Ita/709/2009 Of The Commissioner Of Income Tax,Cochin v. M/S.federal Bank Ltd. Aluva

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, THE 12TH DAY OF DECEMBER 2018 / 21ST AGRAHAYANA, 1940 ITA. No.533 of 2009 AGAINST THE ORDER IN ITA NO.298/2004 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH DATED 16-10-2006 APPELLANT/RESPONDENT/REVENUE: THE COMMISSIONER OF INCOME TAX,COCHIN. BY ADVS.SRI.P.K.R.MENON, SENIOR COUNSEL, GOI (TAXES)SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/APPELLANT/ASSESSEE: THE FEDERAL BANK LTD.FEDERAL TOWERS, ALUVA. BY ADVS.SRI.B.J.JOHN PRAKASHSRI.TERRY V.JAMESSRI.TOM THOMAS (KAKKUZHIYIL)SRI.V.ABRAHAM MARKOSSRI.JOSEPH MARKOSE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12.12.2018,ALONG WITH ITA.709/2009, ITA.861/2009, ITA.1195/2009 &ITA.1222/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, THE 12TH DAY OF DECEMBER 2018 / 21ST AGRAHAYANA, 1940 ITA. No.709 of 2009 AGAINST THE ORDER IN ITA NO.247/2001 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH DATED 17-12-2004 APPELLANT/RESPONDENT: THE COMMISSIONER OF INCOME TAX, COCHIN BY ADVS.SRI.P.K.R.MENON, SENIOR COUNSEL, GOI (TAXES)SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/APPELLANT: M/S.FEDERAL BANK LTD. ALUVA BY ADVS.SRI.TERRY V.JAMESSRI.V.ABRAHAM MARKOSSRI.JOSEPH MARKOSE SRI.JOSEPH KODIANTHARA (SR.) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12.12.2018,ALONG WITH ITA.533/2009, ITA.861/2009, ITA.1195/2009 &ITA.1222/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, THE 12TH DAY OF DECEMBER 2018 / 21ST AGRAHAYANA, 1940 ITA. No.861 of 2009 AGAINST THE ORDER IN ITA NO.103/2001 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH DATED 17-12-2004 APPELLANT/RESPONDENT: THE COMMISSIONER OF INCOME TAX, COCHIN BY ADVS.SRI.P.K.R.MENON, SENIOR COUNSEL, GOI (TAXES)SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/APPELLANT: M/S.FEDERAL BANK LTD. ALUVA BY ADVS.SRI.TERRY V.JAMESSRI.JOSEPH KODIANTHARA (SR.)SRI.V.ABRAHAM MARKOSSRI.JOSEPH MARKOSE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12.12.2018,ALONG WITH ITA.533/2009, ITA.709/2009, ITA.1195/2009 &ITA.1222/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, THE 12TH DAY OF DECEMBER 2018 / 21ST AGRAHAYANA, 1940 ITA. No.1195 of 2009 AGAINST THE ORDER IN ITA NO.501/2005 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH DATED 16.10.2006 APPELLANT/RESPONDENT: THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADVS.SRI.P.K.R.MENON, SENIOR COUNSEL, GOI (TAXES)SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/APPELLANT: M/S.FEDERAL BANK LTD. FEDERALA TOWERS, ALUVA. BY ADVS.SRI.V.ABRAHAM MARKOSSRI.ABRAHAM JOSEPH MARKOSSRI.GOVIND VIJAYAKUMARAN NAIRSRI.HARAN THOMAS GEORGESRI.ISAAC THOMASSRI.JOSEPH MARKOSE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12.12.2018,ALONG WITH ITA.533/2009, ITA.709/2009, ITA.861 /2009 &ITA.1222/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA Nos.533, 709, 861, 1195 &1222 of 2009 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, THE 12TH DAY OF DECEMBER 2018 / 21ST AGRAHAYANA, 1940 ITA. No.1222 of 2009 AGAINST THE ORDER IN ITA NO.283/2003 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH APPELLANT/RESPONDENT: THE COMMR.OF INCOME TAXCOCHIN FEDERALA TOWERS, ALUVA. BY ADVS.SRI.V.ABRAHAM MARKOSSRI.ABRAHAM JOSEPH MARKOSSRI.GOVIND VIJAYAKUMARAN NAIRSRI.HARAN THOMAS GEORGESRI.ISAAC THOMASSRI.JOSEPH MARKOSE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12.12.2018,ALONG WITH ITA.533/2009, ITA.709/2009, ITA.861 /2009 &ITA.1222/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA Nos.533, 709, 861, 1195 &1222 of 2009 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR. JUSTICE ASHOK MENON WEDNESDAY, THE 12TH DAY OF DECEMBER 2018 / 21ST AGRAHAYANA, 1940 ITA. No.1222 of 2009 AGAINST THE ORDER IN ITA NO.283/2003 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH APPELLANT/RESPONDENT: THE COMMR.OF INCOME TAXCOCHIN BY ADVS.SRI.P.K.R.MENON,SENIOR COUNSEL, GOI(TAXES)SRI.JOSE JOSEPH SC FOR INCOME TAX RESPONDENT/S: THE FEDERAL BANK LTD.FEDERAL TOWERS,, ALUVA. BY ADVS.SRI.JOSEPH KODIANTHARA (SR.)SRI.TERRY V.JAMESSRI.V.ABRAHAM MARKOSSRI.JOSEPH MARKOSE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 12.12.2018, ALONG WITH ITA.1195/2009, ITA.533/2009, ITA.709/2009, ITA.861/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: K. Vinod Chandran, J. JUDGMENT In I.T.A. No.861 of 2009 for the assessment year 1996-1997, the following three questionsarise: “(i) Whether the Tribunal was right inhaving upheld the action of the assesseeadopting the valuation of unquotedsecurities on Y.T.M. [Yield To MarketRatio] basis ? (ii) Whether the Tribunal was correctin having treated the current securitiesheld by the Bank and sold, in the course ofthe assessment year as stock in trade andthus permitted the loss incurred to bededucted in computing the income of theassessee Bank for that particular year ? (iii) Whether the Tribunal was correctin having found the expenditure incurred onacquisition of new software purchased alongwith the computers as revenue expenditureand interfered with the disallowance of thesame by the Assessing Officer as capitalexpenditure ?” 2. On the first question regarding the adoption of YTM Ratio, the view has been upheld by ITA Nos.533, 709, 861, 1195 &1222 of 2009 a Division Bench of this Court in Commissioner of Income Tax v. Lord Krishna Bank Ltd.[(2011) 339 ITR 606 (Ker)]. The first questionhence has to be answered in favour of the assesseeand against the Revenue. The second questionregarding treatment of current securities as stockin trade has also been answered in favour of theassessee in Commissioner of Income Tax v.Nedungadi Bank Ltd. [(2003) 264 ITR 545(Ker)]. The second question is also answered infavour of the assessee and against the Revenue. 3. The last question is on whether theTribunal was correct in having treated theexpenditure for acquisition of new software asrevenue expenditure. The Tribunal found thatsoftware is to be revised on a regular basis andcannot be considered as a permanent asset. Weagree with the Tribunal, especially consideringthe technological advancement made at a fast paceand the need to upgrade the software regularly forbetter facilitation of banking services. The ITA Nos.533, 709, 861, 1195 &1222 of 2009 software is also used for the banking facilities and hence we are clearly of the opinion that thesame can be considered as revenue expenditure. Thelast question is also answered in favour of theassessee and against the Revenue. 4. I.T.A. No.1195 of 2009 arises from theassessment year 2003-2004 and raises two questionsof law: “(i) Whether, on the facts and in thecircumstances of the case and also in thelight of Section 14A of the Income Tax Actintroduced by the Finance Act, 2001 withretrospective effect from 01.04.1962, theassessee is entitled to claim theexpenditure in respect of income which doesnot form part of total income? ITA Nos.533, 709, 861, 1195 &1222 of 2009 software is also used for the banking facilities and hence we are clearly of the opinion that thesame can be considered as revenue expenditure. Thelast question is also answered in favour of theassessee and against the Revenue. 4. I.T.A. No.1195 of 2009 arises from theassessment year 2003-2004 and raises two questionsof law: “(i) Whether, on the facts and in thecircumstances of the case and also in thelight of Section 14A of the Income Tax Actintroduced by the Finance Act, 2001 withretrospective effect from 01.04.1962, theassessee is entitled to claim theexpenditure in respect of income which doesnot form part of total income? (ii) Whether the Tribunal was correctin having allowed depreciation on currentinvestments accepting the assessee's methodof valuing the securities held by theassessee on the cost or market price,whichever is lower?” 5. On the first question of applicability of Section 14A of the Income Tax Act, 1961, Commissioner of Income Tax v. ESSAR Teleholdings Pvt. Ltd. [(2018) 401 ITR 445(SC)] held that Section 14A would be applicableonly from the assessment year 2007-2008. Hence thefirst question has to be answered in favour of theassessee and against the Revenue. 6. On the second question the Reserve Bank hasdirected the assessee to treat certain securitiesas current investments and certain as stock intrade. In the present case the investments beingconsidered to be permanent in nature are treatedas current investments and the valuation is doneby the assessee at the close of the financial yearon the cost or market price, whichever is lower,as stipulated by the Reserve Bank of India. Thesaid valuation has been upheld by this Court inNedungadi Bank Ltd.[supra]. Hence that questionis also answered in favour of the assessee andagainst the Revenue. 7. ITA No.1222 of 2009 arises from theassessment year 1999-2000 and raises the following questions of law: “(i) Whether, on the facts and in thecircumstances of the case and also in thelight of Section 14A of the Income Tax Actintroduced by the Finance Act, 2001 withretrospective effect from 01.04.1962, theassessee is entitled to claim theexpenditure in respect of income which doesnot form part of total income? (ii) Whether, on the facts and in thecircumstances of the case, the Tribunal isright in deleting the addition made by theAssessingOfficeramountingtoRs.1,69,63,402/- being excess provision forbad and doubtful debts created by theassessee in terms of Section 36(1)(viia)?” 8. As has been held in the earlier case, Section 14A has application only from theassessment year 2007-2008 and hence the questionhas to be answered in favour of the assessee andagainst the Revenue. The next question in factraises the question as to how the rural brancheshave to be classified. The answer is evident in Lord Krishna Bank Ltd.[supra], which found thatthough classification has to be based on the population, the reference to population has to be related to a Revenue Village and not to Wardswithin a local authority, which would even bringin certain Wards within a municipal area alsowithin the classification of a rural branch.Following the aforesaid dictum of another DivisionBench, we have to set aside the order of theTribunal in so far as the interference caused tothe Assessing Officer's order and disallowancecarried out of Rs.1,69,63,402/- has to be upheld.The second question hence is answered in favour ofthe revenue and against the assessee. Lord Krishna Bank Ltd.[supra], which found thatthough classification has to be based on the population, the reference to population has to be related to a Revenue Village and not to Wardswithin a local authority, which would even bringin certain Wards within a municipal area alsowithin the classification of a rural branch.Following the aforesaid dictum of another DivisionBench, we have to set aside the order of theTribunal in so far as the interference caused tothe Assessing Officer's order and disallowancecarried out of Rs.1,69,63,402/- has to be upheld.The second question hence is answered in favour ofthe revenue and against the assessee. 9. The learned Senior Counsel draws theattention of this Court to the fact that thoughthe amounts were claimed as provision for bad anddoubtful debts under Clause (viia) of Section36(1) of the Act, in fact they were written offdebts, which could be claimed under Clause (vii)of Section 36(1) of the Act, which write off hasnow been upheld by the decision of the Hon'bleSupreme Court inVijaya Bank Ltd. v.Commissioner of Income Tax And Another [(2010) 323 ITR 166 (SC)]. 10. It is to be noticed that as of now we areonly dealing with the Revenue's appeal and such anissue does not arise from the Tribunal's order.The assessee Banks have also not raised such anissue before the Tribunal for the particularassessment year. Hence this Court cannot permitsuch an alternate plea in an appeal by theRevenue. 11. ITA No.533 of 2009 from the assessmentyear 2001-2002 raises only the applicability ofSection 14A for the said year. This has alreadybeen held against the Revenue and in favour of theassessee for the years prior to 2007-2008. Wefollow the same here too. 12. In ITA No.709 of 2009 two questionsarise. The first question is with respect to thededuction claimed in respect of loss claimed onvaluation of the current securities; whether itcan be permitted at cost price or market value,whichever is lower. The second question onsustainability of treating acquisition of software ITA Nos.533, 709, 861, 1195 &1222 of 2009 as a revenue expenditure. Both the questions had been found in favour of the assessee for theassessment year 1996-1997 in ITA No.861 of 2009.Here too, the questions are answered in favour ofthe assessee and against the Revenue. ITA Nos.533, 709, 861 & 1195 of 2009 aredismissed. ITA No.1222 of 2009 is partly allowed. Sd/- K. VINOD CHANDRAN JUDGE Sd/- sp/12/12/18 ASHOK MENON JUDGE //True Copy//P.A. To Judge APPENDIX OF ITA 533/2009 PETITIONER'S EXHIBITS: ANNEXURE-A COPY OF ORDER U/S.143(3) DATED 19/02/2003 FOR THE ASSESSMENT YEAR 2001-02. ANNEXURE-B COPY OF ORDER DATED 26/02/2004 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-C COPY OF THE ORDER DATED 16/10/2006 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH,COCHIN IN ITA NO.298/COCH/2004. APPENDIX OF ITA 709/2009 PETITIONER'S/S EXHIBITS: ANNEXURE-ACOPY OF ASSESSMENT ORDER DATED 29/2/2000 U/S.143/(3) OF THE INCOME TAX ACT FOR THE ASST. YEAR 1997-98. ANNEXURE-BCOPY OF ORDER DATED 20/3/2001 OF THE COMMISSIONER OF INCOME TAX (APPEALS).ANNEXURECOPY OF THE ORDER DATED 17/12/2004 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH,COCHIN IN ITA NO. 247/COCH/2001 FOR THE ASST. YEAR 1997-98. ITA Nos.533, 709, 861, 1195 &1222 of 2009 APPENDIX OF ITA 861/2009 PETITIONER'S EXHIBITS: ANNEXURE-A ANNEXURE-B ANNEXURE-C COPY OF ASSESSMENT ORDER DATED 25/3/1999 U/S.143(3)OF THE INCOME TAX ACT FOR THE ASSESSMENT YEAR 1996-97. COPY OF ORDER DATED 30/1/2001 OF THE COMMISSIONER OF INCOME TAX (APPEALS). COPY OF THE ORDER DATED 17/12/2004 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH,COCHIN IN ITA NO. 103/COCH/2001 FOR THE YEAR1996-97. ITA Nos.533, 709, 861, 1195 &1222 of 2009 APPENDIX OF ITA 1195/2009 PETITIONER'S EXHIBITS: ANNEXURE-A ANNEXURE-B ITA Nos.533, 709, 861, 1195 &1222 of 2009 APPENDIX OF ITA 861/2009 PETITIONER'S EXHIBITS: ANNEXURE-A ANNEXURE-B ANNEXURE-C COPY OF ASSESSMENT ORDER DATED 25/3/1999 U/S.143(3)OF THE INCOME TAX ACT FOR THE ASSESSMENT YEAR 1996-97. COPY OF ORDER DATED 30/1/2001 OF THE COMMISSIONER OF INCOME TAX (APPEALS). COPY OF THE ORDER DATED 17/12/2004 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH,COCHIN IN ITA NO. 103/COCH/2001 FOR THE YEAR1996-97. ITA Nos.533, 709, 861, 1195 &1222 of 2009 APPENDIX OF ITA 1195/2009 PETITIONER'S EXHIBITS: ANNEXURE-A ANNEXURE-B ANNEXURE-C COPY OF ORDER U/S.143(3) DATED 23/11/2004 FOR THE ASSESSMENT YEAR 2003-04. COPY OF ORDER DATED 28/1/2005 OF THE COMMISSIONER OF INCOME TAX (APPEALS). COPY OF THE ORDER DATED 16/10/2006 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH,COCHIN IN ITA NO. 501/COCH/2005. APPENDIX OF ITA 1222/2009 PETITIONER'S EXHIBITS: ANNEXURE-A ANNEXURE-B ANNEXURE-C COPY OF ORDER U/S.143 DATED 7/3/2002 FOR THEASSESSMENT YEAR 1999-2000. COPY OF ORDER DATED 12/3/2003 OF THE COMMISSIONER OF INCOME TAX (APPEALS). CERTIFIED COPY OF THE ORDER DATED 16/10/2006OF THE INCOME TAX APPELLATE TRIBUNAL, COCHINBENCH, COCHIN IN ITA NO. 283/COCH/2003.