2021 (3) TMI 741 - HC - Income Tax

Allowable revenue expenditure - expenditure towards computerization - as per revenue assessee has spent the same on networking of 125 branches with a centralized processing solution and the activity has a long term benefit, warranting capitalization of the expenditure spent for the same - tribunal has recorded the conclusion that the expenditure incurred by the assessee for computerization of its branches is revenue in nature - HELD THAT - The order passed by the tribunal is cryptic in nature and suffers from vice of non application of mind. Even the contention by the revenue that the decision rendered in IBM India Ltd. 2013 (10) TMI 1225 - KARNATAKA HIGH COURT does not apply to the case of the assessee has not been considered. No reasons have been assigned for holding that decision rendered in the case of IBM India Ltd. Applies to the facts of the case of the assessee. Therefore, in view of contentions raised by both the parties before us, we deem it appropriate to quash the order passed by the tribunal so far as it pertains to findings of substantial question of law No.1 and remit the matter to the tribunal for decision afresh in accordance with law after considering the rival submissions made on both sides. Deduction u/s 36(1)(vii) - assessee did not receive any income during the year and is not eligible for the deduction - HELD THAT - The second substantial question of law is covered by decision of this court in 'COMMISSIONER OF INCOME TAX VS. SYNDICATE BANK' 2020 (2) TMI 1020 - KARNATAKA HIGH COURT - For the reasons assigned in the aforesaid judgment, the second substantial question of law is answered in favour of the revenue and against the assessee. Amortization of cost over face value of investment held to maturity - Whether such securities have characteristic of capital asset rather than stock in trade and the investment done as per RBI Guidelines is not an allowable revenue expenditure in terms of Section 37(1) of the Act? - Tribunal holding that the provisions of Section 115JB are not applicable to the assessee, it being a banking company, even though there is no such provision/exclusion under the IT Act - HELD THAT - For the reasons assigned in the decisions in CIT VS. KARNATAKA VIKAS GRAMEEN BANK 2015 (12) TMI 1420 - KARNATAKA HIGH COURT and CIT VS. ING VYSYA BANK LTD. 2020 (1) TMI 1116 - KARNATAKA HIGH COURT the third and fourth substantial questions of law are answered against the revenue and in favour of the assessee.

Summary

Issues:

1. Eligibility of claim for revenue expenditure on computerization of branches.
2. Deduction under Section 36(1)(vii) without any income.
3. Amortization of investment cost.
4. Applicability of Section 115JB to a banking company.

Eligibility of claim for revenue expenditure on computerization of branches:

The appeal involved determining whether the expenditure incurred by the assessee for computerization of its branches, resulting in networking with a centralized processing solution, should be treated as revenue or capital expenditure. The revenue argued that the project resulted in acquiring capital infrastructure with enduring benefits, constituting a capital expenditure. They also cited a Supreme Court decision and a local case to support their stance. On the contrary, the assessee contended that the expenditure was for efficient management and did not create a capital asset, as it was a common practice in the banking industry mandated by the Reserve Bank of India. They argued that the software substituted manpower costs and enhanced operational efficiency, making it revenue in nature. The court found the tribunal's order lacking in reasoning and remitted the matter back for fresh consideration.

Deduction under Section 36(1)(vii) without any income:

The second issue revolved around the deduction of a specific amount under Section 36(1)(vii) despite the assessee not generating any income from rural branches during the assessment year. The tribunal had allowed the deduction, and the court upheld this decision citing a previous judgment in favor of the revenue.

Amortization of investment cost:

Regarding the amortization of investment cost over face value of securities "held to maturity," the court relied on previous judgments to answer against the revenue, stating that such securities were considered capital assets rather than stock in trade, and the investment did not qualify as allowable revenue expenditure under Section 37(1) of the Act.

Applicability of Section 115JB to a banking company:

The final issue dealt with the applicability of Section 115JB to the assessee, a banking company. The court referred to previous judgments to rule against the revenue, stating that there was no provision or exclusion under the Income Tax Act exempting banking companies from the application of Section 115JB. The court disposed of the appeal, quashing the tribunal's order on the first issue and remitting it for fresh consideration, while upholding decisions in favor of the revenue on the second and fourth issues and against the revenue on the third issue.