Commissioner of Income Tax, Cochin v. Federal Bank Ltd.

## **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 APPELLATE TRIBUNAL, 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 PRAKASH SRI.TERRY V.JAMES SRI.TOM THOMAS (KAKKUZHIYIL) SRI.V.ABRAHAM MARKOS SRI.JOSEPH MARKOSE [SR]** **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:** ITA Nos.533, 709, 861, 1195 & 1222 of 2009 2 # **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 APPELLATE TRIBUNAL, 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.JAMES SRI.V.ABRAHAM MARKOS SRI.JOSEPH MARKOSE [SR] 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:** ITA Nos.533, 709, 861, 1195 & 1222 of 2009 3 **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 APPELLATE TRIBUNAL, 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.JAMES SRI.JOSEPH KODIANTHARA (SR.) SRI.V.ABRAHAM MARKOS SRI.JOSEPH MARKOSE [SR]** **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:** ITA Nos.533, 709, 861, 1195 & 1222 of 2009 4 **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 APPELLATE TRIBUNAL, 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 MARKOS SRI.ABRAHAM JOSEPH MARKOS SRI.GOVIND VIJAYAKUMARAN NAIR SRI.HARAN THOMAS GEORGE SRI.ISAAC THOMAS SRI.JOSEPH MARKOSE [SR]** **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 5 **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 APPELLATE TRIBUNAL, COCHIN BENCH** ## **APPELLANT/RESPONDENT:** **THE COMMR.OF INCOME TAX COCHIN** **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.JAMES SRI.V.ABRAHAM MARKOS SRI.JOSEPH MARKOSE [SR]** **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:** ITA Nos.533, 709, 861, 1195 & 6 1222 of 2009 ## **JUDGMENT** ## **K. Vinod Chandran, J.** **In I.T.A. No.861 of 2009 for the assessment year 1996-1997, the following three questions arise:** _**“(i) Whether the Tribunal was right in having upheld the action of the assessee adopting the valuation of unquoted securities on Y.T.M. [Yield To Market Ratio] basis ?**_ _**(ii) Whether the Tribunal was correct in having treated the current securities held by the Bank and sold, in the course of the assessment year as stock in trade and thus permitted the loss incurred to be deducted in computing the income of the assessee Bank for that particular year ?**_ _**(iii) Whether the Tribunal was correct in having found the expenditure incurred on acquisition of new software purchased along with the computers as revenue expenditure and interfered with the disallowance of the same by the Assessing Officer as capital expenditure ?”**_ **2. On the first question regarding the adoption of YTM Ratio, the view has been upheld by** ITA Nos.533, 709, 861, 1195 & 7 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 question hence has to be answered in favour of the assessee and against the Revenue. The second question regarding treatment of current securities as stock in trade has also been answered in favour of the assessee in** _**Commissioner of Income Tax v. Nedungadi Bank Ltd. [(2003) 264 ITR 545**_ _**(Ker)]**_ **. The second question is also answered in favour of the assessee and against the Revenue.** **3. The last question is on whether the Tribunal was correct in having treated the expenditure for acquisition of new software as revenue expenditure. The Tribunal found that software is to be revised on a regular basis and cannot be considered as a permanent asset. We agree with the Tribunal, especially considering the technological advancement made at a fast pace and the need to upgrade the software regularly for better facilitation of banking services. The** ITA Nos.533, 709, 861, 1195 & 8 1222 of 2009 **software is also used for the banking facilities and hence we are clearly of the opinion that the same can be considered as revenue expenditure. The last question is also answered in favour of the assessee and against the Revenue.** **4. I.T.A. No.1195 of 2009 arises from the assessment year 2003-2004 and raises two questions of law:** _**“(i) Whether, on the facts and in the circumstances of the case and also in the light of Section 14A of the Income Tax Act introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962, the assessee is entitled to claim the expenditure in respect of income which does not form part of total income?**_ _**(ii) Whether the Tribunal was correct in having allowed depreciation on current investments accepting the assessee's method of valuing the securities held by the assessee 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,** ITA Nos.533, 709, 861, 1195 & 9 1222 of 2009 _**Commissioner of Income Tax v. ESSAR**_ _**Teleholdings Pvt. Ltd. [(2018) 401 ITR 445**_ _**(SC)]**_ **held that Section 14A would be applicable only from the assessment year 2007-2008. Hence the first question has to be answered in favour of the assessee and against the Revenue.** **6. On the second question the Reserve Bank has directed the assessee to treat certain securities as current investments and certain as stock in trade. In the present case the investments being considered to be permanent in nature are treated as current investments and the valuation is done by the assessee at the close of the financial year on the cost or market price, whichever is lower, as stipulated by the Reserve Bank of India. The said valuation has been upheld by this Court in** _**Nedungadi Bank Ltd.**_ **[supra]. Hence that question is also answered in favour of the assessee and against the Revenue.** **7. ITA No.1222 of 2009 arises from the assessment year 1999-2000 and raises the following** ITA Nos.533, 709, 861, 1195 & 1222 of 2009 10 ## **questions of law:** _**“(i) Whether, on the facts and in the circumstances of the case and also in the light of Section 14A of the Income Tax Act introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962, the assessee is entitled to claim the expenditure in respect of income which does not form part of total income?**_ _**(ii) Whether, on the facts and in the circumstances of the case, the Tribunal is right in deleting the addition made by the Assessing Officer amounting to Rs.1,69,63,402/- being excess provision for bad and doubtful debts created by the assessee in terms of Section 36(1)(viia)?”**_ **8. As has been held in the earlier case, Section 14A has application only from the assessment year 2007-2008 and hence the question has to be answered in favour of the assessee and against the Revenue. The next question in fact raises the question as to how the rural branches have to be classified. The answer is evident in** _**Lord Krishna Bank Ltd.**_ **[supra], which found that though classification has to be based on the** ITA Nos.533, 709, 861, 1195 & 11 1222 of 2009 **population, the reference to population has to be related to a Revenue Village and not to Wards within a local authority, which would even bring in certain Wards within a municipal area also within the classification of a rural branch. Following the aforesaid dictum of another Division Bench, we have to set aside the order of the Tribunal in so far as the interference caused to the Assessing Officer's order and disallowance carried out of Rs.1,69,63,402/- has to be upheld. The second question hence is answered in favour of the revenue and against the assessee.** **9. The learned Senior Counsel draws the attention of this Court to the fact that though the amounts were claimed as provision for bad and doubtful debts under Clause (viia) of Section 36(1) of the Act, in fact they were written off debts, which could be claimed under Clause (vii) of Section 36(1) of the Act, which write off has now been upheld by the decision of the Hon'ble Supreme Court in** _**Vijaya Bank Ltd. v. Commissioner of Income Tax And Another [(2010)**_ ITA Nos.533, 709, 861, 1195 & 1222 of 2009 12 ## _**323 ITR 166 (SC)].**_ **10. It is to be noticed that as of now we are only dealing with the Revenue's appeal and such an issue does not arise from the Tribunal's order. The assessee Banks have also not raised such an issue before the Tribunal for the particular assessment year. Hence this Court cannot permit such an alternate plea in an appeal by the Revenue.** **11. ITA No.533 of 2009 from the assessment year 2001-2002 raises only the applicability of Section 14A for the said year. This has already been held against the Revenue and in favour of the assessee for the years prior to 2007-2008. We follow the same here too.** **12. In ITA No.709 of 2009 two questions arise. The first question is with respect to the deduction claimed in respect of loss claimed on valuation of the current securities; whether it can be permitted at cost price or market value, whichever is lower. The second question on sustainability of treating acquisition of software** ITA Nos.533, 709, 861, 1195 & 13 1222 of 2009 **as a revenue expenditure. Both the questions had been found in favour of the assessee for the assessment year 1996-1997 in ITA No.861 of 2009. Here too, the questions are answered in favour of the assessee and against the Revenue.** **ITA Nos.533, 709, 861 & 1195 of 2009 are dismissed. ITA No.1222 of 2009 is partly allowed.** **Sd/-** **K. VINOD CHANDRAN JUDGE** **Sd/-** **ASHOK MENON JUDGE** **sp/12/12/18** **//True Copy//** **P.A. To Judge** ITA Nos.533, 709, 861, 1195 & 14 1222 of 2009 ## **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.** ITA Nos.533, 709, 861, 1195 & 15 1222 of 2009 ## **APPENDIX OF ITA 709/2009** ## **PETITIONER'S/S EXHIBITS:** **ANNEXURE-A COPY OF ASSESSMENT ORDER DATED 29/2/2000 U/S.143/(3) OF THE INCOME TAX ACT FOR THE ASST. YEAR 1997-98. ANNEXURE-B COPY OF ORDER DATED 20/3/2001 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE COPY 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 16 ## **APPENDIX OF ITA 861/2009** ## **PETITIONER'S EXHIBITS:** **ANNEXURE-A COPY OF ASSESSMENT ORDER DATED 25/3/1999 U/S.143(3)OF THE INCOME TAX ACT FOR THE ASSESSMENT YEAR 1996-97.** **ANNEXURE-B COPY OF ORDER DATED 30/1/2001 OF THE COMMISSIONER OF INCOME TAX (APPEALS).** **ANNEXURE-C 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 YEAR 1996-97.** ITA Nos.533, 709, 861, 1195 & 17 1222 of 2009 ## **APPENDIX OF ITA 1195/2009** ## **PETITIONER'S EXHIBITS:** **ANNEXURE-A COPY OF ORDER U/S.143(3) DATED 23/11/2004 FOR THE ASSESSMENT YEAR 2003-04.** **ANNEXURE-B COPY OF ORDER DATED 28/1/2005 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. 501/COCH/2005.** ITA Nos.533, 709, 861, 1195 & 18 1222 of 2009 ## **APPENDIX OF ITA 1222/2009** ## **PETITIONER'S EXHIBITS:** ## **ANNEXURE-A** **COPY OF ORDER U/S.143 DATED 7/3/2002 FOR THE ASSESSMENT YEAR 1999-2000.** **ANNEXURE-B COPY OF ORDER DATED 12/3/2003 OF THE COMMISSIONER OF INCOME TAX (APPEALS). ANNEXURE-C CERTIFIED COPY OF THE ORDER DATED 16/10/2006 OF THE INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN IN ITA NO. 283/COCH/2003.**