2018 (12) TMI 1611 - HC - Income Tax

Adoption of YTM Ratio - valuation of unquoted securities on Y.T.M. Yield To Market Ratio basis - HELD THAT - The view has been upheld by a Division Bench of this Court in Commissioner of Income Tax v. Lord Krishna Bank Ltd. 2010 (10) TMI 860 - KERALA HIGH COURT . The first question hence has to be answered in favour of the assessee and against the Revenue. Treatment of current securities as stock in trade - HELD THAT - Issue to be answered in favour of the assessee in Commissioner of Income Tax v. Nedungadi Bank Ltd. 2002 (11) TMI 29 - KERALA HIGH COURT . The second question is also answered in favour of the assessee and against the Revenue. Nature of expenditure - expenditure for acquisition of new software - revenue or capital expenditure - Held that - Tribunal found that software is to be revised on a regular basis and cannot be considered as a permanent asset. We agree with the Tribunal, especially considering the technological advancement made at a fast pace and the need to upgrade the software regularly for better facilitation of banking services. The software is also used for the banking facilities and hence we are clearly of the opinion that the same can be considered as revenue expenditure. The last question is also answered in favour of the assessee Addition u/s 14A - scope of amendment introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962 - whether the assessee is entitled to claim the expenditure in respect of income which does not form part of total income? - HELD THAT - In Commissioner of Income Tax v. ESSAR Teleholdings Pvt. Ltd. 2018 (2) TMI 115 - SUPREME COURT OF INDIA held that Section 14A would be applicable only from the assessment year 2007-2008. Hence the first question has to be answered in favour of the assessee Depreciation on current investments - accepting the assessee s method of valuing the securities held by the assessee on the cost or market price, whichever is lower - Reserve Bank has directed the assessee to treat certain securities as current investments and certain as stock in trade - HELD THAT - In the present case the investments being considered to be permanent in nature are treated as current investments and the valuation is done by the assessee at the close of the financial year on the cost or market price, whichever is lower, as stipulated by the Reserve Bank of India. The said valuation has been upheld by this Court in Nedungadi Bank Ltd. 2002 (11) TMI 29 - KERALA HIGH COURT . Hence that question is also answered in favour of the assessee Disallowance of excess provision for bad and doubtful debts created by the assessee in terms of Section 36(1)(viia) - how the rural branches have to be classified? - HELD THAT - The answer is evident in Lord Krishna Bank Ltd. 2010 (10) TMI 860 - KERALA HIGH COURT , which found that though classification has to be based on the population, the reference to population has to be related to a Revenue Village and not to Wards within a local authority, which would even bring in certain Wards within a municipal area also within the classification of a rural branch. Following the aforesaid dictum of another Division Bench, we have to set aside the order of the Tribunal in so far as the interference caused to the Assessing Officer s order and disallowance carried out of ₹ 1,69,63,402/- has to be upheld. The second question hence is answered in favour of the revenue

Summary

Issues:
1. Valuation of unquoted securities on Y.T.M. basis
2. Treatment of current securities as stock in trade
3. Treatment of expenditure on acquisition of new software as revenue expenditure
4. Applicability of Section 14A of the Income Tax Act
5. Allowance of depreciation on current investments

Valuation of Unquoted Securities:
The court upheld the adoption of Yield To Market Ratio (YTM) basis for valuing unquoted securities, citing precedent Commissioner of Income Tax v. Lord Krishna Bank Ltd. The decision favored the assessee, following the established legal position.

Treatment of Current Securities:
The court ruled in favor of the assessee regarding the treatment of current securities as stock in trade, referencing Commissioner of Income Tax v. Nedungadi Bank Ltd. The judgment supported the assessee's position against the Revenue.

Expenditure on Acquisition of New Software:
The court agreed with the Tribunal's decision to treat the expenditure on new software as revenue expenditure. It emphasized the necessity to upgrade software regularly due to technological advancements, supporting the assessee's stance against the Revenue.

Applicability of Section 14A:
The court clarified that Section 14A of the Income Tax Act only applies from the assessment year 2007-2008, favoring the assessee based on the legal interpretation provided in Commissioner of Income Tax v. ESSAR Teleholdings Pvt. Ltd.

Depreciation on Current Investments:
The court supported the assessee's method of valuing securities held as current investments based on the cost or market price, whichever is lower. The decision aligned with the Reserve Bank's directive and upheld by the court in previous cases.

Additional Issue - Provision for Bad and Doubtful Debts:
The court addressed an additional issue concerning the provision for bad and doubtful debts, distinguishing between write-offs under different sections of the Income Tax Act. It highlighted the importance of correctly categorizing such provisions for tax purposes.

Conclusion:
The judgments across various assessment years consistently favored the assessee on multiple issues, including valuation methods, treatment of securities, software expenditure, and the applicability of tax provisions. The decisions were based on legal precedents, statutory provisions, and practical considerations, ensuring a fair and reasoned approach to tax matters.