ING VYSYA BANK LTD. vs. ACIT,

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH “ A ” BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. No.898/Bang/2013 (Assessment Year : 2007-08) M/s. ING Vysya Bank Ltd., ING Vysya House, No.22, M G Road, Bangalore. …. Appellant. PAN AABCT 0529M Vs. Asst. Commissioner of Income Tax, Circle 11(4), Bangalore. ….. Respondent. I.T.A. No.967/Bang/2013 (Assessment Year : 2007-08) (By Revenue) Assessee By : Shri S. Ananthan, C.A. Revenue By : Shri Farhat Hussain Qureshi, CIT (D.R) Date of Hearing : 19.11.2014. Date of Pronouncement : 6.2.2015. O R D E R Per Shri Jason P. Boaz : These are cross appeals, one by the assessee and the other by Revenue, directed against the order of the Commissioner of Income Tax (Appeals)-I, Bangalore dt.28.3.2013 for Assessment Year 2007-08. 2. The facts of the case, briefly are as under :-

ITA Noss.898 & 967/Bang/2013 2 2.1 The assessee, a private sector banking company, filed its return of income for Assessment Year 2007-08 on 31.10.2007. The case was selected for scrutiny and the assessment was completed under Section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dt.16.12.2010, wherein the income of the assessee was determined at Rs.137,20,58,363 under the normal provisions of the Act and comnputed at Rs.167,53,06,065 as ‘book profits’ under Section 115JB of the Act. 2.2 Aggrieved by the order of assessment for Assessment Year 2007-08 dt.16.12.2010, the assessee preferred an appeal before the CIT (Appeals) – I, Bangalore. The learned CIT (Appeals) disposed off the assessee's appeal vide the impugned order dt.28.3.2013, granting the assessee partial relief. 3. Both Revenue and the assessee are aggrieved by the order of CIT (Appeals)-I, Bangalore dt.28.3.2013 for Assessment Year 2007-08 and have preferred separate appeals. We shall now consider and dispose off these two appeals as under :- Assessee's appeal in ITA No.898/Bang/2013 for A.Y. 2007-08. 4. In this appeal, the grounds raised by the assessee are as under :- “1. Ground 1 – Expenditure on purchase of software amounting to Rs.4,45,13,003 1.1 The learned CIT (Appeals) has erred in law and fact confirming the disallowance made by the Assessing Officer amounting to Rs.4,45,13,003 towards purchase of the application software. 1.2 The learned CIT (Appeals) has erred on facts and in law in confirming the disallowance made by the learned A.O. with respect to software expenses claimed as revenue expenditure as being capital in nature. 1.3 The learned CIT (Appeals) 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.

ITA Noss.898 & 967/Bang/2013 3 1.4 The learned CIT (Appeals) ought to have appreciated that the appellant has rightly claimed the above as revenue expenditure. The learned CIT (Appeals) ought to have placed reliance on the following judicial precedents : 1. Hon'ble Karnataka High Court decision in the case of CIT Vs. IBM India Ltd. in ITA No.130/2007. 2. Amway India Enterprises Vs. DCIT (2008-(301)-ITR-0001) (Special Bench of Delhi Tribunal) 3. IBM India Ltd. Vs.CIT (ITA No.755 of 2003 Bangalore ITAT) 2. Ground 2 – Provision for expenses amounting to Rs.75,00,281. 2.1 The learned CIT (Appeals) has erred on facts and in law in confirming the disallowance made by the learned A.O. with respect to provision for expenses of Rs.75,00,281. 2.2 The learned CIT (Appeals) has erred on facts and in law by not appreciating the fact that the amount represents ascertained and actual expenditure incurred by the bank. 2.3 The learned CIT (Appeals) has erred on facts and in law by not appreciating the fact that although the nomenclature used for these expenses is ‘provision for expenses’, they are ascertained based on actual incurrence and is in the nature of business expenditure. A. Grounds of appe3al against adjustments made in computation of total income under the provisions of section 115JB of the Act. 3. Ground 4 – Non-applicability of section 115JB to Banking Company. 3.1 The learned CIT (Appeals) has erred on facts and in law by not appreciating the fact that section 115JB of the Act is not applicable to Banking Company for A.Y. 2007- 08. 3.2 The learned CIT (Appeals) ought to have placed reliance on the decisions of the Hyderabad ITAT in the case of State Bank of Hyderabad ( ITA No.779 % 578 of 2010) and Mumbai ITAT in the case of Krung Tahai Bank (133 TTJ 435). 4. Ground 5 – Provision of expenses amounting to Rs.75,00,281. 4.1 Without prejudice to the Ground 4, the learned CIT (Appeals) has erred on facts and in confirming the disallowance made by the learned A.O. under Section 115JB of the Act with respect to provision for expenses of Rs.75,00,281.” 5. Ground No.1 : Expenditure on purchase of software – Rs.4,45,13,003. 5.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee has claimed an amount of Rs.4,45,13,003 towards purchase of software as deductible

ITA Noss.898 & 967/Bang/2013 4 revenue expenditure. The Assessing Officer did not agree with the assessee's claim and held that expenditure incurred for purchase of the software licenses are to be considered as capital expenditure and disallowed the same. The Assessing Officer, however, allowed depreciation on the same at applicable rates depending upon the period of usage. On appeal, the learned CIT (Appeals), following the decision in the assessee's case for earlier assessment years, upheld the order of the Assessing Officer and held that the computer software purchased was a capital asset eligible for depreciation. 5.2 In the proceedings before us, the assessee reiterated its submissions put forth before the authorities below. It was submitted that the software purchased are only for the purpose of day-to-day usage and that the assessee does not have ownership rights, but only right to use the application software. It was also submitted that the software purchased does not provide any enduring benefit to the assessee, but is required to be replaced within a short span of time. In support of its contentions, the assessee, inter alia, relied on the following judicial decisions :-

(i) CIT V IBM India Ltd. of the Hon'ble Karnataka High Court in ITA No.130/2007; (ii) Amway India Enterprises V DCIT (2008) 301 ITR 1 (Delhi Tribunal – Special Bench); (iii) IBM India V CIT in ITA No.755/Bang/2003 (ITAT, Bangalore); (iv) Assessee's own case in ITA Nos.733 & 748/Bang/2011 dt.28.8.2014 for A.Y. 2001-02. 5.3 Per contra, the learned Departmental Representative supported the orders of the authorities below.

ITA Noss.898 & 967/Bang/2013 5 5.4.1 We have heard the rival contentions and perused and carefully considered the material on record. On perusal of the judicial decisions cited by the assessee (supra), we find that there are a catena of decisions wherein it has been held that the expenditure incurred on application software are revenue in nature. It is seen that the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2001-02 in ITA Nos.733 & 748/Bang/2011 dt.28.8.2014, has held these expenses to be revenue in nature. The relevant portion thereof, is extracted here under :- “ 7.3 On consideration of the material on record, we find that similar issue had arisen in the case of IBM India Ltd., and the jurisdictional High Court, vide judgment dated 10-4-2013 at para.9 has held as under: “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

ITA Noss.898 & 967/Bang/2013 6 expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fresh license fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the 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.” Respectfully following the decision of the jurisdictional High Court on similar set of facts, we hold that the expenditure incurred by the assessee for computerization of its branches is revenue in nature. These grounds are accordingly allowed.” 5.4.2 Respectfully following the decisions of the Hon'ble High Court of Karnataka in the case of IBM India Ltd. (supra) and the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2001-02 as extracted above (supra), we hold that the expenditure incurred by the assessee for purchase of application software is revenue in nature. Ground No.1 raised by the assessee is accordingly allowed.

6.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee has claimed an amount of Rs.75,00,281 towards provision for expenses, related to HRD, Retail, Consumer product assets and Retail Deposit Operations. The Assessing Officer was of the view that these are provisions and had not crystallized or arisen during the course of the year and disallowed the same on the ground that provisions and contingencies cannot be allowed. On appeal, the learned CIT (Appeals) upheld the disallowance made by the Assessing Officer, holding that these provisions are contingent in nature and opined that the assessee

ITA Noss.898 & 967/Bang/2013 7 can claim these expenses as deductions in the year in which the bills are received and approved.

6.2 In support of the grounds raised, the learned Authorised Representative contended that although the nomenclature used for these claims of deduction is ‘provision for expenses’, they are ascertained based on actual incurrence and are clearly in the nature of business expenditure. Therefore, as per the learned Authorised Representative, these amounts represent ascertained and actual expenditure incurred by the assessee and hence is rightly claimed as deduction. In support of these contentions, the learned Authorised Representative has placed reliance on the following judicial pronouncements :-

i) Bharat Earth Movers Ltd. (245 ITR 428); ii) Metal Box of India Ltd. (73 ITR 53) (SC); iii) Calcutta Co. Ltd. (37 ITR 1) (SC). iv) Rotork Controls India (P) Ltd. (2009-TIOL-64-SC-IT).

6.3 Per contra, the learned Departmental Representative supported the orders of the authorities below.

6.4 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. It is settled principle that if expenditure is crystallized, then even if the payment is due at a later date, it is allowable expenditure. It is seen from the submissions of the assessee in this regard that, though the assessee has

ITA Noss.898 & 967/Bang/2013 8 categorized these expenses as provisions, the same represents expenditure actually crystallized and the amounts are eligible for being claimed as deduction in view of the fact that the assessee is following the Mercantile System of Accounting. As extracted in the impugned order of the learned CIT (Appeals), these amounts are towards provisions for staff advances, debit balances in petty cash account, S.B. Account, etc. It is seen that these provisions have been made on specific items and these items of expenditure had crystallized. These expenses appear to be more in the nature of write off. In view of the facts and circumstances of the case on this issue, as discussed above, we are satisfied that these amounts are allowable expenditure while computing the assessee's total income. Accordingly, Ground No.2 raised by the assessee is allowed.

7.1 While framing the order of assessment, the Assessing Officer computed the income both under the normal provisions of the Act and also ‘book profits’ under Section 115JB of the Act. Since the tax payable under the normal provisions of the Act was more than that as computed under Section 115JB of the Act, the Assessing Officer adopted the taxes as per the normal provisions of the Act. The Assessing Officer computed the ‘book profits’ under Section 115JB of the Act by disallowing certain items, including inter alia the amount of Rs.75,00,281 towards provisions and contingencies for expenses.

ITA Noss.898 & 967/Bang/2013 9 7.2 The assessee carried the matter in appeal before the learned CIT (Appeals), contending that the provisions of MAT are not applicable to the assessee since it is a banking company. Without prejudice to the above contention, the assessee also objected to the disallowance of certain items while computing the ‘book profits’ under Section 115JB of the Act and submitted that the learned CIT (Appeals) has not rendered a specific finding, in the impugned order, as to whether the provisions of section 115JB of the Act were applicable to the assessee. The learned CIT (Appeals), however, allowed deduction of certain items from the ‘book profits’, but held that the amount of Rs.75,00,281 on account of provisions and contingencies is to be disallowed for the reason that they are not ascertained liabilities.

7.3 Before us, the learned Authorised Representative reiterated the submissions made before the authorities below. It was submitted that the provisions of section 115JB of the Act are not applicable to Banks. In support of this the learned Authorised Representative contention, cited and placed reliance on various judicial pronouncements, including that of the co-ordinate bench of this Tribunal in the assessee's own case in ITA No.443/Bang/2012 dt.14.8.2013 for Assessment Year 2002-03, which it is submitted has held this issue in favour of the assessee.

7.4 Per contra, the learned Departmental Representative supported the finding in the impugned order of the learned CIT (Appeals).

ITA Noss.898 & 967/Bang/2013 10 7.5.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2002-03 (supra). On a perusal of the cited decision in ITA No.443/Bang/2013 dt.14.8.2013 in the assessee's own case for Assessment Year 2002- 03, we find that the issue of whether or not the provisions of section 115JB of the Act are applicable to Banks has been considered and held in favour of the assessee. The relevant portion of the order at pages 20 and 22 thereof are extracted hereunder :-

“ 20. Ground No.5 raised by the assessee reads as follows:- 5. Ground 5 - Section 115JB not applicable 5.1 The adjustment on account of Minimum Alternative tax provisions under section 115JB is bad in law in as much as the provisions of MAT were never applicable to the appellant company.

ITA Noss.898 & 967/Bang/2013 11 shareholders in the Annual General Meeting, certified by the auditors, and filed before RBI. He rejected the assessee’s contention that the bank was not a company as per Companies Act, 1956, but a statutory corporation governed by the provisions of Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970. It had prepared the profit and loss account as per the latter Act, and not in accordance with the provisions of the Companies Act. However, in view of the requirements of section 115JB(2), it had redrawn the profit and loss account in accordance with the provisions of Parts II and Ill of Schedule VI to the Companies Act. Therefore, the MAT computed in accordance with the redrawn profit and loss account was in order. 90. Before the CIT(Appeals), the assessee stated that the assessing officer had erred in adopting the net profit as per the profit and loss account prepared on the basis of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, for computing the book profit under section 115JB. He ought to have called for and adopted the profit and loss account as required under section 115JB(2) and prepared as per Schedule-Vl of the Companies Act. The assessee also questioned the various other adjustments made by the assessing officer in computing the book profit. On 16.02.2010, the assessee filed an additional ground of appeal, questioning the applicability of section 115JB, while the other adjustments made by the assessing officer in computing the book profit under that section were challenged in the original grounds. 91. On the applicability of section 115JB, the assessee placed reliance on the decision of the Mumbai Bench of the Hon’ble ITAT in the case of Maharashtra State Electricity Board Vs. JCIT [20021 82 lTD 422, where it was held that a company which was not constituted as a company within the meaning of section 3 of the Companies Act, 1956, could not be deemed as a company within the meaning of section 616(c) of the Companies Act and since such company was not required to distribute any dividend , it would not come under the mischief of section 115JA. 92. The CIT(Appeals) was of the view that this decision is not applicable to the assessee’s case because the decision was rendered in the context that the concept of an annual general meeting was alien to the Electricity Board and the reference to section 616(c), which was relevant to a company engaged in the generation or distribution of electricity. 93. The assessee bank does conduct annual general meetings, declares dividends, and is not engaged in generation or distribution of electricity. The Mumbai bench of the Hon’ble ITAT has, in the case of Union Bank of India Vs. JCIT in their order dated 25.07.2006 in ITA Nos. 5493-5495/Mum/2000 for assessment years 1988-89 and 1990-91, held that, even though the assessee was

ITA Noss.898 & 967/Bang/2013 12 functionally regulated by Banking Regulations Act, it was equally governed by the provisions of the Companies Act as it was basically a corporate entity. Therefore, the assessee company was bound by the provisions of law contained in section 115J. In these circumstances, the CIT(A) held that there is nothing in the provisions of section 115JB to exclude its applicability to banking companies. As regards the adoption of profit declared in the profit and loss account prepared under the Banking Companies (Acquisition and Transfer of Undertakings) Act, he relied on the decision of the Hon’ble Supreme Court has, in case of Apollo Tyres Ltd. Vs. CIT [2002] 255 ITR 273, wherein it was held that the assessing officer had no power to rework the book profit if the profits were computed in accordance with Parts II and II of Schedule VI to Companies Act. Accordingly, he referred to his own order dated 15.01.2010 in ITA No. RB-lIl/UDP/CIT(A)MNG/2008-09 in the assessee’s own case for assessment year 1990-91 holding that if the adjustments carried out in preparing the revised profit and loss account were in accordance with the provisions of Parts II and Ill of Schedule V to the Companies Act, the assessing officer ought to consider only the revised profit and loss account for purposes of computation of book profit under section 115J, and not the profit as per the profit and loss account prepared in accordance with the Banking Regulation Act. Following the same reasoning, the CIT(A) directed that computation of MAT may be done on the basis of the profit and loss account redrawn by the assessee in accordance with the Companies Act. The assessee was directed to furnish the profit and loss account redrawn in accordance with Schedule VI of Companies Act. 94. Aggrieved by the order of the CIT(A), the assessee has raised ground No.3 before the Tribunal. 95. At the time of hearing, it was submitted by the ld. DR that the issue can be remanded for fresh consideration as was done by the Tribunal in A.Y. 2005-06 in ITA No.504/Bang/2009, order dated 13.01.2012. The ld. counsel for the assessee, however, submitted that the Tribunal in its earlier order though noted direct judgments on the point viz., (1) Order dated 30.09.2010 in ITA No.3390/2009 passed by ITAT ‘G’ Bench, Mumbai in the case of Krung Thai Bank; (2) Order dated 30.06.2011 in ITA Nos.4702 to 4706/2010 passed by the ITAT, Mumbai ‘F’ Bench in the case of Union Bank of India; and (3) Order dated 03.08.2011 in ITA No.469/2010 passed by the ITAT ‘C’ Bench, Chennai in the case of Indian Bank, did not adjudicate on the applicability of section 115JB, but following an earlier order in the assessee’s own case for earlier years (at which point of time the above Tribunal’s decisions were not available), restored the matter to the Assessing

ITA Noss.898 & 967/Bang/2013 13 Officer to compute book profits based on recast P & L account prepared in accordance with the Schedule-VI of the Companies Act. 96. The learned counsel for the Assessee also submitted that the provisions of Sec.115JB of the Act were amended with effect from 01.04.2013 making it obligatory, inter alia, for banks to prepare P & L account in accordance with the Banking Regulation Act is clearly indicative of legislative understanding that upto and including A.Y. 2012-13, section 115JB had no application to banks and insurance companies. It was so held by ITAT, Hyderabad in the case of State Bank of Hyderabad dated 07.09.2013 in ITA No. 578/Hyd/2010 and ITAT Mumbai in the case of ICICI Lombard General Insurance Co. Ltd. dated 10.10.2012 in ITA No.2398/Mum/2009. 97. The learned DR relied on the order of the CIT(A). 98. We have considered the rival submissions of the ld. counsel for the assessee. We find that this issue was considered by the Mumbai Bench of the Tribunal in the case of Krung Thai Bank (supra) and on the above issue held as follows:- “5. Learned counsel for the assessee, however, contends that the provisions of MAT do not apply to the assessee, and , for this reason, very foundation of impugned reassessment proceedings is devoid of legally sustainable merits. His line of reasoning is this. The provisions of MAT can come into play only when the assessee prepares its profit and loss account in accordance with Schedule VI to the Companies Act. It is pointed out that, in terms of the provisions of Section 115JB(2),every assessee is required to prepare its profit and loss account in terms of the provisions of Part II and II I of Schedule VI to the Companies Act . Unless the profit and loss is so prepared, the provisions of Section 115 JB cannot come into play at al l. However, the assessee is a banking company and under proviso to Section 211 (2) of the Act , the assessee is exempted from preparing its books of accounts in terms of requirements of Schedule VI to the Companies Act , and the assessee is to prepare its books of accounts in terms of the provisions of Banking Regulation Act . It is thus contended that the provisions of Section 115 JB do not apply in the case of banking companies which are not required to prepare the profit and loss account as per the requirements of Part II and III of Schedule VI to the Companies Act . Since the provisions of Section 115 JB do not apply to the assessee company, the reasons recorded for reopening the assessment are clearly wrong and insufficient . We are urged to quash the reassessment proceedings on this short ground. 6. Learned Departmental Representative, on the other hand, vehemently relies upon the orders of the authorities below and submits that there is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to us to infer the same. The submissions of the learned counsel, according to the departmental representative, are clearly contrary to the legislative intent and plain wordings of the statute.

ITA Noss.898 & 967/Bang/2013 14 7. The plea of the assessee is indeed well taken, and it meets our approval. The provisions of Section 115 JB can only come into play when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and I II of Schedule VI to the Companies Act . The starting point of computation of minimum alternate tax under section 115 JB is the result shown by such a profit and loss account. In the case of banking companies, however, the provisions of Schedule VI are not applicable in view of exemption set out under proviso to Section 211 (2) of the Companies Act . The final accounts of the banking companies are required to be prepared in accordance with the provisions of the Banking Regulation Act . The provisions of Section 115 JB cannot thus be applied to the case of a banking company.”

Once we have held at para 7.5.1 and 7.5.2 of this order (supra), that the provisions of section 115JB of the Act are not applicable to the assessee, which is a banking company, consequently, the disallowance of provisions for expenses amounting to Rs.75,00,281 made by

ITA Noss.898 & 967/Bang/2013 15 the authorities below while computing the ‘book profits’ under Section 115JB of the Act also fails. In this view of the matter, the Ground NO.5 raised by the assessee is allowed.

Revenue’s appeal for Assessment Year 2007-08 in ITA No.967/Bang/2013.

“1. The order of the learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The CIT (Appeals) erred in deleting the addition of Rs.11,91,41,534 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. 3. The CIT (Appeals) erred in deleting the addition of Rs.11,91,41,534 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. 4. The CIT (Appeals) erred in directing the A.O. to delete the addition of Rs.11,91,41,534 following the decision of the ITAT in the case of State Bank of Mysore in the order dt.17.4.2009 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. 5. The CIT (Appeals) erred in allowing the alternate plea of the assessee on the issue of disallowance of Rs.2,75,00,000 of write off of non-convertible debentures by holding that the diminution of valuable investments as eligible for deduction on the ground that the debentures were treated as investment in AFS category. 6. The CIT (Appeals) erred in allowing the appeal on the issue of operational losses of Rs.36,99,509 holding that the banking activities re run based on software and there may be some technical faults occasionally. 7. The CIT (Appeals) erred in holding that business losses resulting out of technical failures have to be treated as incurred during the course of business and allowable as deduction. 8. The CIT (Appeals) erred in holding that since the bank had written off irrecoverable amounts of Rs.36,99,509 as operational losses the same are eligible for deduction.

ITA Noss.898 & 967/Bang/2013 16 9. The CIT (Appeals) erred in holding that the operational losses are definitely not capital in nature as these amounts were incurred in the day to day revenue generating activity without appreciating the fact that the Assessing Officer had not only questioned the nature of the expenditure but also the business expediency of the expenditures. 10. The CIT (Appeals) erred in holding that the MTM losses are eligible for deduction and deleted the addition of Rs.2,03,15,166 without appreciating the fact that the Assessing Officer had followed the instruction No.17/2008, CBDT, while disallowing MTM losses. 11. The CIT (Appeals) erred in deleting the addition made by the Assessing Officer of Rs.6,05,64,289 towards diminution in value of investment under AFS/HFT categories. 12. The CIT (Appeals) erred in not appreciating that the Assessing Officer had made the above addition based on the RBI guidelines and based on CBDT instruction No.17/2008 dated 26.11.2008 wherein it clearly says that the depreciation and appreciation on these securities has to be aggregated scrip-wise and only net depreciation, if any, is to be provided and allowed for in the account. 13. The CIT (Appeals) erred in directing the Assessing Officer to delete the addition of Rs.6,05,64,289 following the decision of the ITAT in the case of Corporation Bank in the order dt.18.6.2012 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 High Court against such order and is pending. 14. The CIT (Appeals) erred in directing the Assessing Officer to allow relief on the insurance premia paid on the Life Insurance cover for the housing loan customers as it was revenue in nature. 15. The CIT (Appeals) erred in deleting the addition made on account of insurance on housing loans as assessee has not been benefitted for a longer period by incurring such expenditure. 16. The CIT (Appeals) erred in not appreciating that the addition was made by the Assessing Officer after a detailed discussion with the assessee company as stated in the assessment order. 17. The CIT (Appeals) erred in directing the Assessing Officer to give relief by allowing the claim of the assessee relying upon his own decision in the assessee's own case for the A.Y. 2006-07 without appreciating the fact that his decision for the A.Y. 2006-07 has not reached a finality and as an appeal before the ITAT has been preferred on this issue. 18. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed and that of the Assessing Officer be restored. 19. The appellant craves leave to add, to alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”

ITA Noss.898 & 967/Bang/2013 17 11. The Grounds at S.Nos.1, 18 & 19, being general in nature, no adjudication is called for thereon. 12. Ground Nos. 2 to 4 : Broken Period Interest – Rs.11,91,41,534.

12.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee has excluded an amount of Rs.79,57,65,611 from the computation of income, towards broken period interest accrued but not received. The Assessing Officer observed that out of the amount of Rs.79,52,69,611, an amount of Rs.67,60,28,077 pertained to the period relevant to Assessment Year 2006-07 and the incremental accrued broken period interest for the year under consideration was Rs.11,91,41,534. The Assessing Officer included this amount in the income of the assessee, in line with the stand taken by the Assessing Officer in earlier years. The Assessing Officer further observed that even though the stand taken by the Assessing Officer’s in earlier years have not been found favour with by the higher appellate fora, he is making the additions of Rs.11,91,41,534 in the year under consideration on the grounds that the Department is in appeal and the issue has not become final.

12.2 On appeal, the learned CIT (Appeals) allowed the assessee's claim that the broken period interest accrued but not received should not be brought to tax until the receipt thereof, following the decision of the co-ordinate bench of this Tribunal in the case of State Bank of Mysore in ITA No.1401/Bang/03 dt.17.4.2009.

ITA Noss.898 & 967/Bang/2013 18 12.3.1 We have heard both the learned Authorised Representative of the assessee and the learned Departmental Representative for revenue on the issue before us and carefully perused and considered the material on record. The brief facts of the matter are that the assessee makes investments in Government Securities as per RBI Guidelines. Interest on these securities is normally payable on specific coupon dates, which are 30th of June and 30th of December of every year, in the case of the assessee. The assessee accounts for the income from the last coupon date, 30th December till 31st March as “broken period interest income” on accrual basis. It is the contention of the assessee, that even though it follows the Mercantile Basis of Accounting, an amount cannot be charged to tax under it constitutes income and as the broken period income does not constitute income, it is therefore not chargeable to tax.

12.3.2 We find that this issue has been considered and decided in favour of the assessee in several cases cited by both the Hon'ble Karnataka High Court and the co-ordinate bench of this Tribunal, including the decision in the case of State Bank of Mysore in ITA No. 1401/Bang/2003 dt.17.4.2009 relied on by the learned CIT (Appeals) in the impugned order. In the appellate proceedings before us, the learned Authorised Representative of the assessee placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT V Karnataka Bank Ltd. in ITA No.433 of 2005 dt.12.9.2012. The relevant portion of the said judgment at paras 16 & 17 thereof is extracted hereunder :- “16. It is declared under Section 5 of the Act that when interest is accrued or deemed to have been accrued, it is liable to tax. The word ‘accrued’ has defined the legal connotation. The interest that becomes due or liable to be payable whether or not it is

ITA Noss.898 & 967/Bang/2013 19 paid, the interest is accrued or deemed to have been accrued. If the interest does not become due and not liable to pay such part of the interest arise, it cannot be said that the interest has become accrued. It appears form the facts of the case that the assessee is a bank. For its accounting purpose, it has shown the proportionate interest entitled to receive on the Govt. securities. But for the assessment year, although it is not accrued, in the legal sense and in terms of sections 5 and 145 of the I.T. Act. The contention of the Revenue that in the books of accounts, the proportionate interest shown for the broken period in the balance sheet, should be construed as the income accrued, is not tenable. In other words, the income which has become due and payable should alone be considered as income accrued and that should be offered as tax. The contention that Assessing Officer is entitled to tax on the interest income although not due and payable as accrued, is untenable. The fact that the assessee in its internal books of accounting mentions the proportionate interest, which is entitled to receive, in its balance sheet for the purpose of profit and loss cannot be deemed as income accrued, unless such income has become due and payable. On the basis of such amount, the Assessing Officer has no right to charge the interest, which has not become due and payable. 17. In fact, we find no inconsistency between the amended provisions of sections 145 and 5 of the I.T. Act. It may be that the amended provisions of section 145 now insists mercantile system of accounting where on the income accrued the tax can be levied whether or not received unlike in cash system. Merely because in the books of accounts, the interest income, which is not due and payable is shown in the account of the assessee. That itself will not give right to A.O. to tax unless it has become due and payable as per provisions of section 5 of the I.T. Act.” 12.3.3 We find that the facts of the case on hand are exactly similar, on these issues to those decided by the Hon'ble High Court in the above cited decision (supra). Respectfully following a decision of the Hon'ble Karnataka High Court in the case of Karnataka Bank Ltd. (supra), we hold that the broken period interest does not constitute income in the year under consideration as it has not become due and payable / receivable as per the provisions of the Act. Consequently, Grounds raised at S.Nos.2 to 4 of Revenue’s appeal are dismissed.

ITA Noss.898 & 967/Bang/2013 20 13. Ground No.5 : Write off of Non-Convertible Debentures (NCDs) – Rs.2,75,00,000.

13.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed write off of investments in NCDs amounting to Rs.2,75,00,000. The Assessing Officer held that the amount is on account of diminution in value and not write off of NCDs and disallowed the expenditure claimed by the assessee in this regard.

13.2 On appeal, the learned CIT (Appeals) upheld the claim of the assessee that the amount of Rs.2,75,00,000 represents write off and allowed the same as deduction.

13.3 The learned Departmental Representative was heard in support of the ground raised on this issue and assailed the impugned order of the learned CIT (Appeals) for allowing the assessee relief on this issue. The learned Departmental Representative supported and relied on the finding of the Assessing Officer in the order of assessment and prayed that the same be confirmed.

13.4 The learned Authorised Representative of the assessee reiterated the submissions put forth by the assessee before the learned CIT (Appeals). It was submitted that the debentures were acquired from a debtor in satisfaction of debt owed. It is contended that the debentures so acquired constitute stock-in-trade and their deduction on account of write off due to reduction in the value of debentures is eligible for being allowed as deduction. It was submitted that since the debentures were acquired from a debtor in satisfaction of debt owed, which was classified as NPA, the debentures were also classified as NPA and were

ITA Noss.898 & 967/Bang/2013 21 written off in the Books of Account in accordance with RBI Circular. Since the original transaction was a trading transaction, the debentures were also in the nature of trading assets and its write off is eligible for deduction.

13.5.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal, in the assessee's own case for Assessment Year 2002-03 in ITA No.443/Bang/2012 dt.14.8.2013 has held that the loss in question is incidental to the business of the assessee and had to be allowed as a diminution in the value of stock-in-trade. The relevant portion of the finding at para 6 of this order is extracted hereunder :- “6. We have considered the submissions of the ld. counsel for the assessee and are of the view that the actual write off in the NCD account had taken place in this year. The claim of the assessee as made in the A.Y. 2000-01 and 2001-02 would be on the basis that there is a diminution in the value of stock in trade, whereas the claim of the assessee in this assessment year would be on the basis that it is a bad debt and allowable as a deduction u/s. 36(1)(vii) of the Act. We are of the view that the claim of the assessee has to be allowed in either of the assessment years, as the loss in question is incidental to the business and had to be allowed as a diminution in value of stock in trade. We therefore hold that in the event of the claim of the assessee being rejected in A.Ys. 2000-01 & 2001-02, the claim should be allowed in the A.Y. 2002-03. We hold and direct accordingly.” 13.5.2 We also find that the learned CIT (Appeals) in the impugned order has only mentioned the alternate submissions of the assessee, that since the said debentures were treated as investments in the ‘available for sale’ category, any diminution in the value of such investment is eligible for deduction. The learned CIT (Appeals) has not rendered any finding that the alternate submissions of the assessee is acceptable or otherwise. We, therefore, finding that the Ground No.5 raised by revenue is untenable, dismiss the same.

ITA Noss.898 & 967/Bang/2013 22 14. Ground Nos.6 to 9 : Disallowance of operational losses – Rs.36,99,509.

14.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed operational losses of Rs.36,99,509. On examination of details filed, the Assessing Officer determined that these losses are due to operational mistakes related mainly to ATM transactions of customers. The Assessing Officer held these losses to be essentially capital losses incurred for operational reasons and disallowed the same. On appeal, the learned CIT (Appeals) on appreciation of the details of the matter held that these amounts are eligible for deduction, holding them to be business losses arising out of technical defaults incurred by the assessee in day-to-day revenue earning activity.

14.2 We have heard the rival contentions of both the learned Departmental Representative for revenue and the learned Authorised Representative of the assessee and perused and carefully considered the material on record. The basic facts of the matter, not in dispute, are that these amounts represent operational losses on account of debit balance lying in the accounts where customers accounts were overdrawn and lying in such accounts for a period of more than one year. The discrepancies arose due to delayed posting of offline ATM transactions, reversals for suspect ATM transactions which were subsequently debited back from customers accounts, offline ATM transactions not debited to customers accounts done subsequently and credits given to wrong ATM claims which were debited back, etc. Evidently, these are operational mistakes as admitted by the Assessing Officer. After having held these

ITA Noss.898 & 967/Bang/2013 23 amounts as having arisen out of operational mistakes, the Assessing Officer was wrong in holding these to be capital in nature. The Assessing Officer has not given any reason nor rendered any finding for holding it so. From the details on record and in the impugned order, it is clear that these losses have arisen due to operational mistakes in the course of banking activity of the assessee. As these amounts have been written off as irrecoverable, we concur with the view of the learned CIT (Appeals) that these are eligible for deduction.

15.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed an amount of Rs.2,03,15,166 towards Mark-to-Market (MTM) losses. Relying on CBDT’s Instruction No.17/2008, the Assessing Officer disallowed the claim made by the Assessing Officer. On appeal, the learned CIT (Appeals) allowed the deduction claimed by the assessee. Following the decisions of the ITAT, Mumbai benches in the cases of Bank of Bahrain & Kuwait in 41 SOT 290 and ABN Amro Securities India (P) Ltd. in 145 TTJ 702, the learned CIT (Appeals) observed that the assessee has been following a consistent accounting method in respect of the derivative products and the method followed by the assessee is based on recognized accounting principles and allowed the deduction claimed by the assessee.

15.2 The learned Departmental Representative was heard in support of the grounds raised and prayed that the finding of the Assessing Officer in the order of assessment be confirmed.

ITA Noss.898 & 967/Bang/2013 24 15.3 In appellate proceedings, the learned Authorised Representative reiterated the submissions made before the authorities below and placed reliance on the following decisions :- i) UCO Bank – 240 ITR 355 (SC). ii) Woodward Governor India (P) Ltd., 312 ITR 254 (SC) iii) DCIT V Bank of Bahrain & Kuwait – 41 SOT 290 (Mum)(SB) iv) Edelweiss Capital Ltd., 6 Taxmann.Com 157 (Mum) v) Shirhan Bank 23 TAxmann.Com 449 (Mum)

The learned Authorised Representative prayed for the order of the learned CIT (Appeals) on this issue to be upheld.

15.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. There is no dispute with regard to the basic facts of the concerned transactions. The assessee, in the course of its business, enters into various derivative contracts to protect itself against risks of loss on account of fluctuation in foreign exchange rates. The contract gets executed on the date of maturity, resulting in either profit and loss to the assessee. There is no dispute with respect to the allowability of the loss arising on execution of contracts within the same year. However, where the contract has not matured on the last date of the accounting year and the maturity date falls beyond the last day of the accounting year, the derivatives outstanding at the year end are reinstated in the Books of Account as on the last date of the accounting year i.e. 31st March. The loss arising on such reinstatement is charged to the profit and loss account and

ITA Noss.898 & 967/Bang/2013 25 claimed as a deduction during the year under consideration. It is the treatment to be given to this loss that is under dispute before us.

15.4.2 It is the contention of the assessee that the accounting entries in connection with the derivative contracts are passed by the assessee as per the guidelines of the Foreign Exchange Dealers Association of India (‘FEDAI’) and that the loss claimed is in accordance with the recognized method of accounting, consistently followed by the assessee and is not a notional loss. It was also contended that the derivatives are in the nature of stock-in-trade to be valued at cost or market value, whichever is lower and is therefore an allowable expenditure, as has been held in the judicial decisions relied on by the assessee.

15.4.3 It may be useful to understand the nature of derivative contracts. These contracts create a binding obligation on the date of contract on the assessee to fulfill the same on the date of maturity. Further, it is in the nature of hedging contract because it was a contract entered into against possible future financial losses. It follows from the above, that while it is true that the assessee would come to know of the actual profit / loss only on the date of maturity (unless there is a premature cancellation of the contract), it is equally true that the assessee could anticipate the loss on the valuation date, which is the year and date of 31st March, with reasonable accuracy. Prudent accounting and commercial principles require that all accrued losses have to be taken into account.

ITA Noss.898 & 967/Bang/2013 26 15.4.4 Having considered the nature of the contract, it requires examination as to whether on account of the existing obligation arising out of the contract, a liability accrued as per the provisions of the Act. In this regard, it would be both useful and necessary to take into account some of the settled principles regarding accounting propositions, which are as under :-

i) Income is to be accounted for only when the right to receive the same has accrued in favour of the assessee, thereby creating a realizable debt in its / his favour. A legally enforceable right should have accrued;

ii) All anticipated losses, which accrued on the date of the Balance Sheet have to be accounted for, as per prudent accounting policy;

iii) Stock-in-trade is valued at the end of the previous year in accordance with the matching principle, in order to arrive at the true and correct profit / loss ;

iv) The method of accounting consistently followed by the assessee should not be discarded casually without giving strong reasons for the same.

15.4.5 It is the assessee's contention that the derivative contracts have to be revealed in accordance with FEDAI Guidelines and therefore it has to determine the profit / loss in regard to unmatured derivative contracts in accordance with the currency rates as on the valuation date (i.e. 31st March). This contention of the assessee is not in dispute. It is a settled principle, upheld by the Hon'ble Courts in a catena of decisions that deduction is

ITA Noss.898 & 967/Bang/2013 27 allowable under the Act in respect of liabilities which have crystallized during the year. If an anticipated liability is coupled with present obligation, then that would result in a crystallized liability, even though the quantification may vary depending upon the terms of contracts. A contingent liability depends purely on the happening or non-happening of an event. Whereas, if an event has taken place, which in the case on hand was of entering into the contract and undertaking of obligation to meet the liability, and only the consequential effect of the same is to be determined, then it cannot be said that it is in the nature of contingent liability. It is to be borne in mind that the issues relating to the accrual of income cannot be decided on the same footing / considerations on which issues relating to losses are to be decided. In case of loss / expense, the concept of reasonable certainty to meet an existing obligation which comes into play, which in legal technology is called “crystallization of liability.” This is in consonance with the principles of prudence, as considered by the Hon'ble Apex Court in the case of CIT V Woodward Governor India Pvt. Ltd. reported in 312 ITR 254 (SC).

15.4.6 At this stage it would be relevant to peruse and consider the decision of the Hon'ble Apex Court in the case of CIT V Woodward Governor India Pvt. Ltd. (supra). The substantial questions of law for consideration before the Hon'ble Apex Court are extracted from para 3 of its order are as under : “3. In this batch of civil appeals, the following question arises for determination: "(i) Whether, on the facts and circumstances of the case and in law, the additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes could be allowed as deduction under s. 37(1) in the year of fluctuation in

ITA Noss.898 & 967/Bang/2013 28 the rate of exchange or whether the same could only be allowed in the year of repayment of such loans? (ii) Whether the assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the varied liability?" The above questions of law were elaborated by their Lordships at para 4 of the order which is extracted as under :- “ 4. At the outset, for the sake of convenience, we may state that in this batch of civil appeals broadly we have before us two categories. In the first category, we are concerned with exchange differences arising in foreign currency transaction on revenue items. In such category, we are concerned with the assessee(s) incurring loss on revenue account. In that category, we are concerned with the provisions of ss. 28, 29, 37(1) and 145 of the IT Act, 1961 ("1961 Act"). In the second category of cases, we are concerned with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets. In other words, in the second category of cases, we are concerned with the assessee(s) incurring liabilities on capital account. In such cases, we are required to consider the provisions of s. 43(1), 43A (both, before and after amendment vide Finance Act, 2002).”

15.4.7 The Hon'ble Apex Court after it considered and examined the issue, decided as at paras 13 to 21 of its order which are extracted as under :- “ 13. As stated above, one of the main arguments advanced by the learned Addl. Solicitor General on behalf of the Department before us was that the word "expenditure" in s. 37(1) connotes "what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Company. Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of "expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which

ITA Noss.898 & 967/Bang/2013 29 does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression "expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in praesenti and a liability de futuro. The word "expenditure" is not defined in the 1961 Act. The word "expenditure" is, therefore, required to be understood in the context in which it is used. Sec. 37 enjoins that any expenditure not being expenditure of the nature described in ss. 30 to 36 laid out or expended wholly and exclusively for the purposes of the business should be allowed in computing the income chargeable under the head "Profits and gains of business". In ss. 30 to 36, the expressions "expenses incurred" as well as "allowances and depreciation" has also been used. For example, depreciation and allowances are dealt with in s. 32. Therefore, Parliament has used the expression "any expenditure" in s. 37 to cover both. Therefore, the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is really a "loss" even though the said amount has not gone out from the pocket of the assessee. 14. In the case of M.P. Financial Corporation vs. CIT (1986) 51 CTR (MP) 249 : (1987) 165 ITR 765 (MP) the Madhya Pradesh High Court has held that the expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is a "loss" even though the said amount has not gone out from the pocket of the assessee. This view of the Madhya Pradesh High Court has been approved by this Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC). According to the Law and Practice of Income-tax by Kanga and Palkhivala, s. 37(1) is a residuary section extending the allowance to items of business expenditure not covered by ss. 30 to 36. This section, according to the learned author, covers cases of business expenditure only, and not of business losses which are, however, deductible on ordinary principles of commercial accounting. It is this principle which attracts the provisions of s. 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under ss. 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word "paid" in s. 43(2), which is used in several ss. 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under s. 28/29. That is why in deciding the question as to whether the word "expenditure" in s. 37(1) includes the word "loss" one has to read s. 37(1) with s. 28, s. 29 and s. 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. Under s. 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision

ITA Noss.898 & 967/Bang/2013 30 with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P&L a/c the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading s. 37(1) with s. 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price, whichever is the lower. As profits for income-tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accounting year and carried over to the following years account in a continuing business are not brought to the charge as a matter of practice, though, as stated above, loss due to fall in the price below cost is allowed even though such loss has not been realized actually. At this stage, we need to emphasise once again that the above system of commercial accounting can be superseded or modified by legislative enactment. This is where s. 145(2) comes into play. Under that section, the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under s. 209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, Accounting Standard which is continuously adopted by an assessee can be superseded or modified by legislative intervention. However, but for such intervention or in cases falling under s. 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the AO stating that the assessee has not complied with the Accounting Standards. 15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the 1961 Act. 16. In the light of what is stated hereinabove, it is clear that profits and gains of the previous year are required to be computed in accordance with the relevant Accounting Standard. It is important to bear in mind that the basis on which stock-in-trade is valued is part of the method of accounting. It is well established, that, on general principles of commercial accounting, in the P&L account, the values of the stock-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower-the market value being ascertained as on the last date of the

ITA Noss.898 & 967/Bang/2013 31 accounting year and not as on any intermediate date between the commencement and the closing of the year, failing which it would not be possible to ascertain the true and correct state of affairs. No gain or profit can arise until a balance is struck between the cost of acquisition and the proceeds of sale. The word "profit" implies a comparison between the state of business at two specific dates, usually separated by an interval of twelve months. Stock-in-trade is an asset. It is a trading asset. Therefore, the concept of profit and gains made by business during the year can only materialize when a comparison of the assets of the business at two different dates is taken into account. Sec. 145(1) enacts that for the purpose of s. 28 and s. 56 alone, income, profits and gains must be computed in accordance with the method of accounting regularly employed by the assessee. In this case, we are concerned with s. 28. Therefore, s. 145(1) is attracted to the facts of the present case. Under the mercantile system of accounting, what is due is brought into credit before it is actually received; it brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. (judgment of this Court in the case of United Commercial Bank vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC)). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. As stated, there is no finding given by the AO on the correctness of the Accounting Standard followed by the assessee(s) in this batch of civil appeals. 17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under s. 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-II mandatory, we are now required to examine the said Accounting Standard ("AS"). 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of exchange differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words "monetary items" are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word "paid" is defined under s. 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on initial recognition. Para 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to

ITA Noss.898 & 967/Bang/2013 32 initial recognition. Para 7(a) inter alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under s. 37(1), para 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under s. 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-a-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period. 19. A company imports raw material worth US $ 250000 on 15th Jan., 2002 when the exchange rate was Rs. 46 per US $. The company records the transaction at that rate. The payment for the imports is made on 15th April, 2002 when the exchange rate is Rs. 49 per US $. However, on the balance sheet date, 31st March, 2002, the rate of exchange is Rs. 50 per US $. In such a case, in terms of AS-11, the effect of the exchange difference has to be taken into P&L account. Sundry creditors is a monetary item and hence such item has to be valued at the closing rate, i.e. Rs. 50 at 31st March, 2002, irrespective of the payment for the sale subsequently at a lower rate. The difference of Rs. 4 (50-46) per US $ is to be shown as an exchange loss in the P&L account and is not to be adjusted against the cost of raw materials. 20. In the case of Sutlej Cotton Mills Ltd. vs. CIT 1978 CTR (SC) 155 (1979) 116 ITR 1 (SC) this Court has observed as under: "The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." 21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for

ITA Noss.898 & 967/Bang/2013 33 which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted Accounting Standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation.” 15.4.8 As can be seen from the extractions reproduced above, the decision in the case of Woodward Governor India Pvt. Ltd. (supra) has been rendered in respect of “monetary items”, denominated in foreign currency which include to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g. cash, foreign currency notes, balance in bank accounts denominated in a foreign currency, receivables / payables and loans denominated in a foreign currency, sundry creditors, etc. are all monetary items. The decision is also related to transactions in which a legal liability has been incurred before it is actually disbursed. We are therefore unable to concur or agree with the view of the learned CIT (Appeals), that liability could arise only when the contract would have matured, as such a stand is totally divorced from the accounting principles and is in variance with the principle upheld by the Hon'ble Apex Court in the case of Woodward Governor India Pvt. Ltd. (supra). It can also be seen that the decision in the case of Woodward Governor India Pvt. Ltd. (as extracted above) has been rendered with regard to items in the revenue account and capital account. Therefore, the view

ITA Noss.898 & 967/Bang/2013 34 of the learned CIT (Appeals) that this decision of the Hon'ble Apex Court relates to only restatement of existing currency liabilities and assets is not correct. 15.4.9 In the case on hand, it is not in dispute that the forward contracts have been entered into by the assessee in order to protect its interest against fluctuations in foreign currency, in respect of consideration for export proceeds, which is a revenue item. Therefore, in sum and substance, it has the trappings of stock-in-trade and the assessee has to restate or revalue the same as on the Balance Sheet date. The consequent effect of this accounting treatment was to recognize the exchange fluctuation gain or loss in the profit and loss account as on the valuation date. 15.4.10 We find that, on the same set of facts, the ITAT, Mumbai Special Bench in the case of Bank of Bahrain & Kuwait (supra) has held that such MTM losses are allowable as deduction. After elaborately discussing the issue and the judicial pronouncements in this regard, the Special Bench of the Mumbai Tribunal in the afore cited decision held as under at paras 58 & 59 thereof :- “ 58. In view of the above discussion, we allow the assessee’s appeal for the following reasons:- i) A binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts. ii) A consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted. iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31.

ITA Noss.898 & 967/Bang/2013 35 iv) A liability is said to have crystalised when a pending obligation on the balance sheet date is determinable with reasonable certainity. The considerations for accounting the income are entirely on different footing. v) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. vi) The forward foreign exchange contracts have all the trappings of stock-in-trade. vii) In view of the decision of Hon’ble Supreme Court in the case of Woodward Governor India (I) P.Ltd., the assessee’s claim is allowable. viii) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. 59. We, accordingly, hold that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract.” 15.4.11 We had earlier observed that the Assessing Officer had relied on the CBDT’s Instruction No.3/2010. Paras 1 and 3 of this Instruction reads as under :- “ 1.Foreign Exchange derivative transactions entered into by the corporate sector in India have witnessed a substantial growth in recent years. This combined with extreme volatility in the foreign exchange market in the last financial year is reported to have resulted in substantial losses to an assessee on account of trading in forex-derivatives. A large number of assesses are said to be reporting such losses on ‘marked to market’ basis either suo motu or in compliance of the Accounting Standard or advisory circular issued by the Institute of Chartered Accountants. The issue whether such losses on account of forex- derivatives can be allowed against the taxable income of an assessee has been considered by the Board. In this connection, I am directed to say that the Assessing Officers may follow the guidelines given below: 2…… 3. Treatment of loss from actual transactions in forex-derivatives. In a case where a loss on a forex-derivative transaction arises on actual settlement / conclusion of contract and is not a notional or marked to market book entry, a further question will arise as to whether such a loss is on account of a speculative transaction as contemplated in Section 43(5) of the Income tax Act. For determining whether loss from a transaction in respect of a forex- derivative is a speculation loss or not, the Assessing Officers may refer to Proviso (d) below sub-section (5) of Section 43 inserted by the Finance Act, 2005, with effect from 1.4.2006. It lays down that any ‘eligible transaction’ in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956, that has been

ITA Noss.898 & 967/Bang/2013 36 carried out in a recognized stock exchange shall not be treated as a speculative transaction. Further, an ‘eligible transaction’ for this purpose would be one that fulfils the conditions laid down in Explanation to Section 43(5)(d). Any loss in a speculative transaction can be set off only against profit from speculative transactions.” In the case on hand, as discussed earlier, a contract has been concluded and a liability has crystallized. In this factual matrix, from the wordings of the Instruction, it follows that the loss arising out of the forward contract is not notional. In such a case, the CBDT Instruction requires the Assessing Officer to examine whether such a loss is on account of a speculative transaction as contemplated in section 43(5) of the Act. As discussed earlier, in the case on hand, there has been an existing contract with a binding obligation accrued against the assessee when it entered into derivative contracts. Hence, transaction in question cannot be called as a speculative transaction. In view of the factual and legal matrix of the case as discussed at paras 15.4.1 to 15.4.11 (supra), we hold that the assessee's claim in respect of MTM losses is allowable as revenue expenditure. Consequently, revenue’s ground at S.No.10 is dismissed. 16. Grounds No.11 to 13 – Diminution in value of investment under AFS / HFT Categories – Rs.6,05,64,289.. 16.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee has claimed diminution in the value of investments under the AFS/HFT categories to the extent of Rs.6,05,64,289 by considering only the depreciation in the value of securities and ignoring the appreciation in the value of other scrips. According to the Assessing Officer, the assessee ought to consider both the appreciation and depreciation in the respective

ITA Noss.898 & 967/Bang/2013 37 portfolios and after netting off, the balance should be offered as profit for taxation. As the assessee had claimed only the depreciation in value of scrips and ignored the appreciation of value of other scrips, the Assessing Officer disallowed the assessee's claim of deduction of Rs.6,05,64,289 on account of diminution in value of investments under the AFS/HFT categories.

16.2 On appeal, the learned CIT (Appeals) allowed the assessee's claim for deduction of Rs.6,05,64,289 on diminution in the value of investments under the AFS/HFT categories by following the decision of the co-ordinate bench of this Tribunal in the case of Corporation Bank in ITA Nos.794 & 795/Bang/2011 dt.18.6.2012.

16.3.1 We have heard the rival contentions of both the learned Departmental Representative and the learned Authorised Representative. The basic facts of the matter are not in dispute. The assessee recognizes the value of investments held under AFS/HFT category as per RBI Guidelines; as per which the scrips are treated as stock-in-trade and valued at market price. While no depreciation in the value of investments, if any, is provided, any appreciation is ignored; this is as per the accounting treatment mandated by RBI Guidelines.

16.3.2 For the purposes of tax computation, the assessee treats the scrip as stock-in-trade and values the same at cost or market price, whichever is lower. It is the contention of the assessee that this system of accounting is consistently followed and is in tune with the provisions of section 145 of the Act. It was also submitted that the difference between the

ITA Noss.898 & 967/Bang/2013 38 sale price and the price at which the investments are recorded for tax purposes, is offered to tax in the year of sale and as such depreciation in value claimed in the earlier years are offered to tax in the form of profit on sale of stock-in-trade.

16.3.3 As mentioned by the learned CIT (Appeals) in the impugned order, we find that the issue before us for consideration is squarely covered by the decision of the co-ordinate bench of this Tribunal in the case of Corporation Bank (supra) which was rendered after analyzing the decision of the Hon'ble Apex Court in the case of UCO Bank Ltd., in 240 ITR 355 (SC). The relevant portion of the above cited decision of the co-ordinate bench at paras 11 and 12 thereof are extracted here under :-

“ 11. After considering the submissions of both the parties and the material available on the record, it is noticed that a similar issue having identical facts has been decided in favour of the assessee vide the aforesaid referred to order dated 31.05.2011 in ITA No.710/Bang/2010 for the A.Y. 2007-08 in assessee’s own case and the relevant findings has been given in paras 5 to 7, which read as under:- “05. At the time of hearing, though this is Revenue's appeal, the learned Chartered Accountant appearing for the assessee, placed on record a Xerox copy of the order of the Tribunal in ITA 112/Bang/2008 for the assessment year 2004-05 and drew our attention to para nos.14 to 16 of the said order and pleaded that the issue on hand is squarely covered in favour of the assessee. We have also heard the learned DR and considered the facts and materials on record. 06. In our considered opinion, the decision of the coordinate bench of this Tribunal in assessee's own case is binding on us, facts and circumstances being the same. In the said decision cited above, the Tribunal in para nos.14 to 16 has held as under : "14. We are of the considered view that the decision of the Hon'ble Supreme Court in the case of United Commercial Bank v. Commissioner of Income-tax reported in 240 ITR 355 is directly applicable to the facts of the case on hand. As per the Head Note of the said decision, the Hon'ble Apex Court has held that preparation of the Balance sheet in accordance with the statutory provisions would not disentitle the assessee in submitting the Income-tax return on the real taxable income in accordance with the

ITA Noss.898 & 967/Bang/2013 39 method of accounting adopted by the assessee consistently and regularly. For the purpose of Income tax, what is to be taxed is real which is to be deducted on the basis of accounting system regularly maintained by the assessee. 15. Further, the method by which the assessee Bank is valuing securities is in accordance with the accounting principles by treating such securities as stock-in-trade. Moreover, the revenue itself is treating the profit on maturity of such security as business income and, therefore, such securities cannot be treated as capital assets. 16. Considering the facts and circumstances of the case before us and respectfully following the decision of the Hon'ble Supreme Court in the case of United Commercial Bank v. Commissioner of Income-tax referred supra, it is held that the assessee Bank is entitled to value all the investment at cost prices or market value whichever is lower by treating such investment as stock-in-trade. We, therefore, delete the disallowance of Q. 5,21,96,537/- made by the learned Commissioner of Income-tax(A). Our decision is also in line with the decision of the Hon'ble ITAT, Bangalore Bench 'B' in ITA No.253/Bang/2007, dated 24.1.2008 in the case of ACIT (LTU), Bangalore v. Vijaya Bank." 07. Following our above decision, this issue is decided in favour of the assessee by dismissing the grounds of appeal raised by the Revenue.”

ITA Noss.898 & 967/Bang/2013 40

17.2.1 We have heard the rival contentions of both the learned Departmental Representative and the learned Authorised Representative and perused and carefully considered the material on record. It is not in dispute that the assessee had incurred an amount of Rs.9,79,33,190 towards insurance premium in respect of housing loan products. In its Books of Account, the assessee amortised this expenditure over the period of the housing loan. However, in the return of income filed, the entire amount of expenditure was claimed as deduction. The Assessing Officer did not concur with this claim of the assessee and restricted the deduction to the extent of amortization as made by the assessee in its books of account.

ITA Noss.898 & 967/Bang/2013 41 17.2.2 According to the assessee, this expenditure is directly related to the business of the assessee and is liable to be allowed as deduction. It was submitted that the provisions of sections 30 to 36 of the Act covers specific expenses and section 37 of the Act is a residuary section which permits deduction of expenses incurred wholly and exclusively for the purposes of business, provided they are not capital in nature, not personal in nature and not prohibited in law. It is contended that deduction was allowable, irrespective of whether the expenses were deferred over a period of time in the books of account. In support of this contention, the assessee relied on various judicial pronouncements put forth before the learned CIT (Appeals).

17.2.3 On a careful consideration of the facts of the matter, we concur with the finding of the learned CIT (Appeals) in the impugned order that the expenditure incurred on insurance premium on housing loan are revenue in nature and is an allowable deduction. It is not the case of the Assessing Officer that these expenses are not for the purposes of the assessee's business or that they are capital in nature. These expenses are related to the housing products which are very much a part of the assessee's business activities and the payment of insurance premium on the housing products is also not capital in nature. Once the expenditure is accepted to be revenue in nature and incurred for the purposes of business, then it is allowable in the year in which it is incurred. There is no concept of deferred revenue expenditure in the scheme of the Act and unless otherwise expressly provided, the revenue expenditure is to be allowed in full, in the year in which it is incurred. In this view of the matter, we concur with the finding of the learned CIT (Appeals) that the expenditure of

ITA Noss.898 & 967/Bang/2013 42 Rs.2,39,38,811 incurred as insurance premium in connection with their housing loan scheme is revenue in nature and is eligible for deduction. It is ordered accordingly. Consequently revenue’s grounds at S.Nos.14 to 17 are dismissed.

To sum up, the assessee's appeal for A.Y. 2007-08 is allowed and Revenue’s cross appeal for A.Y. 2007-08 is dismissed.

Order pronounced in the open court on 6th Feb., 2015.

Sd/- Sd/- (RAJPAL YADAV) (JASON P BOAZ) Judicial Member Accountant Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore