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2015 (2) TMI 988 - AT - Income TaxExpenditure on purchase of software disallowed - Held that - Respectfully following the decisions of the Hon'ble High Court of Karnataka in the case of IBM India Ltd. (2013 (10) TMI 1225 - KARNATAKA HIGH COURT) and the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2001-02 we hold that the expenditure incurred by the assessee for purchase of application software is revenue in nature. - Decided in favour of assessee. Provision for expenses related to HRD, Retail, Consumer product assets and Retail Deposit Operations - AO disallowed claim as these are provisions and had not crystallized or arisen during the course of the year - Held that - 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 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.These expenses appear to be more in the nature of write off. Thus we are satisfied that these amounts are allowable expenditure while computing the assessee's total income - Decided in favour of assessee. Non-applicability of Section 115JB - whether provisions of MAT are not applicable to the assessee since it is a banking company - Held that - As decided in assessee's own case 2015 (2) TMI 892 - ITAT BANGALORE for Assessment Year 2002- 03, provisions of section 115JB of the Act are not applicable to the assessee which is a banking company. - Decided in favour of assessee. Disallowance of provision for expenses u/s. 115JB - Held that - Once 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 made by the authorities below while computing the book profits under Section 115JB of the Act also fails.- Decided in favour of assessee. Broken Period Interest - CIT(A) held that the broken period interest accrued but not received should not be brought to tax until the receipt thereof - Held that - Respectfully following a decision of the Hon'ble Karnataka High Court in the case of Karnataka Bank Ltd. (2014 (11) TMI 221 - KARNATAKA HIGH COURT), 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.- Decided in favour of assessee. Write off of Non-Convertible Debentures - CIT (A) upheld the claim of the assessee that the amount represents write off and allowed the same as deduction - Held that - Co-ordinate bench of this Tribunal, in the assessee's own case for Assessment Year 2002-03 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. 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. - Decided in favour of assessee. Disallowance of operational losses - CIT(A) 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. - Held 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 amounts as having arisen out of operational mistakes, the Assessing Officer was wrong in holding these to be capital in nature. 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. - Decided in favour of assessee. Mark-to-Market Losses - Held that - In the case on hand 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. Thus we hold that the assessee's claim in respect of MTM losses is allowable as revenue expenditure. - Decided in favour of assessee. Diminution in value of investment under AFS / HFT Categories - Held that - We concur with the decision of the learned CIT (Appeals) in allowing the assessee's claim of diminution in the value of investments under the AFS/HFT categories as relying on assessee's own case for the A.Y. 2007-08 - Decided in favour of assessee. Insurance Premia for Housing Loan - Held that - he 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. - Decided in favour of assessee.
Issues Involved:
1. Expenditure on purchase of software. 2. Provision for expenses. 3. Non-applicability of Section 115JB to Banking Company. 4. Broken period interest. 5. Write off of Non-Convertible Debentures (NCDs). 6. Disallowance of operational losses. 7. Mark-to-Market (MTM) losses. 8. Diminution in value of investment under AFS/HFT categories. 9. Insurance premium for housing loans. Detailed Analysis: 1. Expenditure on Purchase of Software: Issue: Whether the expenditure on the purchase of software amounting to Rs. 4,45,13,003 should be treated as revenue or capital expenditure. Judgment: The Tribunal held that the expenditure incurred by the assessee for the purchase of application software is revenue in nature. This decision was based on the precedent set by the Hon'ble Karnataka High Court in the case of IBM India Ltd. and the assessee's own case for Assessment Year 2001-02. The software purchased did not provide any enduring benefit and was required to be replaced within a short span of time. Hence, the expenditure was rightly claimed as revenue expenditure. 2. Provision for Expenses: Issue: Whether the provision for expenses amounting to Rs. 75,00,281 should be allowed as a deduction. Judgment: The Tribunal allowed the deduction, stating that although the expenses were categorized as provisions, they represented actual expenditure incurred by the assessee. The amounts were ascertained based on actual incurrence and were in the nature of business expenditure. The Tribunal relied on judicial precedents including Bharat Earth Movers Ltd. and Rotork Controls India (P) Ltd. 3. Non-applicability of Section 115JB to Banking Company: Issue: Whether Section 115JB of the Income Tax Act is applicable to banking companies. Judgment: The Tribunal held that the provisions of Section 115JB are not applicable to banking companies. This decision was based on the precedent set by the ITAT Bangalore Bench in the case of Syndicate Bank and the assessee's own case for Assessment Year 2002-03. Consequently, the disallowance of provisions for expenses under Section 115JB also fails. 4. Broken Period Interest: Issue: Whether broken period interest accrued but not received should be brought to tax. Judgment: The Tribunal held that broken period interest does not constitute income in the year under consideration as it has not become due and payable. This decision was based on the precedent set by the Hon'ble Karnataka High Court in the case of CIT V Karnataka Bank Ltd. The Tribunal concluded that the broken period interest should not be taxed until receipt. 5. Write off of Non-Convertible Debentures (NCDs): Issue: Whether the write-off of NCDs amounting to Rs. 2,75,00,000 should be allowed as a deduction. Judgment: The Tribunal upheld the deduction, stating that the debentures were acquired in satisfaction of a debt owed and were classified as stock-in-trade. The loss in question was incidental to the business of the assessee and had to be allowed as a diminution in the value of stock-in-trade. This decision was based on the precedent set by the assessee's own case for Assessment Year 2002-03. 6. Disallowance of Operational Losses: Issue: Whether operational losses amounting to Rs. 36,99,509 should be allowed as a deduction. Judgment: The Tribunal allowed the deduction, stating that these amounts represented operational losses due to technical defaults in the course of banking activity. The losses were written off as irrecoverable and were eligible for deduction as business losses. 7. Mark-to-Market (MTM) Losses: Issue: Whether MTM losses amounting to Rs. 2,03,15,166 should be allowed as a deduction. Judgment: The Tribunal allowed the deduction, stating that the MTM losses were based on recognized accounting principles and were not notional losses. The Tribunal relied on judicial precedents including the case of Bank of Bahrain & Kuwait and the Hon'ble Supreme Court decision in Woodward Governor India Pvt. Ltd. 8. Diminution in Value of Investment under AFS/HFT Categories: Issue: Whether the diminution in the value of investments under AFS/HFT categories amounting to Rs. 6,05,64,289 should be allowed as a deduction. Judgment: The Tribunal allowed the deduction, stating that the investments were treated as stock-in-trade and valued at market price as per RBI Guidelines. The Tribunal relied on the precedent set by the case of Corporation Bank and the Hon'ble Supreme Court decision in UCO Bank Ltd. 9. Insurance Premium for Housing Loans: Issue: Whether the insurance premium paid on housing loan policies amounting to Rs. 2,39,38,811 should be allowed as a deduction. Judgment: The Tribunal allowed the deduction, stating that the expenditure was directly related to the business of the assessee and was revenue in nature. The Tribunal concluded that there is no concept of deferred revenue expenditure in the scheme of the Act and the expenditure should be allowed in full in the year it is incurred. Conclusion: The Tribunal allowed the assessee's appeal for Assessment Year 2007-08 and dismissed the Revenue's cross appeal for the same year. The decisions were based on various judicial precedents and the consistent accounting methods followed by the assessee.
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