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TMI Blog2016 (12) TMI 1799X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be treated as revenue expenditure and the remaining expenses are capital in nature. AO is directed to recompute the depreciation allowable on the above items of capital expenditure on acquisition of software. Assessee claimed depreciation @ 60% on LAN, WAN as applicable to the block of computers - It is not in dispute that the ITAT in the case of assessee itself for A.Y. 2006-07 has considered the LAN and WAN as integral part of computer and eligible for higher depreciation @ 60%. Addition of interest on overdue deposits - HELD THAT:- Claim of assessee, in our opinion, is not acceptable until it is ascertained that the actual payment of the provision has been made to the customers or not. We, therefore, restore this issue to the file of AO for the limited purpose to verify whether actual payment of the provision has been made to the customers or not and to decide the same accordingly as per law. Needless to say, the assessee shall be given reasonable opportunity of being heard. X X X X Extracts X X X X X X X X Extracts X X X X ..... king business of the assessee, b) assessee has sufficient noninterest bearing own funds to invest c) the investments made by the bank are to meet RBI norms like CRR, SLR ratios etc. d) the investments in the bank are made to realize gains or losses and earning dividend is only incidental e) neither the Assessing Officer nor the CIT(A) has any material to support nexus between expenditure incurred and earning of tax free income for disallowance. Hence the order of the CIT(A) upholding disallowance u/s 14A is wrong and bad in law. 7. The CIT(A) has erred in upholding the disallowance of claim of ₹ 2,60,56,117/- in respect of software expenses alleging them to be of capital nature. These are revenue expenditure being software expenses not resulting in any enduring benefit and are of recurring nature being year to year renewal of licenses charges, anti-virus software etc. which should be allowed as revenue expenditure." 2. The grounds raised by the Revenue in both of its appeals are as under: Grounds raised in appeal for A.Y. 2008-09: "1. On the facts & in the circumstances of the case the Ld. CIT(A) has erred in deleting indirect interest expenditure of ₹ 45.52 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, hence does not come in the purview of temporary fixtures. 2.1 On the facts & in the circumstances of the case, the Ld. CIT(A) erred by deleting the addition on account of disallowance of excess claim of depreciation on fixture & fittings on temporary structures by not considering the observation of the AO that the life of wooden partitions, cabins and wiring etc. for computers etc. are easily for a period of four to five years. 3. On the facts & in the circumstances of the case, the Ld. CIT(A) erred in deleting the addition of ₹ 83.00 crores ignoring the fact that the liability to pay interest on overdue deposits neither crystallized nor ascertained and it was a contingent liability which depends on the renewal of the deposits by the customers." From the above grounds of appeals raised by both the parties, it transpires that following issues are involved in all these appeals of the assessee and Revenue : 2008-09 2009-10 Assessee's appeal: (i) Loss due to fall in value of investments held as Stock in trade 209.99 crores 119.55 crores (ii) Disallowance u/s. 14A 3.63 crores 4.30 crores (iii) Expenditure on Software 2.60 crores 10.91 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the loss of ₹ 205.43 crores arising of on account of transfer of securities of ₹ 1664.32 crores from 'available for sale' category to 'held to maturity' category in terms of resolution of the Board of Directors of the appellant. Claim has arisen because of the circular issued by Reserve Bank of India on prudential norms for classification, valuation and operation of investment portfolio bank dated 1st July, 2006. According to that circular the banks are allowed to transfer securities from one category to another category once every year at the least value of following :- (a) Acquisition cost (b) Book value and (c) Market value. It is further provided that if because of such transfer any depreciation arises, it should be fully provided for. The claim of the assessee is that this loss should be allowed as deduction because of transfer of securities from one category to another category. Therefore, the issue in appeal is that whether a banking company claims the loss, based on circulars and instructions of Reserve Bank of India, is allowable because of transfer of security from category of "available for sale" to "held to maturity". This issue now no longer s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod of accounting adopted by the taxpayer consistently and regularly cannot be discarded by the Departmental authorities on the view that he should have adopted a different method of keeping the accounts or on valuation. Financial institutions like bank, are expected to maintain accounts in terms of the RBI Act and its regulations. The form in which, accounts have to be maintained is prescribed under the aforesaid legislation. Therefore, the account had to be in conformity with the said requirements. The RBI Act or the Companies Act do not deal with the permissible deductions or exclusion under the Income Tax Act. For the purpose of the Income Tax Act, if the Assessee has consistently been treating the value of investment for more than two decades the investments as stock-in-trade and claimed depreciation, it is not open to the authorities to disallow the said depreciation on the ground that in the balance-sheet it is shown as investment in terms of the RBI Regulations. The RBI Regulations, the Companies Act and the Income Tax Act operate altogether in different fields. The question whether the assessee is entitled to particular deduction or not will depend upon the provision of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a High Court as well as Mumbai High Court in favour of asssessee. Therefore, respectfully following those judicial precedents, we reverse the order of CIT (A) and delete the disallowance of ₹ 205.43 crores on account of claim of loss of transfer of security from 'available for sale' category to 'held to maturity' category by the appellant bank in accordance with direction/ circular of Reserve Bank of India." This decision has been confirmed by the Hon'ble High Court in appeal of the Revenue No. 306/2016 vide order dated 11.05.2016 holding as under : "3. The ITAT found that the Assessee has been consistently reflecting the investment as stock-in-trade in its balance sheet. The ITAT has noted that the Assessee had in compliance with the direction of the Reserve Bank of India (RBI) transferred SLR securities appreciating to ₹ 1664.32 crores from the 'available for sale1 category to the 'held to maturity' category during the AY in question. This resulted in mark to market devaluation of ₹ 205.43 crores which was debited to the P&L account, regarding maintaining a minimum amount of stock as reserve. The AO disallowed this by terming it as a notional an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 563.52 Mutual Funds 177.64 92.64 88.63 Investment in Tax Free Bonds 210.93 168.06 308.49 Total 694.33 759.04 960.64 From the above investments, the assessee had earned exempt income of ₹ 46,56,79,236/- and ₹ 16,33,33,303/- respectively for A.Y. 2008-09 and 2009-10 as per details given at page No. 26 of the impugned order. The assessee did not make any deduction u/s. 14A in respect of expenditure incurred in relation to above exempt income. The assessee claimed that no expenditure were incurred for earning the exempt income and the expenditure, whatsoever incurred y the bank is in the course of conducting the banking business under the banking Regulation Act, 1949 and hence, the expenditure is allowable as business expenditure as allowed in the past. The assessee had adequate share capital and reserves to cover the entire investment and therefore, there would be no expenditure for disallowance u/s. 14A. The AO was not satisfied with the explanation of the assessee and disallowed the expenditure of ₹ 49.15 crores and ₹ 62.33 crores respectively. The ld. CIT(A) after considering the submissions of the assessee, decision of Hon'ble Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of relevant previous year, under clause (ii) of sub rule (2). Further other indirect expenditure of the relevant previous year are to be disallowed as per clause (iii) of subrule (2), which is to be determined on the basis of average value of investment from which the exempt income is earned. 2.2.3 Hon'ble High Court of Bombay in Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010] 194 Taxman 203 (Bom) held that as a result of the enactment of section 14A, no expenditure can be allowed as a deduction in relation to income which does not form part of the total income under the Act. Only that part of the expenditure, which is incurred in relation to income which forms part of the total income, can be allowed. The expenditure incurred in relation to income which does not form part of the total income has to be disallowed. The expression 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for. Hon'ble High court further held that subsections (2) and (3) of section 14A are intended to enforce and implement the provisions of sub-section (1). The object of subsection (2) is to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counts that interest expenditures are incurred in relation to exempt income and considering the fact that sufficient interest free funds are available, therefore, no disallowance of indirect interest expenditure can be made under Rule 8D(2)(ii). In view of the above the indirect interest expenditure of ₹ 45.52 crores computed by the AO under Rule 8D(2)(ii) for disallowance u/s 14A is not justified. 5.2.7 However, considering the tax exempt investment of ₹ 759.04 crores and tax exempt income of ₹ 46.56 crores, some administrative and managerial expenses are definitely incurred which are attributable to tax exempt investment income. Therefore, as per Rule 8D(2)(iii), 0.5% of average value of investment calls for disallowance u/s 14A keeping in view the administrative and managerial expenses attributable to tax free investment income. The AO has disallowed ₹ 3,63,00,0007- under Rule 8D(2)(iii) being 1/2% of average value of tax exempt investment which is, therefore, justified. In view of the above factual and legal position, the disallowance made by the AO u/s 14A is reduced from ₹ 49.15 crores to ₹ 3.63 crores. Accordingly the grounds of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means any computer program recorded on any disc, tape, perforated media or other information storage device. From the above, it is clear that computer software is included as Machinery and Plant where allowable rate of depreciation is 60%. 5.4.4 In Hindustan Construction Co. Ltd. v. DCIT [2013] 29 taxmann.com 82 (Mum.) the assessee incurred expenses for purchase of software development of EConstruct Suit. These programmes were specifically and exclusively designed for the purpose of business of the assessee and not general software. Hon'ble ITAT held that the expenditures have been laid out for acquiring intangible assets and the same will have an enduring benefit. Therefore, assessee is entitled for depreciation at 60%. Hon'ble ITAT Mumbai in Sandoz (P) Ltd. v. DCIT [2013] 34 taxmann.com 28 held that purchase of software whose life was more than 2 years, was capital in nature. Hon'ble Rajasthan High court in CIT v. Aravali Construction Co. Pvt. Ltd. 124 Taxman 146 (Raj)(2002) and Hon'ble ITAT, Delhi in Maruti Udhyog Ltd. v. DCIT (ITAT, Del) 92 ITD 119 held that expenditure incurred in relation to acquisition of computer software was to be treated as capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition of computer software ₹ 10,91,10,107/-including the licenses are to be treated as capital in nature. Further, the case laws relied upon by the A/R viz. Amway India Enterprises Vs. DCIT [2008] 301 ITR (AT.) 0001 ITAT (Del.) (SB), CIT Vs. G.R Capital Services Ltd. [2008] 300 ITR 420 (Delhi), Business Information Processing Services Vs. ACIT [1999] 239 ITR (AT) 19 ITAT (Jai) and CIT Vs. Southern Roadways Ltd [2008] 304 ITR 84 (Mad.) are not of any help because all the decisions are pertaining to assessment years prior to amendment brought in w.e.f. April 1, 2003 where computer software was also included along with computer as a different class of asset within Machinery and Plant. In view of the above factual and legal position the AMC expenses ₹ 74,95,483/- mentioned above are to be treated as revenue expenditure and the remaining expenses ₹ 10,91,10,107/- are capital in nature. AO is directed to recompute the depreciation allowable on the above items of capital expenditure of ₹ 10,91,10,107/- on acquisition of software. Therefore, appeal fails in ground No. 10 of appeal with direction to the AO." On the similar reasoning, the ld. CIT(A) deleted the AMC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance of ₹ 5,77,71,439/- made by the AO on account of excess claim of depreciation of LAN and WAN equipment. On these assets assessee claimed depreciation @ 60 % considering them as computers whereas AO granted the depreciation @ 15 % as plant and machinery. 30. Before us, Ld. DR relied on the order of AO. 31. Ld. AR submitted that this issue is decided by Hon ITAT in assessee' s own case for A Y 2006-07 in ITA 22/Del/2011 and 173/del/2011. He further relied on decision of Hon Delhi high court where it is held that depreciation on such assets is eligible for depreciation @ 60 % and not 15%. 32. We have carefully considered the issue. LAN (local Area Network) and WAN *(wide area network) is a bunch of cables and switches which can be used with computers only. Hon Delhi High court in case of CIT V BSES Yamuna Power Limited 358 ITR 447 has held that computer accessories and peripherals such as, printers, scanners and server, etc., form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V of ₹ 15622208/- and reduction therefrom of ₹ 100163 resulting in to WDV of ₹ 99748028 and claimed depreciation thereon of ₹ 75136583/-. Firstly, assessee has shown these items as furniture and fixtures and we do not find that Appendix I as per Income tax rules 1962 prescribed under the head furniture and fixtures any class of items, which is eligible for 100 % depreciation. As per annexure D of the tax audit report, assessee himself has classified it is temporary wooden structure. Definitely, it is apparent that it is not building which CIT (A) has considered. Therefore, from the facts it is not clear that whether it is building or furniture and fittings. Secondly, we agree with the views of the CIT (A) that AO has erred in allowing depreciation at the correct rates has amortized these expenditure over 5 years. Therefore, in absence of these facts, this ground of appeal is restored back to the file of AO for fresh verification. Hence ground no four of the appeal is allowed for statistical purposes." Respectfully following the decision of Co-ordinate Bench, we also restore this issue to the file of AO to decide the same in the same lines as directed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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