Ita/4/2015 Of The Commissioner Of Income-Tax v. The Vysya Bank Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 2 DAY OF MARCH 27071| PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE ASHOK S. KINAGLILT.A. NC.4 OF JZOL BETWEEN: 1.|THE COMMISSIONER OF INCOME-TA® C.R. BUILDING, QUEENS ROAD BANGALORE. 2.|THE DEPUTY COMMISSIONER OF INCOME-TAX.CIRCLE-12(3), RASHTROTHANA BHAVANCIRCLE-12(3), RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE-56000 1. .., APPELLANTS. (BY SRI. K.V. ARAVIND, ADV.,) AND" THE VYSYA BANK LITD.,(NOW ING VYSYA BANK LTD.,)ING VYSYA HOUSENO.25, M.G. ROADBANGALORE-560001 PAN: AABCTO5290M ~. RESPONDENT (BY SRI. A. SHANKAR, SR. COUNSEL FOR.SRI. M. LAVA, ADV.) THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX|ACT 1961, ARISING OUT OF ORDER DATED 28.08.2014 PASSEDIN ITA NO.748/BANG/2011 FOR THE ASSESSMENT YEAR 2001-02,PRAYING TO: | (1) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW,STATED ABOVE. (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDERS.PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BANGALOREIN ITA NO.748/BANG/2011 DATED 28.08.2014 CONFIRMING THEORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE.ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX,CIRCLE-12(3), BANGALORE. THIS ILT.A. COMING ON FOR’ HEARING, THIS DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (hereinafter referred to as the Act for short)nas been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2001-02.The appeal was admitted by a bench of this Court videorder dated 31.07.2015 on the following substantialquestions of law:| “(1) Whether on the facts and in the.circumstances of the case, the Tribunal wasjustified in holding that the assessee Is.eligible for claim of Rs.23,05,49,466/- asrevenue expenditure without appreciatingthat the assessee has spent the same onnetworkingofT75brancheswith a centralizedprocessingsolutionandtheactivity has a long term benefit, warrantingcapitalization of the expenditure spent forthe same? (ii) Whether on the facts and in the.circumstances of the case, the Tribunal wasjustified in law in allowing deduction of.Rs.1,00,000/- under Section 36(1)(vii) even.though the assessee did not receive anyincome during the year and fs not eligible forthe deduction? (iii) Whether on the facts and in the.circumstances of the case, the Tribunal wasjustified in law in allowing the amortizationof cost over face value of Investment "heldto maturity” of Rs.3,19,37,45/7/- withoutappreciatingthat|suchsecuritieshaveCharacteristic of capital asset rather thanStock in trade and the Investment done asper RBI Guidelines is not an allowablerevenue expenditure in terms of Section3/(1) of the Act? (iv) Whether on the facts and in the.circumstances of the case, the Tribunal wasjustified in law in holding that the provisionsof Section 115JB are not applicable to theassessee, it being a banking company, even.though there is no such provision/exclusion—under the IT Act?” 2.|Facts leading to filing of this appeal brieflystated are that the assessee is a Schedule Bank carryingon the business of banking across the country. Theassessee filed its return for the Assessment Year JOOI1O02. The assessee claimed a sum of Rs.28,/3,88,373/-asincome exempt under Section 10 without debiting any|expenses for the same. The return was selected forscrutiny and notices were issued to the assessee. The.Assessing Officer passed an order under Section 143(3).of the Act, and held that since, administrative expenses.are to be incurred for earning exempt income, 50% of the exempt income has to be treated as expensesincurred to unexempt income. Thus, Assessing Officer 2.|Facts leading to filing of this appeal brieflystated are that the assessee is a Schedule Bank carryingon the business of banking across the country. Theassessee filed its return for the Assessment Year JOOI1O02. The assessee claimed a sum of Rs.28,/3,88,373/-asincome exempt under Section 10 without debiting any|expenses for the same. The return was selected forscrutiny and notices were issued to the assessee. The.Assessing Officer passed an order under Section 143(3).of the Act, and held that since, administrative expenses.are to be incurred for earning exempt income, 50% of the exempt income has to be treated as expensesincurred to unexempt income. Thus, Assessing Officer added 50% of the amount to Income of the assessee.|The assessee debited the aforesaid amount as write off|of non convertible debentures under ‘provision and.contingencies in the statement of computation of income... The aforesaid claim was disallowed by theAssessing Officer. The assessee had also claimed the|aforesaid amount as expenditure for computerization ofits 12725 branches which were networked with centralized processing solution. Tne assessee claimed.the aforesaid expenditure as revenue expenditure The.Assessing Officer capitalized the aforesaid expenditure|and allowed depreciation at the rate of 12.5%. TheAssessing Officer added a sum of Rs.1,00,000/- since,assessee did not Nave any income from rural Dranches—during tne Assessment Year and the provisions ofSection 36(1)(viia) stipulate to allow deduction notexceeding 5% of the income and 10% of the aggregate|income from rural branches. The Assessing Officercomputed the book profit of Rs.38,38,87,065/-. 3Against.theorderofassessment,theassessee filed appeal before the Commissioner of.Income.Tax(Appeals)whoby|an)orderdated19.05.2011 partly allowed the appeal. Being aggrieved,by the order passed by the Commissioner of Income Tax(Appeals) the revenue as well as the assessee filedappeals before the Income Tax Appellate Tribunal(hereinafter referred to as the tribunal’ for short). Thetribunal Dy a common order dated 28.04.2014 hasdismissed the revenue’s appeal and has allowed theassessee's appeal. In the aforesaid factual background,|this appeal has been filed by the revenue.| 4Learned counsel for the revenue with regardto the first substantial question of law submitted thattheaSS@CSSEChacincurredexpendituretowardscomputerization, by which 125 branches of the bank.were networked with the centralized processing solution.It is further submitted that the computerization projectnas resulted an enduring advantage to the assessee and assessee has acquired capital infrastructure in the form.of code banking solution, integrated licence software,implementation software, hardware and internal licencerelated to manpower service, consultancy service,networking of computer, which amounts to acquisition of capital asset having enduring benefit and constitutes a|capital expenditure. It is also urged that if ansexpenditure has resulted in acquisition of capital asseteither tangible or intangible, the same would constitutecapital expenditure. It is also pointed out that the factthat intangible asset has been provided for depreciation|under Section 32(1)(ii) of the Act would demonstratethat intangible asset is capital asset eligible fordepreciation. It is also pointed out that the tribunal hasfailed to take Into account the fact that in the decision of IBMINDIALTDrenderedbythis|COUIT,theexpenditure incurred was towards acquisition of an.application software which has a limited period of.operation. However, in the instant case, not only the software but the entire computerized network has been.acquiredincluding.thesoftware,|hardwareandnetworking of computer etc., therefore, the expenditure|is capital in nature. It is also submitted that secondsubstantial question of law has been answered against|the revenue In|‘COMMISSIONER OF INCOME TAX VS,SYNDICATE BANK’, 422 ITR 460 (KAR). In support|of aforesaid submissions, reliance has been placed on.decision of the Supreme Court in|"EMPIRE JUTE CO.|LTD. VS. COMMISSIONER OF INCOME TAX’, (1980)3 TAXMAN 69 (SC). 5.|On the other hand, learned Senior counsel forthe assessee with reference to substantial question oflaw submitted as follows: (i) The expenditure was incurred for the purposesof computerization of its 125 branches and the aforesaidexpenses are incurred towards a licence of integratedsoftware viz., profile in its branches and other relevant.expenditure in the nature of implementation of the software and the networking of the branches. — (ii) The software is a core banking’ solutionsoftware which enables the assessee for. efficientmanagement of its day to day operations and seemless|integration of its customers, loan and deposit accounts|maintained at its branches and ultimately enabling the|assessee in rendering quality services to its customers. (iii) The expenditure is incurred towards efficientmanagement of day to day operations of the assesseeand the same does not create any asset which is capital in nature. (iv) The expenditure incurred towards core bankingsolution software is a common expenditure in the.banking industry to enable it to render quality servicesto its customers and Reserve Bank of India has made it mandatory for all the banks to have core banking.solution software. (v) The core banking solution software effectivelysubstitutes manpower costs and results in effective ultilization|oftheManpowerandtherefore,|theexpenditure incurred is revenue in nature and cannot be.considered as capital expenditure. (vi) Alternatively, it is submitted that the entireexercise is revenue neutral as assessee is earning profits|year after year. 6.|With regard to second substantial question oflaw, it is urged that tribunal has rightly held that the|amount is allowable as a deduction under Section|36(1)(vila) of the Act. With regard to third and fourth|substantial question of law, it is pointed out that theaforesaid substantial questions of law are covered by.juagment of this court inCIT VS, KARNATAKA VIKAS| GRAMEENBAINK,(2016)282CTR|51/7(KARNATAKA) and CIT VS. ING VYSYA BANK LTD.,(2020) 422 ITR 116 (KAR)respectively and havebeen answered against the revenue. The aforesaidSubmission could not be disputed by learned counsel forthe revenue. For the reasons assigned in the aforesaid judgments substantial question of law Nos.3 and 4 are|answered against the revenue and in favour of theaSSe@SSAEC 7We have considered the submissions made.by learned counsel for the parties and have perused therecord. From the perusal of the order passed by thetribunal, it is evident that the issue with regard to|eligibility of claim for deduction of an amount of Rs.23,05,49,466/- as revenue expenditure incurred by.the assessee has been dealt with by the tribunal byextracting para 9 of the decision of this court inCIT VS. IBMIndiaLtd.(2013)35/7[TR8S(KAR)Tnereafter, the tribunal Nas recorded the conciusion that.theexpenditureincurredby theaSS@CSSECforcomputerization of its branches is revenue in nature,which is evident from para 7.3 of the order. The order.passed by the tribunal is cryptic in nature and suffers.from vice of non application of mind. Even tnecontention by the revenue that the decision rendered in. 7We have considered the submissions made.by learned counsel for the parties and have perused therecord. From the perusal of the order passed by thetribunal, it is evident that the issue with regard to|eligibility of claim for deduction of an amount of Rs.23,05,49,466/- as revenue expenditure incurred by.the assessee has been dealt with by the tribunal byextracting para 9 of the decision of this court inCIT VS. IBMIndiaLtd.(2013)35/7[TR8S(KAR)Tnereafter, the tribunal Nas recorded the conciusion that.theexpenditureincurredby theaSS@CSSECforcomputerization of its branches is revenue in nature,which is evident from para 7.3 of the order. The order.passed by the tribunal is cryptic in nature and suffers.from vice of non application of mind. Even tnecontention by the revenue that the decision rendered in. IBM India Ltd. supra does not apply to the case of theassessee 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 ofthe assessee. Therefore, in view of contentions raised byboth the parties before us, we deem it appropriate toquash the order passed by the tribunal so far as itpertains to findings of substantial question of law No.1|and remit the matter to the tribunal for decision afresnin} accordance with law after considering the rivalsubmissions made on both sides. Therefore, the firstsubstantial question of law is answered accordingly. 8.|Tne second substantial question of law Iscovered by decision of this court in"‘COMMISSTONEROF INCOME TAX VS. SYNDICATE BANK’, 422 ITR460 (KAR).For the reasons assigned in the aforesaid.judgment, the second substantial question of law is.answered in favour of the revenue and against tneaSSesSsee, oiFor the reasons assigned in the decisions in.CIT VS. KARNATAKA VIKAS GRAMEEN BANK,(2016) 282 CTR 517 (KARNATAKA) and CIT VS.ING VYSYA BANK LTD., (2020) 422 ITR 116 (KAR),the third and fourth substantial questions of law are.answered against the revenue and in favour of the.aSSe@SSAEC In the result, the impugned order of the tribunalinsofar as it contains findings on first substantial|question of law is quashed and the matter is remitted to.the tribunal to decide the aforesaid question afternearing the parties. Needless to state tnat all thecontentions which are available to the parties in law are.kept open. Accordingly, the appeal is disposed of. Sd/-JUDGE. Sd/-—JUDGE.