2022 (7) TMI 1569 - HC - Income Tax

Tribunal rules in favor of assessee on various tax issues

The Tribunal's decisions on the classification of securities, software expenditure, provision for branch office expenses, treatment of non-banking assets, ... Nature of receipts - Securities held under 'held to maturity' have the material characteristics of capital asset rather than stock in trade and the form part of investments only - HELD THAT:- Question No.1 is covered against the Revenue in Commissioner of Income-tax, Hubli Vs. Karnataka Vikas Grameen Bank [2015 (12) TMI 1420 - KARNATAKA HIGH COURT] Writing off entire expense as revenue - Whether expenditure towards software item is capital in nature having enduring benefit eligible for depreciation at 60%? - HELD THAT:- In [2013 (10) TMI 1225 - KARNATAKA HIGH COURT], this Court has recorded detailed reasons and held that software is an aid in manufacturing process rather than a tool itself. Though certain application has enduring benefit, it does not result into acquisition of capital asset. It merely enhances the productivity or the efficiency and therefore, it has to be treated as a Revenue expenditure. In Oriental Bank of Commerce [2018 (4) TMI 1534 - DELHI HIGH COURT] for the use of such software, the nature of expenditure otherwise incurred for streamlining its functions i.e. towards fee payable to the consultants for systems and employment of special professionals to carry on the tasks that the software in fact performs, would have fallen undoubtedly in the revenue stream. Taking these into account and the further circumstance that the software itself would have run its course or life span as it were, given that the earlier assessment year in question is 2008-09, we are of the opinion that the question of law framed is to be answered in favour of the assessee Provision for expenses of branch offices' - AO disallowed the same on the ground that the liability is purely contingent and not an ascertained one - HELD THAT:- We have perused the said Circular. It is stated therein that in the Direct Tax Laws (Amendment) Act, 1987, the provisions of Section 36(1)(vii) of the IT act and Section 36(2) of IT Act, 1961, has been amended to rationalize the provisions regarding allowability of bad debt with effect from April 1, 1989. It is further stated that the Legislative intention behind the amendment was to eliminate the litigation on the issue of allowability of 'bad debt' by doing away with the requirement for assessee to establish that the debt had in fact, become irrecoverable. He placed reliance on Big Bags International Pvt. Ltd. [2020 (12) TMI 830 - KARNATAKA HIGH COURT] in support of this contention. In view of the said Circular and the said authority wherein, this Court has held that the Act mandates that in order to claim bad debts, the assessee has to write-off the same in his Books of accounts and he is not required to prove that the debt was irrecoverable, we answer this question in favour of the assessee and against the Revenue. Writing off of non-banking assets - Whether losses which are contingent in nature cannot be allowed to be written off and charges against the profits of the company? - HELD THAT:- We hold that the ITAT's conclusion that the asset shall be treated as 'Stock in Trade' does not call for any interference and accordingly, this question is answered in favour of the assessee and against the Revenue Broken period interest - Whether assessee cannot follow receipt basis of accounting for some items of income and follow accrual basis of accounting for other items of income? - HELD THAT:- This question is covered against the Revenue in Commissioner of Income-tax Vs. The Karnataka Bank Ltd [2014 (11) TMI 221 - KARNATAKA HIGH COURT] and the same is not disputed Expenditure claimed to be incurred in connection with sale of shares - Whether assessee has failed to substantiate that the expenditure on sale of shares is a wholly and exclusively incurred for the purpose of transfer of shares? - HELD THAT:- ITAT has recorded that the terms of Compromise indicated that the payment of Rs.2.66 Crores was in connection with the transfer of Capital asset. We have also perused the portion of the compromise terms extracted in the ITAT's order. It is stated therein that parties had amicably agreed upon certain terms and the assessee had paid the said amount. The DHFL has waived all indemnities, liabilities and claims. It is settled that the Revenue shall not sit in the arm chair of an assessee and decide the exigencies of business/transactions. ITAT is the last fact finding authority and based on the facts, it has held that the expenditure had nexus with the agreement between the parties. In substance, assessee has paid money to DHFL to give quietus to the dispute between the parties. As per Section 48 of the Act, the expenditure incurred in connection with the transfer is permissible. In view of the facts recorded hereinabove, in our considered opinion, payment has nexus with the transfer of shares as per the terms of Compromise. Accordingly, this question is answered in favour of the assessee and against the Revenue. Issues Involved:1. Classification of securities held under 'held to maturity'.2. Nature of expenditure towards software items.3. Provision for expenses of branch offices.4. Provision of loss on fraud.5. Writing off non-banking assets.6. Treatment of 'broken period interest'.7. Expenditure incurred in connection with the sale of shares.Detailed Analysis:Re: Question No.1The Tribunal's decision that securities held under 'held to maturity' are capital assets rather than stock in trade was upheld. This issue is covered against the Revenue based on the precedent set in Commissioner of Income-tax, Hubli Vs. Karnataka Vikas Grameen Bank [2017] 79 taxmann.com 359 (Karnataka).Re: Question No.2The Tribunal's treatment of software expenditure as revenue expenditure was contested. The Revenue argued that such expenditure is capital in nature and eligible for 60% depreciation. However, the Court referred to ITA No.130/2007 CIT vs. M/s. IBM India Ltd., and the decision in Oriental Bank of Commerce Vs. Additional Commissioner of Income-tax [2018] 93 taxmann.com 432 (Delhi), concluding that software expenditure enhances productivity and should be treated as revenue expenditure. This question was answered in favor of the assessee.Re: Question No.3The provision for expenses of branch offices was challenged by the Revenue, claiming it was a contingent liability. The ITAT held that the amounts recoverable from customers were written off, thus deductible as bad debt or incidental loss under Section 28 of the Income Tax Act. The Court referred to Circular No.12/2016 and Big Bags International Pvt. Ltd. Vs. Deputy Commissioner of Income-tax (2021) 125 Taxmann.com 338, concluding that it is sufficient if bad debt is written off in the books of accounts. This question was answered in favor of the assessee.Re: Question No.4The Revenue did not press this question.Re: Question No.5The ITAT's decision to treat non-banking assets as 'Stock in trade' and allow deductions was upheld. The Revenue's argument that loss or profit should be shown every year was countered by the assessee's consistent treatment of these assets as 'Stock in trade'. The Court referred to Commissioner of Income-tax, Delhi Vs. Woodward Governor India Pvt. Ltd [2009] 179 Taxman 326 (SC) and L.M. Devare, Liquidator of Bank of Karad Vs. Commissioner of Income-tax (1998) 234 ITR 813 (Bom.), concluding that the assets should be treated as 'Stock in Trade'. This question was answered in favor of the assessee.Re: Question No.6The treatment of 'broken period interest' was covered against the Revenue based on Commissioner of Income-tax Vs. The Karnataka Bank Ltd ITA No.433/2006 and related cases decided on 12.09.2012. This was not disputed by the Revenue.Re: Question No.7The expenditure incurred in connection with the sale of shares was upheld by the ITAT. The assessee had sold shares and later paid Rs.2.66 Crores as part of a compromise deed with Dewan Housing Finance Corporation (DHFC). The ITAT found that this payment had a nexus with the transfer of shares. The Court referred to Commissioner of Income-tax Vs. P. Rajendran 127 ITR 810 and Commissioner of Income-tax Vs. George Henderson (1967) 66 ITR 622 (SC), concluding that the expenditure was incurred wholly and exclusively in connection with the transfer. This question was answered in favor of the assessee.Conclusion:Questions No. 1, 2, 3, 5, 6, and 7 were answered in favor of the assessee and against the Revenue. Question No.4 was not pressed by the Revenue. The appeal was dismissed with no costs.