was treated as interest for delayed payment of lease premium. It was his submission that the liability, as far as assessee is concerned, came to be recognised only on 24.8.2004 when the court passed the order in terms of compromise between the parties. It was his submission that till the court passed the aforesaid order, the assessee wanted to surrender the lease and take back the money from MMRDA, therefore the said liability cannot be said to have
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crystallized prior to the passing of the court's order on 24.8.2004. It was therefore submitted by him that there cannot be any dispute with regard to crystallization of liability on the assessee during the previous year.
As far as question whether aforesaid expenditure is capital or revenue, ld. counsel for the assessee, firstly, submitted that the interest in question is nothing but interest paid on unpaid sale/purchase consideration. It was further submitted by him that in the following decisions, the Hon'ble Courts have taken a view that interest paid on unpaid purchase consideration is a revenue expenditure and is deductible while computing income:-
Sivakami Mills Ltd. (1997) 227 ITR 465 (SC) Bombay Steam Navigation Co. Pvt. Ltd. (1965) 56 ITR 52 (SC) Granulated Fertilizers & Fees (P.) Ltd. (1999) 137 ITR 400 (Guj) Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. (1999) 237 ITR 254 (Bom) Coimbatore Pioneer Mills Ltd. (1999) 236 ITR 69 (Mad)
The ld. counsel for the assessee also brought to our notice that the assessee had offered to tax interest income on deposit of the balance lease premium in IDBI Bank, pursuant to the orders of Hon'ble Bombay High Court of Rs.48,72,12,084 for the A.Ys. 1998-99 to 2004-05. It was submitted by him that revenue cannot tax the interest income on the amount deposited pursuant to the order of Court which was balance lease premium payable and refuse to allow deduction of interest paid on balance lease premium as a revenue expenditure.
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The ld DR, on the other hand, while placing reliance on the order of the CIT(A), submitted that Explanation 8 to section 43(1) has been brought into statute by the Finance Act of 1986 w.r.e.f. 1.4.1974. It was his submission that by virtue of aforesaid Explanation, interest paid on deferred purchase consideration cannot be included as part of cost of asset. According to him, the decisions relied upon by the ld. counsel for the assessee which were rendered prior to the aforesaid statutory amendment, cannot therefore be applied to the facts of present case. It was further submitted by him that the transaction of acquisition of asset should be closely related to the carrying on assessee's business. It is only then that interest paid on unpaid balance consideration for the asset acquired can be regarded as an expenditure incurred for the purpose of business which was carried on by the assessee.
The ld. counsel for the assessee pointed out that Explanation 8 will not be applicable in the present case for the reason that section 43(1) dealt with definition of the expression "cost of acquisition of assets in respect of which depreciation is to be allowed." His first submission was that the asset in question is land which is not a depreciable asset and therefore Explanation 8 to section 43(1) of the Act will not be applicable at all. Secondly, it was submitted, the Hon'ble Supreme Court in the case of Corehealth Care Ltd. 298 ITR 194 (SC) wherein the Hon’ble Supreme Court held that interest paid on borrowings for acquisition of asset which are not put to use should also be allowed as a revenue expenditure u/s.
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36(1)(iii) of the Act. The law has, however, been amended by inserting a proviso to section 36(1)(iii) of the Act by the Finance Act, 2003 w.e.f. 1-4- 2004, whereby it has been provided that where interest is paid for acquisition of an asset for extension of existing business than the interest will be allowed as a deduction only when the asset is put to use by the Assessee. It was pointed out by him that the claim of the Assessee in the present case is u/s.37(1) of the Act and not u/s.36(1)(iii) of the Act i.e., interest paid on borrowing for the purpose of business of the Assessee. It was his submission that there is no such impediment that asset should be used to claim deduction u/s. 37(1) of the Act. He clarified that claim of the assessee in the present case is u/s. 37(1) of the Act.
We have given a very careful consideration to the rival submissions. The material on record shows that assessee was allotted a land at B.K. Complex in Mumbai in the year 1995. As per terms of allotment, the assessee had to pay lease premium of Rs.100,40,96,432/-. The Assessee paid Rs.50,20,48,216 being 50% of lease premium on 12.6.1995. The remaining sum had to be paid by the assessee within a period of six months. The assessee did not pay the balance installment of lease premium. The lease was for a period of 80 years. Assessee was granted time for making payment till 28.3.1997, subject to the condition that assessee pays interest on the delayed payment of balance premium of Rs.10.95 crores on or before 31.10.1996. The assessee paid Rs.10.95 cores on 30.10.1996. The same was shown as advance paid to MMRDA
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and was not claimed as revenue expenditure. Subsequently, assessee wanted to surrender the leasehold land and take back the amounts paid to MMRDA and in this regard filed a Writ Petition before the Hon'ble Bombay High Court. The Bombay High Court passed an interim order on 27.3.1997 directing the assessee to deposit a sum of Rs.54,72,28,140 which includes balance premium payable of Rs.50,10,24,108. The said amount was kept in deposit with IDBI Bank. Ultimately, the issue was compromised by assessee and MMRDA. As per compromise, the assessee had to pay interest of Rs.19,77,32,295, which was the interest paid at 5% p.a. for the period 29.9.1996 to 24.8.2004, on the balance lease premium unpaid by the assessee to MMRDA. By compromise memo, assessee also agreed that a sum of RS.10,95,20,067 which was paid by the assessee on 30.10.1996 as interest for delayed payment of balance installment, will also be retained by MMRDA over which assessee will have no claim to the said amount. This sum represents interest calculated at 18% p.a. for the period from 30.7.95 to 28.9.96. It is thus clear that the liability towards interest (both the interest amounts of Rs.19.77 crores and Rs.10.95 crores) crystallized only pursuant to the Court's order dated 24.8.2004. Till that time, the character of the sum of Rs.10.95 crores already paid by the assessee and the interest to be paid by the assessee of Rs.19.77 crores remained in suspense and cannot be said to have accrued as a liability to the assessee. Till the passing of the order of the Court dated 28.4.2004, it was not clear as to whether assessee will be acquiring the leasehold rights
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over the property or will get back the advance paid by it to MMRDA. In that view of the matter, we are of the view that liability to pay interest crystallized only during the previous year and can be considered for allowance in A.Y. 2005-06.
The next question is as to whether the said expenditure can be said to be capital or revenue expenditure. As we have already seen, the character of the interest payment is clearly interest on unpaid balance consideration for acquiring leasehold rights. The question whether the said interest payment can be regarded as capital or revenue is no longer res integra and has been settled by several decisions rendered by Courts, on which the ld. counsel for the assessee has placed reliance before us.
The decision of Hon'ble Supreme Court in the case of Bombay 41.
Steam Navigation Co. (supra) is on the point. In the aforesaid decision,
the Hon'ble Supreme Court held that payment of interest in respect of capital borrowed for acquiring assets to carrying on of business must be regarded as revenue expenditure in commercial practice and should not be termed as capital expenditure. In the present case, the property at Mumbai was acquired by the assessee for the purpose of constructing its office premises and was closely related to the carrying on of business of the assessee and was an integral part of profit earning process. The Hon'ble Bombay High Court in the case of Gwalior Rayon Silk Manufacturing
Weaving Co. Ltd. (supra) has taken the view that interest on unpaid cost
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of price of land and bank guarantee commission should be allowed as a revenue expenditure.
We are also of the view that reliance placed by the ld. DR on Explanation 8 to section 43(1) of the Act is not applicable for the reason that the asset involved in the present case is a land, which is not a depreciable asset. Section 43(1) of the Act defines cost of acquisition of capital asset for the purpose of allowing depreciation. When land is not a depreciable asset, provisions of section 43(1) of the Act are not relevant. The argument of the ld. DR, therefore, cannot be accepted.
It is also to be noticed that the deposit of the balance lease premium by the assessee in the IDBI Bank, pursuant to the directions of the Bombay High Court pending disposal of the writ petition filed by the assessee, yielded interest income which was duly offered by the assessee to tax. All the cumulative facts and circumstances clearly go to point out that expenditure in question was revenue expenditure and it has to be allowed as deduction in computing total income. We hold accordingly and allow ground No.2 raised by the assessee.
Ground No.4 reads as follows:-
“4. Claim of unamortized premium paid on change in the method of accounting amounting to Rs 15,31,09,000 4.1 The learned CIT (A) has erred on facts and in law in confirming the disallowance made by the learned AO of the
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amount of unamortized premium, written off on account of change in the method of accounting. 4.2 The learned CIT (A) failed to appreciate that the claim was in accordance with the accounting policy of the Appellant. 4.3 The learned CIT (A) failed to appreciate that the change in the accounting policy was on account of justifiable reasons and also bonafide in nature.
The assessee in the course of its business used to acquire loans by way of assignment from third parties. Such acquisition will be either at premium or discount. In the past, assessee had amortised the premium/discount (loss/profit) on acquiring loans under deeds of assignment over the remaining period of loan and claimed it proportionately in different assessment years. During the previous year, the assessee had changed the accounting policy and accounted for the entire loss or profit on acquiring loans in the year of acquisition. The assessee claimed deduction of Rs.15,31,09,000 on account of loss on acquiring loans under deeds of assignment.
The AO was of the view that assessee cannot claim the entire expenditure in one year and should spread over the loss for the remaining period for which loans ought to be held by the assessee.
On appeal by the assessee, the CIT(A) held as follows:-
“6.5 I have carefully considered the appellant’s submissions. During the period relevant to the assessment year 2005-06, the appellant changed its accounting policy on treatment of premium
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paid/discount received on loans acquired under deeds of assignment and to recognized such premium/discount in the profit and loss account in the year of purchase. Consequently, the unamortized premium of Rs.15,31,09,000/- was claimed in the profit and loss account. The AO was of the opinion that the premium/discount should have been spread over to the remaining period of the validity of the loans and disallowed the claim. The appellant in their submissions argued that the method of accounting policy was changed to follow the same consistently in the future. It was also argued that it was a bona fide change. Though in their elaborate submissions the necessity for change of accounting method, the same are not justified. The appellant relied on various decisions on the ground that, when an assessee changes the method of accounting for bona fide reasons, the same should be accepted. However, I am not convinced with the appellant’s arguments in the absence of justifiable reasons for change in the method of account. In view of this, the AO’s action is upheld.”
Aggrieved by the order of CIT(Appeals), the assessee has raised ground No.4 before the Tribunal.
The ld. counsel for assessee submitted that the change in accounting policy was a bonafide change and that the effect will be tax neutral. Our attention was drawn to the decision of Hon'ble Supreme Court in CIT v. Bilahari Investments Pvt. Ltd., [2008] 168 taxman95
(SC), wherein the Hon’ble Supreme Court held that every assessee is
entitled to arrange its affairs and follow method of accounting, which department has earlier accepted, and it is only in those cases where department records a finding that method adopted by assessee results in distortion of profits, that it can insist on substitution of existing method.
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Assessee-company was subscribing to chits as its business activity. In the aforesaid decision of the Hon’ble Supreme Court, the Assessee was offering to tax “chit discount” by following ‘completed contract method’ of accounting which was earlier accepted by department over several years. For relevant assessment years, Assessing Officer substituted that method by ‘deferred revenue expenditure method’. The question before the Hon’ble Court was whether since in past department had accepted completed contract method; entire exercise arising out of change of method from completed contract method to deferred revenue expenditure was revenue neutral; and method adopted by assessee did not result in distortion of profits, High court was justified in holding that completed contract method of accounting adopted by assessee was valid, and that department had erred in spreading discount over remaining period of chit on proportionate basis. The Hon’ble Held in the affirmative on the above question.
Relying on the aforesaid principle laid down in para 20 of the judgment that the department has to bring on record a finding that method adopted by the assessee results in distortion of profits and the department cannot insist the assessee on following the old method of accounting, the ld. counsel for the assessee submitted that neither the AO nor the CIT(A) has brought out any material to show loss of revenue, consequent to change of method of accounting.
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The ld. DR submitted that it would be appropriate to amortise the loss over the remaining period of loan and that would be in tune to the matching principle of accounting. According to him, the fact that matching principle of accounting will not be adhered to pursuant to change in method of accounting is itself enough to show that change in method of accounting is not bonafide.
We have given a very careful consideration to the rival submissions. We are of the view that legally assessee has a right to change the method of accounting that it was adopting. The requirement of law is that change in method of accounting should be bonafide and should be consistently followed after the change by the assessee. In the present case, as we have already seen, the AO did not assign any reason for rejecting the claim of assessee for deduction. The CIT(A), on the other hand, was of the view that there were no justifiable reasons for change in method of accounting. In our view, the reasons assigned by the revenue authorities for rejecting the claim of assessee are without any basis. As has been observed by the Hon'ble Supreme Court in the case of Bilahari Investments Pvt. Ltd.
(supra), the department has to show that change in method of accounting results in distortion of profits. In the absence of such a finding, it has to be necessarily concluded that the change of accounting is revenue neutral. We are also of the view that the expenditure in question is purely revenue expenditure and the fact that assessee in the past was deferring the expenditure and claiming it over a period of time cannot be the basis to
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hold that the same method of accounting should be followed. In other words, we are of the view that change in method of accounting is bonafide. We therefore hold that the claim of assessee deserves to be accepted. Accordingly, ground No.4 raised by the assessee is allowed.
In the result, appeal by the assessee is partly allowed.
ITA 318/B/13 (Revenue's appeal)
Ground Nos. 1, 8 & 9 are general in nature and calls for no specific adjudication.
Ground Nos. 2 to 4 read as follows:-
“2. The CIT (A) erred in deleting the addition made by the Assessing Officer of Rs.16,99,68,583/- towards diminution in value of investment under AFS/HFT categories. 3. The CIT(A) has erred in not appreciating the fact that the AO had made the above addition based on the RBI guidelines dated 16.11.2008 wherein it clearly says that the depreciation and appreciation on these securities has to be aggregated scripwise and only net depreciation, if any, is to be provided and allowed for in the account. 4. The CIT(A) erred in directing the AO to delete the addition of Rs.8,82,48,583 following the decision of the ITAT in the case of Corporation Bank in the order dt 18.06.2012 in ITA No. 794 & 795/2011 while the same has not been accepted by the department and an appeal under section 260A has been filed before the Hon’ble High Court against such order and is pending.”
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Certain investments made by the Assessee in various securities including the government securities were categorised as ‘Available for Sale (AFS)’ and ‘Held for Trading (HFT)’ form and formed part of the stock-in- trade of the Assessee. The depreciation claimed due to diminution in their value was Rs.16,99,68,583/-. According to the AO, only net depreciation is allowable on the securities aggregated scrip-wise as per the RBI Guidelines and the CBDT Instruction No.17/2008 dated 26/11/2008. As per the AO, once appreciation is also considered and netting off is made, the amount allowable works out to only Rs.8,82,48,583/-. The AO, therefore, disallowed the excess amount of Rs.8,82,48,583/-.
On appeal by the Assessee, the CIT(A) found that the Assessee classified its investments under three categories i.e. (i) available for sale (AFS), (ii) held for trading (HFT) and (iii) held to maturity (HTM) as per the guidelines prescribed by the RBI. The investments in AFS and HFT category can be considered as held as stock-in-trade. The depreciation/appreciation was aggregated scrip-wise in respect of these two categories and the net depreciation amounting to Rs.8,82,48,583/- was provided for in the books of account as per the guidelines of RBI while valuing the same. In the return of income, the Assessee claimed diminution in the value of investment and claimed an amount of Rs.16,99,68,583/-. The AO found that the appellant has ignored the appreciation of Rs.8,82,48,583/- and claimed the total depreciation of Rs16,99,68,583/-. Therefore, the AO added the amount of depreciation of Rs.8,82,48,583/-.
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The CIT(A) noticed the argument of the Assessee on the ground that the Assessee was regularly and consistently following the same accounting treatment in all the years. The CIT(A) noticed the argument that the Assessee is entitled to value all the investments, which are part of the trading stock at cost price or market value, whichever is lower under section 145 of the Act. Therefore, the total depreciation in respect of the investment amounting to Rs.16,99,68,583/- was claimed and that the AO was not correct in adding back the appreciation. The Assessee relied on various decisions in their submissions including the decision of the Hon’ble ITAT, Bangalore in the case of Corporation Bank, Mangalore (ITA.No.794 & 795/Bang/2011 dt. 18/6/2012). The Hon’ble ITAT discussed the issue and various other decisions on the subject and held that the depreciation on account of valuation of the said securities is an allowable deduction. The CIT(A) following the said decision of the ITAT directed the AO to delete the addition.
Aggrieved by the order of the CIT(A), the Revenue has raised the aforesaid grounds before the Tribunal. The learned DR relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A). In support of assessee's contentions, following decisions were also relied upon:-
(i) UCO Bank, 240 ITR 355 (ii) Karnataka Bank Ltd., 356 ITR 549 (iii) Southern Technologies Ltd., 310 ITR 577 (SC)
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We have given a careful consideration to the rival submissions. Similar issue as to whether depreciation on investments held under the category “Held to Maturity” or “Available for Sale” can be allowed as deduction came up for consideration in the case of Corporation Bank in AY 10-11 in ITA No.1310/Bang/2012 and this Tribunal upheld similar order of CIT(A). The following were the relevant observations of the Tribunal:
“21. We have considered the rival submissions. Similar issue as to whether depreciation on investments held under the category “Held to Maturity” can be allowed as deduction came up for consideration in the case of Syndicate Bank (supra) before the ITAT Bangalore Bench. The Tribunal on the issue held as follows: “58. We have heard the submissions of the ld. DR and the ld. counsel for the assessee. The ld. DR relied on the decision of the Hon’ble High Court of Karnataka in the case of CIT v. ING Vysya Bank Ltd. in ITA No.2886/2005 dated 06.06.2012. In the aforesaid decision, the Hon’ble High Court of Karnataka took a view that the guidelines issued by the RBI will not be relevant while computing income under the Income-tax Act. The Hon’ble Court further took the view that every investment held by a bank cannot be considered as stock- in-trade. The Hon’ble High Court finally concluded that 30% of the investments can be clothed to the character of stock-in-trade and that the remaining amounts will be investments and therefore diminution in their value cannot be allowed as a deduction. 59. The ld. counsel for the assessee, however, submitted that in the assessee’s own case for the A.Y. 2005-06, this Tribunal has confirmed the order of the
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CIT(A), deleting identical addition made by the AO. Our attention was also drawn to the order of the Tribunal in assessee’s own case in ITA No.492/Bang/2009 for the A.Y. 2005-06, order dated 13.01.2012, wherein the Tribunal had to deal with identical issue as to whether the CIT(A) was correct in deleting the addition made by the AO on account of profit on sale of investments of Rs.200,77,13,662/- and deleting the action of the AO in disallowing loss claimed on treating investments as stock-in-trade by drawing the investment trading account of Rs.775,96,55,047. The Tribunal held “16. We have heard both sides and find that the Supreme Court in the case of UCO Bank in 240 ITR 355 has held as under : "In our view, as stated above, consistently for 30 years, the assessee was valuing the stock-in-trade at cost for the purpose of statutory balance-sheet, and for the income-tax return, valuation was at cost or market value, whichever was lower. That practice was accepted by the Department and there was no justifiable reason for not accepting the same. Preparation of the balance-sheet in accordance with the statutory provision would not disentitle the assessee in submitting the Income-tax return on the real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. That cannot be discarded by the departmental authorities on the ground that the assessee was maintaining the balance- sheet in the statutory form on the basis of the cost of the investments. In such cases, there is no question of following two different methods for valuing its stock-in- trade (investments) because the bank was required to prepare the balance-sheet in the
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prescribed form and it had no option to change it. For the purpose of income tax as stated earlier, what is to be taxed is the real income which is to be deduced on the basis of the accounting system regularly maintained by the assessee and that was done by the assessee in the present case." The Bangalore Bench of ITAT in Corporation Bank (supra) has also followed the above decision of the Hon'ble Supreme Court as also the ITAT, Mumbai and ITAT, Chennai. Following the above decisions, we are deciding this issue in favour of the assessee. This ground of appeal by the Revenue is dismissed. 60. Apart from the above, the ld. counsel for the assessee also submitted that the decision rendered by the Hon’ble High Court of Karnataka in the case of ING Vysya Bank (supra) is per incuriam the decision of the Hon’ble Supreme Court in the case of UCO Bank v. CIT, 240 ITR 355 (SC). He brought to our notice that the Hon’ble Supreme Court approved the practice of nationalized bank governed by Banking Regulation Act, following mercantile system of accounting both for book keeping as well for income-tax purposes. The Hon’ble Apex Court upheld the method adopted by the banks valuing stock-in-trade (investments) at cost in balance sheet in accordance with the Banking Regulation Act and valuing the same at cost or market value, whichever was lower for income-tax purposes. The Hon’ble Court took the view that all investments held by a bank are to be regarded as stock-in-trade. 61. The ld. counsel for the assessee further drew our attention to a very recent decision of the Hon’ble High Court of Karnataka rendered on 11.03.2013 in the case of CIT v. Vijaya Bank, ITA No.687/2008. The Hon’ble High Court of Karnataka in the aforesaid case followed its own decision rendered in the case of Karnataka Bank
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Ltd. v. CIT in ITA No.172/2009 rendered on 11.01.2013, wherein the Court took the view that depreciation claimed on investments ‘held on maturity’ by a bank has to be treated as stock-in-trade in accordance with RBI guidelines and CBDT Circular. It was his submission that the later decision of the Hon’ble Karnataka High Court has to be followed. 62. We have given a careful consideration to the rival submissions and are of the view that the contentions put forth on behalf of the assessee deserve to be accepted. The Tribunal in assessee’s own case on an identical issue for the A.Y. 2005-06 has upheld the claim of the assessee. The later decision of the Hon’ble High Court of Karnataka is also in favour of the assessee. In such circumstances, we are of the view that the issue raised by the revenue in its appeal is without merit. Consequently, the same is dismissed.” 22. The above decision squarely covers the issue in favour of the Assessee. Respectfully following the same, we uphold the order of the CIT(A) and dismiss the relevant grounds of appeal of the Revenue.”
Respectfully following the aforesaid decision of the Tribunal, we uphold the order of the CIT(A) and dismiss the relevant ground of appeal of the Revenue.
Ground Nos. 5 to 7 raised by the revenue read as follows:-
“5. The CIT(A) erred in deleting the addition of Rs 6,07,37,240 made on account of broken period interest without appreciating the fact that the interest on government securities does accrue on day-to-day basis as against the contention of the assessee to the contrary.
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The CIT(A) erred in deleting the addition of Rs 6,07,37,240 made on account of broken period interest without appreciating the fact that the assessee does have a right or claim over such interest on government securities till the date prior to its trading as against the contention of the assessee to the contrary. 7. The CIT(A) erred in directing the AO to delete the addition of Rs 6,07,37,240 following the decision of the ITAT in the case of State Bank of Mysore in the order dt 17.04.2009 in ITA No.1409/Bang/03 while the same has not been accepted by the department and an appeal under section 260A has been filed before the Hon’ble High Court against such order and is pending.”
The AO noticed that the interest due to the Assessee from its investments for the months of January, February and March on mercantile basis would be accruing only on the following 30th June. On account of this, the Assessee made a claim of Rs.72.66 crores by way of expenditure towards broken period interest by adding back Rs.66.59 crores for the assessment year 2005-06. As this issue pertaining to the assessment year 2004-05 was still in appeal, the AO disallowed the claim and brought to tax a sum of Rs.6,07,37,240/-.
On appeal by the Assessee, the CIT(A) noticed that the Assessee makes investments in government securities as per the guidelines of RBI. The interest on these securities falls on coupon dates. The interest income from the last coupon date till 31st March is the broken period of interest income. The interest income on government securities does not accrue from day to day but only on the coupon dates. There is no right or claim
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over the interest on such securities till it becomes due. The CIT(A) was of the view that the Assessee on the above basis had claimed deduction in respect of the broken period of interest income accrued in the books amounting to Rs.72,66,77,549/- and added back Rs.66,59,40,309/-, which was claimed as deduction in the assessment year 2004-05. Thus the net claim of the Assessee for deduction was only Rs.6,07,37,240/-, which was disallowed by the AO while completing the assessment. According to the AO, the amount was disallowed as in the earlier years since the matter has not reached finality. The CIT(A) noticed that contention of the Assessee that interest for the broken period does not accrue on a day to day basis but only on the coupon date mentioned in the instrument and that before that date the Assessee has not right to claim interest. The Assessee also relied on various decisions including the decision of the jurisdictional ITAT, Bangalore in the case of State Bank of Mysore in ITA.No.1401/Bang/03 dated 17/4/2009. As per the said decision, the Hon’ble ITAT has examined the issue of taxability of broken period interest income by considering various decisions on the subject. The Hon’ble Tribunal concluded that the broken period interest income cannot be included in the computation of income for the purpose of income-tax. The CIT(A) was of the view that in view of the binding nature of the decision of Hon’ble Tribunal, the broken period interest income is not chargeable to tax in the assessment year 2005-06 and the addition made by the AO was deleted.
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Aggrieved by the order of the CIT(A), the revenue has raised the aforesaid grounds of appeal before the Tribunal. We have heard the submission of the learned DR who relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A). Ld. counsel for the assessee placed reliance on the judgment of Hon'ble High Court of Karnataka in the case of Karnataka Bank Ltd. in ITA
No.433/2005 dated 12.9.2013.
We have given a careful consideration to the rival submissions. At the time of hearing before us, it was agreed by the parties that the issue raised by the revenue in this appeal has already been decided by the Hon’ble Madras High Court in the case of CIT v. Tamil Nadu
Mercantile Bank Ltd., 291 ITR 137 (Mad). The question of law
before the Hon’ble Madras High Court was as follows:-
“Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that interest on securities is taxable only on specified dates when it became due for payment and not on accrued basis?" The Hon’ble Madras High Court held as follows:-
" In view of the deletion of section 18 of the Income-tax Act, 1961, with effect from 1st April, 1989, the third proviso to section 145(1) was inserted with effect from April 1, 1989, which is a saving clause. Although the amendment was with effect from April 1, 1989, it clearly provides that any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which such interest is due to the assessee only where no method of accounting is regularly employed by the
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assessee. In other words, if the assessee is maintaining cash system of accounting, the aforesaid proviso would not apply. The legislative intent is that when the assessee is maintaining the cash system of accounting, income by way of interest on securities will have to be charged to tax only when the assessee actually receives the interest and not on the date on which interest on such securities might become due. The assessee, while filing the return of income for the assessment years 1989-90 and 1990-91, claimed exclusion of the sums representing the accrued interest for the periods till March 31, 1989, and till March, 31, 1990, for the respective assessment years, in respect of the securities held by it on the ground that it did not become due in the respective previous years and that even after the omission of section 18, the interest on securities should be charged only when it became due for payment as it did not accrue on day-to-day basis. The Assessing Officer, however, disallowed the claims of the assessee, holding that after the omission of section 18 of the Act, i.e., after July 8, 1988, interest is to be assessed under the head “Business” or “Other Sources” as the case may be, and therefore, the interest which accrued up to the end of the accounting year became taxable as the income of the previous year. The Commissioner of Income-tax (Appeals) held that the Assessing Officer was not justified in holding that the interest accrued up to the last day of the accounting year should be subjected to tax. This was upheld by the Tribunal. On appeal to the High Court: Held, dismissing the appeal that even though section 18 of the Act was deleted, the assessee was taxable for interest on securities only on specified dates when it became due for payment, in view of the third proviso to section 145(1) of the Act, which was in force during the relevant assessment years.”
It is not in dispute before us that identical decision has also been rendered by the Hon’ble High Court of Kerala in the case of CIT v. Federal Bank, 301 ITR 188 (Ker) and the Hon’ble Karnataka
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High Court in the case of Karnataka Bank Ltd. in ITA
No.433/2005 dated 12.9.2013.
In the present case, the assessee has been following the method of offering interest on securities to tax on receipt basis on maturity and the same has been accepted by the revenue in the past. In view of the aforesaid decision, we are of the view that the order of the CIT(A) does not call for any interference. Consequently, the relevant grounds of appeal raised by the revenue are dismissed.
In the result, appeal by the Assessee is partly allowed while the 68.
appeal by the Revenue is dismissed.
Pronounced in the open court on this 6th day of February, 2015.
Sd/- Sd/- ( ABRAHAM P. GEORGE ) ( N.V. VASUDEVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 6th February, 2015. /D S/
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Copy to: 1. Assessee 2. Revenue 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar / Senior Private Secretary ITAT, Bangalore.