AI Drafter 
TaxTMI 
TaxTMI 
2015 (2) TMI 988
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....15JB of the Act. 2.2 Aggrieved by the order of assessment for Assessment Year 2007-08 dt.16.12.2010, the assessee preferred an appeal before the CIT (Appeals) - I, Bangalore. The learned CIT (Appeals) disposed off the assessee's appeal vide the impugned order dt.28.3.2013, granting the assessee partial relief. 3. Both Revenue and the assessee are aggrieved by the order of CIT (Appeals)-I, Bangalore dt.28.3.2013 for Assessment Year 2007-08 and have preferred separate appeals. We shall now consider and dispose off these two appeals as under :- Assessee's appeal in ITA No.898/Bang/2013 for A.Y. 2007-08. 4. In this appeal, the grounds raised by the assessee are as under :- "1. Ground 1 - Expenditure on purchase of software amounting to Rs. 4,45,13,003 1.1 The learned CIT (Appeals) has erred in law and fact confirming the disallowance made by the Assessing Officer amounting to Rs. 4,45,13,003 towards purchase of the application software. 1.2 The learned CIT (Appeals) has erred on facts and in law in confirming the disallowance made by the learned A.O. with respect to software expenses claimed as revenue expenditure as being capital in nature. 1.3 The learned....
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....ssessment proceedings, the Assessing Officer observed that the assessee has claimed an amount of Rs. 4,45,13,003 towards purchase of software as deductible revenue expenditure. The Assessing Officer did not agree with the assessee's claim and held that expenditure incurred for purchase of the software licenses are to be considered as capital expenditure and disallowed the same. The Assessing Officer, however, allowed depreciation on the same at applicable rates depending upon the period of usage. On appeal, the learned CIT (Appeals), following the decision in the assessee's case for earlier assessment years, upheld the order of the Assessing Officer and held that the computer software purchased was a capital asset eligible for depreciation. 5.2 In the proceedings before us, the assessee reiterated its submissions put forth before the authorities below. It was submitted that the software purchased are only for the purpose of day-to-day usage and that the assessee does not have ownership rights, but only right to use the application software. It was also submitted that the software purchased does not provide any enduring benefit to the assessee, but is required to be repla....
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....The assessee in the course of its business acquired certain application software. The amount is paid for application of software and not system software. The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. In fact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these softwares if they are licensed for a particular period, for utilizing the same for the subsequent years fre....
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....are clearly in the nature of business expenditure. Therefore, as per the learned Authorised Representative, these amounts represent ascertained and actual expenditure incurred by the assessee and hence is rightly claimed as deduction. In support of these contentions, the learned Authorised Representative has placed reliance on the following judicial pronouncements :- i) Bharat Earth Movers Ltd. (245 ITR 428); ii) Metal Box of India Ltd. (73 ITR 53) (SC); iii) Calcutta Co. Ltd. (37 ITR 1) (SC). iv) Rotork Controls India (P) Ltd. (2009-TIOL-64-SC-IT). 6.3 Per contra, the learned Departmental Representative supported the orders of the authorities below. 6.4 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited. 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 dedu....
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....s. In support of this the learned Authorised Representative contention, cited and placed reliance on various judicial pronouncements, including that of the co-ordinate bench of this Tribunal in the assessee's own case in ITA No.443/Bang/2012 dt.14.8.2013 for Assessment Year 2002-03, which it is submitted has held this issue in favour of the assessee. 7.4 Per contra, the learned Departmental Representative supported the finding in the impugned order of the learned CIT (Appeals). 7.5.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2002-03 (supra). On a perusal of the cited decision in ITA No.443/Bang/2013 dt.14.8.2013 in the assessee's own case for Assessment Year 2002- 03, we find that the issue of whether or not the provisions of section 115JB of the Act are applicable to Banks has been considered and held in favour of the assessee. The relevant portion of the order at pages 20 and 22 thereof are extracted hereunder :- " 20. Ground No.5 raised by the assessee reads as follows:- 5. Ground 5 - ....
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....count prepared on the basis of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, for computing the book profit under section 115JB. He ought to have called for and adopted the profit and loss account as required under section 115JB(2) and prepared as per Schedule-Vl of the Companies Act. The assessee also questioned the various other adjustments made by the assessing officer in computing the book profit. On 16.02.2010, the assessee filed an additional ground of appeal, questioning the applicability of section 115JB, while the other adjustments made by the assessing officer in computing the book profit under that section were challenged in the original grounds. 91. On the applicability of section 115JB, the assessee placed reliance on the decision of the Mumbai Bench of the Hon'ble ITAT in the case of Maharashtra State Electricity Board Vs. JCIT [20021 82 lTD 422, where it was held that a company which was not constituted as a company within the meaning of section 3 of the Companies Act, 1956, could not be deemed as a company within the meaning of section 616(c) of the Companies Act and since such company was not required to distribute any dividend , it ....
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....rdance with the Companies Act. The assessee was directed to furnish the profit and loss account redrawn in accordance with Schedule VI of Companies Act. 94. Aggrieved by the order of the CIT(A), the assessee has raised ground No.3 before the Tribunal. 95. At the time of hearing, it was submitted by the ld. DR that the issue can be remanded for fresh consideration as was done by the Tribunal in A.Y. 2005-06 in ITA No.504/Bang/2009, order dated 13.01.2012. The ld. counsel for the assessee, however, submitted that the Tribunal in its earlier order though noted direct judgments on the point viz., (1) Order dated 30.09.2010 in ITA No.3390/2009 passed by ITAT 'G' Bench, Mumbai in the case of Krung Thai Bank; (2) Order dated 30.06.2011 in ITA Nos.4702 to 4706/2010 passed by the ITAT, Mumbai 'F' Bench in the case of Union Bank of India; and (3) Order dated 03.08.2011 in ITA No.469/2010 passed by the ITAT 'C' Bench, Chennai in the case of Indian Bank, did not adjudicate on the applicability of section 115JB, but following an earlier order in the assessee's own case for earlier years (at which point of time the above Tribunal's decisions were not available), restored the matte....
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....s Act . Since the provisions of Section 115 JB do not apply to the assessee company, the reasons recorded for reopening the assessment are clearly wrong and insufficient . We are urged to quash the reassessment proceedings on this short ground. 6. Learned Departmental Representative, on the other hand, vehemently relies upon the orders of the authorities below and submits that there is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to us to infer the same. The submissions of the learned counsel, according to the departmental representative, are clearly contrary to the legislative intent and plain wordings of the statute. 7. The plea of the assessee is indeed well taken, and it meets our approval. The provisions of Section 115 JB can only come into play when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and I II of Schedule VI to the Companies Act . The starting point of computation of minimum alternate tax under section 115 JB is the result shown by such a profit and loss account. In the case of banking companies, however, the provisions of Schedule VI a....
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....he contention of the assessee to the contrary. 3. The CIT (Appeals) erred in deleting the addition of Rs. 11,91,41,534 made on account of broken period interest without appreciating the fact that the assessee does have a right or claim over such interest on government securities till the date prior to its trading as against the contention of the assessee to the contrary. 4. The CIT (Appeals) erred in directing the A.O. to delete the addition of Rs. 11,91,41,534 following the decision of the ITAT in the case of State Bank of Mysore in the order dt.17.4.2009 in ITA No.1409/Bang/03 while the same has not been accepted by the department and an appeal under Section 260A has been filed before the Hon'ble High Court against such order and is pending. 5. The CIT (Appeals) erred in allowing the alternate plea of the assessee on the issue of disallowance of Rs. 2,75,00,000 of write off of non-convertible debentures by holding that the diminution of valuable investments as eligible for deduction on the ground that the debentures were treated as investment in AFS category. 6. The CIT (Appeals) erred in allowing the appeal on the issue of operational losses of Rs. 36,99,509 hold....
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....curring such expenditure. 16. The CIT (Appeals) erred in not appreciating that the addition was made by the Assessing Officer after a detailed discussion with the assessee company as stated in the assessment order. 17. The CIT (Appeals) erred in directing the Assessing Officer to give relief by allowing the claim of the assessee relying upon his own decision in the assessee's own case for the A.Y. 2006-07 without appreciating the fact that his decision for the A.Y. 2006-07 has not reached a finality and as an appeal before the ITAT has been preferred on this issue. 18. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed and that of the Assessing Officer be restored. 19. The appellant craves leave to add, to alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal." 11. The Grounds at S.Nos.1, 18 & 19, being general in nature, no adjudication is called for thereon. 12. Ground Nos. 2 to 4 : Broken Period Interest - Rs. 11,91,41,534. 12.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee has ....
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....No. 1401/Bang/2003 dt.17.4.2009 relied on by the learned CIT (Appeals) in the impugned order. In the appellate proceedings before us, the learned Authorised Representative of the assessee placed reliance on the decision of the Hon'ble Karnataka High Court in the case of CIT V Karnataka Bank Ltd. in ITA No.433 of 2005 dt.12.9.2012. The relevant portion of the said judgment at paras 16 & 17 thereof is extracted hereunder :- "16. It is declared under Section 5 of the Act that when interest is accrued or deemed to have been accrued, it is liable to tax. The word 'accrued' has defined the legal connotation. The interest that becomes due or liable to be payable whether or not it is paid, the interest is accrued or deemed to have been accrued. If the interest does not become due and not liable to pay such part of the interest arise, it cannot be said that the interest has become accrued. It appears form the facts of the case that the assessee is a bank. For its accounting purpose, it has shown the proportionate interest entitled to receive on the Govt. securities. But for the assessment year, although it is not accrued, in the legal sense and in terms of sections 5 and 145 of the I....
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....aimed by the assessee in this regard. 13.2 On appeal, the learned CIT (Appeals) upheld the claim of the assessee that the amount of Rs. 2,75,00,000 represents write off and allowed the same as deduction. 13.3 The learned Departmental Representative was heard in support of the ground raised on this issue and assailed the impugned order of the learned CIT (Appeals) for allowing the assessee relief on this issue. The learned Departmental Representative supported and relied on the finding of the Assessing Officer in the order of assessment and prayed that the same be confirmed. 13.4 The learned Authorised Representative of the assessee reiterated the submissions put forth by the assessee before the learned CIT (Appeals). It was submitted that the debentures were acquired from a debtor in satisfaction of debt owed. It is contended that the debentures so acquired constitute stock-in-trade and their deduction on account of write off due to reduction in the value of debentures is eligible for being allowed as deduction. It was submitted that since the debentures were acquired from a debtor in satisfaction of debt owed, which was classified as NPA, the debentures were also classifi....
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....es of Rs. 36,99,509. On examination of details filed, the Assessing Officer determined that these losses are due to operational mistakes related mainly to ATM transactions of customers. The Assessing Officer held these losses to be essentially capital losses incurred for operational reasons and disallowed the same. On appeal, the learned CIT (Appeals) on appreciation of the details of the matter 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. 14.2 We have heard the rival contentions of both the learned Departmental Representative for revenue and the learned Authorised Representative of the assessee and perused and carefully considered the material on record. The basic facts of the matter, not in dispute, are 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 d....
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....ned CIT (Appeals) on this issue to be upheld. 15.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. There is no dispute with regard to the basic facts of the concerned transactions. The assessee, in the course of its business, enters into various derivative contracts to protect itself against risks of loss on account of fluctuation in foreign exchange rates. The contract gets executed on the date of maturity, resulting in either profit and loss to the assessee. There is no dispute with respect to the allowability of the loss arising on execution of contracts within the same year. However, where the contract has not matured on the last date of the accounting year and the maturity date falls beyond the last day of the accounting year, the derivatives outstanding at the year end are reinstated in the Books of Account as on the last date of the accounting year i.e. 31st March. The loss arising on such reinstatement is charged to the profit and loss account and claimed as a deduction during the year under consideration. It is the treatment to be given to this loss that i....
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....tently followed by the assessee should not be discarded casually without giving strong reasons for the same. 15.4.5 It is the assessee's contention that the derivative contracts have to be revealed in accordance with FEDAI Guidelines and therefore it has to determine the profit / loss in regard to unmatured derivative contracts in accordance with the currency rates as on the valuation date (i.e. 31st March). This contention of the assessee is not in dispute. It is a settled principle, upheld by the Hon'ble Courts in a catena of decisions that deduction is allowable under the Act in respect of liabilities which have crystallized during the year. If an anticipated liability is coupled with present obligation, then that would result in a crystallized liability, even though the quantification may vary depending upon the terms of contracts. A contingent liability depends purely on the happening or non-happening of an event. Whereas, if an event has taken place, which in the case on hand was of entering into the contract and undertaking of obligation to meet the liability, and only the consequential effect of the same is to be determined, then it cannot be said that it is in t....
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....ategory of cases, we are concerned with the assessee(s) incurring liabilities on capital account. In such cases, we are required to consider the provisions of s. 43(1), 43A (both, before and after amendment vide Finance Act, 2002)." 15.4.7 The Hon'ble Apex Court after it considered and examined the issue, decided as at paras 13 to 21 of its order which are extracted as under :- " 13. As stated above, one of the main arguments advanced by the learned Addl. Solicitor General on behalf of the Department before us was that the word "expenditure" in s. 37(1) connotes "what is paid out" and that which has gone irretrievably. In this connection, heavy reliance was placed on the judgment of this Court in the case of Indian Molasses Company. Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no ques....
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.... this principle which attracts the provisions of s. 145. That section recognizes the rights of a trader to adopt either the cash system or the mercantile system of accounting. The quantum of allowances permitted to be deducted under diverse heads under ss. 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word "paid" in s. 43(2), which is used in several ss. 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under s. 28/29. That is why in deciding the question as to whether the word "expenditure" in s. 37(1) includes the word "loss" one has to read s. 37(1) with s. 28, s. 29 and s. 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. Under s. 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into ac....
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....no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the AO stating that the assessee has not complied with the Accounting Standards. 15. For the reasons given hereinabove, we hold that, in the present case, the "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1) of the 1961 Act. 16. In the light of what is stated hereinabove, it is clear that profits and gains of the previous year are required to be computed in accordance with the relevant Accounting Standard. It is important to bear in mind that the basis on which stock-in-trade is valued is part of the method of accounting. It is well established, that, on general principles of commercial accounting, in the P&L account, the values of the stock-in-trade at the beginning and at the end of the accounting year should be entered at cost or market value, whichever is lower-the market value being ascertained as on the last date of the accounting year and not as on any intermediate date between the commencement and the closing of the year, failing which it wo....
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....eived or paid in fixed amounts, e.g., cash, receivables and payables. The word "paid" is defined under s. 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on initial recognition. Para 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under s. 37(1), para 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that pa....
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....oss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." 21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the a....
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....e allowable as deduction. After elaborately discussing the issue and the judicial pronouncements in this regard, the Special Bench of the Mumbai Tribunal in the afore cited decision held as under at paras 58 & 59 thereof :- " 58. In view of the above discussion, we allow the assessee's appeal for the following reasons:- i) A binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts. ii) A consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted. iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31. iv) A liability is said to have crystalised when a pending obligation on the balance sheet date is determinable with reasonable certainity. The considerations for accounting the income are entirely on different footing. v) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting ....
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....ays down that any 'eligible transaction' in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956, that has been carried out in a recognized stock exchange shall not be treated as a speculative transaction. Further, an 'eligible transaction' for this purpose would be one that fulfils the conditions laid down in Explanation to Section 43(5)(d). Any loss in a speculative transaction can be set off only against profit from speculative transactions." In the case on hand, as discussed earlier, 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 tr....
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.... was also submitted that the difference between the sale price and the price at which the investments are recorded for tax purposes, is offered to tax in the year of sale and as such depreciation in value claimed in the earlier years are offered to tax in the form of profit on sale of stock-in-trade. 16.3.3 As mentioned by the learned CIT (Appeals) in the impugned order, we find that the issue before us for consideration is squarely covered by the decision of the co-ordinate bench of this Tribunal in the case of Corporation Bank (supra) which was rendered after analyzing the decision of the Hon'ble Apex Court in the case of UCO Bank Ltd., in 240 ITR 355 (SC). The relevant portion of the above cited decision of the co-ordinate bench at paras 11 and 12 thereof are extracted here under :- " 11. After considering the submissions of both the parties and the material available on the record, it is noticed that a similar issue having identical facts has been decided in favour of the assessee vide the aforesaid referred to order dated 31.05.2011 in ITA No.710/Bang/2010 for the A.Y. 2007-08 in assessee's own case and the relevant findings has been given in paras 5 to 7, which read....
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....T, Bangalore Bench 'B' in ITA No.253/Bang/2007, dated 24.1.2008 in the case of ACIT (LTU), Bangalore v. Vijaya Bank." 07. Following our above decision, this issue is decided in favour of the assessee by dismissing the grounds of appeal raised by the Revenue." 12. So respectfully following the aforesaid referred to order dated 31.05.2011 in ITA No.710/Bang/2010 for the A.Y. 2007-08 in assessee's own case, the issue stands covered in favour of the assessee, we therefore do not see any merit in these appeals of the department." As we find that the facts of the assessee in the case on hand are similar to that of the cited case, i.e. Corporation Bank Ltd. (supra) followed by the learned CIT (Appeals) in the impugned order, 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 amounting to Rs. 6,05,64,289. Consequently, Revenue's grounds at S.Nos.11 to 13 are dismissed. 17. Ground No.14 to 17 - Insurance Premia for Housing Loan - Rs. 2,39,38,811. 17.1 In the course of assessment proceedings, the Assessing Officer observed that the assessee claimed an amount o....